THEORY OF ACCOUNTS ACCOUNTING CONCEPTS
1. Which of the following statements is/are true?
I. Accounting is a service activity intended to fulfill a useful function in society
II. Accounting involves the art of recording, classifying and summarizing transaction and events, and interpreting the results thereof.
III. Accounting is an art but not a science
IV. Accounting provides quantitative financial information intended to be useful in making economic decisions
a. I, II, III, IV c. I, II, IV
b. I, II, III d. II, III, IV
2. The branch of accounting concerned with the presentation of financial information primarily for use of third person outside of business enterprise.
a. Financial Accounting c. Government Accounting b. Management Accounting d. All of the above
3. Accounting is an art because
a. of the existence of a body knowledge governing accounting practice b. of accounting theory
c. the necessity of applying creative skill and ability d. None of the above
4. Financial accounting is the branch of accounting that focuses on
a. special purpose reports of financial position and results of operations b. financial statements
c. the various need of statement users
d. general purpose reports of financial position and results of operations 5. General-purpose information is
a. not intended to satisfy the specialized needs of individual users. b. intended to satisfy the specialized needs of individual users
c. not intended to satisfy the common needs of individual users. d. Provided by managerial accounting.
6. Which of the following is not true?
a. Accounting is concerned primarily with quantitative information used by persons who must make economic decisions among alternative actions.
b. Governmental accounting is also known as municipal or fund accounting
c. The branch of accounting concerned with the presentation of financial information to assist management in planning and controlling operations is called managerial accounting.
d. Financial accounting emphasizes special purpose information based on presumption that significant numbers of users need similar information.
7. The body of rules and principles which govern accounting practices is referred to as a. Accounting practice c. Accounting concepts
b. Accounting principles d. Accounting theory
8. The layers of the structure of accounting theory include the following except a. methods and procedures c. measurement and recognition
b. principles d. postulates and convention
9. The basic assumption or premises on which accounting principles rest are called a. accounting postulates c. accounting principles
b. accounting procedures d. accounting laws
10. The normative attitudes or ideas of the accounting profession as to what ought to represent good accounting practice and which modify the application of accounting principles are known as
a. accounting postulates c. accounting procedures b. accounting conventions d. accounting principles
11. The general guidelines used in accounting practice that are based on substantial authoritative support are called
a. Accounting postulates c. accounting procedures
b. accounting conventions d. accounting principles
12. The specific methods used by accountants in carrying out t5he general guidelines provided by GAAP, including the numerous rules specifying how financial data should be recorded, classified, summarized and reported are referred to as
a. accounting postulates c. accounting procedures b. accounting conventions d. accounting principles
13. “The accounting entity is assumed to be separate and distinct from other entities and from the owners, managers and employees which constitute the firm”. This postulate is referred to as
a. Matching c. Historical cost
b. Going concern d. Specific-separate-entity
14. Unless there is specific evidence to the contrary, the firm will continue to be in existence in the foreseeable future. This postulate is referred to as
a. Matching c. Historical cost
b. Going concern d. Specific-separate-entity
15. “Money is the best measuring unit of a firm’s assets, liabilities and equity, as well as changes therein; its instability is immaterial”. This postulate is referred to as
a. Historical cost c. Money-measuring unit
b. Revenue recognition d. Fiscal period
16. “Cost is normally the proper money measurement of a firm’s assets, liabilities, and equity, and changes in them because it is objective, verifiable and convenient to obtain, approximating value at time of acquisition. “ This postulate is referred to as
a. Historical cost c. Money measuring unit b. Revenue recognition d. Fiscal period
17. “The life of a business firm can be segmented into short run time periods in order to provide timely financial information to aid in financial decision making; hence, periodic reporting implies the use of accrual accounting and use of estimates ( approximations) and informed judgment by accountants.” This postulate is referred to as
a. Historical cost c. Money measuring unit
b. Revenue recognition d. Fiscal period
