Chapter 1 - Accounting in Action

1. All of the financial statements are for a period of time, except the
a. statement of cash flows
b. income statement
c. statement of financial position
d. retained earnings Statement

2. Which of the following is not part of the accounting process?

a. Identifying
b. Communicating
c. Recording
d. Financial decision making

3. Which of the following would not be considered an internal user of accounting data
for the XYZ Company?
a. Merchandise inventory clerk
b. Production manager
c. President of the company
d. President of the employees' labor union

4. The ______ describes a company's revenues and expenses along with the resulting
net income or net loss over a period of time due to earnings activities.
a. Cash flows
b. The statement of owner's equity
c. Statement of financial position
d. Income Statement

5. The three types of business entities are:

a. proprietorships, small businesses, and partnerships.
b. financial, manufacturing, and service companies.
c. proprietorships, partnerships, and corporations.
d. proprietorships, partnerships, and large businesses.

6. Received cash from customers when service was performed. Describe the e ect of
this transaction on assets, liabilities, and equity?
a. Increase in assets and increase in equity
b. Increase in equity and decrease in liabilities
c. Increase in assets and decrease in assets
d. Decrease in assets and decrease in equity
7. As of December 31, 2020, Stoneland AG has assets of €3,500 and equity of €2,000.
What are the liabilities for Stoneland AG as of December 31, 2020?
a. €1,000.
b. €1,500.
c. €2,000.
d. €2,500.

8. The ________ assumption states that transactions and events are expressed in
money units.
a. monetary unit
b. business entity
c. accounting period
d. going-concern

9. Owner's equity is decreased by

a. revenues
b. expenses
c. assets
d. liabilities

10. If during the current accounting period, the company's assets increased by $24,000
and equity increased by $5,000, then how did liabilities change?
a. Increased by $29,000.
b. Decreased by $19,000.
c. Increased by $24,000.
d. Decreased by $5,000.
e. Increased by $19,000.

11. Which of the following statements is FALSE?

a. A statement of cash flows summarizes information about the cash inflows
(receipts) and outflows (payments) for a specific period of time.
b. An income statement presents the revenues, expenses, assets, and liabilities for
a specific period of time.
c. A statement of financial position reports the assets, liabil- ties, and equity at a
specific date.
d. A retained earnings statement summarizes the changes in retained earnings for a
specific period of time.

12. Net loss will result during a time period when:

a. Expenses exceed revenues
 b. Assets exceed liabilities
c. Assets exceed revenues
d. Revenues exceed expenses

13. A disadvantage of a sole proprietorship is the fact that the owner has _________.
a. simple activities
b. unlimited liability
c. limited liability
d. only one owner

14. ________ which is one part of accounting, is the recording of transactions and
events, either manually or electronically.
a. Communicating
b. Processing
c. Preparing
d. Record-keeping or Bookkeeping

15. Which of the following financial statements refers to a specific date (point in time)?
a. Income statement.
b. Statement of cash flows.
c. Statement of Financial Position.
d. Statement of owner's equity.

16. Revenues would not result from

a. rental of property
b. performance of services
c. sale of merchandise
d. initial investment of cash by owner

17. If total liabilities decreased by $25,000 and owner's equity increased by $5,000
during a period of time, then total assets must change by what amount and
direction during that same period?
a. $20,000 decrease
b. $25,000 increase
c. $30,000 increase
d. $20,000 increase

18. Which of the following would not be considered internal users of accounting data
for a company?
a. The president of a company
b. Salesmen of the company
 c. The controller of a company
d. Creditors of a company

19. If expenses are paid in cash, then...

a. owner's equity will increase
b. assets will decrease
c. assets will increase
d. liabilities will decrease

20. The ________ assumption assumes business will continue operating indefinitely
instead of being closed or sold.
a. business entity
b. monetary unit
c. accounting period
d. going-concern

21. _______ is the area of accounting aimed at serving external users by providing them
with general-purpose financial statements.
a. Auditing
b. Financial accounting
c. Managerial accounting
d. Tax accounting

22. Payment of an account payable a ects the components of the accounting equation
in the following way.
a. decreases assets and increases equity.
b. decreases assets and decreases liabilities.
c. decreases equity and decreases liabilities.
d. increases assets and decreases liabilities.

23. Sources of increases to owner's equity are

a. purchases of merchandise
b. expenses
c. revenues
d. additional investments by owners

24. Indicate whether the following items would appear on the income statement.
a. Share capital - Ordinary
b. Accounts Receivable
c. Sales Revenue
d. Cash
25. If total liabilities increased by $15,000 and owner's equity increased by $5,000
during a period of time, then total assets must change by what amount and
direction during that same period?
a. $30,000 increase
b. $20,000 decrease
c. $25,000 increase
d. $20,000 increase

26. If supplies that have been purchased are used in the course of business, then
a. owner's equity will decrease
b. owner's equity will increase
c. an asset will increase
d. a liability will increase

27. A limited liability company o ers the limited liability of a partnership or

proprietorship.
a. False
b. True

28. An income statement

a. presents the revenues and expenses for a specific period of time.
b. reports the changes in assets, liabilities, and equity over a period of time
c. summarizes the changes in owner's equity for a specific period of time
d. reports the assets, liabilities, and owner's equity at a specific date

29. Which of the following is an external user of accounting information?

a. Company o icers
b. Labor unions
c. Finance directors

30. A CPA owns a large home and has divided the second floor into two separate units:
one used as her personal residence and the other rented out to local college
students as an apartment. On the first floor, she has her own CPA firm where she
meets with and provides accounting services to clients. If she wishes to keep
separate records for each of these three activities, the accounting principle to which
she is adhering is?
a. Conservatism principle.
b. Business entity principle.
c. Monetary unit principle.
 d. Going-concern principle.
e. Cost principle.

