Exam 1

Question 1

General-purpose financial statements are the product of

a. financial accounting.
b. managerial accounting.
c. both financial and managerial accounting.
d. neither financial nor managerial accounting.

Answer 1

a. financial accounting.

Question 2

Users of financial reports include all of the following except

a. creditors.
b. government agencies.
c. unions.
d. All of these are users.

Answer 2

d. All of these are users.

Question 3

The financial statements most frequently provided include all of the following except the

a. balance sheet.
b. income statement.
c. statement of cash flows.
d. statement of retained earnings.

Answer 3

d. statement of retained earnings.

Question 4

The information provided by financial reporting pertains to

a. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.
b. business industries, rather than to individual enterprises or an economy as a whole or to members of society as consumers.
c. individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers.
d. an economy as a whole and to members of society as consumers, rather than to individual enterprises or industries.

Answer 4

a. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.

Question 5

All the following are differences between financial and managerial accounting in how accounting information is used except to

a. plan and control company’s operations.
b. decide whether to invest in the company.
c. evaluate borrowing capacity to determine the extent of a loan to grant.
d. All the above.

Answer 5

d. All the above.

Question 6

Which of the following represents a form of communication through financial reporting but not through financial statements?

a. Balance sheet.
b. President’s letter.
c. Income statement.
d. Notes to financial statements.

Answer 6

b. President’s letter.

Question 7

The process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control an organization’s operations is called

a. financial accounting.
b. managerial accounting.
c. tax accounting.
d. auditing.

Answer 7

b. managerial accounting.

Question 8

How does accounting help the capital allocation process attract investment capital?

a. Provides timely, relevant information.
b. Encourages innovation.
c. Promotes productivity.
d. a and b above.

Answer 8

a. Provides timely, relevant information.

Question 9

Whether a business is successful and thrives is determined by

a. markets.
b. free enterprise.
c. competition.
d. all of these.

Answer 9

d. all of these.

Question 10

An effective capital allocation process

a. promotes productivity.
b. encourages innovation.
c. provides an efficient market for buying and selling securities.
d. all of these.

Answer 10

d. all of these.

Question 11

Financial statements in the early 2000s provide information related to

a. nonfinancial measurements.
b. forward-looking data.
c. hard assets (inventory and plant assets).
d. none of these.

Answer 11

c. hard assets (inventory and plant assets).

Question 12

Which of the following is not a major challenge facing the accounting profession?

a. Nonfinancial measurements.
b. Timeliness.
c. Accounting for hard assets.
d. Forward-looking information.

Answer 12

c. Accounting for hard assets.

Question 13

What is the objective of financial reporting?

a. Provide information that is useful to management in making decisions.
b. Provide information that clearly portray nonfinancial transactions.
c. Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors.
d. Provide information that excludes claims to the resources.

Answer 13

c. Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors.

Question 14

Primary users for general-purpose financial statements include

a. creditors.
b. employees.
c. investors.
d. both creditors and investors.

Answer 14

d. both creditors and investors.

Question 15

When making decisions, investors are interested in assessing

a. the company’s ability to generate net cash inflows.
b. management’s ability to protect and enhance the capital providers’ investments.
c. Both a and b.
d. the company’s ability to generate net income.

Answer 15

c. Both a and b.

Question 16

Accrual accounting is used because

a. cash flows are considered less important.
b. it provides a better indication of ability to generate cash flows than the cash basis.
c. it recognizes revenues when cash is received and expenses when cash is paid.
d. none of the above.

Answer 16

b. it provides a better indication of ability to generate cash flows than the cash basis.

Question 17

Which perspective is adopted as part of the objective of general-purpose financial reporting?

a. Decision-usefulness perspective.
b. Proprietary perspective.
c. Entity perspective.
d. Financial reporting perspective.

Answer 17

c. Entity perspective.

Question 18

Accounting principles are “generally accepted” only when

a. an authoritative accounting rule-making body has established it in an official pro-nouncement.
b. it has been accepted as appropriate because of its universal application.
c. both a and b.
d. neither a nor b.

Answer 18

c. both a and b.

Question 19

A common set of accounting standards and procedures are called

a. financial accounting standards.
b. generally accepted accounting principles.
c. objectives of financial reporting.
d. statements of financial accounting concepts.

Answer 19

b. generally accepted accounting principles.

