Course Introduction
Principles of Accounting Pre-Test
Questions
Principles of Accounting introduces students to the fundamental concepts and techniques used in the recording, classification, and interpretation of financial transactions. The course covers the accounting cycle, including journal entries, ledgers, trial balances, and the preparation of financial statements such as the balance sheet, income statement, and cash flow statement. Emphasis is placed on understanding the role of accounting in business decision-making, internal controls, and the ethical responsibilities of accountants. Students will develop analytical and problem-solving skills essential for interpreting financial information and supporting organizational objectives.
Recommended Textbook
Fundamental Accounting Principles 23rd Edition by John Wild
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Page 2
Chapter 1: Accounting in Business
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Q1) From an accounting perspective, an event is a happening that affects the accounting equation, but cannot be measured.
A)True
B)False
Answer: False
Q2) Technology:
A) Reduces the time, effort and cost of recordkeeping.
B) In accounting is only available to large corporations.
C) Has not improved the clerical accuracy of accounting.
D) Has replaced accounting.
E) In accounting has replaced the need for decision makers.
Answer: A
Q3) The assumption that requires that a business be accounted for separately from its owners is the ________ assumption.
Answer: business entity
Q4) In the partnership form of business, the owners are called stockholders.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Analyzing and Recording Transactions
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Q1) An income statement is also called an earnings statement, a statement of operations or a profit and loss statement.
A)True
B)False
Answer: True
Q2) On February 5, Teddy's Catering purchased an oven that cost $35,000. The firm made a down payment of $5,000 cash and signed a long-term note payable for the balance. Show the general journal entry to record this transaction.
Answer: \(\begin{array} { l l l }
2 / 5& \text { Oven } & 35,000 & \\ &\text { Cash } & & 5,000 \\ &\text { Note Payable } && 30,000 \end{array}\)
Q3) The purchase of land and buildings will generally be recorded in the same ledger account.
A)True
B)False
Answer: False
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4
Chapter 3: Adjusting Accounts and Preparing Financial Statements
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Q1) Costs incurred during an accounting period but unpaid and unrecorded are accrued expenses.
A)True
B)False
Answer: True
Q2) A physical count of supplies on hand at the end of May for Masters, Inc. indicated $1,250 of supplies on hand. The general ledger balance before any adjustment is $2,100. What is the adjusting entry for office supplies that should be recorded on May 31?
A) Debit Supplies Expense $1,250 and credit Supplies $2,100.
B) Debit Prepaid Supplies $850 and credit Supplies Expense $850.
C) Debit Supplies $1,250 and credit Cash $1,250.
D) Debit Supplies Expense $1,250 and credit Supplies $1,250.
E) Debit Supplies Expense $850 and credit Supplies $850.
Answer: E
Q3) In preparing statements from the adjusted trial balance, the balance sheet must be prepared first.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Completing the Accounting Cycle
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Q1) A classified balance sheet:
A) Broadly groups items into assets, liabilities and equity.
B) Measures a company's ability to pay its bills on time.
C) Organizes assets and liabilities into important subgroups that provide more information.
D) Reports operating, investing, and financing activities.
E) Reports the effect of profit and withdrawals on owner's capital.
Q2) The Income Summary account is used to close the permanent accounts at the end of an accounting period.
A)True
B)False
Q3) After posting the entries to close all revenue and expense accounts, the Income Summary account of Cleaver Auto Services has a $4,000 debit balance. This result implies that Cleaver earned a net income of $4,000.
A)True
B)False
Q4) The current ratio is computed by dividing current liabilities by current assets.
A)True
B)False
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Chapter 5: Accounting for Merchandising Operations
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Q1) Cushman Company had $800,000 in net sales, $350,000 in gross profit, and $200,000 in operating expenses. Cost of goods sold equals:
A) $150,000.
B) $450,000.
C) $200,000.
D) $350,000. E) $800,000.
Q2) Reductions in the selling price of merchandise sold to customers, often involving damaged or defective merchandise that a customer is willing to purchase with a decrease in the selling price is referred to as__________
Q3) Martin Corporation allows customers to return merchandise within 60 days of purchase. At year-end, Martin estimates that sales of $20,000, with a cost of $14,000 will be returned in the upcoming year. The unadjusted balance in Inventory Returns Estimated is a debit of $4,000, and the unadjusted balance in Sales Refund Payable is a credit of $2,500. Prepare the adjusting entries necessary to record the revenue side and cost side estimates for returns and allowances.
