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| 1 | Reports prepared on the accrual basis reflect: |
A) | income earned and expenses incurred |
| B) | cash receipts and cash disbursements only |
| C) | income earned and cash disbursements |
| D) | cash receipts and expenses incurred |
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| 2 | The matching principle requires that expenses be deducted from related revenue in the period in which the revenue occurs. |
| A) | True |
| B) | False |
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| 3 | The Internal Revenue Service makes up the rules for preparation of financial reports. |
| A) | True |
| B) | False |
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| 4 | Shirley, who has a seashell business, hires Tom to drive her truck, delivering shells to customers. During June, Tom works 150 hours, and Shirley pays him on July 5. This is an expense of which month, on an accrual basis operating report? |
| A) | June |
| B) | July |
| C) | not enough information given to make a determination |
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| 5 | In a mercantile business (a retailer or a wholesaler), a sale occurs and is included in the sales figure on the financial report in the period in which: |
| A) | the customer orders the merchandise |
| B) | the customer pays for the merchandise |
| C) | the merchandise is delivered to the customer (or the customer picks it up) |
| D) | the owner of the business is sure the customer will not return the merchandise |
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| 6 | Pearl, who owns a jewelry store in Boston, orders merchandise from Jean, a wholesaler in San Francisco. On the way across the country, the shipment falls into the Mississippi River and is lost. Nevertheless, Pearl has to pay Jean for the jewelry. |
| A) | True |
| B) | False |
| C) | depends on the shipping terms |
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| 7 | Assume the same situation as in question 5, except that the shipment is not lost in the river and Jean ships the jewelry on consignment to Pearl. Jean can include the value of the shipment in her sales: |
| A) | when the jewelry leaves Jean’s warehouse |
| B) | when the jewelry arrives at Pearl’s store |
| C) | piece-by-piece, as Jean sells each piece of jewelry |
| D) | whenever Jean’s bookkeeper decides to list it in the sales record |
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| 8 | Archie owns an appliance repair business. He repairs a dishwasher for Dorothy. Archie includes the sale in his report when: |
| A) | Dorothy calls Archie and orders the repair service |
| B) | Archie repairs the dishwasher |
| C) | Dorothy pays Archie for the repair |
| D) | none of the above |
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| 9 | For every expense, there was or will be a check written sometime. |
| A) | TRUE |
| B) | FALSE |
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| 10 | On an income statement covering one year, prepared according to GAAP, a bad debt expense represents: |
| A) | the total amount owed by customers who became insolvent during the year |
| B) | according to estimates by management, the amount of the year's sales for which the company will never be paid in the future |
| C) | the total of checks written to customers who are insolvent |
| D) | none of the above |
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| 11 | Sales allowance and sales return mean the same thing. |
| A) | TRUE |
| B) | FALSE |
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| 12 | Cost of goods sold on an annual income statement should be
composed of: |
| A) | the cost of merchandise (for resale) purchased during the year |
| B) | beginning inventory plus purchases minus ending inventory |
| C) | purchases plus ending inventory minus beginning inventory |
| D) | a guess as to how much the merchandise that was sold probably cost the business |
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| 13 | In a time of rising prices (inflation), an enterprise can reduce its reported profits, and therefore taxes, by using which inventory
system? |
| A) | TRUE |
| B) | FALSE |
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| 14 | Inventory valuation must follow the physical flow of goods. That is, a coal yard must use LIFO and a grocery store must use FIFO. |
| A) | TRUE |
| B) | FALSE |
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| 15 | A perpetual inventory system: |
| A) | is a system of recording every item that is added to and every item that is taken out of inventory |
| B) | requires a great deal of record keeping |
| C) | c. is feasible for many businesses only since moderately priced computers became available |
| D) | all of the above |
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| 16 | The conservatism principle states that: |
