1) Which of the following is NOT considered cash for financial reporting purposes?

A. Coin, currency, and available funds

B. Money orders, certified checks, and personal checks

C. Petty cash funds and change funds

D. Postdated checks and I.O.U.’s

2) What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet?

A. As assets but separately from other receivables.

B. As offsets to capital.

C. As trade notes and accounts receivable if they otherwise qualify as current assets.

D. By means of footnotes only.

3) Which of the following is considered cash?

A. Money market savings certificates

B. Certificates of deposit (CDs)

C. Postdated checks

D. Money market checking accounts

4) If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as

A. an item of “other expense” in the income statement

B. a deduction from accounts receivable in determining the net realizable value of accounts receivable

C. a deduction from sales in the income statement

D. sales discounts forfeited in the cost of goods sold section of the income statement

5) Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does NOT make the balance sheet misleading because

A. the allowance for uncollectible accounts includes a discount element

B. the amount of the discount is NOT material

C. most short-term receivables are NOT interest-bearing

D. most receivables can be sold to a bank or factor

6) Which of the following methods of determining annual bad debt expense best achieves the matching concept?

A. Direct write-off

B. Percentage of average accounts receivable

C. Percentage of ending accounts receivable

D. Percentage of sales

7) The accountant for the Orion Sales Company is preparing the income statement for 2007 and the balance sheet at December 31, 2007. Orion uses the periodic inventory system. The January 1, 2007 merchandise inventory balance will appear

A. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet

B. only as an asset on the balance sheet

C. only in the cost of goods sold section of the income statement

D. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet

8) Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in inventory, but did NOT record the transaction. The effect of this on its financial statements for January 31 would be

A. net income, current assets, and retained earnings were understated

B. net income, current assets, and retained earnings were overstated

C. net income was correct and current assets were understated

D. net income and current assets were overstated and current liabilities were understated

9. If the beginning inventory for 2006 is overstated, the effects of this error on cost of goods sold for 2006, net income for 2006, and assets at December 31, 2007, respectively, are

A. understatement, overstatement, no effect

B. overstatement, understatement, overstatement

C. overstatement, understatement, no effect

D. understatement, overstatement, overstatement

10) Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method?

A. Price trend cannot be determined from information given

B. Prices decreased

C. Prices remained unchanged

D. Prices increased

11) Which method of inventory pricing best approximates specific identification of the actual flow of costs and units in most manufacturing situations?

A. Base stock

B. Average cost

C. First-in, first-out

D. Last-in, first-out

12) All of the following costs should be charged against revenue in the period in which costs are incurred EXCEPT for

A. costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory

B. manufacturing overhead costs for a product manufactured and sold in the same accounting period

C. costs which will NOT benefit any future period

D. costs from idle manufacturing capacity resulting from an unexpected plant shutdown

13) In no case can “market” in the lower-of-cost-or-market rule be more than

A. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses

B. estimated selling price in the ordinary course of business

C. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal

D. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin

14) When the direct method is used to record inventory at market

A. the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods sold

B. there is a direct reduction in the selling price of the product that results in a loss being recorded on the income statement prior to the sale

C. a loss is recorded directly in the inventory account by crediting inventory and debiting loss on inventory decline

D. only the portion of the loss attributable to inventory sold during the period is recorded in the financial statements

15) An item of inventory purchased this period for $15.00 has been incorrectly written down to its current replacement cost of $10.00. It sells during the following period for $30.00, its normal selling price, with disposal costs of $3.00 and normal profit of $12.00. Which of the following statements is NOT true?