18. “The point of sale when goods are delivered or services are rendered, is the time at which revenue is to be recognized.” This postulate is referred to as
a. Historical cost c. Money measuring unit
b. Revenue recognition d. Fiscal period
19.“Goods and services used (“expenses”) during the fiscal period can be associated with the revenue earned during the same fiscal period”. This postulate referred to as
a. Matching c. Historical Cost
b. Going concern d. Specific-separate entity
20. “Exception to the application of accounting theory are permitted if the amount involve is not material; financial reporting is concerned only with information that is significant enough to affect evaluations or decisions.” This convention is called
a. Conservatism c. Consistency
b. Objectivity d. Materiality
21. “The same accounting procedures for a given entity should be used from one period to the next. Changes may however be made if it will result in more accurate or useful information for decision making provided it disclosed”. The convention is called
a. Conservatism c. Consistency
b. Objectivity d. Materiality
22. “Financial statements of different firms should be based on similar accounting principles and procedures in order to aid users of financial statements in finding similarities and differences among firms for purposed of financial decision making” This convention is called
b. Comparability d. Conservatism
23. “Accounting measurement should be based on evidence that is verifiable by competent persons”. This convention is called
a. Consistency c. Objectivity
b. Comparability d. Conservatism
24. “The accountant should recognize all possible losses but anticipate no profit. Where alternative courses of action are available, he should choose the alternative least favorable to owners’ equity.
a. Consistency c. Objectivity
b. Comparability d. Conservatism
MULTIPLE CHOICE—Financial Accounting Standards 21. 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.
22. Users of financial reports include all of the following except a. creditors.
b. government agencies. c. unions.
d. All of these are users.
23. 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.
24. 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.
P25. 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.
26. Whether a business is successful and thrives is determined by a. markets.
b. free enterprise. c. competition. d. all of these.
27. 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.
28. Financial statements in the early 2000s provide information related to a. non-financial measurements.
b. forward-looking data.
c. hard assets (inventory and plant assets). d. none of these.
29. Which of the following statements is not an objective of financial reporting? a. Provide information that is useful in investment and credit decisions.
b. Provide information about enterprise resources, claims to those resources, and changes to them.
c. Provide information on the liquidation value of an enterprise. d. Provide information that is useful in assessing cash flow prospects. 30. 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.
31. One objective of financial reporting is to provide
a. information about the investors in the business entity.
b. information about the liquidation values of the resources held by the enterprise. c. information that is useful in assessing cash flow prospects.
d. information that will attract new investors.
32. 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.
33. 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.
34. The role of the Securities and Exchange Commission in the formulation of accounting principles can be best described as
a. consistently primary. b. consistently secondary.
c. sometimes primary and sometimes secondary. d. non-existent.
35. The body that has the power to prescribe the accounting practices and standards to be employed by companies that fall under its jurisdiction is the
a. FASB. b. AICPA. c. SEC. d. APB.
36. Companies that are listed on a stock exchange are required to submit their financial statements to the
a. AICPA. b. APB c. FASB. d. SEC.
37. The Financial Accounting Standards Board (FASB) was proposed by the a. American Institute of Certified Public Accountants.
b. Accounting Principles Board.
c. Study Group on the Objectives of Financial Statements.
d. Special Study Group on establishment of Accounting Principles (Wheat Committee). 38. The Financial Accounting Standards Board
a. has issued a series of pronouncements entitled Statements on Auditing Standards. b. was the forerunner of the current Accounting Principles Board.
c. is the arm of the Securities and Exchange Commission responsible for setting financial accounting standards.
39. The Financial Accounting Foundation a. oversees the operations of the FASB. b. oversees the operations of the AICPA.
c. provides information to interested parties on financial reporting issues.
d. works with the Financial Accounting Standards Advisory Council to provide informa-tion to interested parties on financial reporting issues.