| A) | accountants must wear dark suits and subdued ties |
| B) | income cannot be reported on an income statement until it is earned (as when a sale takes place), but losses should be reported as soon as there is a possibility they may occur |
| C) | assets (with the exception of property and equipment) should be reported at the lower of their cost or their current market value |
| D) | both b and c |
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| 17 | If a mercantile business is to preserve its cash, it should: |
| A) | raise its selling prices when the cost of replacing merchandise in inventory is increased |
| B) | wait to raise prices until it starts to sell merchandise for which it paid a higher price |
| C) | raise its prices when the bank calls to say the bank account is overdrawn |
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| 18 | A trade discount is: |
| A) | a discount given to a customer for prompt payment of an invoice |
| B) | a discount given to a customer because they are a reseller (such as a retailer) of the merchandise |
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| 19 | Allocation of expenses between departments or divisions can be based upon: |
| A) | sales volume |
| B) | floor space |
| C) | any reasonable basis |
| D) | all of the above |
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| 20 | If the chief executive of an enterprise can control an expense, that expense is deemed to be controllable by every manager within the enterprise. |
| A) | TRUE |
| B) | FALSE |
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| 21 | Breakeven point can be defined as that level of sales at which: |
| A) | total of all expenses equals total sales |
| B) | total of variable expenses equals total sales |
| C) | total of fixed expenses equals total sales |
| D) | none of the above |
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| 22 | Fixed expenses never change, no matter how big the enterprise grows. |
| A) | TRUE |
| B) | FALSE |
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| 23 | The contribution margin of an item is: |
| A) | that portion of the selling price that management will donate to charity |
| B) | surplus products that will be donated to charity |
| C) | the difference between the sales price and the variable costs of an item |
| D) | the difference between the sales price and the fixed costs of an item |
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| 24 | Depreciation is: |
| A) | a tax deduction item, for which there is no logical reason, generously allowed by the IRS |
| B) | the difference between what an item originally cost and its value today on the used equipment market |
| C) | the allocation of the cost of a piece of equipment over the useful life of that equipment |
| D) | accountants' mumbo jumbo that ensures their job security |
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| 25 | If an asset which cost $12,000 has a salvage value of $2,000 and a five-year useful life, the annual straight-line depreciation would be $2,000. |
| A) | TRUE |
| B) | FALSE |
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| 26 | Salvage value must be used for every asset subject to depreciation, even though it is sure to be worthless at the end of its useful life (like a well-used copy machine). |
| A) | TRUE |
| B) | FALSE |
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| 27 | You can determine what the real estate and equipment owned by an enterprise is worth by looking at the section of the balance sheet called property and equipment. |
| A) | TRUE |
| B) | FALSE |
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| 28 | Accelerated depreciation is: |
| A) | a method of depreciating automobiles with fast acceleration |
| B) | a method computing depreciation that results in a high depreciation expense at the end of an asset's life |
| C) | a method of computing depreciation that results in a high depreciation expense at the beginning of an asset's life |
| D) | none of the above |
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| 29 | Accelerated depreciation can be justified because it offsets repair expense that increases as equipment ages. |
| A) | TRUE |
| B) | FALSE |
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| 30 | When a units-of-production depreciation method is used, it makes it, easy to predict depreciation expense in future years. |
| A) | TRUE |
| B) | FALSE |
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| 31 | The capitalization policy of an enterprise is a dollar level below which equipment cost will not be depreciated but will be treated as an expense in the year it is acquired. |
| A) | TRUE |
| B) | FALSE |
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| 32 | An error that is not material is one that: |