Q4) Distinguish between selling expenses and general and administrative expenses.
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Page 7
Chapter 6: Inventories and Cost of Sales
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Q1) Damaged and obsolete goods that can be sold:
A) Are assigned a value of zero.
B) Are included in inventory at their full cost.
C) Should be disposed of immediately.
D) Are included in inventory at their net realizable value.
E) Are never counted as inventory.
Q2) A company reported the following data:
\[\begin{array} { | l | r | r | }
\hline & \text { Year 1 } & \text { Y ear 2 } \\
\hline \text { Cost of goods sold } & \$ 317,500 & \$ 279,100 \\
\hline \text { Average inventory } & 72,000 & 93,000 \\
\hline
\end{array}\] Required:
1. Calculate the company's merchandise inventory turnover for each year.
2. Comment on the company's efficiency in managing its inventory.
Q3) An understatement of the ending inventory balance will overstate cost of goods sold and understate net income.
A)True
B)False
Q4) Identify and describe the four inventory valuation methods.
Page 8
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Chapter 7: Accounting Information Systems
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Q1) Which of the following is not a feature of special journals?
A) They produce an efficient division of labor.
B) They eliminate the need for a general journal.
C) Good system design could collapse sales and cash receipts into one journal to better suit a business.
D) They allow posting of amounts as column totals rather than as individual amounts.
E) They are efficient tools in helping journalize and post transactions.
Q2) Which of the following statements is not true regarding internal control procedures?
A) Internal control procedures include methods to achieve compliance with laws and regulations.
B) Internal control procedures direct operations toward common goals.
C) Internal control procedures are designed to safeguard company assets.
D) Internal control procedures are not affected by the cost-benefit principle.
E) Internal control procedures are designed to ensure reliable financial reports.
Q3) The ________ principle requires that an accounting information system report useful, understandable, timely, and pertinent information for effective decision making.
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Chapter 8: Cash and Internal Controls
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Q1) Identify each of the following items 1 through 10 as either (A) cash or (B) cash equivalent.
1. Coins
_____ 2. Petty cash
_____ 3. Three-month certificate of deposit
4. Commercial paper
_____ 5. Currency
6. Certified check
7. Cashier's check
_____ 8. Money market accounts
9. Money orders
_____ 10. U.S. treasury bills
Q2) Canceled checks are checks the bank has paid and deducted from the customer's account during the period.
A)True
B)False
Q3) When evaluating the days' sales uncollected ratio, generally the higher the receivables balance, the better the ratio.
A)True
B)False
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Chapter 9: Accounting for Receivables
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Q1) To write off an uncollectible account receivable when the allowance method of accounting for uncollectible accounts is used, a company should debit ________ and credit accounts receivable.
Q2) Which of the following is not true regarding a credit card expense?
A) Credit card expense is not recorded by the seller.
B) Credit card expense may be classified as a selling expense.
C) Credit card expense is a fee the seller pays for services provided by the card company.
D) Credit card expense may be classified as a "discount" deducted from sales to get net sales.
E) Credit card expense may be classified as an administrative expense.
Q3) The practice of placing dishonored notes receivable into accounts receivable keeps only notes that have not yet matured in the Notes Receivable account.
A)True
B)False
Q4) Federal laws prohibit the selling of accounts receivables to factors.
A)True
B)False
Q5) __________refers to the expected proceeds from converting an asset into cash.
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Chapter 10: Plant Assets Natural Resoures and Intangibles
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Q1) Which of the following statements regarding increases in the value of plant assets under U.S. GAAP and IFRS is true?
A) IFRS prohibits upward asset revaluations.
B) Under GAAP, a company can reverse an impairment and record that increase in income.
C) U.S. GAAP prohibits companies from recording increases in the value of plant assets.
D) U.S. GAAP allows companies to record increases in the value of plant assets.
E) Under IFRS, an impairment increase beyond as asset's original cost is not recorded.
Q2) Determine the machines' first year depreciation under the double-declining-balance method.
A) $48,000.
B) $24,000.
C) $66,000.
D) $25,800.
E) $54,000.
Q3) Plant assets can be disposed of by discarding, selling, or exchanging them.
A)True
B)False
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Chapter 11: Current Liabilities and Payroll Accounting
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Q1) The times interest earned ratio reflects:
A) A company's ability to pay interest even if sales decline.
