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1 | |
Bender Company uses accrual accounting. Which of the following statements best describes the application of accrual accounting to the recognition of revenues and expenses for 2005? (LO 1) |
| | A) | Net income for 2005 represents the cash received from services provided in 2005 less the cash paid for expenses incurred during 2005. |
| | B) | Net income for 2005 represents the cash received from services provided in 2005 less the expenses incurred during 2005. |
| | C) | Net income for 2005 represents the revenue from services provided in 2005 less the expenses incurred during 2005. |
| | D) | Net income for 2005 represents the revenue from services provided in 2005 less the cash paid for expenses incurred during 2005. |
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2 | |
Trace Company was started on January 1, 2005. During its first year Trace Company provided $100,000 in consulting services to its clients on account and collected $85,000 of this amount. Use the horizontal model to record these transactions and determine the incorrect statement. (LO 1, 2) |
| | A) | Retained earnings increased by $100,000. |
| | B) | Net income increased by $100,000. |
| | C) | Total assets increased by $85,000. |
| | D) | A cash inflow of $85,000 is shown on the statement of cash flows |
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3 | |
Johnson Company collected $25,000 from customers in partial settlement of its accounts receivable. Which of the following best describes this transaction type? (LO 1) |
| | A) | Asset use transaction |
| | B) | Asset source transaction |
| | C) | Asset exchange transaction |
| | D) | Claims exchange transaction |
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4 | |
Clancy Company was started on January 1, 2005. During its first year Clancy Company incurred $52,000 for salary expense and paid $51,000 of this amount. Use the horizontal model to determine the incorrect statement. (LO 1, 2) |
| | A) | Net income decreased by $52,000. |
| | B) | Total assets decreased by $52,000. |
| | C) | Retained earnings decreased by $52,000. |
| | D) | A cash outflow of $51,000 is shown on the statement of cash flows. |
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5 | |
Stanley Company’s employees are paid each Friday for hours worked the previous week. At the end of the accounting period, Stanley Company accrues $20,000 for earned salaries that have not yet been paid. Which of the following best describes this accrual transaction type? (LO 5, 7) |
| | A) | Asset source transaction |
| | B) | Asset use transaction |
| | C) | Asset exchange transaction |
| | D) | Claims exchange transaction |
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6 | |
Which of the following accounts is a temporary (nominal) account? (LO 4) |
| | A) | Cash |
| | B) | Dividends |
| | C) | Common Stock |
| | D) | Retained earnings |
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7 | |
Use the following information to answer questions 7, 8, and 9:
On December 31, 2005, Jamison Corporation had the following account balances: Cash | $15,000 | Revenue | 75,000 | Advertising Expense | 12,000 | Accounts Receivable | 20,000 | Salaries Payable | 2,000 | Land | 11,000 | Retained Earnings | 39,000 | Salary Expense | 27,000 | Common Stock | 5,000 |
What is Jamison Corporation’s net income for 2005? (LO 3) |
| | A) | $34,000 |
| | B) | $36,000 |
| | C) | $63,000 |
| | D) | $75,000 |
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8 | |
What are Jamison Corporation’s total assets at December 31, 2005? (LO 3) |
| | A) | $15,000 |
| | B) | $35,000 |
| | C) | $46,000 |
| | D) | $51,000 |
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9 | |
The $2,000 balance in the Jamison Company’s Salary Payable account was paid on January 4, 2006. Which of the following best describes this transaction type? (LO 1) |
| | A) | Asset use transaction |
| | B) | Asset source transaction |
| | C) | Asset exchange transaction |
| | D) | Claims exchange transaction |
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10 | |
Use the following information to answer questions 11, 12, and 13:
On November 1, 2005, Marigold Corporation purchased a $12,000, 6-month certificate of deposit (CD) that had a 5% annual interest rate. (LO 5) How will this CD purchase be shown on Marigold Corporation’s statement of cash flows? |
| | A) | Cash outflow for operating activities |
| | B) | Cash outflow for investing activities |
| | C) | Cash outflow for financing activities |
| | D) | The amount will not appear on the statement of cash flow. |
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11 | |
Which of the following transaction types best describes the purchase of the CD? (LO 5) |
| | A) | Asset use transaction |
| | B) | Asset source transaction |
| | C) | Asset exchange transaction |
| | D) | Claims exchange transaction |
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12 | |
What amount of interest income will Marigold Corporation show on its 2005 and 2006 income statements assuming the company redeems the CD at the end of the 6-month period? (LO 5)| 2005 | 2006 | | $ -0- | $ 300 | | $ 300 | $ -0- | | $ 100 | $ 200 | | $ 200 | $ 400 |
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13 | |
On December 1, 2004 Grady Corporation signed contracts for $30,000 of consulting services to be performed in 2005. What was the result of this event? (LO 1) |
| | A) | Revenue increased by $30,000. |
| | B) | Assets increased by $30,000. |
| | C) | Retained earnings increased by $30,000. |
| | D) | This event did not affect any of the financial statements. |
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14 | |
Use the following information to answer questions 14, 15, and 16:
Hi-Tech Company borrowed $10,000 from the bank on March 1, 2005. The note carried a 9% annual interest rate and a one-year term to maturity.