| A) | will never be noticed by the boss, we hope |
| B) | can be easily covered up |
| C) | would not cause anyone to change a decision about operations if it were known and corrected |
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| 33 | If a piece of equipment is sold for less than its book value, the loss should be ignored and omitted from the financial statements, according to GAAP |
| A) | TRUE |
| B) | FALSE |
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| 34 | If a repair to a machine is so extensive that it lengthens the useful life of the machine, the cost of the repair is: |
| A) | reflected in the financial statements as a repair expense on the income statement |
| B) | reflected in the financial statements as an addition to the cost of the machine, which is then subject to depreciation |
| C) | reflected in the financial statements as an intangible asset that is amortized over several years |
| D) | omitted from the financial statements with only a brief explanation in the notes to the financial statements |
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| 35 | Cash flow can be defined as the cash that will be saved by replacing manual labor, an old machine, or an outside supplier by a new machine. |
| A) | TRUE |
| B) | FALSE |
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| 36 | In computing the cash flow from a machine, depreciation has to be considered as if it were expenditure of cash. |
| A) | TRUE |
| B) | FALSE |
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| 37 | Payback from a machine purchase is: |
| A) | an illegal kickback from the supplier of the machine to the folks in the purchasing department |
| B) | a legitimate cash bonus paid by the manufacturer of the machine to the company that bought the machine |
| C) | the cost of the machine divided by the annual cash flow generated by the machine |
| D) | a termination bonus given to the person replaced by the machine |
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| 38 | A future value is how much a sum of money will be worth in a
number of years if left to earn compound interest over that time. |
| A) | TRUE |
| B) | FALSE |
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| 39 | Internal rate of return is: |
| A) | what can be earned by loaning money to employees |
| B) | the cash flow from a machine stated as a compound interest rate on the investment in the machine |
| C) | a method of comparing the return on an equipment purchase to other investments, such as interest-bearing securities |
| D) | both b and c |
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| 40 | Some leases are not truly leases but are installment loans because: |
| A) | they are offered by commercial banks |
| B) | the amount and number of payments are approximately the same as they would be for an installment loan |
| C) | equipment leases are illegal in some states |
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| 41 | An income statement can be compared to a moving picture, while a balance sheet is like a snapshot. |
| A) | TRUE |
| B) | FALSE |
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| 42 | On a balance sheet, all assets are displayed at their market value. |
| A) | TRUE |
| B) | FALSE |
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| 43 | Common size financial statements express each line item as a percentage of some base line item, such as net sales or total assets. |
| A) | TRUE |
| B) | FALSE |
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| 44 | Working capital is defined as: |
| A) | the amount of money an enterprise has ''working,'' or earning interest, in an account at the bank |
| B) | the figure determined by subtracting current liabilities from current assets |
| C) | the increase in accumulated depreciation from one year to the next |
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| 45 | Working capital can be a measure of an enterprise's ability to pay its bills. |
| A) | TRUE |
| B) | FALSE |
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| 46 | Goodwill can be added as an asset to a corporate balance sheet whenever the board of directors of the corporation thinks it is appropriate to do so. |
| A) | TRUE |
| B) | FALSE |
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| 47 | Total assets equal total liabilities plus total equity. |
| A) | TRUE |
| B) | FALSE |
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| 48 | Equity is an accurate measure of the true value of an enterprise. |
| A) | TRUE |
| B) | FALSE |
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| 49 | Book value of common stock should be a reflection of market value of the stock. |
| A) | TRUE |
| B) | FALSE |
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| 50 | Net assets means the same thing as: |