Question 20

Which of the following is a general limitation of “general purpose financial statements”?

a. General purpose financial statements may not be the most informative for a specific enterprise.
b. General purpose financial statements are comparable.
c. General purpose financial statements are assumed to present fairly the company’s financial operations.
d. None of the above.

Answer 20

a. General purpose financial statements may not be the most informative for a specific enterprise.

Question 21

What is the relationship between the Securities and Exchange Commission and accounting standard setting in the United States?

a. The SEC requires all companies listed on an exchange to submit their financial statements to the SEC.
b. The SEC coordinates with the AICPA in establishing accounting standards.
c. The SEC has a mandate to establish accounting standards for enterprises under its jurisdiction.
d. The SEC reviews financial statements for compliance.

Answer 21

Could be a, c, or d

Question 22

What is a primary objective of financial reporting as indicated in the conceptual framework?

a. provide information that is useful to those making investing and credit decisions.
b. provide information that is useful to management.
c. provide information about those investing in the entity.
d. All of the above.

Answer 22

a. provide information that is useful to those making investing and credit decisions.

Question 23

What is a primary objective of financial reporting as indicated in the conceptual framework?

a. Provide information that is helpful to present and potential investors, creditors, and other users in assessing the amounts, timing, and uncertainty of future cash flows.
b. Provide information that is helpful to present investors, creditors, and other users in assessing the amounts, timing, and uncertainty of future cash flows.
c. Provide information that is helpful to potential investors, creditors, and other users in assessing the amounts, timing, and uncertainty of future cash flows.
d. None of the above.

Answer 23

a. Provide information that is helpful to present and potential investors, creditors, and other users in assessing the amounts, timing, and uncertainty of future cash flows.

Question 24

Which of the following is a fundamental characteristic of useful accounting information?

a. Comparability.
b. Relevance.
c. Neutrality.
d. Materiality.

Answer 24

b. Relevance.

Question 25

Which of the following is a primary characteristic of useful accounting information?

a. Conservatism.
b. Comparability.
c. Faithful representation.
d. Consistency.

Answer 25

c. Faithful representation.

Question 26

What is meant by comparability when discussing financial accounting information?

a. Information has predictive or confirmatory value.
b. Information is reasonably free from error.
c. Information that is measured and reported in a similar fashion across companies.
d. Information is timely.

Answer 26

c. Information that is measured and reported in a similar fashion across companies.

Question 27

What is meant by consistency when discussing financial accounting information?

a. Information that is measured and reported in a similar fashion across points in time.
b. Information is timely.
c. Information is measured similarly across the industry.
d. Information is verifiable.

Answer 27

a. Information that is measured and reported in a similar fashion across points in time.

Question 28

Which of the following is an ingredient of relevance?

a. Verifiability.
b. Neutrality.
c. Timeliness.
d. Materiality.

Answer 28

d. Materiality.

Question 29

Which of the following is an ingredient of faithful representation?

a. Predictive value.
b. Materiality.
c. Neutrality.
d. Confirmatory value.

Answer 29

c. Neutrality.

Question 30

Changing the method of inventory valuation should be reported in the financial statements under what qualitative characteristic of accounting information?

a. Consistency.
b. Verifiability.
c. Timeliness.
d. Comparability.

Answer 30

a. Consistency.

Question 31

Company A issuing its annual financial reports within one month of the end of the year is an example of which ingredient of fundamental quality of accounting information?

a. Neutrality.
b. Timeliness.
c. Predictive value.
d. Completeness.

Answer 31

b. Timeliness.

Question 32

What is the quality of information that enables users to better forecast future operations?

a. Faithful representation.
b. Materiality.
c. Timeliness.
d. Relevance.

Answer 32

d. Relevance.

Question 33

Neutrality is an ingredient of which fundamental quality of information?

a. Faithful representation.
b. Comparability.
c. Relevance.
d. Understandability.

Answer 33

a. Faithful representation.

Question 34

If the FIFO inventory method was used last period, it should be used for the current and following periods because of

a. relevance.
b. neutrality.
c. understandability.
d. consistency.

Answer 34

d. consistency.

Question 35

The pervasive criterion by which accounting information can be judged is that of

a. decision usefulness.
b. freedom from bias.
c. timeliness.
d. comparability.

Answer 35

a. decision usefulness.

Question 36

The two fundamental qualities that make accounting information useful for decision making are

a. comparability and timeliness.
b. materiality and neutrality.
c. relevance and faithful representation.
d. faithful representation and comparability.

Answer 36

c. relevance and faithful representation.

