Principles of Accounting

Question 1

The accounting process involves all of the following except

identifying economic transactions that are relevant to the business.

analyzing and interpreting financial reports.

communicating financial information to users by preparing financial reports.

recording non-quantifiable economic events.

Question 2

Which of the following would not be considered an internal user of accounting data?

Controller of the company

Production manager

President of the company

Internal Revenue Service

Question 3

Generally Accepted Accounting Principles are

theories that are based on physical laws of the universe.

principles that have been proven correct by academic researchers.

income tax regulations of the Internal Revenue Service.

standards that indicate how to report economic events.

Question 4

The three types of business entities are

proprietorships, partnerships, and corporations.

proprietorships, partnerships, and large businesses.

financial, manufacturing, and service companies.

proprietorships, small businesses, and partnerships.

Question 5

Owner’s equity is equal to

assets minus liabilities.

assets plus liabilities.

assets minus revenues.

revenues minus expenses.

Question 6

The left side of an account

is always the credit side.

is always the debit side.

is always the balance side.

may represent the debit side or the credit side.

Question 7

Credits

decrease both assets and liabilities.

increase both assets and liabilities.

decrease both assets and equity.

increase liabilities and decrease assets.

Question 8

The second step in the recording process is

preparing a trial balance.

posting to the general ledger.

analyzing a transaction.

journalizing a transaction.

Question 9

The chart of accounts is a

device used to prove the mathematical accuracy of the ledger.

listing of the accounts and the account numbers that identify their location in the ledger.

required step in the recording process.

list of accounts and their balances at a given time.

Question 10

A list of accounts and their balances at a given point in time is called a

chart of accounts.

trial balance.

general journal.

general ledger.

Question 11

The expense recognition principle matches

assets with owner’s equity.

assets with liabilities

assets with expenses.

expenses with revenues.

Question 12

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

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

an adjusting entry should be made recognizing the expense.

an expense should be recorded in the next accounting period when the bill is received.

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

Question 13

An adjusting entry for accrued expenses increases an expense and also increases a liability account.

True

False

Question 14

The adjusted trial balance is prepared

after the balance sheet is prepared.

after the adjusting entries are prepared and posted to the ledger.

to prove no errors have been made during the accounting period.

after the financial statements are prepared.

Question 15

If cash received for future services is initially recorded in revenue accounts and the company has not yet performed all of the required services at the end of the accounting period, then failure to make an adjusting entry will cause

liabilities to be overstated.

revenues to be overstated.

revenues to be understated.

accounts receivable to be overstated.

Question 16

Closing entries are necessary for

both permanent and temporary accounts.

temporary accounts only.

permanent or real accounts only.

permanent account only.

Question 17

A post-closing trial balance will contain only

permanent accounts.

temporary accounts.

income statement accounts.

nominal accounts.

Question 18

Correcting entries

may involve any combination of accounts in need of correction.

affect income statement accounts only.

always affect at least one balance sheet account and one income statement account.

affect balance sheet accounts only.

Question 19

All of the following are property, plant, and equipment except

land.

buildings.

supplies.

machinery.

Question 20

Current liabilities

are obligations that the company expects to pay within the coming year or the operating cycle, whichever is longer.

should not include long-term debt that is expected to be paid within the next year.

are listed in the balance sheet in order of their expected maturity.

	must reasonably be expected to be paid within one year or the operating cycle, whichever is shorter.
Question 21

Under a perpetual inventory system

freight costs are debited to Freight-Out.

purchase returns are debited to Purchase Returns and Allowances.

purchases on account are debited to Inventory.

purchases on account are debited to Purchases.

Question 22

A company that maintains a perpetual inventory system has an inventory account balance of $50,000. The physical count of goods on hand totals $49,600. Which of the following adjusting entries is correct?

debit Inventory and credit Purchases.

debit Purchases and credit Inventory.

debit Sales Discounts and credit Inventory.

debit Cost of Goods Sold and credit Inventory.