| A) | working capital |
| B) | net equipment |
| C) | equity |
| D) | market value of assets |
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| 51 | Division of income among partners in a partnership is inflexible, as it is determined by state law. |
| A) | TRUE |
| B) | FALSE |
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| 52 | If you are a stockholder in a corporation, the number of votes you
have at a stockholders' meeting is determined by: |
| A) | how much you paid for your stock |
| B) | whether or not you are an original stockholder |
| C) | the number of shares of stock you own |
| D) | the political clout of your stockbroker |
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| 53 | Dividends are one of many expenses that are subtracted from sales to arrive at net income. |
| A) | TRUE |
| B) | FALSE |
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| 54 | Budgeting is too complicated for mere mortals. The preparation of budgets is best left to the accountants. |
| A) | TRUE |
| B) | FALSE |
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| 55 | Long-range and short-range goal-setting and planning should precede the preparation of budgets. |
| A) | TRUE |
| B) | FALSE |
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| 56 | Sales budgets should be prepared by: |
| A) | the sales manager |
| B) | the sales people in the field |
| C) | the chief accountant |
| D) | both a and b |
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| 57 | There is no need to budget balance sheet items, such as inventory levels. |
| A) | TRUE |
| B) | FALSE |
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| 58 | Zero-based budgeting, in essence, consists of: |
| A) | adding some percentage to last year's budget numbers |
| B) | asking for more expense budget than you will need, so you will have what you want after your request is cut by management |
| C) | computing your needs from scratch, as if there were no numbers from prior years |
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| 59 | Flexible budgeting can be defined as: |
| A) | a budget in which the budget for variable expenses will vary with the actual sales volume or some other measure of activity |
| B) | a budget that will let department managers change their budget if they spend more than they expected to spend |
| C) | a budget that top management changes every week |
| D) | a budget printed on flimsy (flexible) paper |
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| 60 | Budget variance percentages are usually computed as follows: |
| A) | (actual results minus the budget number)_the budget number |
| B) | (actual results minus the budget number)_actual results |
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| 61 | Budgets should be compared with actual results: |
| A) | at the end of the year |
| B) | at least monthly |
| C) | whenever the managers have some extra free time |
| D) | never (it is of interest to the accounting department only) |
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| 62 | A cash flow budget should take into consideration: |
| A) | the operating budget |
| B) | available bank credit |
| C) | equipment acquisition budget |
| D) | all of the above |
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| 63 | Much confusion over operating and budget reports is caused by department managers considering an amount as spent when the funds are obligated, while accountants do not consider the expense as incurred until delivery of the product or service takes place. |
| A) | TRUE |
| B) | FALSE |
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| 64 | In manufacturing, direct labor usually consists of: |
| A) | the wages and salaries of everyone who works in the factory or is connected with the production department(s) |
| B) | the salaries of managers-those who direct others |
| C) | the wages of those who actually work on the fabrication or assembly of the product |
| D) | the wages of all hourly employees |
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| 65 | In manufacturing, direct material usually refers to the materials that become part of the finished products, as opposed to incidental items and supplies. |
| A) | TRUE |
| B) | FALSE |
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| 66 | Factory overhead generally refers to: |
| A) | the cost of a new roof on the factory |
| B) | all the costs of production except for direct materials and direct labor |
| C) | all the costs of operating the enterprise (including sales,
accounting, etc.) except for direct materials and direct labor |
| D) | all the costs of production except for depreciation on machinery, direct materials, and direct labor |
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| 67 | Probably the most common method of allocating overhead costs to various products is to base the allocation on direct-labor hours. |
