Financial Accounting Exam 2
1) The fundamental accounting equation is a reflection of the:
Money measurement concept
Conservatism concept
Dual-aspect concept
Historical cost concept
2) The historical cost concept reflects the fact that financial accounting practice favors:
Reliability over relevance
Management's best guess over historical financial information
Relevance over reliability
Consensus market values over historical financial information
3) Jon Sports' inventory account increased from $25,000 on December 31, 2003 to $30,000 on December 31, 2004. Which one of the following items would be included in the operating section of its 2004 indirect method statement of cash flows?
Add increase in inventory $5,000
Subtract increase in inventory ($5,000)
Add inventory balance $20,000
Subtract inventory balance ($20,000)
4) Turnkey Systems, Inc. began the month of June, 2004 with a prepaid expenses balance of $240,000. During the month, debits totaling $110,000 and credits totaling $80,000 were made to the prepaid expenses account. What was the June, 2004 ending balance of prepaid expenses?
A debit balance of $210,000
A credit balance of $210,000
A debit balance of $270,000
A credit balance of $270,000
5) Pentex and Marbro, small companies in the stationery business, each had a dollar gross margin of $20,000 during September 2004. Pentex's September sales were twice that of Marbro's. If Pentex's gross margin as a percentage of sales for September was 10%, Marbro's gross margin as a percentage of sales for the same period was:
10% 5% 20% Cannot be calculated
Accounts payable
Accounts receivable
Prepaid expense
7) Juan Foods pays off a long-term debt in full. Which one of the following statements describes the effect of the sale on Juan Foods?
Current ratio increases; total debt to equity ratio decreases
Current ratio decreases; total debt to equity ratio decreases
Current ratio decreases; total debt to equity ratio increases
Current ratio increases; total debt to equity ratio increases
8) On January 1, 2005, Mansfield Company has a retained earnings balance of $256,000. During 2005, its net income is $44,000 and it announces and pays $12,000 in dividends. There is no other dividend-related activity during the year. Its December 31, 2005 retained earnings balance is:
$2,12,000 $2,88,000 $3,00,000 $2,24,000
9) Juan Foods makes a cash sale with a positive gross margin. Which one of the following statements describes the effect of the sale on Juan Foods?
Current ratio increases
Current ratio decreases
No change to Juan Foods' current ratio
Insufficient information to judge effect on current ratio
10) Juan Foods pays off a long-term debt in full. Which one of the following statements best describes the appropriate book-keeping for this transaction?
Debit cash; credit long-term debt
Debit long-term debt; credit owners' equity
Debit owners' equity; credit long-term debt
Debit long-term debt; credit cash
11) On March 31, 2005, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2005, Preston sells Cars devices with a sales price of $10,000 and a cost to Preston of $8,000. During April Cars pays Preston $12,000 against the amount owed to Preston. What is the effect of these April transactions on Preston's balance sheet?
Cash increased by $12,000; retained earnings decreased by $2,000; inventory decreased by $10,000; accounts receivable decreased by $12,000.
Cash increased by $2,000; accounts receivable decreased by $2,000; inventory decreased by $8,000; retained earnings decreased by $12,000.
12) Consider the same scenario as in the previous question: On March 31, 2005, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2005, Preston sells Cars devices with a sales price of $10,000 and a cost to Preston of $8,000. During April Cars pays Preston $12,000 against the amount owed to Preston. If Preston had no other sales and records no other collections from customers during the month of April, the operating section of Preston's indirect method statement of cash flows for April will show the following de-accrual adjustments to net income:
Subtract change in accounts receivable; add change in inventory.
Add change in accounts receivable; subtract change in inventory
Add change in accounts receivable; add change in inventory.
Subtract change in accounts receivable; subtract change in inventory.
13) Planet Music buys all of its inventory on credit. During 2005, Planet Music's inventory account increased by $10,000. Which of the following statements must be true for Planet Music during 2005?