31. ________ explains changes in the owner's claim on the business's assets from net
income or loss, owner investments, and owner withdrawals over a period of time.
a. Income Statement
b. Cash flows
c. Balance Sheet
d. The statement of owner's equity

32. The ________ principle requires that financial information is supported by

independent, unbiased evidence.
a. objectivity
b. business entity
c. going-concern
d. accounting period

33. Which of the following events is NOT recorded in the accounting records?
a. The company pays a cash dividend.
b. Equipment is purchased on account.
c. A cash investment is made into the business.
d. An employee is terminated.

34. Which of the following objectives are legitimate reasons for taking a physical
inventory count, except?
a. To determine cost of goods sold.
b. To keep employees busy during a slow time in the business.
c. To check the accuracy of the perpetual inventory records.

35. All of the following are property, plant, and equipment except the
a. buildings
b. machinery
c. supplies
d. land

Chapter 2 - The Recording Process

1. Amelia Company received its telephone bill on February 15, 2011 in the amount of
$325. This bill covered the period from January 1, 2011 through January 31, 2011.
Amelia paid this bill immediately. The company uses a calendar year accounting
period and prepares its financial statements only once a year at the end of the year.
The general journal entry to record this transaction includes:
 a. A debit to Accounts Payable for $325.
b. A debit to the Telephone Expense account for $325.
c. A credit to Accounts Payable for $325.
d. A debit to the Cash account for $325.
e. A debit to the Telephone Expense account for $325.

2. The usual sequence of steps in the recording process is to analyze each transaction,
enter the transaction in the
a. ledger, and transfer the information to the journal
b. journal, and transfer the information to the ledger accounts
c. book of accounts, and transfer the information to the journal
d. book of original entry, and transfer the information to the journal

3. At January 31, 2008, the balance in Prieto Inc.'s supplies account was $250. During
February, Prieto purchased supplies of $300 and used supplies of $400. At the end
of February, the balance in the supplies account should be
a. $250 debit
b. $950 debit
c. $150 debit
d. $350 credit

4. Olivia, the proprietor, deposited $40,000 in the company's bank account. She
received the money as the result of a settlement of a class action lawsuit and
decided to invest it in her business to help with expansion. Recording the
transaction on the company books will require which of the following?
a. A liability to be debited, an asset to be credited.
b. An asset to be debited, a liability to be credited.
c. One asset to be debited, another asset to be credited.
d. An asset to be debited, capital to be credited.

5. The double-entry system requires that each transaction must be recorded

a. first as a revenue and then as an expense
b. in at least two di erent accounts
c. in two sets of books
d. in a journal and in a ledger

6. The first step in the recording process is to

a. prepare a trial balance
b. analyze each transaction for its e ect on the accounts
 c. prepare financial statements
d. post to a journal

7. If the sum of the debit column equals the sum of the credit column in a trial
balance, it indicates
a. that all accounts reflect correct balances
b. no errors can be discovered
c. no errors have been made
d. the mathematical equality of the accounting equation

8. Which one of the following is not a part of an account?

a. Debit side
b. Trial balance
c. Title
d. Credit side

9. In the first month of operations, the total of the debit entries to the cash account
amounted to $900 and the total of the credit entries to the cash account amounted
to $500. The cash account has a
a. $400 credit balance
b. $400 debit balance
c. $800 debit balance
d. $500 credit balance

10. A company buys a new car on February 15, 2011, and immediately pays in cash the
$25,000 purchase price. The company's bookkeeper fails to record the transaction
at all. Based on this information, which statement concerning the trial balance is
correct if the company fails to correct this bookkeeping error?
a. The total trial balance debits are equal to the total trial balance credits, but one or
more accounts have incorrect balances.
b. The trial balance is correct as it is.
c. The total trial balance debits do not equal the total trial balance credits.
d. The total trial balance debits are higher than the total trial balance credits.

11. The steps in preparing a trial balance include all of the following except
a. totaling the debit and credit columns
b. transferring journal amounts to ledger accounts
c. listing the account titles and their balances
d. proving the equality of the two columns
12. Anderson Company purchased equipment for $1,800 cash. As a result of this event
a. total assets remained unchanged
b. total assets decreased by $1,800
c. total assets decreased by $1,800
d. Share Capital decreased by $1,800

13. Which of the following statements is not true?

a. Expenses have normal debit balances
b. Expenses are a negative factor in the computation of net income
c. Expenses increase owner's equity
d. Expenses decrease owner's equity

14. On April 2, 2019, Busan performed cash services of $4,500. The entry to record this
transaction would include
a. A credit to Accounts Payable of $4,500
b. A debit to Service Revenue of $4,500
c. A debit to Service Revenue of $4,500
d. A debit to Cash of $4,500

15. An account consists of

a. two sides
b. three sides
c. four sides
d. one side

16. JNK Company showed the following balances at the end of its first year: Cash
$4,200, Prepaid insurance $1,200, Accounts receivable $2,400, Accounts payable
$3,000, Salaries and Wages Expense $4,400, Share Capital - Ordinary $6,000,
Service Revenue $5,000, Salaries and Wages Expense $1,800. What did JNK
Company show as total credits on its trial balance?
a. $14,000
b. $20,000
c. $18,000
d. $17,000

17. On July 7, 2008, Reethink Enterprises performed cash services of $1,400. The entry
to record this transaction would include
a. a debit to Service Revenue of $1,400
b. a credit to Accounts Receivable of $1,400
 c. a credit to Accounts Payable of $1,400
d. a debit to Cash of $1,400

18. After a business transaction has been analyzed and entered in the book of original
entry, the next step in the recording process is to transfer the information to
a. financial statements
b. owner's equity
c. the company's bank
d. ledger accounts