Question 23

Which of the following accounts may be found in the adjustment columns of a worksheet for a merchandiser but not a service company?

Accumulated Depreciation - Equipment

Salaries and Wages Expense

Prepaid Insurance

Cost of Goods Sold

Question 24

When goods are purchased for resale by a company using a periodic inventory system

freight costs are debited to Purchases.

purchases on account are debited to Inventory.

purchases on account are debited to Purchases.

purchase returns are debited to Purchase Returns and Allowances.

Question 25

In a period of rising prices, FIFO will result in

lower income tax expense than LIFO.

lower net purchases than LIFO.

lower net income than LIFO.

lower cost of goods sold than LIFO.

Question 26

Rickety Company purchased 1,000 widgets and has 200 widgets in its ending inventory at a cost of $91 each and a current replacement cost of $80 each. The ending inventory under lower-of-cost-or-market is

$80,000.

$18,200.

$16,000.

$91,000.

Question 27

The following information is available for Tye Company at December 31: Beginning inventory $80,000; Ending inventory $120,000; Cost of goods sold $1,200,000; and Sales Revenue $1,600,000. Tye’s inventory turnover is

15 times.

10 times.

12 times.

16 times.

Question 28

Each of the following is a subsidiary ledger except the

accounts payable ledger.

customers' ledger.

general ledger.

accounts receivable ledger.

Question 29

Which one of the following accounts is a control account?

Sales.

Accounts Payable.

Owner’s Capital.

Cash.

Question 30

Which of the following is not an element of the fraud triangle?

Opportunity.

Segregation of duties.

Rationalization.

Financial pressure.

Question 31

An employee authorized to sign checks should not record

mail receipts.

cash disbursement transactions.

owner cash contributions.

sales transactions.

Question 32

On a bank reconciliation, deposits in transit are

added to the book balance.

deducted from the bank balance.

added to the bank balance.

deducted from the book balance.

Question 33

Receivables are frequently classified as

accounts receivable, notes receivable, and other receivables.

accounts receivable, notes receivable, and employee receivables.

accounts receivable and general receivables.

accounts receivable, company receivables, and other receivables.

Question 34

The sale of receivables by a business

is an indication that the business is owned by a factor.

can be a quick way to generate cash for operating needs.

is generally the major revenue item on its income statement.

indicates that the business is in financial difficulty.

Question 35

Foti Co. accepts a $1,000, 3-month, 12% promissory note in settlement of an account with Bartelt Co. The entry to record this transaction is as follows:

Notes Receivable 1,020 Accounts Receivable  1,020

Notes Receivable  1,000 Accounts Receivable  1,000

Notes Receivable 1,000 Sales Revenue 1,000

Notes Receivable 1,030 Accounts Receivable 1,030

Question 36

A company purchased land for $70,000 cash. Real estate brokers’ commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the historical cost principle, the cost of land would be recorded at

$82,000.

$77,000.

$70,000.

$75,000.

Question 37

The entry to record depletion expense

decreases assets and increases liabilities.

decreases owner’s equity and assets.

decreases assets and liabilities.

decreases net income and increases liabilities.

Question 38

Which of the following statements concerning current liabilities is incorrect?

Current liabilities include salaries and wages payable.

Current liabilities include unearned revenue.

A company that has more current liabilities than current assets is usually the subject of some concern.

Current liabilities include prepaid expenses.

Question 39

The entry to record the issuance of an interest-bearing note includes a credit to Notes Payable for the note’s

market value.

cash realizable value.

face value.

maturity value.

Question 40

Working capital is

current assets plus current liabilities.

current assets minus current liabilities.

current assets multiplied by current liabilities.

current assets divided by current liabilities.

Question 41

The current ratio is

current assets plus current liabilities.

current assets minus current liabilities.

current assets multiplied by current liabilities.

current assets divided by current liabilities.

Question 42

Companies determine net pay by subtracting payroll deductions from gross earnings.

True

False

Question 43

Which one of the following payroll taxes does not result in a payroll tax expense for the employer?