40. The major distinction between the Financial Accounting Standards Board (FASB) and its predecessor, the Accounting Principles Board (APB), is
a. the FASB issues exposure drafts of proposed standards.
b. all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions.
c. all members of the FASB possess extensive experience in financial reporting. d. a majority of the members of the FASB are CPAs drawn from public practice. 41. The Financial Accounting Standards Board employs a "due process" system which
a. is an efficient system for collecting dues from members.
b. enables interested parties to express their views on issues under consideration. c. identifies the accounting issues that are the most important.
d. requires that all accountants must receive a copy of financial standards. 42. Which of the following is not a publication of the FASB?
a. Statements of Financial Accounting Concepts b. Accounting Research Bulletins
c. Interpretations d. Technical Bulletins 43. FASB Technical Bulletins
a. are similar to FASB Interpretations in that they establish enforceable standards under the AICPA's Code of Professional Ethics.
b. are issued monthly by the FASB to deal with current topics.
c. are not expected to have a significant impact on financial reporting in general and provide guidance when it does not conflict with any broad fundamental accounting principle.
d. were recently discontinued by the FASB because they dealt with specialized topics having little impact on financial reporting in general.
44. The purpose of the Emerging Issues Task Force is to
a. develop a conceptual framework as a frame of reference for the solution of future problems. b. lobby the FASB on issues that affect a particular industry.
c. do research on issues that relate to long-term accounting problems.
d. issue statements which reflect a consensus on how to account for new and unusual financial transactions that need to be resolved quickly.
45. The Governmental Accounting Standards Board a. oversees the activities of the SEC.
b. is a private-sector body, which addresses state and local governmental reporting issues. c. is a division of the Securities and Exchange Commission, which oversees the corpo-rate
accounting in annual reports.
d. was terminated when the Financial Accounting Standards Board was created.
46. The Governmental Accounting Standards Board's main purpose is to develop standards for a. the General Accounting Office.
b. the Federal government. c. state and local government. d. the Internal Revenue Service.
47. Which of the following organizations has not been instrumental in the development of financial accounting standards in the United States?
a. AICPA b. FASB c. IASB d. SEC
48. An organization that has not published accounting standards is the a. American Institute of Certified Public Accountants.
b. Securities and Exchange Commission. c. Financial Accounting Standards Board.
d. All of these have published accounting standards.
49. The purpose of Statements of Financial Accounting Concepts is to a. establish GAAP.
b. modify or extend the existing FASB Standards Statement.
c. form a conceptual framework for solving existing and emerging problems. d. determine the need for FASB involvement in an emerging issue.
P50. Members of the Financial Accounting Standards Board are
a. employed by the American Institute of Certified Public Accountants (AICPA). b. part-time employees.
c. required to hold a CPA certificate. d. independent of any other organization.
P51. The following published documents are part of the "due process" system used by the FASB in the
evolution of a typical FASB Statement of Financial Accounting Standards: 1. Exposure Draft
2. Statement of Financial Accounting Standards 3. Discussion Memorandum
The chronological order in which these items are released is as follows: a. 1, 2, 3.
b. 1, 3, 2. c. 2, 3, 1. d. 3, 1, 2.
P52. In the House of GAAP, is the following on the highest level of authoritative status (meaning
among the most authoritative)?
FASB FASB
Statement Statement
FASB of Financial of Financial
Technical Accounting FASB Accounting
Bulletin Standards Interpretation Concepts
a. Yes Yes Yes Yes
b. Yes Yes Yes No
c. No Yes No No
d. No Yes Yes No
53. Generally Accepted Accounting Principles include: 1) FASB Technical Bulletins, 2) APB Opinions, and 3) Widely-accepted industry practices. These three items rank from most authoritative to least authoritative as follows:
a. 1, 2, 3. b. 1, 3, 2. c. 2, 1, 3. d. 2, 3, 1.
54. Generally accepted accounting principles
a. include detailed practices and procedures as well as broad guidelines of general application. b. are influenced by pronouncements of the SEC and IRS.
c. change over time as the nature of the business environment changes. d. all of these.
55. The most significant current source of generally accepted accounting principles is the a. AICPA.
b. SEC. c. APB. d. FASB.
56. The most authoritative category of generally accepted accounting principles includes all of the following except
a. Accounting Research Bulletins. b. APB Opinions.
c. FASB Standards.
d. FASB Technical Bulletins.