19. A debit is not the normal balance for which account listed below?
a. Service Revenue
b. Accounts Receivable
c. Dividends
d. Cash

20. The procedure of transferring journal entries to the ledger accounts is called
a. posting
b. analyzing
c. journalizing
d. reporting

21. A trial balance is a listing of

a. general ledger accounts and balances
b. transactions in a journal
c. the totals from the journal pages
d. the chart of accounts

22. A company which sells and services medical insurance policies received one
payment of $14,000 cash from a customer for insurance coverage for the next two
years. Recording the receipt of this cash when it is received will require which of the
following?
a. A liability to be debited, an asset to be credited
b. An asset to be debited, capital to be credited
c. One asset to be debited, another asset to be credited
d. An asset to be debited, a liability to be credited
e. An asset to be debited, a liability to be credited

23. A list of accounts and their balances at a given time is called a

a. journal.
b. income statement.
 c. posting.
d. trial balance.

24. The right side of an account

a. is the credit side
b. is the correct side
c. shows all the balances of the accounts in the system
d. reflects all transactions for the accounting period

25. On January 14, Franco Industries purchased supplies of $500 on account. The entry
to record the purchase will include
a. a debit to Supplies and a credit to Cash
b. a debit to Supplies Expense and a credit to Accounts Receivable
c. a debit to Supplies and a credit to Accounts Payable
d. a debit to Accounts Receivable and a credit to Supplies

26. On March 1, 2019, a company collects a $500 deposit from a customer for the
installation of a home-theater system. The installation is scheduled for May 5, 2019.
How should the company record this entry on March 1, 2019?
a. The Unearned Sales Revenue account is credited for $500.
b. The Cash account is credited for $500.
c. The Unearned Sales Revenue account is debited for $500.
d. The Sales Revenue account is credited for $500.

27. At December 1, 2019, JNN Travel Agency had an Accounts Payable balance of
$40,000. During the month, the company made purchases on account of $50,000
and made payments on account of $20,000. At December 31, 2019, the Accounts
Payable balance is
a. $10,000
b. $70,000
c. $82,000
d. $90,000

28. Franklin Company provided consulting services and billed the client $2,500. As a
result of this event,
a. assets decreased by $2,500
b. assets increased by $2,500
c. Share Capital decreased by $2,500
d. assets remained unchanged
 29. A chart of accounts usually starts with
a. expense accounts
b. revenue accounts
c. liability accounts
d. asset accounts

30. The name given to entering transaction data in the journal is

a. listing
b. posting
c. journalizing
d. chronicling

Chapter 3 - Adjusting the Accounts

1. In a service-type business, revenue is considered earned

a. at the end of the year
b. when the service is performed
c. when cash is received
d. at the end of the month

2. At December 31, 2008, before year-end adjustments, Karr Company's Insurance

Expense account had a balance of $1,450 and its Prepaid Insurance account had a
balance of $3,800. It was determined that $3,000 of the Prepaid Insurance had
expired. The adjusted balance for Insurance Expense for the year would be
a. $1,450
b. $4,450
c. $2,250
d. $3,000

3. The revenue recognition principle dictates that revenue should be recognized in the
accounting records
a. in the period that income taxes are paid
b. at the end of the month
c. when cash is received
d. when it is earned

4. Boron Company has prepared the adjusted trial balance as of December 31, 2011.
Even though this adjusted trial balance is correct in every respect, there is still one
account whose balance does not represent the correct end-of-the-period balance.
Which account is it?
a. Accounts Receivable.
 b. Retained Earnings.
c. Accumulated Depreciation.
d. Cash.

5. The accounts of a business before an adjusting entry is made to record an accrued

revenue reflect an
a. understated asset and understated revenue
b. understated expense and an overstated revenue
c. overstated asset and an overstated revenue
d. understated liability and overstated owner's capital

6. Prepaid expenses are

a. incurred and already paid or recorded
b. paid and recorded in an asset account after they are used or consumed
c. paid and recorded in an asset account before they are used or consumed
d. incurred but not yet paid or recorded

7. Expenses incurred but not yet paid or recorded are called

a. unearned expenses
b. interim expenses
c. prepaid expenses
d. accrued expenses

8. At the end of the accounting period, the business had $5,000 of o ice supplies on
hand. At the beginning of the period, the amount of supplies on hand was $2,000. If
the business purchased $12,000 of o ice supplies during the year, what amount of
o ice supplies were used during the year?
a. $9,000.
b. $14,000.
c. $7,000.
d. $10,500.

9. The adjusted trial balance is prepared

a. before the trial balance
b. after financial statements are prepared
c. after adjusting entries have been journalized and posted
d. to prove the equality of total assets and total liabilities

10. Which of the following statements concerning accrual-basis accounting is

incorrect?
a. Accrual-basis accounting recognizes expenses when they are paid
 b. Accrual-basis accounting is the method required by generally accepted
accounting principles
c. Accrual-basis accounting follows the revenue recognition principle
d. Accrual-basis accounting follows the matching principle

11. A business rented space in an o ice building on October 1, at $600 per month,
paying 9 months of rent in advance. The bookkeeper recognized a prepaid asset of
$5,400 when the payment was made. No year-end adjustment was recorded. As a
consequence of not recording the required adjustment, which of following
occurred?
a. Expenses were understated and assets were understated.
b. Expenses were overstated and assets were overstated.
c. Expenses were understated and assets were overstated.
d. Expenses were overstated and assets were overstated.