FICA tax

Federal income tax

Federal unemployment tax

State unemployment tax

Question 44

Employer payroll taxes do not include

federal unemployment taxes.

FICA taxes.

state unemployment taxes.

federal income taxes.

Question 45

Partnership dissolution occurs whenever a partner withdraws or a new partner is admitted.

True

False

Question 46

Salaries to partners and interest on partners’ capital are expenses of the partnership.

True

False

Question 47

The balance sheet of a partnership will

report retained earnings below the partnership capital accounts.

show a separate drawing account for each partner.

show the amount of income that was distributed to each partner.

show a separate capital account for each partner.

Question 48

Which of the following is not a necessary action that the partnership must take upon the death of a partner?

Prepare financial statements.

Determine net income or net loss for the year to date.

Discontinue business operations.

	Close the books.

Question 49

Dividends are declared out of

capital stock.

treasury stock.

retained earnings.

paid-in capital in excess of par value.

Question 50

Common stockholders have the right to share in the distribution of corporate income before preferred stockholders.

True

False

Question 51

Which of the following is not reported under Additional paid-in capital?

Common stock.

Paid-in Capital in Excess of Par–Common Stock.

Paid-in Capital in Excess of Stated Value–Common Stock.

Paid-in Capital from Treasury stock.

Question 52

The following are characteristics, assumptions, principles, or constraints that guide the FASB when it creates accounting standards.

Relevance

Faithful representation

Comparability

Consistency

Monetary unit assumption

Economic entity assumption

Expense recognition principle

Time period assumption

Going concern assumption

Historical cost principle

Full disclosure principle

Materiality

Match each item above with a description below.

1.				Ability to easily evaluate one company’s results relative to another’s.
2.				Belief that a company will continue to operate for the foreseeable future.
3.				The judgment concerning whether an item's size is large enough to matter to decision-makers.
4.				The reporting of all information that would make a difference to financial statement users.
5.				The practice of preparing financial statements at regular intervals.
6.				The quality of information that indicates the information makes a difference in a decision.
7.				A belief that items should be reported on the balance sheet at the price that was paid to acquire the item.
8.				A company’s use of the same accounting principles and methods from year to year.
9.				Tracing accounting events to particular companies.
10.				The desire to minimize bias in financial statements.
11.				Reporting only those things that can be measured in monetary units.
12.				Dictates that efforts (expenses) be matched with results (revenues).

Question 53

The steps in the accounting cycle are listed in random order below. List the steps in proper sequence, assuming no worksheet is prepared, by placing numbers 1–9.

(a)		Prepare a trial balance.
(b)		Journalize the transactions.
(c)		Journalize and post closing entries.
(d)		Prepare financial statements.
(e)		Journalize and post adjusting entries.
(f)		Post to ledger accounts.
(g)		Prepare a post-closing trial balance.
(h)		Prepare an adjusted trial balance.
(i)		Analyze business transactions.

Part Two

SHOW YOUR WORK! Partial credit may be available if your work is shown (i.e., formulas used, your calculations, t-accounts)

1. (4 points) Two items are omitted from each of the following summaries of balance sheet and income statement data for two proprietorships for the year 2014, Garba’s Goods and Zahra Enterprises. Determine the missing amounts. Place your answers BELOW the table (or on a separate sheet).

		Garba’s Goods		Zahra Enterprises
Beginning of year:
Total assets		$150,502			$176,498
Total liabilities		116,297			$	(c)
Total owner’s equity		$	(a)		109,456
End of year:
Total assets		218,912			246,276
Total liabilities		164,184			68,410
Total owner’s equity		54,728			177,866
Changes during year in owner’s equity:
Additional investment		$	(b)		34,205
Drawings		39,678			$	(d)
Total revenues		294,163			136,820
Total expenses		239,435			82,092

a.

b.

c.

d.

2. Andrew Tym is the sole owner of Deer Park, a public camping ground near the Lake Mead National Recreation Area. Andrew has compiled the following financial information as of December 31, 2014.