Question 37

Accounting information is considered to be relevant when it

a. can be depended on to represent the economic conditions and events that it is intended to represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.

Answer 37

b. is capable of making a difference in a decision.

Question 38

The quality of information that means the numbers and descriptions match what really existed or happened is

a. relevance.
b. faithful representation.
c. completeness.
d. neutrality.

Answer 38

b. faithful representation.

Question 39

Which of the following does not relate to relevance?

a. Materiality
b. Predictive value
c. Confirmatory value
d. All of these relate to relevance

Answer 39

d. All of these relate to relevance

Question 40

According to Statement of Financial Accounting Concepts No. 2, materiality is an ingredient of the fundamental quality of
Relevance - Faithful Representation
a. Yes - Yes
b. No - Yes
c. Yes - No
d. No - No

Answer 40

c. Yes No

Question 41

According to Statement of Financial Accounting Concepts No. 2, completeness is an ingredient of the fundamental quality of
		Relevance - Faithful Representation
	a.	Yes	        -         No
	b.	Yes	        -         Yes
	c.	No	        -          No
	d.	No	        -         Yes

Answer 41

d. No Yes

Question 42

A trial balance may prove that debits and credits are equal, but

	a. an amount could be entered in the wrong account.
	b. a transaction could have been entered twice.
	c. a transaction could have been omitted.
	d. all of these.

Answer 42

d. all of these.

Question 43

A general journal

	a. chronologically lists transactions and other events, expressed in terms of debits and credits.
	b. contains one record for each of the asset, liability, stockholders’ equity, revenue, and expense accounts.
	c. lists all the increases and decreases in each account in one place.
	d. contains only adjusting entries.

Answer 43

a. chronologically lists transactions and other events, expressed in terms of debits and credits.

Question 44

A journal entry to record the sale of inventory on account will include a

	a. debit to inventory.
	b. debit to accounts receivable.
	c. debit to sales.
	d. credit to cost of goods sold.

Answer 44

b. debit to accounts receivable.

Question 45

A journal entry to record a payment on account will include a

	a. debit to accounts receivable.
	b. credit to accounts receivable.
	c. debit to accounts payable.
	d. credit to accounts payable.

Answer 45

c. debit to accounts payable.

Question 46

A journal entry to record a receipt of rent revenue in advance will include a

	a. debit to rent revenue.
	b. credit to rent revenue.
	c. credit to cash.
	d. credit to unearned rent.

Answer 46

d. credit to unearned rent.

Question 47

Which of the following errors will cause an imbalance in the trial balance?

a. Omission of a transaction in the journal.
b. Posting an entire journal entry twice to the ledger.
c. Posting a credit of $720 to Accounts Payable as a credit of $720 to Accounts Receivable.
d. Listing the balance of an account with a debit balance in the credit column of the trial balance.

Answer 47

d. Listing the balance of an account with a debit balance in the credit column of the trial balance.

Question 48

Which of the following is not a principal purpose of an unadjusted trial balance?

a. It proves that debits and credits of equal amounts are in the ledger.
b. It is the basis for any adjustments to the account balances.
c. It supplies a listing of open accounts and their balances.
d. It proves that debits and credits were properly entered in the ledger accounts.

Answer 48

d. It proves that debits and credits were properly entered in the ledger accounts.

Question 49

An adjusting entry should never include

a. a debit to an expense account and a credit to a liability account.
b. a debit to an expense account and a credit to a revenue account.
c. a debit to a liability account and a credit to revenue account.
d. a debit to a revenue account and a credit to a liability account.

Answer 49

b. a debit to an expense account and a credit to a revenue account.

Question 50

Which of the following is an example of an accrued expense?

a. Office supplies purchased at the beginning of the year and debited to an expense account.
b. Property taxes incurred during the year, to be paid in the first quarter of the subsequent year.
c. Depreciation expense
d. Rent earned during the period, to be received at the end of the year

Answer 50

b. Property taxes incurred during the year, to be paid in the first quarter of the subsequent year.

Question 51

Which of the following statements is associated with the accrual basis of accounting?

a. The timing of cash receipts and disbursements is emphasized.
b. A minimum amount of record keeping is required.
c. This method is used less frequently by businesses than the cash method of accounting.
d. Revenues are recognized in the period they are earned, regardless of the time period the cash is received.

Answer 51

d. Revenues are recognized in the period they are earned, regardless of the time period the cash is received.