12. Monthly and quarterly time periods are called

a. interim periods
b. fiscal periods
c. calender periods
d. quarterly periods

13. Financial statements are prepared directly from the

a. general journal
b. trial balance
c. ledger
d. adjusted trial balance

14. Alpha Company collected £180,000 from customers in 2018. Of the amount
collected, £20,000 was for services performed in 2017. In addition, Alpha performed
services worth £80,000 in 2018, which will not be collected until 2019. Alpha also
paid £140,000 for expenses in 2018. Of the amount paid, £10,000 was for expenses
incurred on account in 2017. In addition, Alpha incurred £60,000 of expenses in
2018, which will not be paid until 2019. 2018 accrual-basis net income is
a. £50,000 180-20+80-140+10-60
b. £70,000
c. £60,000
d. £40,000

15. The theoretical reason for recording periodic depreciation expense rather than
immediately expensing the cost of a plant asset in the period it is acquired is to
 adhere to the:
a. Matching principle.
b. Monetary unit principle.
c. Cost principle.
d. Going-concern principle.

16. Can financial statements be prepared directly from the adjusted trial balance?
a. Yes, adjusting entries have been recorded in the general journal and posted to the
ledger accounts
b. They cannot. The general ledger must be used
c. They can because that is the only reason that an adjusted trial balance is
prepared
d. No, the adjusted trial balance merely proves the equality of the total debit and
total credit balances in the ledger after adjustments are posted. It has no other
purpose

17. Failure to prepare an adjusting entry at the end of the period to record an accrued
expense would cause
a. an understatement of expenses and an understatement of liabilities
b. an overstatement of assets and an overstatement of liabilities
c. an overstatement of expenses and an overstatement of liabilities
d. net income to be understated

18. An NBA basketball team sells season tickets worth $48 million before the basketball
season starts late in the year. Assume this $48 million is debited to Cash and
credited to Unearned Ticket Revenue. By the end of the calendar year, which also
happens to be the end of the team's accounting period, 25% of the games have
been played. What adjusting journal entry should be made at the end of the year?
a. Ticket Revenue, debit, $12 million; Cash, credit, $12 million.
b. Unearned Ticket Revenue, debit, $12 million; Ticket Revenue, credit, $12 million.
c. Unearned Revenue, debit, $12 million; Cash, credit, $12 million.
d. Ticket Revenue, debit, $12 million; Unearned Ticket Revenue, credit, $12 million.

19. Accrued revenues are

a. received and recorded as liabilities before they are earned
b. earned and recorded as liabilities before they are received
c. earned and already received and recorded
d. earned but not yet received or recorded
20. If the adjusting entry for depreciation is not made
a. net income will be understated
b. expenses will be understated
c. assets will be understated
d. owner's equity will be understated

21. On January 1, 2019, M. Johnson Company purchased equipment for $30,000. The
company is depreciating the equipment at the rate of $700 per month. The book
value of the equipment at December 31, 2019 is
a. $30,000
b. $21,600
c. $8,400
d. $0

22. An adjusting entry

a. a ects two statement of financial position accounts
b. is always a compound entry
c. a ects a statement of financial position account and an income statement
account
d. a ects two income statement accounts

23. Mart Company began operations in June 2019. At the end of the years, the company
prepares annual financial statements. On July 1, the company borrowed €30,000
from a bank on a 2-year note. The annual interest rate is 12%. Mart Company should
make the following adjusting entry on December 31:
a. Debit Interest Expense, €1,800; Credit Cash, €1,800
Credit
b. Debit Interest Expense, €1,800; Interest Payable, €1,800
c. Debit Interest Payable, €300; Credit Interest Expense, €300
d. Debit Interest Expense, €3,600; Credit, Interest Payable €3,600

24. If a business has received cash in advance of services performed and credits a
liability account, the adjusting entry needed after the services are performed will be
a. debit Unearned Revenue and credit Accounts Receivable
b. debit Unearned Revenue and credit Prepaid Expense
c. debit Unearned Revenue and credit Service Revenue
d. debit Unearned Revenue and credit Cash

25. M&M Company purchased a equipment for $36,000 on July 1. It is estimated that
annual depreciation on the computer will be $3,000. If financial statements are to
be prepared on December 31, the company should make the following adjusting
 entry:
a. Debit Depreciation Expense, $18,000; Credit Accumulated Depreciation, $1,500.
b. Debit Depreciation Expense, $3,000; Credit Accumulated Depreciation, $3,000.
c. Debit Depreciation Expense, $3,600; Credit Accumulated Depreciation, $3,600.
d. Debit Accumulated Depreciation, $1,800; Credit Depreciation Expense, $1,800.

26. A tenant rented space in your company's o ice building on October 1 at $1,800 per
month, paying seven months' rent in advance. The bookkeeper recognized a current
liability of $12,600. How much of this amount remains unearned as of December
31?
a. $0.
b. $5,400.
c. $12,600.
d. $7,200.

27. Adjusting entries are required

a. made to statement of financial position accounts only
b. made whenever management desires to change an account balance
c. not necessary if the accounting system is operating properly
d. usually required before financial statements are prepared

28. Which of the following statements related to the adjusted trial balance is incorrect?
a. It shows the balances of all accounts at the end of the accounting period
b. It is prepared before adjusting entries have been made
c. Financial statements can be prepared directly from the adjusted trial balance
d. It proves the equality of the total debit balances and the total credit balances in
the ledger

Chapter 4 - Completing the Accounting Cycle

1. Which of the following statements about the accounting cycle is false?

a. Journalizing the transactions is performed before preparing the unadjusted trial
balance.
b. Adjusting the accounts is done prior to preparing the adjusted trial balance.
c. Preparing the post-closing trial balance is done after the temporary account have
been closed.
d. Financial statements are prepared before preparing the adjusted trial balance.
e. Posting is done after transactions have been analyzed.