Which of the following is an affect of this transaction on Hi-Tech Corporation’s financial statements? (LO 5) |
| | A) | Liabilities increased by $10,000. |
| | B) | Interest expense increased by $900. |
| | C) | Retained earnings decreased by $10,000. |
| | D) | All of the above statements are correct. |
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15 | |
What amount of interest expense will Hi-Tech Corporation show on its 2005 and 2006 income statements assuming the company repays the loan plus the interest at the end of the 1-year period? (LO 5)2005 | 2006 | a. $ -0- | $ 900 | b. $ 900 | $ -0- | c. $ 675 | $ 225 | d. $ 750 | $ 150 |
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16 | |
Where will the Hi-Tech Corporation’s cash payment for interest be shown on the 2006 statement of cash flows? (LO 5) |
| | A) | Cash flow for operating activities |
| | B) | Cash flow for investing activities |
| | C) | Cash flow for financing activities |
| | D) | The amount will not appear on the statement of cash flow. |
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17 | |
Which of the following accounts is a permanent account? (LO 4) |
| | A) | Cash |
| | B) | Dividends |
| | C) | Revenue |
| | D) | Expense |
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18 | |
Which of the following statements is incorrect? (LO 3) |
| | A) | Expenses can be defined as decreases in assets or increases in liabilities resulting from consuming assets and services to generate revenue. |
| | B) | Stockholder’s equity includes common stock, retained earnings, and salaries payable. |
| | C) | Expenses that are matched with the period in which they are incurred are called period costs. |
| | D) | The balance sheet discloses an entity’s assets, liabilities, and stockholders’ equity at a particular point in time. |
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19 | |
Webster Company began the period with a $10,000 balance in Cash, a $25,000 in Accounts Receivable, and a $35,000 balance in Retained Earnings. During the period Webster provided $75,000 of consulting services on account, collected $70,000 of the accounts receivable, and paid $25,000 cash for salary expense. Which of the following statements is incorrect? (Hint: Use a horizontal model to record the transactions.) (LO 1) |
| | A) | The ending Cash balance is $55,000. |
| | B) | The ending retained earnings balance is $50,000. |
| | C) | The net income for the period is $50,000. |
| | D) | The ending Accounts Receivable balance is $30,000. |
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20 | |
A multi-cycle vertical financial statements model can be used to observe important interrelationships among the financial statements. Which of the following statements is incorrect when using this model to compare 2005 and 2006 accrual accounting data? (LO 6, 7) |
| | A) | The beginning cash balance for 2006 is the same as the ending cash balance for 2005. |
| | B) | The cash amount reported on the 2005 balance sheet is the same as the ending cash balance on the 2005 statement of cash flows. |
| | C) | The net income for 2005 increases the 2005 retained earnings on the statement of changes in stockholders’ equity. |
| | D) | The net cash flow from operating activities is always equal to the net income for the same period. |
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21 | |
What is the correct order of the steps in an accounting cycle? (LO 4) |
| | A) | Prepare financial statements; adjust accounts; close temporary accounts; record transactions |
| | B) | Record transactions; adjust accounts; close temporary accounts; prepare financial statements |
| | C) | Record transactions; adjust accounts; prepare financial statements; close temporary accounts |
| | D) | Record transactions; prepare financial statements; adjust accounts; close temporary accounts |
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22 | |
A CPA conducts an audit on a company’s financial statements and finds that the statements are materially correct and are in compliance with GAAP without reservation or exception. What form of opinion will the CPA firm issue on these statements? (LO 8) |
| | A) | Unqualified opinion |
| | B) | Qualified opinion |
| | C) | Adverse opinion |
| | D) | Disclaimer of audit opinion |
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23 | |
The American Institute of Certified Public Accountants (AICPA) requires its members to comply with the AICPA Code of Professional Conduct. Which of the following is not covered by this Code of Professional Conduct? (LO 9) |
| | A) | A CPA will serve the public interest. |
| | B) | A CPA will perform all professional responsibilities with the highest sense of integrity. |
| | C) | A CPA will maintain independence in fact and appearance when performing an audit. |
| | D) | A CPA will guarantee that financial statements are absolutely correct before issuing an audit opinion. |
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24 | |
As a result of major audit failures on the part of the independent auditors (e.g. Enron and WorldCom), Congress passed what Act in 2002 to tighten rules governing auditor independence? (LO 9) |
| | A) | AICPA Auditor Independence Act |
| | B) | SEC Audit Control Act |
| | C) | Sarbanes-Oxley Act |
| | D) | GAAP Improvement Act of 2002 |
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25 | |
Allen Corporation experienced an accounting event that affected its financial statements as indicated below: | Assets | = | Liab. | + | Equity | | Rev. | – | Exp. | = | Net Inc. | | Cash Flow | | | + | | n/a | | + | | + | | n/a | | + | | n/a | |
Which of the following accounting events could have caused these effects on Allen Company’s financial statements? (LO 1) |
| | A) | Purchased equipment on account |
| | B) | Provided services on account |
| | C) | Collected accounts receivable |
| | D) | Paid accounts payable |
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26 | |
On December 31, 2005 Atwell Company adjusted the books to recognize interest revenue earned to date on a 1-year certificate of deposit (CD). The CD was purchased on June 1, 2005 and has a 4 percent annual rate of interest. Which of the following choices accurately reflects how this event would affect the company’s financial statements? (LO 5) | | Assets | = | Liab. | + | Equity | | Rev. | – | Exp. | = | Net Inc. | | Cash Flow | | a. | | + | | + | | n/a | | + | | n/a | | + | | n/a | | b. | | + | | n/a | | + | | n/a | | n/a | | n/a | | + OA | | c. | | + | | n/a | | + | | + | | n/a | | + | | n/a | | d. | | + | | n/a | | + | | + | | n/a | | + | | + IA | | | | | | | | | | | | | | | | | |
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