It made payments of less than $10,000 to suppliers.
It made cash payments of $10,000 to suppliers.
It made more cash payments to its suppliers than it recorded as cost of goods sold.
It paid less cash to suppliers than it recorded as cost of goods sold.
Increases operating expenses by $12,000
No material effect
Increases cost of goods sold by $12,000
It must involve a transfer of resources to another entity
It must involve the expenditure of cash now or in the future
It must not cause total liabilities to exceed total assets
Inflow of $15,000
Outflow of $8,000
Inflow of $8,000
Common stock issued, $3,000
Long-term debt paid, ($3,000)
Cash from financing, $3,000
Add: decrease in accounts payable $1,000
Add: increase in taxes payable $2,400
Add: decrease inventories $6,000
The sales revenue account increases by $1,400
The gross margin account increases by $1,400
The retained earnings account increases by $1,400
Entity concept
Materiality concept
Conservatism concept
Current ratio decreases
Current ratio remains unchanged
Insufficient information provided to judge effect on current ratio
In the indirect method statement, the period's depreciation is added to net income because it is a source of cash
Interest payments are included in the operating section of the direct method statement
The investing section of the direct method statement for a period is identical to the investing section of the indirect method statement for the same period
Debit short-term debt $50,000; credit cash $50,000
Debit cash $50,000; credit long-term debt $50,000
Debit cash $50,000; credit short-term debt $10,000; credit long-term debt $40,000
For assets, credits are entered on the left; for liabilities, debits are entered on the left
Debits on the left; credits on the right
Credits on the left; debits on the right
The financing section
The investing section
Depends on whether cash flow statement is direct or indirect method.
$18,000
$1,00,000
Cannot be determined from the information provided
Debit accounts receivable $3,500; credit cash $3,500
Debit accounts payable $3,500; credit cash $3,500
Debit cash $3,500; credit accounts receivable $3,50
Debit tax expense $80,000; credit cash $20,000; credit taxes payable $60,000
Debit tax expense $80,000; credit cash $20,000
Debit tax expense $80,000; credit cash $20,000; credit accounts payable $60,000
A debit balance of $42,000
A credit balance of $56,000
A debit balance of $53,000
Debit inventory $100,000; credit cash $58,000; credit accounts payable $42,000
Debit accounts payable $58,000; credit cash $42,000; credit inventory $16,000
Debit accounts payable $58,000; debit cash $42,000; credit inventory $100,000
Debit cash $600; debit accounts receivable $400; credit revenues $1,000
Debit revenues $1,000; credit cash $600; credit accounts receivable $400
Debit cash $600; debit accounts receivable $400; credit inventory $1,000
Debit inventory $750; credit cost of goods sold expense $750
Debit cost of goods sold expense $750; credit inventory $750
Debit inventory $750; credit accounts payable $750
1) The fundamental accounting equation is a reflection of the:
Money measurement concept
Conservatism concept
Dual-aspect concept
Historical cost concept
2) The historical cost concept reflects the fact that financial accounting practice favors:
Reliability over relevance
Management's best guess over historical financial information
Relevance over reliability
Consensus market values over historical financial information
3) Jon Sports' inventory account increased from $25,000 on December 31, 2003 to $30,000 on December 31, 2004. Which one of the following items would be included in the operating section of its 2004 indirect method statement of cash flows?
Add increase in inventory $5,000
Subtract increase in inventory ($5,000)
Add inventory balance $20,000
Subtract inventory balance ($20,000)
4) Turnkey Systems, Inc. began the month of June, 2004 with a prepaid expenses balance of $240,000. During the month, debits totaling $110,000 and credits totaling $80,000 were made to the prepaid expenses account. What was the June, 2004 ending balance of prepaid expenses?