B) The relation between assets and liabilities.
C) A company's ability to pay its operating expenses on time.
D) The relation between income and debt.
E) A company's profitability.
Q2) FICA taxes include:
A) Charitable giving.
B) Employee federal income tax.
C) Social Security and Medicare taxes.
D) Employee state income tax.
E) Federal and state unemployment taxes.
Q3) The rate that a state assigns reflecting a company's stability or instability in employing workers is the:
A) Pay rate.
B) Tax withholding rate.
C) FICA rate.
D) Credit rating.
E) Merit rating.
Q4) Gross pay less all deductions is called ________.
Page 13
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Chapter 12: Accounting for Partnerships
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Q1) Current partners usually require any new partner to pay a bonus for the privilege of joining when the current value of a partnership is greater than the recorded amounts of equity.
A)True
B)False
Q2) A partnership that has two classes of partners, general and limited, where the limited partners have no personal liability beyond the amounts they invest in the partnership, and no active role in the partnership, except as specified in the partnership agreement is a:
A) Limited liability company.
B) Limited partnership.
C) Mutual agency partnership.
D) Limited liability partnership.
E) General partnership.
Q3) Define the partner return on equity ratio and explain how a specific partner would use this ratio.
Q4) Accounting procedures for both C corporations and S corporations are the same in all aspects.
A)True
B)False
Page 14
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Chapter 13: Accounting for Corporations
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Q1) The main limitation in using book value per share for stock valuation models is the potential difference between recorded value and market value for both assets and liabilities.
A)True
B)False
Q2) A company made an error in recording the Year 1 purchase of computer equipment as an expense. This was discovered in Year 2. The item should be reported as a prior period adjustment on the Year 2 income statement.
A)True
B)False
Q3) Book value per common share is computed by:
A) Dividing the number of common shares outstanding by stockholders' equity applicable to common shares.
B) Dividing total assets by the number of shares outstanding.
C) Dividing stockholders' equity applicable to common shares by the number of common shares outstanding.
D) Multiplying the number of common shares outstanding times the market price per common share.
E) Multiplying the number of common shares outstanding by par value per share.
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Chapter 14: Long-Term Liabilities
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Q1) The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing structure.
A)True
B)False
Q2) A company borrows $40,000 and issues a 3-year, 10% installment note with interest payable annually. The factor for the present value of an annuity at 10% for 3 years is 2.4869. The factor for the present value of a single sum at 10% for 3 years is 0.7513. The amount of the annual payment is $12,000.
A)True
B)False
Q3) Mandarin Company has 9%, 20-year bonds outstanding with a par value of $500,000 and a carrying value of $475,000. The company calls the bonds at $482,000. Calculate the gain or loss on the retirement of these bonds.
Q4) A company's ability to issue unsecured debt depends on its credit standing.
A)True
B)False
Q5) Explain the amortization of a bond premium. Identify and describe the amortization methods available.
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Chapter 15: Investments
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Q1) Scotsland Company had the following transactions relating to investments in trading securities during the year. Prepare the required general journal entries for these transactions.
May 4 Scotsland purchased 600 shares of Lobe Company stock at $120 per share plus a $750 brokerage fee.
July 1 Scotsland received a $2.50 per share cash dividend on the Lobe Company stock. Sept. 15 Sold 300 shares of Lobe Company stock for $125 per share, less a $450 brokerage fee.
Dec. 31 The fair value of the Lobe Company stock (the only investment that Scotsland owns) is $124 per share. The balance of the Fair value Adjustment-Trading account had a zero balance prior to adjustment.
Q2) A company has net income of $130,500. Its net sales were $1,740,000 and its average total assets were $2,750,000. Its total asset turnover equals 4.7%. A)True B)False
Q3) Explain how to record the sale of trading securities.
Q4) Discuss the reasons companies make investments.
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Chapter 16: Reporting the Statement of Cash Flows
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Q1) Use the following information to calculate cash received from dividends: \[\begin{array} { l l r }
\text { Dividends revenue } & \$ 63,500 \\
\text { Dividends receivable, January 1 } & 3,600 \\
\text { Dividends receivable, December } 31 & 3,100
\end{array}\]
A) $64,000.
B) $63,500.
C) $60,400.
D) $67,100.
E) $63,000.
Q2) Noncash financing and investing activities are disclosed in a ________ or in a separate ________.