Revenues during 2014—camping fees		$182,196		Fair value of equipment		$182,196
Revenues during 2014—general store		84,591		Notes payable		78,084
Accounts payable		14,315		Expenses during 2014		195,210
Cash on hand		29,932		Accounts receivable		22,775
Original cost of equipment		137,298

a. (1 point) Determine Andrew Tym’s net income from Deer Park for 2014.

b. (10 points) Prepare a balance sheet for Deer Park as of December 31, 2014.  (List assets in order of liquidity.)

3. The adjusted trial balance of Galecki Company at December 31, 2014, includes the following accounts: Owner's Capital $16,530, Owner's Drawings $7,295, Service Revenue $38,409, Salaries and Wages Expense $16,791, Insurance Expense $1,666, Rent Expense $3,299, Supplies Expense $1,145, and Depreciation Expense $1,180.

(5 points) Prepare an income statement for the year.

4. The adjusted trial balance of Parsons Company at December 31, 2014, includes the following accounts: Owner’s Capital $17,577, Owner’s Drawings $7,610, Service Revenue $38,090, Salaries and Wages Expense $16,368, Insurance Expense $1,388, Rent Expense $3,468, Supplies Expense $1,681, and Depreciation Expense $1,046. The balance in Owner’s Capital is the balance as of January 1.

(6 points) Prepare an owner’s equity statement for the year

5. (6 points) For each of the following accounts, indicate the effects of a debit and a credit on the accounts and the normal balance of the account.

		Debit Effect (Decrease, Increase)	Credit Effect (Decrease or Increase)	Normal Balance (Debit or Credit)
For Ex: Cash		Increase	Decrease	Debit
Accounts Payable
Advertising Expense
Service Revenue
Accounts Receivable
Owner’s Capital
Owner’s Drawing

6. (2 points) DeWitt Advertising Company’s trial balance at December 31 shows Supplies $7,136 and Supplies Expense $0. On December 31, there are $3,251 of supplies on hand. Prepare the adjusting entry at December 31.

7. Don Wyatt is unable to reconcile the bank balance at January 31. Don’s reconciliation is as follows.

Cash balance per bank		$3,870.20
Add: NSF check		535.00
Less: Bank service charge		30.00
Adjusted balance per bank		$4,375.20
Cash balance per books		$4,185.20
Less: Deposits in transit		685.00
Add: Outstanding checks		935.00
Adjusted balance per books		$4,435.20

(10 points) Prepare a correct bank reconciliation.

THIS PORTION IS BLANK – GO TO NEXT PAGE 8. The trial balance for Pioneer Advertising Agency shows the following.

Pioneer Advertising Agency Trial Balance October 31, 2014
	Debit		Credit
Cash	$14,371
Supplies	2,162
Prepaid Insurance	499
Equipment	5,621
Notes Payable			$4,272
Accounts Payable			2,778
Unearned Service Revenue			1,131
Owner’s Capital			9,769
Owner’s Drawings	698
Service Revenue			10,741
Salaries and Wages Expense	4,448
Rent Expense	892
	$28,691		$28,691

Assume the following adjustment data.

1.		Supplies on hand at October 31 total $625.
2.		Expired insurance for the month is $189.
3.		Depreciation for the month is $80.
4.		Services related to unearned service revenue in October worth $775 were performed.
5.		Services performed but not recorded at October 31 are $307.
6.		Interest accrued at October 31 is $92.
7.		Accrued salaries at October 31 are $1,217.

(14 points) Prepare the adjusting entries for the items above.

9. The accounting records of Old Towne Electronics show the following data.

Beginning inventory		2,829	units at	$5
Purchases		7,970	units at	$7
Sales		9,214	units at	$11

a. (1 point) Calculate Average-cost per unit.  (Round answer to 3 decimal places, e.g. 2.525.)

b. (3 points) Determine cost of goods sold during the period under a periodic inventory system using the FIFO method, the LIFO method, and the average-cost method.  (Round answers to 0 decimal places, e.g. 1,250.)

