Chapter 1

Multiple Choice
1. Financial accounting focuses on the specific needs of decision makers external to the organization.
Which of the following would not be an external user?

a. Stockholders
b. Internal Revenue Service
c. Vice President—Marketing
d. Banks

2. The three major financial statements are the

a. balance sheet, income statement, and the production statement.

b. balance sheet, income statement, and the statement of cash flows.
c. balance sheet, production statement, and the statement of cash flows.
d. balance sheet, production statement, and the statement of earnings per share.

3. The balance sheet shows the financial status of a company

a. at a particular point in time.

b. for a period of a month, quarter, or year.
c. from the beginning of a period to the end of the period.
d. only at the end of the year.

4. A loan from the bank

a. increases assets and owner's equity.

b. increases assets and liabilities.
c. increases liabilities and owner's equity.
d. has no effect on total assets.

5. The purchase of inventory by paying cash causes

a. an increase in one asset and a decrease in another.

b. an increase in owner's equity and a decrease in an asset.
c. an increase in an asset and an increase in a liability.
d. none of the above.

6. The preparation of the financial statements is the responsibility of

a. the CPA. (Certified Public Auditor)

b. the tax accountant.
c. the cost accountant.
d. management.

7. Which of the following is (are) not true of an audit opinion?

a. It includes the signature of the audited company's president.

b. Financial statements are the responsibility of the auditors.
c. It must be conducted in accordance with generally accepted accounting principles.
d. It includes an examination of every transaction.
e. All of the above
f. None of the above

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8. The controller of a corporation

a. audits the financial statements.

b. cannot be a CPA.
c. is the chief accountant.
d. must be a CMA (Certified Management Accountant).

9. A certified public accountant (CPA) earns certification through

a. being an accounting major in college.

b. experience.
c. passing a written national examination.
d. all of the above.
e. both a and c.
f. both b and c.

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Chapter 2
Multiple Choice
1. A fiscal year

a. ends on December 31.

b. always ends at the end of the month.
c. ends on June 30.
d. is any 12 consecutive months.

2. The key components in measuring income are

a. revenue and assets.

b. assets and liabilities.
c. revenue and expenses.
d. retained earnings and expenses.
e. revenue and liabilities.
f. expenses and assets.

3. Which of the following help(s) determine when a sale should be included in the income statement?

a. Recognition principle
b. Cost recovery principle
c. Matching principle
d. Both a and c

4. The recording of expenses in the same time period as the related revenues is called

a. matching.
b. recognition.
c. allocation.
d. accuracy.

5. Given the following information at the end of the year, what was the balance in retained earnings at
the beginning of the year?

Total Assets = $190,000

Total Liabilities = 110,000
Contributed Capital = 30,000
Revenues = 85,000
Expenses = 70,000

a. $25,000
b. $35,000
c. $45,000
d. $80,000

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6. Which of the following accounts is not an expense?

a. depreciation
b. sales salaries
c. dividends
d. delivery expense

7. Given the following information at the end of the year, how much was net income for the year?

Beginning retained earnings = $54,000

Dividends = $20,000
Ending retained earnings = $69,000

a. $(5,000)
b. $15,000
c. $35,000
d. $40,000

8. Payments of dividends to stockholders

a. increase paid-in capital.

b. decrease paid-in capital.
c. increase retained earnings.
d. decrease retained earnings.
e. increase assets.
f. increase liabilities.

9. The ratio that is sometimes referred to as the earnings multiple is the

a. earnings-per-share ratio.
b. dividend-yield ratio.
c. price-earnings ratio.
d. dividend-payment ratio.

10. The stockholder who is interested in cash dividends payout would be most interested in

a. growth company stock.

b. a company's dividend-yield ratio.
c. comparing earnings-per-share ratio.
d. comparing net-income.

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11. Which of the following formulas is used to calculate dividend-yield ratio?

a. Net income / average number of shares outstanding

b. Common dividends per share / market price per share
c. Market price per share / gross profit per share
d. Revenue / average number of shares outstanding

12. The ledger

a. should always have a credit balance.

b. accumulates the increases and decreases that occur during the period for a single
balance sheet or income statement item.
c. is the book of original entry.
d. compiles all source documents.

