FINANCIAL ACCOUNTING REVIEW (THEORY)

16 September 2017

1. Which of the following is usually considered cash?

a. Certificate of deposit
b. Checking account
c. Money market savings certificate
d. Postdated check issued to the entity

2. Deposits held as compensating balances

a. Usually do not earn interest
b. If legally restricted and held against short-term credit may be
included as cash
c. If legally restricted and held against short-term credit may be
included among current assets
d. None of the above

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3. What is the major purpose of an imprest petty cash fund?

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a. To effectively plan cash inflows and outflows
b. To ease the payment of cash to vendors

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c. To determine the honesty of the petty cashier
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d. To effectively control cash disbursements

4. If the balance show in the bank statement is less than the correct cash
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balance and neither the entity nor the bank has made any errors, there
must be
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a. Deposits credited by the bank but not yet recorded by the entity
b. Outstanding checks
c. Deposits in transit
d. Bank charges not yet recorded by the entity
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5. Which of the following will the entity record to adjust the cash per ledger?
a. Outstanding check
b. NSF check
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c. Deposits in transit
d. Withdrawal erroneously debited against the entity’s bank account
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6. A Cash Over and Short Account

a. Is generally not accepted
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b. Is debited when the petty cash fund proves out over

c. Is debited when the petty cash fund proves out short
d. Is a contra account to cash

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 FINANCIAL ACCOUNTING REVIEW (THEORY)
16 September 2017

7. Nontrade receivables are classified as current assets only if there are

reasonably expected to be realized in cash
a. Within one year or within the operating cycle, whichever is shorter
b. Within one year or within the operating cycle, whichever is longer
c. Within the normal operating cycle
d. Within one year, the length of the operating cycle notwithstanding

8. In the case of long-term installments receivable as in real estate

installment sales where a major portion is collected beyond the normal
operating cycle
a. The entire receivables are shown as current without disclosure of
the amount not currently due
b. The entire receivables are shown as noncurrent
c. Only the portion currently due is shown as current and the balance
as noncurrent

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d. The entire receivables are shown as current with disclosure of the
amount not currently due

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9. Which method of recording bad debt loss is consistent with accrual

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accounting?
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a. Allowance method
b. Direct write-off method
c. Percent of sales method
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d. Percent of accounts receivable method

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10. When the allowance method of recognizing bad debt expense is used, the
entries at the time of collection of an account previously written off would
a. Decrease the allowance for doubtful accounts
b. Increase net income
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c. Have no effect on the allowance for doubtful accounts

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d. Have no effect on net income

11. Which of the following methods of determining bad debt expense most
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closely matches expense to revenue?

a. Charging bad debts only when accounts are written off as
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uncollectible
b. Charging bad debts with a percentage of sales for that period
c. Estimating the allowance for doubtful accounts as a percentage of
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accounts receivable
d. Estimating the allowance for doubtful accounts by aging the
accounts receivable

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 FINANCIAL ACCOUNTING REVIEW (THEORY)
16 September 2017

12. Which of the following relates to the allowance method in accounting for
uncollectible accounts receivable?
a. Bad debt expense is an estimate based on historical and
prospective information
b. Bad debt expense is the actual amount determined to be
uncollectible
c. Bad debt expense is an estimate based only on aging of accounts
receivable
d. Bad debt expense is management determination of which accounts
are considered doubtful

13. On July 1 of the current year, an entity received a one-year note

receivable bearing interest at the market rate. The face amount of the note
receivable and the entire amount of the interest are due in one year. When
the note receivable was recorded on July 1, which of the following was

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debited?
a. Interest receivable

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b. Unearned discount on note receivable
c. Both interest receivable and unearned discount on note receivable

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d. Neither interest receivable nor unearned discount on note
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receivable

14. Accounting for the interest in a non-interest bearing note receivable is an

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example of what aspect of accounting theory?

a. Matching
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b. Verifiability
c. Substance over form
d. Form over substance
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15. A loan receivable is initially measured at

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a. Fair value
b. Fair value plus transaction cost
c. Fair value less transaction cost
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d. Present value
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16. If there is evidence that an impairment loss on loan receivable has been
incurred, the loss is equal to the
a. Excess of the carrying amount of the loan receivable over the
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present value of the cash flows related to the loan

b. Excess of the present value of the cash flows related to the loan
over the carrying amount of the loan receivable
c. Excess of the carrying amount of the loan receivable over the
principal amount of the loan
d. Excess of the principal amount of the loan over the carrying amount

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 FINANCIAL ACCOUNTING REVIEW (THEORY)
16 September 2017

of the loan receivable

17. Which of the following is a method to generate cash from accounts

receivable?
a. Assignment
b. Factoring
c. Assignment and factoring
d. Assignment, factoring, and discounting