A debit balance of $210,000
A credit balance of $210,000
A debit balance of $270,000
A credit balance of $270,000
5) Pentex and Marbro, small companies in the stationery business, each had a dollar gross margin of $20,000 during September 2004. Pentex's September sales were twice that of Marbro's. If Pentex's gross margin as a percentage of sales for September was 10%, Marbro's gross margin as a percentage of sales for the same period was:
10% 5% 20% Cannot be calculated
6) When an
entity recognizes revenue before it has received cash for the sale, it records
an increase in a(n):
Liability
such as 'Advances from customers'Accounts payable
Accounts receivable
Prepaid expense
7) Juan Foods pays off a long-term debt in full. Which one of the following statements describes the effect of the sale on Juan Foods?
Current ratio increases; total debt to equity ratio decreases
Current ratio decreases; total debt to equity ratio decreases
Current ratio decreases; total debt to equity ratio increases
Current ratio increases; total debt to equity ratio increases
8) On January 1, 2005, Mansfield Company has a retained earnings balance of $256,000. During 2005, its net income is $44,000 and it announces and pays $12,000 in dividends. There is no other dividend-related activity during the year. Its December 31, 2005 retained earnings balance is:
$2,12,000 $2,88,000 $3,00,000 $2,24,000
9) Juan Foods makes a cash sale with a positive gross margin. Which one of the following statements describes the effect of the sale on Juan Foods?
Current ratio increases
Current ratio decreases
No change to Juan Foods' current ratio
Insufficient information to judge effect on current ratio
10) Juan Foods pays off a long-term debt in full. Which one of the following statements best describes the appropriate book-keeping for this transaction?
Debit cash; credit long-term debt
Debit long-term debt; credit owners' equity
Debit owners' equity; credit long-term debt
Debit long-term debt; credit cash
11) On March 31, 2005, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2005, Preston sells Cars devices with a sales price of $10,000 and a cost to Preston of $8,000. During April Cars pays Preston $12,000 against the amount owed to Preston. What is the effect of these April transactions on Preston's balance sheet?
Cash
increased by $12,000; accounts receivable decreased by $2,000; inventory
decreased by $8,000; retained earnings increased by $2,000.
Accounts
receivable increased by $2,000; inventory decreased by $8,000; cash increased
by $12,000; retained earnings increased by $12,000.Cash increased by $12,000; retained earnings decreased by $2,000; inventory decreased by $10,000; accounts receivable decreased by $12,000.
Cash increased by $2,000; accounts receivable decreased by $2,000; inventory decreased by $8,000; retained earnings decreased by $12,000.
12) Consider the same scenario as in the previous question: On March 31, 2005, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2005, Preston sells Cars devices with a sales price of $10,000 and a cost to Preston of $8,000. During April Cars pays Preston $12,000 against the amount owed to Preston. If Preston had no other sales and records no other collections from customers during the month of April, the operating section of Preston's indirect method statement of cash flows for April will show the following de-accrual adjustments to net income:
Subtract change in accounts receivable; add change in inventory.
Add change in accounts receivable; subtract change in inventory
Add change in accounts receivable; add change in inventory.
Subtract change in accounts receivable; subtract change in inventory.
13) Planet Music buys all of its inventory on credit. During 2005, Planet Music's inventory account increased by $10,000. Which of the following statements must be true for Planet Music during 2005?
It made payments of less than $10,000 to suppliers.
It made cash payments of $10,000 to suppliers.
It made more cash payments to its suppliers than it recorded as cost of goods sold.
It paid less cash to suppliers than it recorded as cost of goods sold.
14) On
December 31, 2005, Juan Foods purchases a van for $12,000. How does the
purchase of the van affect Juan Foods' 2005 income statement?
Decreases
sales by $12,000Increases operating expenses by $12,000
No material effect
Increases cost of goods sold by $12,000
15) To be
recorded as a liability, an item must meet three specific conditions. Two of
them are: it must involve probable future sacrifice of economic resources by
the entity, and it must be a present obligation that arose as a result of a
past transaction. Which one of the following is the third condition?