2. The final step in the accounting cycle is to prepare

a. a post-closing trial balance
 b. financial statements
c. The final step in the accounting cycle is to prepare
d. adjusting entries

3. The closing entry process consists of closing

a. all temporary accounts
b. all asset and liability accounts
c. all permanent accounts
d. out the owner's capital account

4. Which of the following accounts is a temporary account?

a. Lola Delong, Withdrawals.
b. Unearned Revenue.
c. Capital, Lola Delong.
d. Land.
e. Notes Payable.

5. The income summary

a. is a temporary account
b. appears on the statement of financial position
c. appears on the income statement
d. is a permanent account

6. As described in the textbook, in what order should the temporary accounts be

closed?
a. (1) revenues, (2) expenses, (3) income summary, and (4) dividend.
b. (1) expenses, (2) income summary, and (4) owner's drawings.
c. (1) owner's drawings, (2) expenses, (3) revenues, and (4) income summary.
d. (1) expenses, (2) revenues, (3) income summary, and (4) dividend.

7. The balances that appear on the post-closing trial balance will match the
a. statement of financial position account balances after adjustments
b. income statement account balances after closing entries
c. income statement account balances after adjustments
d. statement of financial position account after closing entries

8. O ice Equipment is classified in the statement of financial position as

a. a long-term investment
b. an intangible asset
c. a current asset
d. property, plant, and equipment
9. Closing entries are necessary for
a. temporary accounts only
b. permanent accounts only
c. permanent or real accounts only
d. both permanent and temporary accounts

10. On September 23, Pitts Company received a $350 check from Mike Moluf for
services to be performed in the future. The bookkeeper for Pitts Company
incorrectly debited Cash for $350 and credited Accounts Receivable for $350. The
amounts have been posted to the ledger. To correct this entry, the bookkeeper
should
a. debit Cash $350 and credit Unearned Service Revenue $350
b. debit Accounts Receivable $350 and credit Service Revenue $350
c. debit Accounts Receivable $350 and credit Unearned Service Revenue $350
d. debit Accounts Receivable $350 and credit Cash $350

11. GNN Moto Company received a $590 cash from a customer for the balance due.
The transaction was erroneously recorded as a debit to Cash $990 and a credit to
Service Revenue $990. Assuming the incorrect entry is not reversed, the correcting
entry is
a. Debit Service Revenue, $990; credit Cash, $400 and Accounts Receivable, $590.
b. Debit Cash, $590 and Accounts Receivable, $590; credit Service Revenue,
$1,080.
c. Debit Cash, $400 and Service Revenue, $590; credit Accounts Receivable, $990.
d. Debit Cash, $590; credit Accounts Receivable, $990.

12. The balance in the income summary account before it is closed will be equal to
a. the beginning balance in the owner's capital account
b. the ending balance in the owner's capital account
c. zero
d. the net income or loss on the income statement

13. A post-closing trial balance is prepared

a. after closing entries have been journalized and posted
b. before closing entries have been journalized and posted
c. before closing entries have been journalized but after the entries are posted
d. after closing entries have been journalized but before the entries are posted

14. All of the following statements about the post-closing trial balance are correct
except t it
 a. proves that all transactions have been recorded
b. shows that the accounting equation is in balance
c. provides evidence that the journalizing and posting of closing entries have been
properly completed
d. contains only permanent accounts

15. Income Summary has a credit balance of $8,000 in B&B Company after closing
revenues and expenses. The entry to close Income Summary is
a. Debit Revenue, $8,000; Credit Income Summary $8,000
b. Debit Income Summary, $8,000; Credit Retained Earnings $8,000
c. Debit Retained Earnings, $8,000; Credit Income Summary $8,000
d. Debit expense, $8,000; Credit income Summary $8,000

16. The first required step in the accounting cycle is

a. journalizing transactions in the book of original entry
b. reversing entries
c. analyzing transactions
d. posting transactions

17. Which of the following is listed on the post-closing trial balance for a company?
a. Salaries Expense.
b. Depreciation Expense.
c. Accumulated Depreciation.
d. Sales Revenue.
e. Income Summary.

Chapter 5 - Accounting for Merchandising Operations

1. A merchandising company using a perpetual system will make _____ adjusting

entries compared to a service company.
a. the same number of adjusting entries as a service company does
b. di erent types of adjusting entries compared to a service company
c. one more adjusting entry than a service company does
d. one less adjusting entry than a service company does

2. In a perpetual inventory system, when a buyer returns defective merchandise to the

seller, the buyer credits which account?
a. Sales Revenue.
b. Cash.
c. Sales Returns.
d. Merchandise Inventory.
3. Sales revenues are usually considered earned when
a. cash is received from credit sales
b. an order is received
c. goods have been transferred from the seller to the buyer
d. adjusting entries are made

4. Cost of goods sold is determined only at the end of the accounting period in
a. neither a perpetual nor a periodic inventory system
b. a periodic inventory system
c. both a perpetual and a periodic inventory system
d. a perpetual inventory system

5. In a perpetual inventory system, the Cost of Goods Sold account is used

a. only when a credit sale of merchandise occurs
b. only when a sale of merchandise occurs
c. whenever there is a sale of merchandise or a return of merchandise sold
d. only when a cash sale of merchandise occurs

6. T&H Company reported the following balances at December 31, 2018: Sales
Revenue £300,000, Freight-Out £2,000, Sales Returns and Allowances £10,000,
Sales Discounts £4,000, Cost of Goods Sold £250,000. Net sales for the month is
a. £300,000
b. £290,000
c. £286,000
d. £236,000

7. Which of the following expenses would not generally be found in the General and
Administrative Expenses section of an income statement?
a. Rent Expense.
b. Depreciation Expense.
c. Advertising Expense.
d. Wages Expense.

