Sample Midterm

Question 1

1) The balance sheet includes assets, liabilities, and stockholders’ equity as of a point in time.

a. True
b. False

Answer 1

TRUE

Explanation: The balance sheet reports the amount of assets, liabilities, and stockholders’ equity of an entity at a point in time.

Question 2

For the current year, net income of Carol Company is $20,000 and dividends declared are $6,000;
therefore, retained earnings have increased $26,000 during the year.

a. True
b. False

Answer 2

FALSE

Explanation: Retained earnings = Net income less dividends declared.
Therefore, retained earnings have increased by $20,000 less $6,000 = $14,000.

Question 3

During the current fiscal year, a company had revenues of $400,000, cost of goods sold of
$280,000, and an income tax rate of 30 percent on income before income taxes. What was the
company’s current year net income assuming no other items were needed for the calculation?

a. $120,000
b. $36,000
c. $84,000
d. $400,000

Answer 3

C

Explanation: ($400,000 − $280,000) = Income before income taxes, $120,000.

Income tax expense = 30% × $120,000 = $36,000. Net income = $120,000 − $36,000 = $84,000.

Question 4

Which of the following equations best describes the income statement?

a. Assets − Liabilities = Stockholders’ Equity.

b. Net income = Revenues + Expenses.

c. Net income = Revenues − Expenses.

d. Retained earnings = Net Income + Dividends.

Answer 4

C

Explanation: The income statement equation is revenues − expenses = net income.

Question 5

The current assets section of a balance sheet includes both inventory and prepaid expenses.

a. True
b. False

Answer 5

TRUE

Explanation: Current assets are resources that a business will use or turn into cash within one year.

Question 6

Purchasing supplies for cash results in an increase in total assets for the purchasing company.

a. True
b. False

Answer 6

FALSE

Explanation: This transaction has zero effect on the total asset amount. The asset Supplies is increased, and the asset Cash is decreased by the same amount.

Question 7

In what order are current assets listed on a balance sheet?

a. By dollar amount (largest first).

b. By date of acquisition (earliest first).

c. By liquidity.

d. By relevance to the operation of the business.

Answer 7

C

Explanation: Assets are listed on the balance sheet in order of liquidity with the most liquid assets listed first.

Question 8

Which of the following statements is true?

a. Common stock is a noncurrent asset.

b. Current liabilities are debts expected to be paid within the next year.

c. Current assets are resources of a company that might include cash and land.

d. Patents, copyrights, and research and development expense are classified as intangible assets on the balance sheet.

Answer 8

B

Explanation: Current liabilities are debts expected to be paid within the next year and expected to consume current assets.

Question 9

Which of the following describes the reporting of interest expense on the income statement?

a. It is reported as an operating expense.

b. It is a component of operating income.

c. It is deducted from operating income.

d. It is added to operating income.

Answer 9

C

Explanation: Interest expense is a cost resulting from financing activities, not operating activities, and thus results in a reduction after the operating income caption of the income statement.

Question 10

Lantz Company has provided the following information:

• Cash sales totaled $255,000.
• Credit sales totaled $479,000.
• Cash collections from customers for services yet to be provided totaled $88,000.
• A $22,000 loss from the sale of property and equipment occurred.
• Interest income was $7,700.
• Interest expense was $19,900.
• Supplies expense was $336,000.
• Rent expense for the store was $36,000.
• Wages expense was $49,000.
• Other operating expenses totaled $79,000.
• Unearned revenue was $4,000.

What is the amount of Lantz’s income before income taxes?

a. $553,800.
b. $465,800.
c. $199,800.
d. $531,800.

Answer 10

C

Explanation: Operating revenues = $734,000 = $255,000 + $479,000.

Operating
expenses = $522,000 = $336,000 + $36,000 + $49,000 + $79,000 + $22,000.

Operating income =
$212,000 = $734,000 − $522,000.

Income before taxes = $199,800 = $212,000 + $7,700 − $19,900.

Question 11

Which of the following correctly describes the impact of collecting cash from customers for
services to be provided in the future?

a. Assets and stockholders’ equity increase.

b. Assets and revenues increase.

c. Assets and liabilities increase.

d. Assets and operating income increase.

Answer 11

C

Explanation: Collecting cash from customers increases assets. For services to be provided in the future, an increase in the unearned revenue (a liability) account is also recorded.

Question 12

Colby Corporation has provided the following information:

• Operating revenues from customers were $199,700.
• Operating expenses for the store were $111,000.
• Interest expense was $9,200.
• Gain from sale of plant and equipment was $3,300.
• Dividend payments to Colby’s stockholders were $7,700.
• Income tax expense was $36,000.
• Prepaid rent was $5,000.

What is the amount of Colby’s income before income taxes?

a. 70,100.
b. $75,100.
c. $82,800.
d. $92,000.