Question 52

An adjusting entry to record an accrued expense involves a debit to a(an):

a. expense account and a credit to a prepaid account.
b. expense account and a credit to Cash.
c. expense account and a credit to a liability account.
d. liability account and a credit to an expense account.

Answer 52

c. expense account and a credit to a liability account.

Question 53

The failure to properly record an adjusting entry to accrue an expense will result in an:

a. understatement of expenses and an understatement of liabilities.
b. understatement of expenses and an overstatement of liabilities.
c. understatement of expenses and an overstatement of assets.
d. overstatement of expenses and an understatement of assets.

Answer 53

a. understatement of expenses and an understatement of liabilities.

Question 54

Which of the following properly describes a deferral?

a. Cash is received after revenue is earned.
b. Cash is received before revenue is earned.
c. Cash is paid after expense is incurred.
d. Cash is paid in the same time period that an expense is incurred.

Answer 54

b. Cash is received before revenue is earned.

Question 55

The failure to properly record an adjusting entry to accrue a revenue item will result in an:

a. understatement of revenues and an understatement of liabilities.
b. overstatement of revenues and an overstatement of liabilities.
c. overstatement of revenues and an overstatement of assets.
d. understatement of revenues and an understatement of assets.

Answer 55

d. understatement of revenues and an understatement of assets.

Question 56

The omission of the adjusting entry to record depreciation expense will result in an:

a. overstatement of assets and an overstatement of owners’ equity.
b. understatement of assets and an understatement of owner’s equity.
c. overstatement of assets and an overstatement of liabilities.
d. overstatement of liabilities and an understatement of owners’ equity.

Answer 56

a. overstatement of assets and an overstatement of owners’ equity.

Question 57

Adjustments are often prepared

	a. after the balance sheet date, but dated as of the balance sheet date.
	b. after the balance sheet date, and dated after the balance sheet date.
	c. before the balance sheet date, but dated as of the balance sheet date.
	d. before the balance sheet date, and dated after the balance sheet date.

Answer 57

a. after the balance sheet date, but dated as of the balance sheet date.

Question 58

At the time a company prepays a cost

	a. it debits an asset account to show the service or benefit it will receive in the future.
	b. it debits an expense account to match the expense against revenues earned.
	c. its credits a liability account to show the obligation to pay for the service in the future.
	d. more than one of the above.

Answer 58

a. it debits an asset account to show the service or benefit it will receive in the future.

Question 59

How do these prepaid expenses expire?

Rent - Supplies

a. With the passage of time - Through use and consumption
b. With the passage of time - With the passage of time
c. Through use and consumption - Through use and consumption
d. Through use and consumption - With the passage of time

Answer 59

a. With the passage of time - Through use and consumption

Question 60

Recording the adjusting entry for depreciation has the same effect as recording the adjusting entry for

	a. an unearned revenue.
	b. a prepaid expense.
	c. an accrued revenue.
	d. an accrued expense.

Answer 60

b. a prepaid expense.

Question 61

Unearned revenue on the books of one company is likely to be

	a. a prepaid expense on the books of the company that made the advance payment.
	b. an unearned revenue on the books of the company that made the advance payment.
	c. an accrued expense on the books of the company that made the advance payment.
	d. an accrued revenue on the books of the company that made the advance payment.

Answer 61

a. a prepaid expense on the books of the company that made the advance payment.

Question 62

Classification as an extraordinary item on the income statement would be appropriate for the

a. gain or loss on disposal of a component of the business.
b. substantial write-off of obsolete inventories.
c. loss from a strike.
d. none of these.

Answer 62

d. none of these.

Question 63

Which of these is generally an example of an extraordinary item?

a. Loss incurred because of a strike by employees.
b. Write-off of deferred marketing costs believed to have no future benefit.
c. Gain resulting from the devaluation of the U.S. dollar.
d. Gain resulting from the state exercising its right of eminent domain on a piece of land used as a parking lot.

Answer 63

d. Gain resulting from the state exercising its right of eminent domain on a piece of land used as a parking lot.

Question 64

Under which of the following conditions would material flood damage be considered an extraordinary item for financial reporting purposes?

a. Only if floods in the geographical area are unusual in nature and occur infrequently.
b. Only if the flood damage is material in amount and could have been reduced by prudent management.
c. Under any circumstances as an extraordinary item.
d. Flood damage should never be classified as an extraordinary item.