13. Which of the following is a group of accounts that all normally have a debit balance?

a. Cash, Mortgage Payable, and Inventory

b. Land, Cost of goods sold, and Paid-in Capital
c. Accounts Receivable, Salaries Expense, and Dividends
d. Prepaid Rent, Building, and Notes Payable

14. The term credit means

a. to increase.
b. to decrease.
c. the left side of an account.
d. the right side of an account.

15. Source documents are

a. supporting original records of financial transactions.

b. journal entries.
c. ledger accounts.
d. increases on the left side of an account.

16. What is the correct order of the accounting process?

a. Ledger, journal, trial balance, balance sheet, income statement

b. Journal, trial balance, ledger, balance sheet, income statement
c. Journal, ledger, trial balance, balance sheet, income statement
d. Journal, ledger, trial balance, income statement, balance sheet

17. The trial balance is

a. the listing of all accounts.

b. a listing of all accounts with their balances.
c. a place where a running balance of an account is kept.
d. the book of original entry.

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18. To find an explanation of a transaction, one would look at the

a. journal.
b. ledger.
c. chart of accounts.
d. trial balance

19. When dividends are paid,

a. total assets remain the same.

b. stockholders' equity will increase.
c. total assets will increase.
d. total assets will decrease.

20. Which of the following entries would be used to record the sale of services for cash?

a. Sales xxx
Cash xxx

b. Cash xxx
Accounts Payable xxx

c. cash xxx
Service Revenue xxx

d. Sales xxx
Accounts Receivable xxx

21. The following journal entry should be posted as

Supplies xxx
Accounts Payable xxx

a. a debit to Accounts Payable and a credit to Supplies.

b. a debit to Accounts Payable and a debit to Supplies.
c. a credit to Accounts Payable and a credit to Supplies.
d. a credit to Accounts Payable and a debit to Supplies.

22. Revenue accounts are increased by credits

a. always.
b. only when they have a debit balance.
c. only when they have a credit balance.
d. never.

23. The trial balance makes sure that

a. the proper accounts are effected.

b. each account has the appropriate dollar amount balance.
c. the debits equal the credits in the journal.
d. the debits equal the credits in the ledger.
e. None of the above

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Chapter 3
Multiple Choice
1. Which of the following is an example of an implicit transaction?

a. payment of one year's rent in advance

b. payment of dividends to stockholders
c. recording monthly depreciation on equipment
d. expiration of prepaid rent.
e. both a and c
f. both c and d

2. Which of the following is not an application of an accrual accounting?

a. adjusting the accounts at the end of a period

b. recognizing revenues when earned
c. recognizing expenses when incurred
d. recording expenses when paid

3. A company recorded cash purchases of equipment in the Depreciation Expense account when
purchased. The result would be an

a. understatement of assets.
b. overstatement of liabilities.
c. overstatement of assets.
d. understatement of net income.
e. understatement of liabilities.

4. In November, cash was received in advance of rendering a service. If the service was not performed
by December 31, the adjusting entry would be

a. a debit to Unearned Services and a credit to Cash.

b. a debit to Unearned Services and a credit to Revenue from Services.
c. a debit to Revenue from Services and a credit to Prepaid Services.
d. a debit to Prepaid Services and a credit to Revenue from Services.
e. both b and d.
f. none of the above.

5. The Wages Payable account is an example of

a. an expense.
b. an asset.
c. a liability.
d. an owners' equity item.

6. ABC Engineering completed a survey for York, Corp., on July 30 and billed the company on August
1. For ABC, this is an example of

a. an accrued expense.
b. an accrued revenue.
c. a deferred expense.
d. a deferred revenue.

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7. The journal entry to record the receipt of rent received in advance requires a

a. debit to Unearned Rent.

b. credit to Rent Revenue.
c. credit to Cash.
d. debit to Cash.
e. debit to Rent Revenue.

8. The journal entry to record the payment of interest expense on a one-year note requires a credit to

a. Cash.
b. Interest Expense.
c. Unearned Interest.
d. Prepaid Interest.