57. Which of the following is not a part of generally accepted accounting principles? a. FASB Interpretations
b. CAP Accounting Research Bulletins c. APB Opinions
d. All of these are part of generally accepted accounting principles.
58. Which of the following publications does not qualify as a statement of generally accepted accounting principles?
a. Statements of financial standards issued by the FASB b. Accounting interpretations issued by the FASB
c. APB Opinions
d. Accounting research studies issued by the AICPA 59. Financial accounting standard-setting in the United States
a. can be described as a social process which reflects political actions of various interested user groups as well as a product of research and logic.
b. is based solely on research and empirical findings.
c. is a legalistic process based on rules promulgated by governmental agencies.
d. is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable.
60. The purpose of the International Accounting Standards Board is to
a. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations.
b. develop a uniform currency in which the financial transactions of companies through-out the world would be measured.
c. promote uniform accounting standards among countries of the world.
d. arbitrate accounting disputes between auditors and international companies. MULTIPLE CHOICE—Current Liabilities/ Contengencies 21. Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future. 22. Which of the following is a current liability?
a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue
c. A long-term debt maturing currently, which is to be converted into common stock d. None of these
23. Which of the following is true about accounts payable?
1. Accounts payable should not be reported at their present value.
2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used.
3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used.
a. 1 b. 2 c. 3
d. Both 2 and 3 are true.
24. Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-day notes,
renewable for another 90-day period. These notes should be classified on the balance sheet of Lance Company as a. current liabilities. b. deferred charges. c. long-term liabilities. d. intermediate debt.
25. Which of the following is not true about the discount on short-term notes payable? a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance sheet. c. When there is a discount on a note payable, the effective interest rate is higher than the
stated discount rate. d. All of these are true.
26. Which of the following may be a current liability? a. Withheld Income Taxes
b. Deposits Received from Customers c. Deferred Revenue
d. All of these
27. Which of the following items is a current liability?
a. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.
28. Which of the following should not be included in the current liabilities section of the balance sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable c. The discount on short-term notes payable d. All of these are included
29. Which of the following is a current liability? a. Preferred dividends in arrears
b. A dividend payable in the form of additional shares of stock c. A cash dividend payable to preferred stockholders
d. All of these
30. Stock dividends distributable should be classified on the a. income statement as an expense.
b. balance sheet as an asset. c. balance sheet as a liability.
d. balance sheet as an item of stockholders' equity.
31. Of the following items, the only one which should not be classified as a current liability is a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced. d. unearned revenues.
32. An account which would be classified as a current liability is a. dividends payable in the company's stock.
b. accounts payable—debit balances.
c. losses expected to be incurred within the next twelve months in excess of the company's insurance coverage.
d. none of these.
33. Which of the following statements is correct?
a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis.
b. A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued.
d. None of these.
34. The ability to consummate the refinancing of a short-term obligation may be demonstrated by a. actually refinancing the obligation by issuing a long-term obligation after the date of the
balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis.
c. actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued.
d. all of these.
35. Which of the following statements is false?
a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing.
b. Cash dividends should be recorded as a liability when they are declared by the board of directors.
c. Under the cash basis method, warranty costs are charged to expense as they are paid.
d. FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.
36. Which of the following is not a correct statement about sales taxes? a. Sales taxes are an expense of the seller.
b. Many companies record sales taxes in the sales account.
c. If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide sales by 1 plus the sales tax rate.
d. All of these are true.
S37. If a short-term obligation is excluded from current liabilities because of refinancing, the footnote
to the financial statements describing this event should include all of the following information except
a. a general description of the financing arrangement. b. the terms of the new obligation incurred or to be incurred. c. the terms of any equity security issued or to be issued.
d. the number of financing institutions that refused to refinance the debt, if any.
S38. In accounting for compensated absences, the difference between vested rights and accumulated
rights is
a. vested rights are normally for a longer period of employment than are accumulated rights. b. vested rights are not contingent upon an employee's future service.
c. vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose.
d. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.