Q3) Cash flows are essentially the same as net income because they are both measured using accrual accounting principles.
A)True
B)False
Q4) Define and discuss the differences between operating, investing, and financing activities.
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Chapter 17: Analysis of Financial Statements
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Q1) The measurement of key relations among financial statement items is known as:
A) Horizontal analysis.
B) Financial reporting.
C) Investment analysis.
D) Ratio analysis.
E) Risk analysis.
Q2) Standards for comparison are not generally necessary when making judgments about a company's performance.
A)True
B)False
Q3) When an item has a value in the base period and zero in the analysis period, the decrease is 100 percent.
A)True
B)False
Q4) General standards of comparisons, developed from experience, include the 2:1 level for the current ratio and 1:1 level for the acid-test ratio.
A)True
B)False
Q5) Identify and describe three common tools of financial statement analysis.
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Chapter 18: Managerial Accounting Concepts and Principles
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Q1) Romeo Corporation has accumulated the following accounting data for the year: \(\begin{array}{ll}
\text { Finished goods inventory, January 1 } & \$ 3,200 \\
\text { Finished goods inventory, December } 31 & 4,000 \\
\text { Total cost of goods sold } & 14,200 \end{array}\)
The cost of goods manufactured for the year is:
A) $11,000.
B) $21,400.
C) $17,400.
D) $10,200.
E) $15,000.
Q2) Which of the following represents the correct formula for calculating days' sales in raw materials inventory for a manufacturer?
A) Raw materials used/Beginning raw materials inventory × 365.
B) Raw materials used/Average raw materials inventory.
C) Raw materials purchased/Average raw materials inventory.
D) Average raw materials inventory/Raw materials used.
E) Ending raw materials inventory/Raw materials used × 365.
Q3) What is managerial accounting and how is it used to aid decision makers?
Page 20
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Chapter 19: Job Order Costing
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Q1) Under a job order costing system, individual jobs are always charged with actual overhead costs when they are transferred to finished goods.
A)True
B)False
Q2) A ________ accounting system records production activities using a perpetual inventory system.
Q3) The production activities for a customized product represent a(n):
A) Unit.
B) Operation.
C) Process.
D) Job.
E) Pool.
Q4) If overhead is overapplied, it means that individual jobs have been charged too much overhead during the year and the cost of goods sold reported is too high.
A)True
B)False
Q5) The predetermined overhead rate is used to allocate overhead cost to jobs. A)True
B)False
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Chapter 20: Process Costing
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Q1) At the beginning of the recent period, there were 900 units of product in a department, 35% completed. These units were finished and an additional 5,000 units were started and completed during the period. 800 units were still in process at the end of the period, 25% completed. Using the weighted average method, the equivalent units produced by the department were:
A) 6,100 units.
B) 6,700 units.
C) 5,900 units.
D) 5,000 units.
E) 5,500 units.
Q2) Process and job order manufacturing operations both combine materials, labor, and overhead items in the process of producing products.
A)True
B)False
Q3) In process costing, the classification of materials as direct or indirect depends on whether or not they are clearly linked with a specific process or department.
A)True
B)False
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22
Chapter 21: Cost-Volume-Profit Analysis
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Q1) Degree of operating leverage (DOL) is defined as total contribution margin in dollars divided by pretax income.
A)True
B)False
Q2) Managers can use variable costing information for internal decision making, but they must use absorption costing for external reporting purposes.
A)True
B)False
Q3) Cost-volume-profit analysis is used to predict future costs to be incurred, volumes of activity, sales to be made, and profit to be earned.
A)True
B)False
Q4) While the total amount of fixed cost changes with the level of production, fixed cost per unit remains constant as volume changes.
A)True
B)False
Q5) Define the break-even point of a company.
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Chapter 22: Master Budgets and Planning
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Q1) The master budget includes individual budgets for sales, production or purchases, various expenses, capital expenditures, and cash.
A)True
B)False
Q2) Compute the number of units to be produced that would appear on the company's production budget for the month of June.
A) 266,000.
B) 280,000.
C) 294,500.
D) 280,500.
E) 290,000.
Q3) The amount Webster must borrow during April is:
A) $98,900.
B) $0.
C) $8,400.
D) $21,600.
E) $58,000.
Q4) What are rolling budgets? Why are rolling budgets prepared?
Q5) What is activity-based budgeting?