The item
must reduce the market value of the recording entityIt must involve a transfer of resources to another entity
It must involve the expenditure of cash now or in the future
It must not cause total liabilities to exceed total assets
16) The next
9 questions are based on Patnode Inc.'s balance sheets at year end 2004 and
2005.
During
2005, Patnode announced and paid dividends of $1,000, the only dividend-related
activity during the year. What was its 2005 net income?
$5,600 $3,600 $4,600 Cannot be estimated
17) During
2005, Patnode had a cash outflow of $15,000 for investing activities and a cash
inflow of $7,000 from financing activities. Its 2005 cash flow from operations
was:
Outflow
of $15,000Inflow of $15,000
Outflow of $8,000
Inflow of $8,000
18) Patnode's
2005 statement of cash flows contains four items in the financing section.
Three of them are: Short-term debt issued, $15,000; Short-term debt paid,
($10,000) and Dividends paid, ($1,000). What is the fourth item in the
financing section?
Retained
earnings, $4,600Common stock issued, $3,000
Long-term debt paid, ($3,000)
Cash from financing, $3,000
19) How much
total depreciation and amortization expense did Patnode record during 2005?
$10,000 $6,000
$3,000 $5,000
20) During
2005, Patnode recorded sales of $17,000. How much cash did it collect from its
customers?
$17,000 $14,000
$3,000
Cannot be estimated
21) Which one of the following items will not appear in
the operating section of Patnode's 2005 indirect method cash flow statement?
Deduct:
increase in accounts receivable $3,000Add: decrease in accounts payable $1,000
Add: increase in taxes payable $2,400
Add: decrease inventories $6,000
22) What is Patnode's current ratio at the end of 2004?
2.46 0.41 1.12 0.89
23) What is
Patnode's total debt to equity ratio at the end of 2004 (rounded to two decimal
places)?
5.3 0.19 0.25 4.04
24) Patnode
recorded a 2005 tax expense of $3,000. What amount did it pay to the tax
authorities during 2005?
$2,400 $7,000 $600 $5,400
25) Kirby, Inc. records a sale with a gross margin of
$1,400. Which one of the following statements correctly describes the effect of
such a sale on its balance sheet?
Common
stock increases by $1,400The sales revenue account increases by $1,400
The gross margin account increases by $1,400
The retained earnings account increases by $1,400
26) Sandy
Robbins is the sole owner of a hair salon. He often takes small amounts of
"lunch money" from the cash register, figuring that "it is my
business anyway." His accountant, however, insists that Sandy make a note
of the cash he takes, and at the end of the each accounting period, she debits
owners' equity and credits the cash account for the total amount that Sandy has
taken during the period.
In
recording the cash withdrawals even though Sandy is sole proprietor, the
accountant is correctly applying the:
Matching
conceptEntity concept
Materiality concept
Conservatism concept
27) Anderson
Electronics' 2005 return on sales percentage is 20%. Its 2005 net income is
$40,000. What is its 2005 sales?
$4,00,000
$80,000
$2,00,000 $1,00,000
28) Anderson Electronics' 2005 return on sales
percentage is 20%. Its 2005 net income is $40,000. What is its 2005 sales?
$4,00,000
$80,000 $2,00,000 $1,00,000
29) During
June 2005, Bextra Inc. recorded sales of $55,000 but only $20,000 was collected
in cash from customers. Cost of goods sold of $38,000. What was the effect of
these sales on Bextra's current ratio?
Current
ratio increasesCurrent ratio decreases
Current ratio remains unchanged
Insufficient information provided to judge effect on current ratio
30) Which one
of the following statements is not
true about statements of cash flows prepared according to U.S. GAAP?
The
operating section of the indirect method starts with the net income of the
periodIn the indirect method statement, the period's depreciation is added to net income because it is a source of cash
Interest payments are included in the operating section of the direct method statement
The investing section of the direct method statement for a period is identical to the investing section of the indirect method statement for the same period
31) A company raised $50,000 in cash by taking a
one-year loan of $10,000 and a 5-year loan of $40,000. Which of the following
is the correct journal entry to record this transaction?