P39. An employee's net (or take-home) pay is determined by gross earnings minus amounts for
income tax withholdings and the employee's
a. portion of FICA taxes, and unemployment taxes.
b. and employer's portion of FICA taxes, and unemployment taxes.
c. portion of FICA taxes, unemployment taxes, and any voluntary deductions. d. portion of FICA taxes, and any voluntary deductions.
40. Which of these is not included in an employer's payroll tax expense? a. F.I.C.A. (social security) taxes
b. Federal unemployment taxes c. State unemployment taxes d. Federal income taxes
41. Which of the following is a condition for accruing a liability for the cost of compensation for future absences?
a. The obligation relates to the rights that vest or accumulate. b. Payment of the compensation is probable.
c. The obligation is attributable to employee services already performed. d. All of these are conditions for the accrual.
42. A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should
a. be accrued during the period when the compensated time is expected to be used by employees.
b. be accrued during the period following vesting. c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.
43. The amount of the liability for compensated absences should be based on
1. the current rates of pay in effect when employees earn the right to compensated absences.
2. the future rates of pay expected to be paid when employees use compensated time. 3. the present value of the amount expected to be paid in future periods.
a. 1. b. 2. c. 3.
d. Either 1 or 2 is acceptable.
44. Which of the following is the proper way to report a gain contingency? a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the contingency. d. As a disclosure only.
45. Which of the following contingencies need not be disclosed in the financial statements or the notes thereto?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated c. Guarantees of indebtedness of others
d. All of these must be disclosed.
46. Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?
a. Amount of loss is reasonably estimable and event occurs infrequently.
b. Amount of loss is reasonably estimable and occurrence of event is probable. c. Event is unusual in nature and occurrence of event is probable.
d. Event is unusual in nature and event occurs infrequently.
47. Mark Ward is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2007, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Ward had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Ward in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Ward appears inclined to accept the Railroad's offer. The Railroad's 2007 financial statements should include the following related to the incident:
a. recognition of a loss and creation of a liability for the value of the land. b. recognition of a loss only.
c. creation of a liability only. d. disclosure in note form only. 48. A contingency can be accrued when
a. it is certain that funds are available to settle the disputed amount. b. an asset may have been impaired.
c. the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.
d. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.
49. A contingent liability
a. definitely exists as a liability but its amount and due date are indeterminable. b. is accrued even though not reasonably estimated.
c. is not disclosed in the financial statements. d. is the result of a loss contingency.
50. To record an asset retirement obligation (ARO), the cost associated with the ARO is a. expensed.
b. included in the carrying amount of the related long-lived asset. c. included in a separate account.
d. none of these.
51. A company is legally obligated for the costs associated with the retirement of a long-lived asset a. only when it hires another party to perform the retirement activities.
b. only if it performs the activities with its own workforce and equipment.
c. whether it hires another party to perform the retirement activities or performs the activities itself.
d. when it is probable the asset will be retired.
52. Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty
a. should be reported as long-term. b. should be reported as current.
c. should be reported as part current and part long-term. d. need not be disclosed.
53. Lopez Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2007. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Lopez recall all cans of this paint sold in the last six months. The management of Lopez estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?
a. No recognition b. Note disclosure only
c. Operating expense of $800,000 and liability of $800,000 d. Appropriation of retained earnings of $800,000
54. Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be
a. accrued.
b. disclosed but not accrued. c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.
P55. Mayberry Co. has a loss contingency to accrue. The loss amount can only be reasonably
estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be
a. zero.
b. the minimum of the range. c. the mean of the range. d. the maximum of the range.
S56. Marx Company becomes aware of a lawsuit after the date of the financial statements, but before
they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and
a. the Marx Company admits guilt.
b. the court will decide the case within one year. c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the financial statements.
S57. Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with the warranty.
d. represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.
S58. Which of the following is not acceptable treatment for the presentation of current liabilities?
a. Listing current liabilities in order of maturity b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of working capital
P59. The ratio of current assets to current liabilities is called the
a. current ratio. b. acid-test ratio.
c. current asset turnover ratio. d. current liability turnover ratio.