| A) | TRUE |
| B) | FALSE |
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| 68 | In the long-term contract method of reporting gross profit: |
| A) | gross profit is assumed to be earned only when the contract is 100 percent completed |
| B) | gross profit is assumed to be earned when the contract is signed |
| C) | gross profit is assumed to be earned equally over the years the contract is in progress |
| D) | gross profit is assumed to be earned according to the percentage of completion at the end of each year |
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| 69 | | Claude's Classy Clothing Income Statements | | December 31 | | Last year | Prior year | | Sales, net of returns and allowances | $500,000 | $400,000 | | Subtract: Cost of goods sold | 300,000 | 250,000 | | Gross profit | 200,000 | 150,000 | | Expenses: | | Selling expenses | 100,000 | 80,000 | | General expenses | 50,000 | 45,000 | | Total selling and general expenses | 150,000 | 125,000 | | Net operating income | 50,000 | 25,000 | | Interest expense | 9,000 | 10,000 | | Net income before income tax | 41,000 | 15,000 | | Income tax | 10,000 | 4,000 | | Net income | $ 31,000 | $ 11,000 |
| Claude's Classy Clothing | | Balance Sheets | | Last year | Prior year | | Assets | | Current assets: | | Cash | $ 12,000 | $ 10,000 | | Accounts receivable, net of bad debt allowance | 36,000 | 32,000 | | Inventory | 100,000 | 82,000 | | Prepaid expenses | 2,000 | 1,000 | | Total current assets | 150,000 | 125,000 | | Fixtures and equipment, net of depreciation allowance | 50,000 | 55,000 | | Total assets | $200,000 | $180,000 | | Liabilities | | Current liabilities: | | Current portion, loans payable | $ 30,000 | $ 25,000 | | Accounts payable | 40,000 | 35,000 | | Taxes payable | 4,000 | 3,000 | | Accrued expenses | 1,000 | 2,000 | | Total current liabilities | 75,000 | 65,000 | | Long-term liabilities: | | Notes payable to bank | 60,000 | 75,000 | | Total liabilities | 135,000 | 140,000 | | Stockholders' equity | | Common stock: $10 par value per share: | | 15,000 shares authorized; 1,000 issued and outstanding | 10,000 | 10,000 | | Retained earnings | 55,000 | 30,000 | | Total stockholders' equity | 65,000 | 40,000 | | Total liabilities and equity | $200,000 | $180,000 |
Working capital of this corporation, at Dec. 31 last year, is: |
| A) | $150,000 |
| B) | $200,000 |
| C) | $48,000 |
| D) | $75,000 |
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| 70 | The corporation borrows $20,000 from the bank, repayable in 90 days, and puts the money in its checking account. The working capital will have: |
| A) | increased |
| B) | decreased |
| C) | stayed the same |
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| 71 | The book value of this corporation, at Dec. 31 last year: |
| A) | is $200,000 |
| B) | is $65,000 |
| C) | is $55,000 |
| D) | cannot be determined from the information given |
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| 72 | The liquidation value of this corporation, at Dec. 31 last year: |
| A) | is $65,000 |
| B) | is $200,000 |
| C) | is $55,000 |
| D) | cannot be determined from the information given |
|
| 73 | If you decided to buy this corporation from Claude at a capitalization rate of 25 percent (based on the numbers from last year), you would pay: |
| A) | $124,000 |
| B) | $775,000 |
| C) | $65,000 |
| D) | $7,750 |
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| 74 | The current ratio of this corporation, at Dec. 31 last year, is: |
| A) | 1.2 to 1 |
| B) | 1.5 to 1 |
| C) | 2.0 to 1 |
| D) | none of the above |
|
| 75 | Compute the current ratio for this corporation at Dec. 31 of the prior year and determine whether the ratio, from the prior year to last year is: |
| A) | improving |
| B) | worsening |
| C) | staying the same |
| D) | cannot tell from information given |
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| 76 | The inventory turnover ratio of this corporation, at Dec. 31 last year, is: |
| A) | 3.0 to 1 |
| B) | 5.0 to 1 |
| C) | 0.3 to 1 |
| D) | 2.0 to 1 |
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| 77 | The earnings per share of this corporation, at Dec. 31 last year, are: |
| A) | $2.07 |
| B) | $13.33 |
| C) | $31.00 |
| D) | some other number |
|
| 78 | The debt-to-equity ratio of this corporation, at Dec. 31 last year, is: |
| A) | 13.5 to 1 |
| B) | 2.5 to 1 |
| C) | 2.1 to 1 |
| D) | 7.5 to 1 |
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| 79 | Receivable turnover, in number of days, of this corporation, at
Dec. 31 last year, is 26.3 days. |
| A) | TRUE |
| B) | FALSE |
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| 80 | Finance is an easy subject that can be mastered with very little study and concentration. |
| A) | TRUE |
| B) | FALSE |