18. Why would an entity sell accounts receivable to another entity?

a. To improve the quality of its credit granting process
b. To limit its legal liability
c. To accelerate access to amount collected
d. To comply with customer agreements

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19. If receivables are hypothecated against borrowings, the amount of
receivables involved should be

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a. Disclosed in the notes
b. Excluded from the total receivables with disclosure

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c. Excluded from the total receivables without disclosure
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d. Disclosed in the notes, including the equity in such accounts which
is equal to the carrying value of the receivables less the loan
amount
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20. A 90-day 15% interest-bearing note receivable is sold to a bank without

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recourse after being held for 60 days. The proceeds are calculated using a
12% interest rate. The amount credited to note receivable at the date of
the discounting transaction would be
a. The same as cash proceeds
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b. Less than the face value of the note

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c. The face value of the note

d. The maturity value of the note
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21. The cost of inventory is the sum of

a. Cost of purchase and cost of conversion
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b. Direct cost, indirect cost, and other cost

c. Cost of purchase, cost of conversion, and other cost incurred in
bringing the inventory to the present location and condition
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d. Cost of conversion and other cost incurred in bringing the inventory

to the present location and condition

22. How should unallocated fixed overhead be treated?

a. Allocated to finished goods and cost of goods sold
b. Allocated to goods in process and finished goods

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 FINANCIAL ACCOUNTING REVIEW (THEORY)
16 September 2017

c. Allocated to goods in process, finished goods, and cost of goods

sold
d. Expensed in the period incurred

23. Which of the following should not be reported as inventory?

a. Land acquired for resale by a real estate firm
b. Shares and bonds held for resale by a brokerage firm
c. Partially completed goods held by a manufacturing entity
d. Machinery acquired by a manufacturing entity for use in the
production process

24. Goods shipped FOB destination in transit at the end of the year should be
included in the inventory of
a. Seller
b. Common carrier

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c. Buyer
d. Bank

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25. An entry debiting inventory and crediting cost of goods sold would be

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made when
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a. Merchandise is sold and the periodic inventory method is used
b. Merchandise is sold and the perpetual inventory method is used
c. Merchandise is returned and the periodic inventory method is used
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d. Merchandise is returned and the perpetual inventory method is

used
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26. Goods in transit at year-end purchased FOB shipping point were

appropriately recorded in the purchases account but were incorrectly
excluded from the ending inventory. What is the effect of the omission on
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assets, liabilities, and retained earnings at year-end?

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a. No effect, no effect, no effect

b. Understated, understated, no effect
c. Understated, no effect, understated
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d. Overstated, no effect, overstated

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27. Cost of goods sold is the same under a periodic system and a perpetual
system when an entity uses
a. FIFO
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b. LIFO
c. Weighted average
d. None of the above

28. The cost of ending inventory was lower using FIFO than weighted
average. If there was no beginning inventory, what direction did the cost of

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 FINANCIAL ACCOUNTING REVIEW (THEORY)
16 September 2017

purchases move during the period?

a. Up
b. Down
c. Steady
d. Cannot be determined

29. Which is the reason why the specific identification method may be
considered ideal for assigning cost to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced
b. There is no arbitrary allocation of cost
c. The cost flow matches the physical flow
d. It is applicable to all types of inventory

30. Inventories are usually written down to net realizable value

a. Item by item

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b. By classification
c. By total

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d. By segment

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31. The amount of any write-down of inventory to net realizable value and all
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losses of inventory shall be
a. Recognized as operating expenses in the period the write-down or
loss occurs
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b. Recognized as other expense in the period the write-down or loss

occurs
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c. Recognized as a component of cost of goods sold in the period the

write-down or loss occurs
d. Deferred until the related inventory is sold
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32. Which of the following statements is not a required disclosure in relation

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to inventory?
I. The amount of inventories recognized as an expense during the
period
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II. The fair value less cost of disposal of inventories pledges as

security for liabilities
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a. I only
b. II only
c. Both I and II
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d. Neither I nor II

33. The gross profit method of inventory valuation is invalid when

a. A portion of inventory is destroyed
b. There is a substantial increase in inventory during the year
c. There is no beginning inventory because it is the first year of

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 FINANCIAL ACCOUNTING REVIEW (THEORY)
16 September 2017

operation
d. The gross profit percentage applicable to the goods in ending
inventory is different from the percentage applicable to goods sold
during the period

34. The conventional retail method produces an ending inventory that

approximates
a. Lower of average cost and net realizable value
b. Lower of FIFO cost and net realizable value
c. Lower of LIFO cost and net realizable value
d. Lower of cost and net realizable value

35. The retail inventory method would include which of the following in the
calculation of the goods available for sale at both cost and retail?
a. Freight in

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b. Purchase returns
c. Markups

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d. Markdowns

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