8. In preparing closing entries for a merchandising company, the Income Summary

account will be credited for the balance of
a. merchandise inventory
b. sales discounts
c. sales
d. freight-out
9. Cole Company has sales revenue of $39,000, cost of goods sold of $24,000 and
operating expenses of $9,000 for the year ended December 31. Cole's gross profit is
a. $6,000
b. $30,000
c. $0
d. $15,000

10. Under a perpetual inventory system, acquisition of merchandise for resale is

debited to the
a. Merchandise Inventory account
b. Supplies account
c. Cost of Goods Sold account
d. Purchases account

11. The adjusted trial balance of BNJ Enterprises shows the following data pertaining to
sales at the end of its fiscal year December 31, 2018: Sales Revenue €600,000,
Freight-Out €2,000, Sales Returns and Allowances €5,000, and Sales Discounts
€2,000. The closing entries for sales as following
a. Debit Sales Revenue, €600,000 and Sales Returns and Allowances €5,000 and
Sales Discounts €2,000; Credit Income Summary €605,000.
b. Debit Sales Revenue, €600,000 and Freight-Out €2,000; Credit Income Summary
€602,000.
c. Debit Sales Revenue, €600,000; Credit Income Summary €600,000.
d. Debit Sales Revenue, €600,000 and Sales Returns and Allowances €5,000 and
Sales Discounts €2,000; Credit Income Summary €607,000.

12. A company uses the perpetual inventory system and makes a purchase of inventory
on open account. Which of the following is the correct journal entry to record this
purchase?
a. A debit to the asset O ice Supplies and a credit to Cash.
b. A debit to Sales Returns and Allowances and a credit to Cost of Goods Sold.
c. A debit to Merchandise Inventory and a credit to Cash.
d. A debit to Merchandise Inventory and a credit to Accounts Payable.

13. Which of the following would not be classified as a contra account?

a. Sales Discounts
b. Sales Returns and Allowances
c. Accumulated Depreciation
d. Sales
14. Company A is taking the end-of-the-year physical inventory. Its accounting period
ends on December 31. Which of the following items would not be counted in the
ending inventory count?
a. Items sold on December 29 and shipped the same day where the purchaser is
responsible for paying the freight charge. The item arrived at its destination on
January 3.
b. Items owned by Company A were delivered to another company on consignment
on December 27. The items are still held by the other company on December 31.
c. Unsold inventory that remains in Company A's warehouse on December 31.
d. Items Company A ordered from a supplier on December 15 were shipped on
December 17th and received by Company A on December 28 where the seller paid
the shipping charges.

15. A company understates its ending inventory by $5,000. It never discovers this error.
The company is a sole proprietorship. Which statement accurately describes the
company's permanent situation?
a. Net income for the current year is overstated. Net income for the next year will
also be overstated by $5,000 and owner's equity will never be correct since the error
was not discovered.
b. Net income for the current year is understated and the owner's equity account
will permanently remain understated since the error is never discovered.
c. Net income for the current year is understated. Net income for the next year will
be overstated by $5,000, but the balance in the owner's equity account will be
correct at the end of year 2.
d. Net income for the current year is overstated and the owner's equity account will
permanently remain overstated since the error is never discovered.

16. At the beginning of September, 2008, RFI Company reported Merchandise Inventory
of $4,000. During the month, the company made purchases on account of $7,800.
At September 31, 2008, a physical count of inventory reported $3,200 on hand. Cost
of goods sold for the month is
a. $11,800
b. $8,600
c. $600
d. $7,800

17. Sales revenue less cost of goods sold is called

a. gross profit
b. net income
 c. net profit
d. marginal income

18. Net sales is sales less

a. sales returns and allowances
b. sales discounts
c. sales discounts and sales returns and allowances
d. sales returns

19. The buyer received an invoice from the seller for merchandise with a list price of
$700 and credit terms of 2/10, n/45. The term, 2/10, in the credit terms denotes
which of the following?
a. The discount percentage and the number of days in the discount period.
b. The discount percentage and the number of days to the end of the month.
c. Only the discount period.
d. The discount percentage.

20. Which of the following accounts has a normal credit balance?

a. Sales Discounts
b. Sales Returns and Allowances
c. Sales
d. Selling Expense

21. Cost of goods available for sale is computed by adding

a. purchases to beginning inventory
b. beginning inventory to the cost of goods purchased
c. beginning inventory to net purchases
d. net purchases and freight-in

22. On June 7, N&N Company sold £2,600,000 of merchandise on account to JMM

Company. The cost of the merchandise sold was £2,350,000. The journal entries to
record this transaction on W.B. Reind N&N Company's books under a perpetual
inventory system as following
a. Debit Cost of Goods Sold, £2,350,000; Credit Inventory £2,350,000
b. Debit Accounts Receivable, £2,600,0000; Credit Sales Revenue £2,600,000
c. Debit Accounts Receivable, £2,600,000; Credit Sales Revenue £2,600,000 and
Debit Cost of Goods Sold, £2,350,000; Credit Inventory £2,350,000
d. Debit Accounts Receivable, £2,350,000; Credit Sales Revenue £2,350,000 and
Debit Cost of Goods Sold, £2,600,000; Credit Inventory £2,600,000
 23. Income from operations is gross profit less
a. operating expenses
b. selling expenses
c. other expenses and losses
d. administrative expenses

24. Bryan Company purchased merchandise from Cates Company with freight terms of
FOB shipping point. The freight costs will be paid by the
a. buyer
b. seller
c. buyer and the seller
d. transportation company

25. When merchandise is purchased for resale, the Inventory account would be debited
for such acquisition costs as the cost of the item itself and any freight charges for
which the purchaser is responsible. This procedure is an application of which
accounting principle?
a. Historical cost principle.
b. Monetary unit principle.
c. Materiality principle.
d. Going-concern principle.