Answer 12

C

Explanation: Operating revenues = $203,000 = $199,700 + $3,300.

Operating expenses = $111,000.

Operating income = $92,000 = $203,000 − $111,000.

Other items = $9,200.

Income before income taxes = $82,800 = $92,000 − $9,200.

Question 13

Which of the following statements does not properly describe the accrual basis of accounting?

a. Expenses are recognized when incurred in generating revenues regardless of the timing of cash flows.

b. Revenues are recognized when the company transfers promised goods or services to customers regardless of the timing of cash flows.

c. Generally accepted accounting principles require use of the accrual basis.

d. Accrual accounting should not be used when providing financial statements to external
decision makers.

Answer 13

D

Explanation: Accrual basis accounting is required by GAAP for use when providing financial statements to external decision makers.

Question 14

During 2019, Sigma Company earned service revenue amounting to $700,000, of which $630,000
was collected in cash; the balance will be collected in January, 2020.

Also in 2019, there were collections of cash prior to the delivery of goods/services totaling $10,000.

What amount should the 2019 income statement report for service revenue?

a. $630,000.
b. $700,000.
c. $70,000.
d. $570,000.

Answer 14

B

Explanation: $700,000 of service revenue was earned during 2019; therefore that amount should be reported on the income statement.

Question 15

An accrued expense is incurred and paid for in the current period.

a. True
b. False

Answer 15

FALSE

Explanation: Accrued expenses are previously unrecorded expenses that
have been incurred but not yet paid for.

Question 16

Under accrual accounting, interest expense would be recognized on the income statement when the interest has accrued with the passage of time even though cash has not been paid.

a. True
b. False

Answer 16

TRUE

Explanation: In accrual accounting, expenses are recognized in the period they are incurred in generating revenue.

Question 17

Accounts that retain their balance from one period to the next are referred to as permanent
accounts and include balance sheet accounts.

a. True
b. False

Answer 17

TRUE

Explanation: Balance sheet accounts retain their balances from one accounting period to the next, and are considered permanent accounts.

Question 18

On April 1, 2019, the premium on a one-year insurance policy was purchased for $3,000 cash
with the insurance coverage beginning on that date. The books are adjusted only at year-end.

Which of the following correctly describes the effect on the financial statements of the December 31, 2019 adjusting entry?

a. Prepaid insurance will decrease $750.

b. Insurance expense will increase $750.

c. Insurance expense will increase $2,250.

d. Prepaid insurance will decrease $2,250.

Answer 18

C

Explanation: $3,000 ÷ 12 = $250 per month and 9 months of coverage has been used.

The insurance expense and reduction in prepaid insurance is $250 × 9 = $2,250.

Question 19

Which of the following transactions and events results in an increase in liabilities and a decrease
in net income?

a. The accrual of wages expense at year-end.

b. Collecting cash from a customer for services to be provided in the future.

c. The accrual of revenue earned at year-end.

d. Adjustment of the unearned revenue account for revenue earned during the period.

Answer 19

A

Explanation: The accrual of wages expense at year-end recognizes an expense that decreases net income, and creates wages payable which increases liabilities.

Question 20

On December 31, 2019, Krug Company prepared adjusting entries that included the following
items:

• Depreciation expense: $31,000.
• Accrued sales revenue: $29,000.
• Accrued expenses: $12,000.
• Used insurance: $9,000; the insurance was initially recorded as prepaid.
• Rent revenue earned: $7,000; the rent was initially prepaid by the tenant and credited to unearned rent revenue.

If Krug Company reported total assets of $390,000 prior to the adjusting entries, how much are
Krug’s total assets after the adjusting entries?

a. $350,000
b. $386,000
c. $379,000
d. $374,000.

Answer 20

C

Explanation: Total assets = $379,000 = $390,000 − $31,000 + $29,000 − $9,000.

Question 21

Assume Idaho Company recorded the following adjusting at year-end:
Adjusting Entry is 2000
Increase Insurance Expense and Decrease Prepaid Insurance

If the beginning balance in prepaid insurance was $500, and $2,500 was paid for an insurance premium during the year, what is the ending balance in the prepaid insurance account after the above adjusting entry?

a. $1,200.
b. $700.
c. $2,200.
d. $1,000.

Answer 21

D

Explanation: Prepaid insurance = $1,000 = $500 + $2,500 − $2,000.

Question 22

Which of the following accounts would most likely not require an adjusting entry at year-end?

a. Unearned subscription revenue
b. Office supplies.
c. Cash.
d. Prepaid rent

Answer 22

C

Explanation: Cash is never part of an adjusting entry. Adjustments are required to record revenues and expenses in the proper period because the cash part of the transaction occurs at a different point in time.