Debit
short-term debt $40,000; debit retained earnings $10,000; credit cash $50,000Debit short-term debt $50,000; credit cash $50,000
Debit cash $50,000; credit long-term debt $50,000
Debit cash $50,000; credit short-term debt $10,000; credit long-term debt $40,000
32) Which one of the following statements describes the
rules about posting transactions into T-accounts in the ledger?
For
assets, debits are entered on the left; for liabilities, credits are entered on
the leftFor assets, credits are entered on the left; for liabilities, debits are entered on the left
Debits on the left; credits on the right
Credits on the left; debits on the right
33) Baxtra, Inc. pays $20,000 in cash as interest to
its lenders during 2005. According to U.S. GAAP, in which section of the
statement of cash flows would this payment be included?
The
operating sectionThe financing section
The investing section
Depends on whether cash flow statement is direct or indirect method.
34) Taylor Company had a salaries payable balance of
$18,000 on December 31, 2004. During 2005, it paid $50,000 in cash as salaries,
and recorded a salary expense of $50,000. Its December 31, 2005 salaries
payable balance is:
$50,000 $18,000
$1,00,000
Cannot be determined from the information provided
35) On April 30, 2005, Zono Electronics, Inc. made a
payment of $3,500 to Imperial Distributors, a supplier. Choose the statement
that best describes the recording of this financial transaction by Imperial
Distributors.
Debit
cash $3,500; credit accounts payable $3,500Debit accounts receivable $3,500; credit cash $3,500
Debit accounts payable $3,500; credit cash $3,500
Debit cash $3,500; credit accounts receivable $3,50
36) Sardi Company estimates its 2005 tax expense to be
$80,000. It makes a cash payment of $20,000 to the tax authorities on December
31, 2005. How should this transaction be recorded by Sardi?
Debit tax
expense $80,000; credit cash $60,000; credit taxes payable $20,000Debit tax expense $80,000; credit cash $20,000; credit taxes payable $60,000
Debit tax expense $80,000; credit cash $20,000
Debit tax expense $80,000; credit cash $20,000; credit accounts payable $60,000
37) On June 1, 2005, Planet Music has accounts payable
of $45,000. During the month, debits of $3,000 and credits of $11,000 were made
to the account. At the end of June 2005, what was the accounts payable balance?
A credit
balance of $53,000A debit balance of $42,000
A credit balance of $56,000
A debit balance of $53,000
38) Barnaby & Sons receives a large shipment of
goods from its supplier. It pays $58,000 at the time of delivery and promises
to pay the remaining $42,000 within the next two months. What is appropriate
journal entry for this transaction?
Debit
cash $42,000; debit inventory $16,000; credit accounts payable $58,000;Debit inventory $100,000; credit cash $58,000; credit accounts payable $42,000
Debit accounts payable $58,000; credit cash $42,000; credit inventory $16,000
Debit accounts payable $58,000; debit cash $42,000; credit inventory $100,000
39) Annie's Fitness sells a set of free weights to a
customer for $1,000. The customer pays $600 in cash and puts the rest on her
store credit account. Which one of the following statements describes the most
appropriate accounting for the transaction?
Debit
cash $600; debit accounts receivable $400; credit cost of good sold $1000Debit cash $600; debit accounts receivable $400; credit revenues $1,000
Debit revenues $1,000; credit cash $600; credit accounts receivable $400
Debit cash $600; debit accounts receivable $400; credit inventory $1,000
40) Annie's Fitness sells a set of free weights to a
customer for which Annie's had paid $750. Which one of the following statements
describes the most appropriate accounting for the transaction?
Debit
cost of goods sold expense $750; credit cash $750Debit inventory $750; credit cost of goods sold expense $750
Debit cost of goods sold expense $750; credit inventory $750
Debit inventory $750; credit accounts payable $750
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