I.

Multiple-choice questions:
1. 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) A balance sheet reports the assets, liabilities, and owner’s equity at a specific date.
C) An income statement presents the revenues, expenses, changes in owner’s equity, and
resulting net income or net loss for a specific period of time.
D) An owner’s equity statement summarizes the changes in owner’s equity for a specific period
of time.
2. The three types of business entities are:
A) proprietorships, small businesses, and partnerships.
B) proprietorships, partnerships, and corporations.
C) proprietorships, partnerships, and large businesses
D) financial, manufacturing, and service companies.
3. Which of the following statements about a journal is false?
A) It is not a book of the original entry.
B) It provides a chronological record of transactions.
C) It helps to locate errors because the debit and credit amounts for each entry can be readily
compared.
D) It discloses in one place the complete effect of a transaction.
4. A revenue account:
A) is increased by debits.
B) is decreased by credits.
C) has a normal balance of a debit.
D) is increased by credits.
5. The principle or assumption dictating that efforts (expenses) be matched with accomplishments
(revenues) is the:
A) expense recognition principle.
B) cost assumption.
C) time period assumption.
D) revenue recognition principle
6. Fred Jones, the sole owner of a business, withdraws cash for his personal use. How does this
transaction affect the accounting equation?
A) The assets increase and liabilities decrease.
 B) The assets decrease and equity increases.
C) The assets decrease and equity decreases.
D) The assets, liabilities, and equity remain the same.
7. The time period assumption states that:
A) companies must wait until the calendar year is completed to prepare financial statements.
B) companies use the fiscal year to report financial information.
C) the economic life of a business can be divided into artificial time periods.
D) companies record information in the time period in which the events occur
8. Current assets are listed:
A) by expected conversion to cash.
B) by importance.
C) by longevity.
D) alphabetically
9. The closing process involves separate entries to close (1) expenses, (2) drawings, (3) revenues,
and (4) income summary. The correct sequencing of the entries is:
A) (4), (3), (2), (1).
B) (1), (2), (3), (4).
C) (3), (1), (4), (2).
D) (3), (2), (1), (4).
10. To record the sale of goods for cash in a perpetual inventory system:
A) Only one journal entry is necessary to record the cost of goods sold and reduction of
inventory.
B) Only one journal entry is necessary to record the receipt of cash and the sales revenue.
C) Two journal entries are necessary: one to record the receipt of cash and sales revenue, and
one to record the cost of goods sold and reduction of inventory.
D) Two journal entries are necessary: one to record the receipt of cash and reduction of
inventory, and one to record the cost of goods sold and sales revenue.
11. Which of the following should not be included in the physical inventory of a company?
A) Goods held on consignment from another company.
B) Goods shipped on consignment to another company.
C) Goods in transit from another company shipped FOB shipping point.
D) None of the above
12. Falk Company’s ending inventory is understated $4,000. The effects of this error on the current
year’s cost of goods sold and net income, respectively, are:
 A) understated, overstated.
B) overstated, understated.
C) overstated, overstated.
D) understated, understated
13. If a customer returns goods for credit, the selling company normally makes an entry in the:
A) cash payments journal.
B) sales journal.
C) general journal.
D) cash receipts journal.
14. Which of these would cause the inventory turnover to increase the most?
A) Increasing the amount of inventory on hand.
B) Keeping the amount of inventory on hand constant but increasing sales.
C) Keeping the amount of inventory on hand constant but decreasing sales.
D) Decreasing the amount of inventory on hand and increasing sales.
15. Prepaid Rent is an ________ account and has a normal ________ balance.
A) Asset; debit
B) Liability; credit
C) Liability; debit
D) Asset; credit
16. Ten years ago, a company purchased a building for $190,000. at that time, the company felt that
the building was worth $215,000. The current market value of the building is $450,000. The
building has been assessed at $425,000 for property tax purposes. at which amount should the
company record the building in its accounting records?
A) $425,000
B) $190,000
C) $215,000
D) $450,000
17. The income statement and balance sheet columns of Beer and Nuts Company's worksheet
reflect the following totals:
The net income (loss) for the period is
A) $51,000 income.
B) $24,000 income.
C) $24,000 loss.
D) Not determinable.
18. Which of the following statements is correct?
A) The sales discount column is included in the cash receipts journal.
B) The purchases journal records all purchases of merchandise whether for cash or on
account.
C) The cash receipts journal records sales on account.
D) Merchandise returned by the buyer is recorded by the seller in the purchases journal.
19. In the unadjusted trial balance of its worksheet for the year ended December 31, 2017, Knox
Company reported Equipment of $120,000. The year-end adjusting entries require an
adjustment of $15,000 for depreciation expense for the equipment. After the adjusted trial
balance is completed, what amount should be shown in the financial statement columns?
A) A debit of $105,000 for Equipment in the balance sheet column.
B) A credit of $15,000 for Depreciation Expense— Equipment in the income statement column.
C) A debit of $120,000 for Equipment in the balance sheet column.
D) A debit of $15,000 for Accumulated Depreciation—Equipment in the balance sheet column.
20. Australia Company sells a product for $500 cash to Martin and Lewis Enterprises. This
transaction will be recorded in the ________.
A) Cash payment journal
B) Sales journal
C) Cash receipts journal
D) Purchase journal
21. Which of the following approaches for bad debts is best described as a balance sheet method?
A) Percentage-of-receivables basis.
B) Direct write-off method.
C) Percentage-of-sales basis.
D) Both percentage-of-receivables basis and direct write-off method.