Question 23

Which of the following account balances would not be affected by closing entries?

a. Interest expense.
b. Accumulated depreciation.
c. Dividends.
d. Retained earnings.

Answer 23

B

Explanation: Closing entries impact income statement accounts, and retained earnings. Balance sheet accounts, other than retained earnings, are not affected by closing
entries

Question 24

When goods are shipped FOB shipping point, title passes to the buyer on the shipment date.

a. True
b. False

Answer 24

TRUE

Explanation: When goods are shipped FOB shipping point, the title passes to the buyer when the goods are shipped.

Question 25

Flyer Company has provided the following information prior to any year-end bad debt adjustment:

• Cash sales, $150,000
• Credit sales, $450,000
• Selling and administrative expenses, $110,000
• Sales returns and allowances, $30,000
• Gross profit, $490,000
• Accounts receivable, $110,000
• Sales discounts, $14,000
• Allowance for uncollectible accounts $1,200

Flyer prepares an aging of accounts receivable and the result shows that 5% of accounts receivable is estimated to be uncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense is recorded?

a. $5,500.
b. $6,700.
c. $4,240.
d. $4,300.

Answer 25

A

Explanation: The allowance for doubtful accounts balance = 5% of accounts of accounts receivable = 5% × $110,000 = $5,500.

Question 26

On December 31, 2019, Raptor Company has 1,000 units of an inventory item, which cost $30 per
unit when purchased on June 15, 2019. The selling price was $40 per unit. On December 30, 2019, it was determined that the cost to sell is $12 per unit.

At what amount should the 1,000 units of inventory be reported at on the December 31, 2019 balance sheet?

a. $30,000
b. $28,000
c. $18,000
d. $40,000

Answer 26

B

Explanation: Inventory should be reported at the lower of cost or market (net realizable value).

Cost is $30, whereas net realizable value is $28 ($40 less costs to sell of $12), therefore $28,000 is the proper inventory value (1,000 * $28)

Question 27

Which of the following statements is false?

a. An adjustment to record bad debt expense decreases current assets.

b. An adjustment to record bad debt expense decreases retained earnings.

c. An adjustment to write off an uncollectible account receivable decreases operating
income.

d. An adjustment to write off an uncollectible account receivable does not affect current
assets.

Answer 27

C

Explanation: The journal entry to write off an uncollectible account receivable decreases both the accounts receivable and the allowance for uncollectible accounts balances.

There is no effect on operating income.

Question 28

The use of raw materials in the manufacturing process is reported as an operating expense on the income statement.

a. True
b. False

Answer 28

FALSE

Explanation: Raw materials become part of work in process inventory.

Question 29

Goods available for sale are allocated to both ending inventory and cost of goods sold.

a. True
b. False

Answer 29

TRUE

Explanation: Cost of goods available for sale minus ending inventory equals cost of goods sold.

Question 30

The FIFO inventory method will result in the lowest net income in comparison with the LIFO method when costs are decreasing.

a. True
b. False

Answer 30

TRUE

Explanation: Cost of goods available for sale minus ending inventory equals cost of goods sold.

Question 31

The LIFO inventory method allocates the oldest inventory purchase costs to cost of goods sold.

a. True
b. False

Answer 31

FALSE

Explanation: LIFO cost of goods sold consists of the newest inventory costs.

Question 32

The journal entry to write down inventory under the lower of cost or net realizable value rule results in an increase to cost of goods sold and a decrease to inventory.

a. True
b. False

Answer 32

TRUE

Explanation: When inventory is written down, the journal entry credits inventory to reduce that amount, and offsets the entry with a debit to cost of goods sold.

Question 33

Coleman Company has provided the following information: beginning inventory, $100,000; cost of goods sold, $450,000; and ending inventory, $80,000. How much were Coleman’s inventory
purchases?

a. $450,000.
b. $410,000.
c. $430,000.
d. $420,000.

Answer 33

C

Explanation: Beginning inventory + Purchases (X) – Cost of Goods Sold = Ending inventory. $100,000 + X – $450,000 = $80,000. Purchases = X = $430,000.

Question 34

Which of the following costs will not affect cost of goods sold?

a. Inventory inspection costs.
b. Inventory preparation costs.
c. Inventory-related selling costs.
d. Freight charges incurred to bring inventory to the warehouse.

Answer 34

C

Explanation: Selling costs are operating costs and do not affect cost of goods sold.

Question 35

Moore Company purchased an item for inventory that cost $20 per unit and was priced to sell at $30. It was determined that the cost to sell is $12 per unit. Using the lower of cost or net
realizable value rule, what amount should be reported on the balance sheet for inventory?

a. $18.
b. $20.
c. $10.
d. $8.

Answer 35

C

Explanation: Selling costs are operating costs and do not affect cost of goods sold.