26. In a perpetual inventory system, cost of goods sold is recorded

a. with each sale
b. on an annual basis
c. on a daily basis
d. on a monthly basis

27. Gross profit for a merchandiser is net sales minus

a. operating expenses
b. sales discounts
c. cost of goods sold
d. cost of goods available for sale

Chapter 6 - Inventories

1. If goods in transit are shipped FOB destination

a. the seller has legal title to the goods until they are delivered
b. the buyer has legal title to the goods until they are delivered
c. no one has legal title to the goods until they are delivered
 d. the transportation company has legal title to the goods while the goods are in
transit

2. JNJ Co completed its inventory count. It arrived at a total inventory value of

£240,000. However, you have been given the information as follow: The physical
count of the inventory did not include goods costing £20,000 that were shipped to
JNJ, FOB shipping point on December 29 and were still in transit at year-end.
Besides, AC sold goods costing £35,000 to BB Co., FOB destination, on December
31. The goods were received at BB on January 2. They were not included in BB's
physical inventory. The correct inventory amount on December 31 is
a. £295,000
b. £240,000
c. £205,000
d. £275,000

3. When inventory prices are decreasing, which of the following will result in the
highest amount of income tax expense?
a. LIFO.
b. FIFO.
c. Weighted average.

4. AC Co completed its inventory count. It arrived at a total inventory value of

£240,000. However, you have been given the information as follow: The physical
count of the inventory did not include goods costing £20,000 that were shipped to
JNJ, FOB shipping point on December 29 and were still in transit at year-end.
Besides, AC sold goods costing £35,000 to BB Co., FOB destination, on December
31. The goods were received at BB on January 2. They were not included in AC's
physical inventory. The correct inventory amount of AC on December 31 is
a. £205,000.
b. £295,000.
c. £275,000.
d. £240,000.

5. Disclosures about inventory should include each of the following except the
a. costing method
b. basis of accounting
c. major inventory classifications
d. quantity of inventory
6. If beginning inventory is understated by $15,000, the e ect of this error in the
current period is
a. Cost of Goods Sold is understated by $15,000, Net Income is understated by
$15,000
b. Cost of Goods Sold is overstated by $15,000, Net Income is overstated by
$15,000
c. Cost of Goods Sold is overstated by $15,000, Net Income is understated by
$15,000
d. Cost of Goods Sold is understated by $15,000, Net Income is overstated by
$15,000

7. Sam's Used Cars uses the specific identification method of costing inventory.
During March, Sam purchased three cars for $6,000, $7,500, and $9,750,
respectively. During March, two cars are sold for $9,000 each. Sam determines that
at March 31, the $9,750 car is still on hand. What is Sam's gross profit for March?
a. $8,250
b. $4,500
c. $5,250
d. $750

8. At October 1, 2019, ABC Company had beginning inventory consisting of 80 units

with a unit cost of $20. During October, the company purchased inventory as
follows: October 2 purchased 120 units at $22, October 12 purchased 60 units at
$23 and October 20 purchased 150 units at $24. Vanida sold 100 units on October 8
and 200 units on October 28. Vanida uses a perpetual inventory system. The cost of
good sold under the Average Cost is
a. $5,420
b. $8,070
c. $6,580
d. $6,700

9. At March 1, 2019, XYZ Company had beginning inventory consisting of 80 units with
a unit cost of $120. During March, the company purchased inventory as follows: (1)
50 units at $115, (2) 100 units at $120, and (3) 120 units at $125. At the end of the
month, XYZ had 180 units in ending inventory. XYZ uses a periodic inventory system.
The cost of good sold under the FIFO is
a. $20,150
b. $24,400
 c. $22,200
d. $21,300

10. In a perpetual inventory system:

a. a new average is computed under the average-cost method after each sale.
b. specific identification is always used.
c. FIFO cost of goods sold will be the same as in a periodic inventory system.
d. average costs are computed as a simple average of unit costs incurred.

11. A merchandising business discovers that its ending inventory is understated by

$6,000. If the company does not correct this error, what will the e ect be on the
company's Total Expenses and Net Income?
a. Total expenses are understated and net income is overstated.
b. Total expenses and net income are both overstated.
c. Total expenses and net income are understated.
d. Total expenses are overstated and net income is understated.

12. Even though the amount of cost of goods sold and the amount of ending inventory
can vary dramatically depending on which inventory cost flow assumption is used,
which one of the following amounts will always be the same, regardless of which
inventory cost flow assumption is used?
a. The amount of the beginning inventory.
b. The amount of the ending inventory.
c. The amount of computed gross profit.
d. The amount of cost of goods available for sale.

13. Cost of goods sold is computed from the following equation

a. beginning inventory – cost of goods purchased + ending inventory
b. beginning inventory + cost of goods purchased – ending inventory
c. sales – cost of goods purchased + beginning inventory – ending inventory
d. beginning inventory + cost of goods purchased + ending inventory

14. FOB Shipping Point means that the:

a. Trucking company pays the freight.
b. Goods are shipped free on board (FOB) to the buyer's place of business.
c. Seller pays the freight.
d. Buyer pays the freight.

15. Inventories a ect

a. neither the statement of financial position nor the income statement
b. only the statement of financial position
 c. only the income statement
d. both the statement of financial position and the income statement

16. A company purchased inventory as follows: 200 units at $10, 300 units at $12. The
average unit cost for inventory is
a. $10.00
b. $12.00
c. $11.20
d. $11.00

17. In a manufacturing business, inventory that is ready for sale is called a

a. store supplies inventory
b. finished goods inventory
c. raw materials inventory
d. work in process inventory

18. Merchandise inventory is

a. often reported as a miscellaneous expense on the income statement
b. reported under the classification of Property, Plant, and Equipment on the
balance sheet
c. generally valued at the price for which the goods can be sold
d. reported as a current asset on the statement of financial position

19. A merchandising business discovers that its ending inventory is overstated by

$5,000. If the company does not correct this error, what will the e ect be on the
company's Cost of Goods Sold and Net Income?
a. Cost of goods sold is understated and net income is overstatcd.
b. Cost of goods sold is overstated and net income is overstatcd.
c. Cost of goods sold is overstated and net income is understated.
d. Cost of goods sold is understated and net income is understated.