9. When the financial statements are completed, the Income Summary account is found on which
financial statement?

a. Balance sheet
b. Income statement
c. Statement of cash flows
d. None of the above

10. If the company ends the year with a net income, the balance in the Income Summary account
immediately preceding its closing will have a

a. debit balance.
b. credit balance (usually).
c. Both a and b
d. credit balance (always).

11. If the bookkeeper (in 20x2) expenses the entire cost of a truck that normally would be used for three
years, then

a. net income will be understated for 20x2 and overstated for the years 20x3 and 20x4.
b. total assets will not equal liabilities plus owners' equity.
c. net income will be overstated for 20x2 and understated for the years 20x3 and 20x4.
d. assets will be overstated for 20x2.

12. If the bookkeeper fails to make a revenue entry for 20x2,

a. both 20x2's and 20x3's net income will be overstated.

b. only 20x2's net income will be overstated.
c. net income for 20x2 would be understated.
d. assets will be overstated for 20x2 and 20x3.

13. Which of the following accounts is a current liability?

a. Accounts Receivable
b. Equipment
c. Goodwill
d. Accounts Payable

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14. Which of the following accounts is a long-term liability?

a. Wages payable
b. Bonds Payable due 2025
c. Prepaid Rent
d. Sales Taxes Payable

15. Which of the following is not used in solvency determination?

a. return on sales ratio

b. working capital
c. current ratio
d. none of the above

16. Donald, Corp.'s balance sheet as of Dec. 31, 20x2 includes the following:

Current assets $ 60,000

Current liabilities $ 15,000
Total assets $ 90,000
Total liabilities $ 45,000

What is Donald's current ratio? Current ratio=

Current assets/
a. 2.0 current liabilities
b. 4.0
c. 3.0
d. 6.0

17. Morton, Corp., has the following income statement items for the year 20x2:

Sales $ 100,000
Gross profit $ 72,000
Operating expenses $ 47,000
Net income $ 25,000

What is Morton's return on sales?

a. 5%
b. 10%
c. 25%
d. 40%

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Chapter 5
Multiple Choice
1. The primary purpose of the statement of cash flows is to provide information

a. about a company’s cash receipts and cash payments during an accounting period.
b. about a company’s investing and financing activities during an accounting period.
c. regarding a company’s financial position at the end of an accounting period.
d. regarding the operating activities for a period of time.

2. For the year ended December 31, 20X2, a company had cash collections from customers of $50,000;
cash paid to employees of $8,000; cash used to retire long-term bonds of $7,000; and cash payments
for dividends of $1,000. Cash provided by operating activities for 20X2 is

a. $34,000.
b. $35,000.
c. $42,000
d. $43,000.

3. For the year ended December 31, 20X2, a company had cash payments for dividends on stock of
$40,000; cash paid for interest of $7,000; cash paid to suppliers (not subject to depreciation) of
$8,000; and cash payments for equipment of $9,000. Cash used by investing activities for 20X2 is

a. $9,000.
b. $17,000.
c. $24,000.
d. $49,000.

4. Which of the following would not be represented in the financing section of the statement of cash
flows?

a. long-term bonds payable issued

b. issuing of equity securities
c. purchase of treasury stock
d. make a loan to a supplier (the word supplier lets us understand it is a financing activity
and not commercial)

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5. Wilguess Company began the current year with an Accounts Receivable balance of $15,000. During
the year, Wilguess Company had credit sales of $110,000. At the end of the year the balance in the
Accounts Receivable account was $5,000. How much cash did Wilguess Company generate from
collections from customers?

a. $120,000
b. $115,000
c. $110,000
d. $100,000

6. A decrease in operating assets would appear in which section of the statement of cash flows?

a. operating
b. investing
c. financing
d. other

7. When preparing a statement of cash flows, the difference between the direct and indirect method
occurs in which of the following section(s)?

a. financing activities
b. operating activities
c. investing activities
d. all of the above

8. The Wages Payable account had a beginning balance of $5,000 and an ending balance of $7,000.
Wage expense for the period was $79,000. How much cash was paid for wages during the period?

a. $77,000
b. $79,000
c. $81,000
d. $86,000

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