Answer 64

a. Only if floods in the geographical area are unusual in nature and occur infrequently.

Question 65

An item that should be classified as an extraordinary item is

a. write-off of goodwill.
b. gains from transactions involving foreign currencies.
c. losses from moving a plant to another city.
d. gains from a company selling the only investment it has ever owned.

Answer 65

d. gains from a company selling the only investment it has ever owned.

Question 66

How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements?

a. Shown as a separate item in operating revenues or expenses if material and supple-mented by a footnote if deemed appropriate.
b. Shown in operating revenues or expenses if material but not shown as a separate item.
c. Shown net of income tax after ordinary net earnings but before extraordinary items.
d. Shown net of income tax after extraordinary items but before net earnings.

Answer 66

a. Shown as a separate item in operating revenues or expenses if material and supple-mented by a footnote if deemed appropriate.

Question 67

Which of the following is a change in accounting principle?

a. A change in the estimated service life of machinery
b. A change from FIFO to LIFO
c. A change from straight-line to double-declining-balance
d. A change from FIFO to LIFO and a change from straight-line to double-declining- balance

Answer 67

b. A change from FIFO to LIFO
c. A change from straight-line to double-declining-balance
d. A change from FIFO to LIFO and a change from straight-line to double-declining- balance

Question 68

Which of the following is never classified as an extraordinary item?

a. Losses from a major casualty.
b. Losses from an expropriation of assets.
c. Gain on a sale of the only security investment a company has ever owned.
d. Losses from exchange or translation of foreign currencies.

Answer 68

d. Losses from exchange or translation of foreign currencies.

Question 69

Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business?

a. The gain or loss on disposal should be reported as an extraordinary item.
b. Results of operations of a discontinued component should be disclosed immediately below extraordinary items.
c. Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement.
d. The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations.

Answer 69

c. Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement.

Question 70

When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as

a. a prior period adjustment.
b. an extraordinary item.
c. an amount after continuing operations and before extraordinary items.
d. a bulk sale of plant assets included in income from continuing operations.

Answer 70

c. an amount after continuing operations and before extraordinary items.

Question 71

A material item which is unusual in nature or infrequent in occurrence, but not both should be shown in the income statement
	Net of Tax	-Disclosed Separately
a.	No	-No
b.	Yes	-Yes
c.	No	-Yes
d.	Yes	-No

Answer 71

c. No -Yes

Question 72

Income taxes are allocated to

a. extraordinary items.
b. discontinued operations.
c. prior period adjustments.
d. all of these.

Answer 72

d. all of these.

Question 73

Which of the following is true about intraperiod tax allocation?

a. It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return.
b. It is required for extraordinary items and cumulative effect of accounting changes but not for prior period adjustments.
c. Its purpose is to allocate income tax expense evenly over a number of accounting periods.
d. Its purpose is to relate the income tax expense to the items which affect the amount of tax.

Answer 73

d. Its purpose is to relate the income tax expense to the items which affect the amount of tax.

Question 74

Companies use intraperiod tax allocation for all of the following items except

a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.

Answer 74

c. Changes in accounting estimates.

Question 75

Which of the following items would be reported net of tax on the face of the income statement?

a. Prior period adjustment
b. Unusual gain
c. Cumulative effect of a change in an accounting principle
d. Discontinued operations

Answer 75

d. Discontinued operations

Question 76

Which of the following items would be reported at its gross amount on the face of the income statement?

a. Extraordinary loss
b. Prior period adjustment
c. Cumulative effect of a change in an accounting principle
d. Unusual gain

Answer 76

d. Unusual gain

Question 77

Where must earnings per share be disclosed in the financial statements to satisfy generally accepted accounting principles?

a. On the face of the statement of retained earnings (or, statement of stockholders’ equity.)
b. In the footnotes to the financial statements.
c. On the face of the income statement.
d. Either (a) or (c).

Answer 77

c. On the face of the income statement.

Question 78

Which of the following earnings per share figures must be disclosed on the face of the income statement?

a. EPS on income from continuing operations.
b. The effect on EPS from operations of a discontinued division, net of taxes.
c. The effect on EPS from an extraordinary item, net of taxes.
d. All of the above.

Answer 78

d. All of the above.

Question 79

Which of the following earnings per share figures must be disclosed on the face of the income statement?

a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.

Answer 79

d. EPS for income from continuing operations.

Question 80

Earnings per share should always be shown separately for

a. net income and gross margin.
b. net income and pretax income.
c. income before extraordinary items.
d. extraordinary items and prior period adjustments.