22. On May 25, Mt. Hood Company received a $370 check from Douglas Fir for services to be
performed in the future. The bookkeeper for Mt. Wood Company incorrectly debited Cash for
$370 and credited Accounts Receivable for $370. The amounts have been posted to the ledger.
To correct this entry, the bookkeeper should:
 A) debit Cash $370 and credit Unearned Service Revenue $370.
B) debit Accounts Receivable $370 and credit Service Revenue $370.
C) debit Accounts Receivable $370 and credit Cash $370.
D) debit Accounts Receivable $370 and credit Unearned Service Revenue $370.
23. Depreciation is a process of:
A) Valuation.
B) cost allocation.
C) cash accumulation.
D) appraisal
24. Which of the following accounts will have an ending balance after the closing process is
completed?
A) Owners’ Withdrawals.
B) Rent Expense
C) Accumulated Depreciation.
D) Service Revenue.
25. Oliveras Company had net credit sales during the year of $800,000 and cost of goods sold of
$500,000. The balance in accounts receivable at the beginning of the year was $100,000, and
the end of the year it was $150,000. What were the accounts receivable turnover and the
average collection period in days?
A) 4.0 and 91.3 days.
B) 5.3 and 68.9 days.
C) 6.4 and 57 days.
D) 8.0 and 45.6 days.
26. A retailer purchases merchandise with a catalog list price of $30,000. The retailer receives a
15% trade discount and has credit terms of 2/10, n/30. How much cash will be needed to pay
this invoice within the discount period?
A) $30,000
B) $24,900
C) $29,400
D) $24,990
27. ABC Company had the following transactions during the month. What would be the total amount
of service revenues for the month if ABC Company uses the accrual basis method?
a) Paid $3,600 for insurance for the next 12 months.
b) On the first of the month, received $6,000 for services to be performed equally over the next 12
months.
c) Paid $700 for the current month's rent.
d) Paid $150 cash for office supplies.
e) Paid $500 in Salaries Expense.
f) Received $1,500 in cash for service revenue earned this month.
A) $2,000
B) $7,500
C) $2,150
D) $3,000
28. Indicate which of the following statements is true.
A) Since intangible assets lack physical substance, they need be disclosed only in the notes to
the financial statements.
B) Goodwill should be reported as a contra account in the owner’s equity section.
C) Totals of major classes of assets can be shown in the balance sheet, with asset details
disclosed in the notes to the financial statements.
D) Intangible assets are typically combined with plant assets and natural resources and shown
in the property, plant, and equipment section.
29. Who is responsible for the freight costs when the terms are FOB shipping point?
A) The ultimate customer
B) The buyer
C) The seller
D) Either the seller or the buyer
30. Examples of financing activities on the statement of cash flows do NOT include:
A) payment of long-term note payable.
B) payment of dividends.
C) repurchase of the company's own stock.
D) sale of a piece of equipment for cash.
31. An aging of a company's accounts receivable indicates the estimate of uncollectible receivables
totals $7,900. If Allowance for Doubtful Accounts has a $700 credit balance, the adjustment to
record the bad debt expense for the period will require a
A) debit to Bad Debt Expense for $8,600
B) debit to Bad Debt Expense for $7,900
C) debit to Bad Debt Expense for $7,200
 D) credit to Allowance for Doubtful Accounts for $700
32. The statement of cash flows classifies cash receipts and cash payments by these activities:
A) operating and nonoperating.
B) investing, financing, and operating.
C) financing, operating, and nonoperating.
D) investing, financing, and nonoperating
33. Hatfield Company purchased a building for $150,000 on December 1 in exchange for a
six-month loan at 12% with interest and note to be paid six-months later. Assuming the
company uses the accrual basis method, what would be the adjusting entry on December 31?
A) Interest Payable 9,000
Interest Expense 9,000
B) Interest Payable 1,500
Interest Expense 1,500
C) Interest Expense 9,000
Interest Payable 9,000
D) Interest Expense 1,500
Interest Payable 1,500
34. Cash dividends paid to stockholders are classified on the statement of cash flows as:
A) an operating activity.
B) an investing activity.
C) a combination of A) and B).
D) a financing activity.
35. Which statement about the statement of cash flows is FALSE?
A) The statement of cash flows is based on information from several financial statements.
B) The statement of cash flows is based on information from a company's income statement
only.
C) The change in the Cash account on the comparative balance sheets is the check figure for
the statement of cash flows.
D) The indirect method of preparing the statement of cash flows is used by the vast majority of
companies in the United States.
36. To record estimated uncollectible accounts using the allowance method, the adjusting entry
would be a
A) Accounts Receivable DR; Allowance for Doubtful Accounts CR.
B) Bad Debt Expense DR; Allowance for Doubtful Accounts CR.
 C) Allowance for Doubtful Accounts DR; Accounts Receivable CR.
D) Sales Revenue DR; Accounts Receivable CR.
37. Ending inventory is made up of the oldest purchases when a company uses
A) First-in, first-out
B) Last-in, first-out
C) Average cost
D) Retail method
38. A machine originally had an estimated useful life of 6 years, but after 4 complete years, it was
decided that the original estimate of useful life should have been 10 years. At that point the
remaining cost to be depreciated should be allocated over the remaining:
A) 2 years
B) 4 years
C) 6 years
D) 16 years
39. Free cash flow provides an indication of a company’s ability to:
A) generate net income.
B) generate cash to pay dividends.
C) generate cash to invest in new capital expenditures.
D) Both B) and C)
40. At the beginning of the month, the accounts receivable subsidiary ledger showed balances for
Apple Company $5,000 and Berry Company $7,000. During the month, credit sales were made
to Apple $6,000, Berry $4,500, and Cantaloupe $8,500. Cash was collected on account from
Berry $11,500 and Cantaloupe $3,000. At the end of the month, the control account Accounts
Receivable in the general ledger should have a balance of:
A) $11,000.
B) $12,000.
C) $16,500.
D) $31,000.
 II. Short-Answer Questions:

Question 1: Thom’s Candle sells high-quality candles. The inventory, purchase and sales for
November, 2022 is showed in chronological order in following table:

Date Activities Units acquired and sold

November 1 Beginning inventory 100 units ; $8 per unit

November 3 Purchase 50 units ; $8.35 per unit

November 7 Sales 70 units

November 12 Purchase 120 units ; $8.50 per unit

November 20 Sales 80 units

November 25 Sales 50 units

Assume that Thom’s Candle uses a perpetual inventory system.

Instructions:
(a) Compute the ending inventory and the cost of goods sold under (1) FIFO and (2) LIFO.
(b) Which costing method gives the higher ending inventory? Why?
(c) Which method results in the higher cost of goods sold? Why?
Question 2: Vox Corporation’s comparative balance sheets are presented below.

VOX CORPORATION
Comparative Balance Sheets
December 31

2017 2016

Cash $19,300 $ 10,000

Accounts Receivable 21,200 23,000

Land 20,000 26,000

Building 70,000 70,000

Accumulated Depreciation (15,000) (10,000)

Total $115,500 $119,000

Accounts Payable $ 17,370 $ 30,000

Common stock 75,000 69,000

Retained earnings 23,130 20,000

Total $115,500 $119,000

Additional information:
1. Net income was $27,630. Dividends declared and paid were $24,500.
2. All other changes in noncurrent account balances had a direct effect on cash flows, except the
change in accumulated depreciation. The land was sold for $3,900.

Instructions
(a) Prepare a statement of cash flows for 2017 using the indirect method.
(b) Compute free cash flow.
Question 3: Rottino Company purchased a new machine on October 1, 2017, at a cost of $150,000.
The company estimated that the machine will have a salvage value of $12,000. The machine is
expected to be used for 10,000 working hours during its 5-year life.

Instructions
(a) Compute the depreciation expense under the following methods for the year indicated.
1. Straight-line for 2017.
2. Units-of-activity for 2017, assuming machine usage was 1,700 hours.
3. Declining-balance using double the straight-line rate for 2017 and 2018.
(b) Assume that Rottino Company uses the straight-line method.
1. Prepare the journal entry to record 2017 depreciation.
2. Show how the machine would be reported in the December 31, 2017, balance sheet.

Question 4:
(a) Name activities included in the statement of cash flows. Give 2 examples of noncash activities.
(b) Explain how net income is converted to net cash provided by operating activities in the
statement of cash flows using indirect method.

Question 5:
Compare methods of estimating allowance for doubtful debts