60. Accrued liabilities are disclosed in financial statements by a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability total. c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet. 61. The numerator of the acid-test ratio consists of
a. total current assets.
b. cash and marketable securities. c. cash and net receivables.
d. cash, marketable securities, and net receivables.
*62. Which of the following is not a permissible method of calculating a bonus to an employee? a. The bonus is based on income before deductions for the bonus and income taxes.
b. The bonus is based on income after deduction of the bonus but before deduction of income taxes.
c. The bonus is based on income after deductions for the bonus and income taxes. d. All of these are permissible.
MULTIPLE CHOICE—Conceptual Framework 21. Generally accepted accounting principles
a. are fundamental truths or axioms that can be derived from laws of nature. b. derive their authority from legal court proceedings.
c. derive their credibility and authority from general recognition and acceptance by the accounting profession.
d. have been specified in detail in the FASB conceptual framework.
22. A soundly developed conceptual framework of concepts and objectives should
a. increase financial statement users' understanding of and confidence in financial reporting. b. enhance comparability among companies' financial statements.
c. allow new and emerging practical problems to be more quickly soluble. d. all of these.
23. Which of the following (a-c) are not true concerning a conceptual framework in account-ing? a. It should be a basis for standard-setting.
b. It should allow practical problems to be solved more quickly by reference to it. c. It should be based on fundamental truths that are derived from the laws of nature. d. All of the above (a-c) are true.
S24. Which of the following is not a benefit associated with the FASB Conceptual Framework Project?
a. A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting.
b. Practical problems should be more quickly solvable by reference to an existing conceptual framework.
c. A coherent set of accounting standards and rules should result.
d. Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.
25.In the conceptual framework for financial reporting, what provides "the why"--the goals and purposes of accounting?
b. Qualitative characteristics of accounting information c. Elements of financial statements
d. Objectives of financial reporting
26. The underlying theme of the conceptual framework is a. decision usefulness.
b. understandability. c. reliability.
d. comparability.
27. Which of the following is not an objective of financial reporting?
a. To provide information about economic resources, the claims to those resources, and the changes in them.
b. To provide information that is helpful to investors and creditors and other users in assessing the amounts, timing, and uncertainty of future cash flows.
c. To provide information that is useful to those making investment and credit decisions. d. All of these are objectives of financial reporting.
P28. The objectives of financial reporting include all of the following except to provide information that
a. is useful to the Internal Revenue Service in allocating the tax burden to the business community.
b. is useful to those making investment and credit decisions. c. is helpful in assessing future cash flows.
d. identifies the economic resources (assets), the claims to those resources (liabilities), and the changes in those resources and claims.
29. Decision makers vary widely in the types of decisions they make, the methods of decision making they employ, the information they already possess or can obtain from other sources, and their ability to process information. Consequently, for information to be useful there must be a linkage between these users and the decisions they make. This link is
a. relevance. b. reliability.
c. understandability. d. materiality.
30. The overriding criterion by which accounting information can be judged is that of a. usefulness for decision making.
b. freedom from bias. c. timeliness.
d. comparability.
31. The two primary qualities that make accounting information useful for decision making are a. comparability and consistency.
b. materiality and timeliness. c. relevance and reliability. d. reliability and comparability.
32. 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.
33. The quality of information that gives assurance that it is reasonably free of error and bias and is a faithful representation is
a. relevance. b. reliability. c. verifiability. d. neutrality.
34. According to Statement of Financial Accounting Concepts No. 2, which of the following relates to both relevance and reliability?
a. Materiality
b. Understandability c. Usefulness
35. According to Statement of Financial Accounting Concepts No. 2, timeliness is an ingredient of the primary quality of Relevance Reliability a. Yes Yes b. No Yes c. Yes No d. No No
36. According to Statement of Financial Accounting Concepts No. 2, verifiability is an ingredient of the primary quality of
Relevance Reliability
a. Yes No
b. Yes Yes
c. No No
d. No Yes
37. According to Statement of Financial Accounting Concepts No. 2, neutrality is an ingredient of the primary quality of Relevance Reliability a. Yes Yes b. No Yes c. Yes No d. No No 38. Information is neutral if it
a. provides benefits which are at least equal to the costs of its preparation.
b. can be compared with similar information about an enterprise at other points in time. c. would have no impact on a decision maker.
d. is free from bias toward a predetermined result.