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Chapter 23: Flexible Budgets and Standard Costs
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Q1) When standard manufacturing costs are recorded in the accounts and the cost variances are immaterial at the end of the accounting period, the cost variances should be:
A) Closed to cost of goods sold.
B) Written off as a selling expense.
C) Ignored.
D) Carried forward to the next accounting period.
E) Allocated between cost of goods sold, finished goods, and work in process.
Q2) A flexible budget expresses all costs on a per unit basis, regardless of cost behavior.
A)True
B)False
Q3) The difference between the total actual overhead cost incurred and the total standard overhead cost applied is the ________.
Q4) The difference between the actual sales and the flexible budget sales is called the ________ variance.
Q5) A standard that takes into account the reality that some loss usually occurs with any process under normal application of the process is known as a ________ standard.
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Chapter 24: Performance Measurement and Responsibility Accounting
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Q1) Holo Company reported the following financial numbers for one of its divisions for the year; average total assets of $5,800,000; sales of $5,375,000; cost of goods sold of $3,225,000; and operating expenses of $1,147,000. Compute the division's return on investment:
A) 17.3%.
B) 14.7%.
C) 21.3%.
D) 18.6%.
E) 10.4%.
Q2) The Linens Department of the Krafton Department Store had sales of $282,000, cost of goods sold of $173,500, indirect expenses of $19,875, and direct expenses of $41,250 for the current period. What is the Linens Department's contribution to overhead as a percent of sales?
Q3) An example of a service department is the human resources department.
A)True B)False
Q4) Profit center managers are evaluated on their ability to generate revenues in excess of costs.
A)True B)False
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Chapter 25: Capital Budgeting and Managerial Decisions
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Q1) Nebraska Co. is reviewing a capital investment of $100,000. This project's projected cash flows over a five-year period are estimated at $35,000 each year.
Required:
(a) Calculate the payback period.
(b) Calculate the break-even time. Assume a 12% hurdle rate and use the table below: Present Value \(\begin{array} { lc} &\text { Present Value } \\ \underline { \text { Periods } } &\underline { \text { of } \$ 1 \text { at } 12 \%}\\
1 \ldots \ldots& 0.8929 \\
2 \ldots \ldots & 0.7972 \\
3 \ldots \ldots & 0.7118 \\
4 \ldots \ldots & 0.6355 \\
5 \ldots \ldots & 0.5674 \end{array}\)
(c) Using the results in (a) and (b), make a recommendation for the project.
Q2) Identify the five steps involved in managerial decision making.
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Chapter 26: Present and Future Values in Accounting
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Q1) An annuity is a series of equal payments occurring at equal intervals.
A)True
B)False
Q2) Keisha has $3,500 now and plans on investing it in a fund that will pay her 12% interest compounded quarterly. How much will Keisha have accumulated after 2 years? (<sup>PV</sup><sup> </sup><sup>of</sup><sup> </sup><sup>$1</sup>, <sup>FV</sup><sup> </sup><sup>of</sup> <sup>$1</sup>, <sup>PVA</sup><sup> </sup><sup>of</sup><sup> </sup><sup>$1</sup>, and <sup>FVA</sup><sup> </sup><sup>of</sup><sup> </sup><sup>$1</sup>) (Use appropriate factor(s) from the tables provided.)
A) $4,340.00
B) $3,920.00
C) $4,433.80
D) $3,500.00
E) $4,390.40
Q3) A company is beginning a savings plan. It will be saving $15,000 per year for the next 10 years. How much will the company have accumulated after the tenth year-end deposit, assuming the fund earns 10% interest?
Q4) Explain the concept of the present value of an annuity.
Q5) Explain the concept of the future value of an annuity.
Page 28
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Chapter 27: Activity-Based Costing
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Q1) According to the activity-based costing system, the product margin for product R32E is:
A) $29,132.50
B) $4,116.50
C) $5,161.30
D) $6,180.50
E) $4,981.00
Q2) Activity-based costing attempts to better allocate costs to the proper users of overhead by focusing on activities.
A)True
B)False
Q3) Unit costs can be significantly different when using activity-based costing compared to traditional cost allocation methods.
A)True
B)False
Q4) A ________ is a factor that causes the cost of an activity to go up and down.
Q5) Under traditional cost allocation methods, low-volume complex products are often ________ and high-volume simpler products are likely to be ________.
Q6) Briefly describe the process of activity-based costing.
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