20. Beginning inventory plus the cost of goods purchased equals

a. cost of goods available for sale
b. net purchases
c. total goods purchased
d. cost of goods sold

21. In periods of rising prices, the inventory method which results in the inventory value
on the statement of financial position that is closest to current cost is the
a. average-cost method
b. tax method
 c. FIFO method
d. LIFO method

Review Quiz (Ch1-6)

1. At October 1, 2019, ABC Company had beginning inventory consisting of 80 units

with a unit cost of $20. During October, the company purchased inventory as
follows: October 2 purchased 120 units at $22, October 12 purchased 60 units at
$23 and October 20 purchased 150 units at $24. Vanida sold 100 units on October 8
and 200 units on October 28. Vanida uses a perpetual inventory system. The cost of
good sold under the Average Cost is
a. $8,070
b. $5,420
c. $6,700
d. $6,580

2. _______ explains changes in the owner's claim on the business's assets from net
income or loss, owner investments, and owner withdrawals over a period of time.
a. Income Statement
b. Cash flows
c. Balance Sheet
d. The statement of owner's equity

3. The ________ principle requires that financial information is supported by

independent, unbiased evidence.
a. objectivity
b. business entity
c. going-concern
d. accounting period

4. A merchandising business discovers that its ending inventory is overstated by

$5,000. If the company does not correct this error, what will the e ect be on the
company's Cost of Goods Sold and Net Income?
a. Cost of goods sold is understated and net income is overstatcd.
b. Cost of goods sold is overstated and net income is overstatcd.
c. Cost of goods sold is overstated and net income is understated.
d. Cost of goods sold is understated and net income is understated.

5. Which of the following events is NOT recorded in the accounting records?

a. The company pays a cash dividend.
b. Equipment is purchased on account.
 c. A cash investment is made into the business.
d. An employee is terminated.

6. Which of the following objectives are legitimate reasons for taking a physical
inventory count, except?
a. To determine cost of goods sold.
b. To keep employees busy during a slow time in the business.
c. To check the accuracy of the perpetual inventory records.

7. Hardy Company purchased a computer for $4,800 on December 1. It is estimated

that annual depreciation on the computer will be $960. If financial statements are to
be prepared on December 31, the company should make the following adjusting
entry:
a. Debit Depreciation Expense, $80; Credit Accumulated Depreciation, $80
b. Debit Depreciation Expense, $960; Credit Accumulated Depreciation, $960
c. Debit O ice Equipment, $4,800; Credit Accumulated Depreciation, $4,800
d. Debit Depreciation Expense, $3,840; Credit Accumulated Depreciation, $3,840

8. N&N Company purchased a one-year fire insurance policy on October 1 for €3,600.
At the end of the years, the company prepares annual financial statements. N&N
Company should make the following adjusting entry on December 31:
a. Debit Insurance Expense, €900; Credit Prepaid Insurance, €900.
b. Debit Prepaid Insurance, €900; Credit Insurance Expense, €900.
c. Debit Prepaid Insurance, €3,600; Credit Insurance Expense, €3,600.
d. Debit Insurance Expense, €300; Credit Insurance Expense, €300.

9. If a company fails to adjust a Prepaid Rent account for rent that has expired, what
e ect will this have on that month's financial statements?
a. Expenses will be overstated and net income and owner's equity will be
understated
b. Failure to make an adjustment does not a ect the financial statements
c. Assets will be overstated and net income and owner's equity will be overstated
d. Assets will be understated and net income and owner's equity will be understated

10. Items waiting to be used in production are considered to be

a. work in progress
b. raw materials
c. merchandise inventory
d. finished goods
11. A retailer who uses a perpetual inventory system purchased $8,000 of merchandise
on credit. The credit terms were 2/10, n/30, FOB shipping point. The freight costs
were $130. What was the journal entry to record the purchase?
a. Merchandise Inventory, debit, $7,870; Accounts Payable, credit, $7,870.
b. Merchandise Inventory, debit, $8,130; Accounts Payable, credit, $8,130.
c. Merchandise Inventory, debit, $8,000; Accounts Payable, credit, $8,000.
d. Merchandise Inventory, debit, $8,130; Freight-In, debit, $130; Accounts Payable,
credit, $8,130.

12. GAAP stands for

a. Generally Accepted Auditing Principles
b. Generally Accepted Accounting Principles
c. Generally Accepted Auditing Procedures
d. Generally Accepted Accounting Procedures

13. A liability—revenue relationship exists with

a. unearned revenue adjusting entries
b. prepaid expense adjusting entries
c. accrued revenue adjusting entries
d. accrued expense adjusting entries

14. The financial statement that reports assets, liabilities, and equity is the:
a. income statement.
b. retained earnings statement.
c. statement of financial position.
d. statement of cash flows.

15. The historical cost principle states that:

a. assets should be recorded at their cost.
b. activities of an entity are to be kept separate and distinct from its owner.
c. only transaction data capable of being expressed in terms of money be included
in the accounting records.
d. assets should be initially recorded at cost and adjusted when the fair value
changes.

16. If business pays rent in advance and debits a Prepaid Rent account, the company
receiving the rent payment will credit
a. accrued rent revenue
b. unearned rent revenue
c. prepaid rent
d. cash