10. The adjusted trial balance columns of the worksheet for DeSousa Company are as follows.

DESOUSA COMPANY Worksheet (partial) For the Month Ended April 30, 2014
		Adjusted Trial Balance
Account Titles		Dr.		Cr.
Cash		10,040
Accounts Receivable		8,012
Prepaid Rent		2,485
Equipment		22,996
Accumulated Depreciation—Equip.				5,438
Notes Payable				5,675
Accounts Payable				5,271
Owner’s Capital				27,262
Owner’s Drawings		3,542
Service Revenue				15,944
Salaries and Wages Expense		10,951
Rent Expense		836
Depreciation Expense		728
Interest Expense		21
Interest Payable				21
Totals		59,611		59,611

(6 points) Journalize the closing entries at April 30.

11. This information relates to Rana Co.

1.		On April 5, purchased merchandise from Craig Company for $20,100, terms 4/10, net/30, FOB shipping point.
2.		On April 6, paid freight costs of $840 on merchandise purchased from Craig Company.
3.		On April 7, purchased equipment on account for $28,060.
4.		On April 8, returned some of April 5 merchandise, which cost $3,100, to Craig Company.
5.		On April 15, paid the amount due to Craig Company in full.

a. (5 points) Prepare the journal entries to record these transactions on the books of Rana Co. using a perpetual inventory system.

b. (3 points) Briefly describe how the entries would differ if Rana Co. uses a periodic inventory system.

12. In its first month of operation, Franklin Company purchased 289 units of inventory for $8, then 482 units for $9, and finally 337 units for $10. At the end of the month, 434 units remained.

(5 points) Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO. The company uses the periodic method.

13. At December 31, 2014, the following information was available for A. Kamble Company: ending inventory $38,090, beginning inventory $58,950, cost of goods sold $262,390, and sales revenue $378,220.

a. (2 points) Calculate inventory turnover for A. Kamble Company.  (Round answer to 1 decimal place, e.g. 1.5.)

b. (2 points) Calculate days in inventory for A. Kamble Company.  (Round answer to 1 decimal place, e.g. 1.5. Use 365 days for calculation.)

14. Kingston Co. uses the percentage-of-receivables basis to record bad debt expense. It estimates that 2% of accounts receivable will become uncollectible. Accounts receivable are $578,000 at the end of the year, and the allowance for doubtful accounts has a credit balance of $2,210.

a. (3 points) Prepare the adjusting journal entry to record bad debt expense for the year.

b. (1 point) If the allowance for doubtful accounts had a debit balance of $940 instead of a credit balance of $2,210, determine the amount to be reported for bad debt expense.

15. In 2014, Wainwright Company has net credit sales of $1,355,500 for the year. It had a beginning accounts receivable (net) balance of $102,000 and an ending accounts receivable (net) balance of $140,600.

a. (2 points) Compute Wainwright Company’s accounts receivable turnover.  (Round answer to 1 decimal place, e.g. 2.5.)

b. (2 points) Compute Wainwright Company’s average collection period in days.  (Round answer to 1 decimal place, e.g. 2.5. Use 365 days for calculations.)

16. Kieschnick Company has a balance in its Accounts Receivable control account of $10,975 on January 1, 2014. The subsidiary ledger contains three accounts: Bixler Company, balance $3,980; Cuddyer Company, balance $2,640; and Freeze Company. During January, the following receivable-related transactions occurred.

		Credit Sales		Collections		Returns
Bixler Company		$8,629		$8,354		$ -0-
Cuddyer Company		6,849		2,596		2,962
Freeze Company		8,832		9,146		-0-

a. (1 point) What is the January 1 balance in the Freeze Company subsidiary account?

b. (1 point) What is the January 31 balance in the control account?

17. (3 points) On March 3, Kitselman Appliances sells $759,600 of its receivables to Ervay Factors Inc. Ervay Factors assesses a finance charge of 1% of the amount of receivables sold. Prepare the entry on Kitselman Appliances’ books to record the sale of the receivables.