Answer 80

c. income before extraordinary items.

Question 81

A correction of an error in prior periods' income will be reported
	In the income statement	-Net of tax
a.	Yes	-Yes
b.	No	-No
c.	Yes	-No
d.	No	-Yes

Answer 81

d. No -Yes

Question 82

In 2012, Esther Corporation reported net income of $600,000. It declared and paid preferred stock dividends of $150,000 and common stock dividends of $60,000. During 2012, Esther had a weighted average of 200,000 common shares outstanding. Compute Esther’s 2012 earnings per share.

a. $1.95
b. $2.25
c. $3.00
d. $3.75

Answer 82

b. $2.25

Question 83

In 2012, Linz Corporation reported an extraordinary loss of $1,000,000, net of tax. It declared and paid preferred stock dividends of $100,000 and common stock dividends of $300,000. During 2012, Linz had a weighted average of 400,000 common shares outstanding. Compute the effect of the extraordinary loss, net of tax, on earnings per share.

a. $1.50
b. $1.75
c. $2.25
d. $2.50

Answer 83

d. $2.50

Question 84

In 2012, Benfer Corporation reported net income of $280,000. It declared and paid common stock dividends of $32,000 and had a weighted average of 70,000 common shares outstanding. Compute the earnings per share to the nearest cent.

a. $3.54
b. $2.80
c. $3.60
d. $4.00

Answer 84

d. $4.00

Question 85

Moorman Corporation reports the following information:
Correction of understatement of depreciation expense
in prior years, net of tax $ 645,000
Dividends declared 480,000
Net income 1,500,000
Retained earnings, 1/1/12, as reported 3,000,000

Moorman should report retained earnings, 1/1/12, as adjusted at

a. $2,355,000.
b. $3,000,000.
c. $3,645,000.
d. $4,665,000.

Answer 85

a. $2,355,000.

Question 86

Moorman Corporation reports the following information:
Correction of understatement of depreciation expense
in prior years, net of tax $ 645,000
Dividends declared 480,000
Net income 1,500,000
Retained earnings, 1/1/12, as reported 3,000,000

Moorman should report retained earnings, 12/31/12, as adjusted at

a. $2,355,000.
b. $3,375,000.
c. $4,020,000.
d. $4,665,000.

Answer 86

b. $3,375,000.

Question 87

Consistency is best demonstrated when

a. expenses are reported as charges against the period in which incurred.
b. the effect of changes in accounting methods is properly disclosed.
c. extraordinary gains and losses are not reported on the income statement.
d. accounting procedures are adopted which give a consistent rate of net income.

Answer 87

b. the effect of changes in accounting methods is properly disclosed.

Question 88

Why is it necessary to make adjusting entries?

a. The accountant has made errors in recording external transactions.
b. Certain facts about the affairs of the business are not included in the ledger as built up from external transactions.
c. The accountant wants to show the largest possible net income for the period.
d. The accountant wants to show the net cash flow for the year.

Answer 88

b. Certain facts about the affairs of the business are not included in the ledger as built up from external transactions.

Question 89

Of the following adjusting entries, which one would cause an increase in assets at the end of the period?

a. The entry to record the earned portion of rent received in advance.
b. The entry to accrue unrecorded interest expense.
c. The entry to accrue unrecorded interest revenue.
d. The entry to record expiration of prepaid insurance.

Answer 89

c. The entry to accrue unrecorded interest revenue.

Question 90

On June 15, 2012 Stine Corporation accepted delivery of merchandise which it purchased on account. As of June 30 Stine had not recorded the transaction or included the merchandise in its inventory. The effect of this error on its balance sheet for June 30, 2012 would be

a. assets and stockholders’ equity were overstated but liabilities were not affected.
b. stockholders’ equity was the only item affected by the omission.
c. assets and liabilities were understated but stockholders’ equity was not affected.
d. assets and stockholders’ equity were understated but liabilities were not affected.

Answer 90

c. assets and liabilities were understated but stockholders’ equity was not affected.

Question 91

How does failure to record accrued revenue distort the financial reports?

a. It understates revenue, net income, and current assets.
b. It understates net income, stockholders’ equity, and current liabilities.
c. It overstates revenue, stockholders’ equity, and current liabilities.
d. It understates current assets and overstates stockholders’ equity.

Answer 91

a. It understates revenue, net income, and current assets.