A. Income of the following year will be understated

B. The cost of sales of the following year will be understated

C. The current year’s income is understated

D. The closing inventory of the current year is understated

16) The retail inventory method is based on the assumption that the

A. proportions of markups and markdowns to selling price are the same

B. final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods

C. ratio of gross margin to sales is approximately the same each period

D. ratio of cost to retail changes at a constant rate

17) A major advantage of the retail inventory method is that it

A. provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies

B. provides reliable results in cases where the distribution of items in the inventory is different from that of items sold during the period

C. hides costs from competitors and customers

D. gives a more accurate statement of inventory costs than other methods

18) In 2006, Lucas Manufacturing signed a contract with a supplier to purchase raw materials in 2007 for $700,000. Before the December 31, 2006 balance sheet date, the market price for these materials dropped to $510,000. The journal entry to record this situation at December 31, 2006 will result in a credit th
at should be reported

A. on the income statement

B. as a valuation account to Inventory on the balance sheet

C. as a current liability

D. as an appropriation of retained earnings

19) The cost of land typically includes the purchase price and all of the following costs EXCEPT

A. assumption of any liens or mortgages on the property

B. grading, filling, draining, and clearing costs

C. street lights, sewers, and drainage systems cost

D. private driveways and parking lots

20) Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is located with the plan to tear down the Holiday Hotel and build a new luxury hotel on the site. The cost of the Holiday Hotel should be

A. capitalized as part of the cost of the new hotel

B. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down

C. written off as an extraordinary loss in the year the hotel is torn down

D. capitalized as part of the cost of the land

21) If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on

A. the intention of management for the property when the building was acquired

B. the length of time for which the building was held prior to its demolition

C. the significance of the cost allocated to the building in relation to the combined cost of the lot and building

D. the contemplated future use of the parking lot

22) The period of time during which interest must be capitalized ends when

A. the activities that are necessary to get the asset ready for its intended use have begun

B. no further interest cost is being incurred

C. the asset is substantially complete and ready for its intended use

D. the asset is abandoned, sold, or fully depreciated

23) Which of the following assets do NOT qualify for capitalization of interest costs incurred during construction of the assets?

A. Assets NOT currently undergoing the activities necessary to prepare them for their intended use

B. Assets intended for sale or lease that are produced as discrete projects

C. Assets under construction for an enterprise’s own use

D. Assets financed through the issuance of long-term debt

24) When computing the amount of interest cost to be capitalized, the concept of “avoidable interest” refers to

A. that portion of average accumulated expenditures on which no interest cost was incurred

B. a cost of capital charge for stockholders’ equity

C. the total interest cost actually incurred

D. that portion of total interest cost which would NOT have been incurred if expenditures for asset construction had NOT been made

25) The King-Kong Corporation exchanges one plant asset for a similar plant asset and gives cash in the exchange. The exchange is NOT expected to cause a material change in the future cash flows for either entity. If a gain on the disposal of the old asset is indicated, the gain will

A. be credited directly to the owner’s capital account

B. effectively reduce the amount to be recorded as the cost of the new asset

C. be reported in the Other Revenues and Gains section of the income statement

D. effectively increase the amount to be recorded as the cost of the new asset

26) When a plant asset is acquired by issuance of common stock, the cost of the plant asset is properly measured by the

A. market value of the stock

B. stated value of the stock

C. par value of the stock

D. book value of the stock

27) The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset and the exchange has commercial substance is usually recorded at

A. either the fair value of the asset given up or the asset received, whichever one results in the largest gain (smallest loss) to the company

B. the fair value of the asset given up, and a gain but NOT a loss may be recognized

C. the fair value of the asset given up, and a gain or loss is recognized

D. the fair value of the asset received if it is equally reliable as the fair value of the asset given up

28) Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?

A. Partial recognition

B. Systematic and rational allocation

C. Associating cause and effect

D. Immediate recognition

29) If an industrial firm uses the units-of-production method for computing depreciation on its only plant asset, factory machinery, the credit to accumulated depreciation from period to period during the life of the firm will

A. vary with production

B. vary with unit sales

C. be constant

D. vary with sales revenue

30) Which of the following most accurately reflects the concept of depreciation as used in accounting?

A. An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets

B. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset

C. The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred

D. A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved


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