18. (3 points) On May 10, Fillmore Company sold merchandise for $19,000 and accepted the customer’s America Bank MasterCard. America Bank charges a 4% service charge for credit card sales. Prepare the entry on Fillmore Company’s books to record the sale of merchandise.

19. (2 points) Rich Castillo Company incurs the following expenditures in purchasing a truck: cash price $47,280, accident insurance $3,820, sales taxes $3,270, motor vehicle license $226, and painting and lettering $580. What is the cost of the truck?

20. Rottino Company purchased a new machine on October 1, 2014, at a cost of $122,400. The company estimated that the machine will have a salvage value of $13,700. The machine is expected to be used for 10,700 working hours during its 4-year life.

a. (2 points) Compute the depreciation expense under straight-line method for 2014.  (Round answer to 0 decimal places, e.g. 2,125.)

b. (2 points) Compute the depreciation expense under units-of-activity for 2014, assuming machine usage was 1,500 hours.  (Round answer to 0 decimal places, e.g. 2,125.)

c. (4 points) Compute the depreciation expense under declining-balance using double the straight-line rate for 2014 and 2015.

d. (2 points) Prepare the journal entry to record straight-line depreciation for 2014.

21. Peralta Company borrows $75,000 on July 1 from the bank by signing a $75,000, 14%, one-year note payable.

(a)		(2 points) Prepare the journal entry to record the proceeds of the note.
(b)		(2 points) Prepare the journal entry to record accrued interest at December 31, assuming adjusting entries are made only at the end of the year.

(NOTE: Peralta is borrowing the money – not lending it)

22. Coghlan Auto Supply does not segregate sales and sales taxes at the time of sale. The register total for March 16 is $42,525. All sales are subject to a 5% sales tax.

a. (1 point) Compute sales taxes payable.

b. (2 points) Make the entry to record sales taxes payable and sales revenue.

23. Yahoo! Inc.’s recent financial statements contain the following selected data (in thousands).

Current assets		$ 4,594,772		Current liabilities		$1,717,728
Total assets		14,936,030		Total liabilities		2,417,394

a. (1 point) Compute working capital.

b. (1 point) Compute current ratio.  (Round current ratio to 2 decimal places, e.g. 1.25 : 1.)

24. (2 points)  If cash is borrowed on a $84,120, 9-month, 6% note on August 1, how much interest expense would be incurred by December 31?

25. (5 points) In January, the payroll supervisor determines that gross earnings for Carlyle Company are $175,000. All earnings are subject to 7.65% FICA taxes, 4.5% state unemployment taxes, and 0.8% federal unemployment taxes. Record the employer’s payroll taxes.

26. (2 points) At December 31, Ortiz Corporation reports net income of $417,300. Prepare the entry to close net income.

27. (4 points) Beauty Island Corporation began operations on April 1 by issuing 67,800 shares of $5 par value common stock for cash at $17 per share. On April 19, it issued 1,900 shares of common stock to attorneys in settlement of their bill of $29,200 for organization costs. Journalize both issuances, assuming the stock is not publicly traded.

28. (3 points) The characteristics of a partnership include the following: association of individuals, limited life, and co-ownership of property. Explain each of these terms.

29. (2 points) Mutt and Jeff are discussing how income and losses should be divided in a partnership they plan to form. What factors should be considered in determining the division of net income or net loss?

30. (1 point) M. Elston and R. Ogle have partnership capital balances of $40,000 and $80,000, respectively. The partnership agreement indicates that net income or net loss should be shared equally. If net income for the partnership is $42,000, how should the net income be divided?

31. (3 points) The following terms pertain to the forming of a corporation: (1) charter, (2) by-laws, and (3) organization costs. Explain the terms.

32. (3 points) What factors help determine the market price of stock?

33. (3 points) For what reasons might a company like IBM repurchase some of its stock (treasury stock)? (List at least three reasons)

(b)

(d)

(c)

(a)