39. The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers using the same measurement methods is
a. relevance. b. reliability. c. verifiability. d. neutrality.
40. According to Statement of Financial Accounting Concepts No. 2, predictive value is an ingredient of the primary quality of
Relevance Reliability
a. Yes No
b. Yes Yes
c. No No
d. No Yes
41. Under Statement of Financial Accounting Concepts No. 2, representational faithfulness is an ingredient of the primary quality of
Reliability Relevance
a. Yes Yes
b. No Yes
c. Yes No
d. No No
42. Financial information does not demonstrate consistency when
a. firms in the same industry use different accounting methods to account for the same type of transaction.
b. a company changes its estimate of the salvage value of a fixed asset.
c. a company fails to adjust its financial statements for changes in the value of the measuring unit.
d. none of these.
43. Financial information exhibits the characteristic of consistency when
b. accounting entities give accountable events the same accounting treatment from period to period.
c. extraordinary gains and losses are not included on the income statement. d. accounting procedures are adopted which give a consistent rate of net income.
44. Information about different entities and about different periods of the same entity can be prepared and presented in a similar manner. Comparability and consistency are related to which of these objectives? Comparability Consistency a. Entities Entities b. Entities Periods c. Periods Entities d. Periods Periods
45.When information about two different enterprises has been prepared and presented in a similar manner, the information exhibits the characteristic of
a. relevance. b. reliability. c. consistency. d. none of these.
46. The elements of financial statements include investments by owners. These are increases in an entity's net assets resulting from owners'
a. transfers of assets to the entity. b. rendering services to the entity. c. satisfaction of liabilities of the entity. d. all of these.
47. In classifying the elements of financial statements, the primary distinction between revenues and gains is
a. the materiality of the amounts involved.
b. the likelihood that the transactions involved will recur in the future. c. the nature of the activities that gave rise to the transactions involved.
d. the costs versus the benefits of the alternative methods of disclosing the transactions involved.
48. A decrease in net assets arising from peripheral or incidental transactions is called a(n) a. capital expenditure.
b. cost. c. loss. d. expense.
49. One of the elements of financial statements is comprehensive income. As described in Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements," comprehensive income is equal to
a. revenues minus expenses plus gains minus losses.
b. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners.
c. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners plus assets minus liabilities.
d. none of these.
50. Which of the following elements of financial statements is not a component of compre-hensive income?
a. Revenues
b. Distributions to owners c. Losses
d. Expenses
P51. Which of the following is false with regard to the element "comprehensive income"?
a. It is more inclusive than the traditional notion of net income.
b. It includes net income and all other changes in equity exclusive of owners' invest-ments and distributions to owners.
d. It excludes prior period adjustments (transactions that relate to previous periods, such as corrections of errors).
S52. According to the FASB conceptual framework, earnings
a. are the same as comprehensive income.
b. exclude certain gains and losses that are included in comprehensive income. c. include certain gains and losses that are excluded from comprehensive income. d. include certain losses that are excluded from comprehensive income.
S53. According to the FASB Conceptual Framework, the elements assets, liabilities, and
equity describe amounts of resources and claims to resources at/during a Moment in Time Period of Time
a. Yes No
b. Yes Yes
c. No Yes
d. No No
S54. Which of the following basic accounting assumptions is threatened by the existence of severe
inflation in the economy? a. Monetary unit assumption. b. Periodicity assumption. c. Going-concern assumption. d. Economic entity assumption.
S55. During the lifetime of an entity accountants produce financial statements at artificial points in
time in accordance with the concept of Objectivity Periodicity
a. No No
b. Yes No
c. No Yes
d. Yes Yes
56. Under current GAAP, inflation is ignored in accounting due to the a. economic entity assumption.
b. going concern assumption. c. monetary unit assumption. d. periodicity assumption. 57. The economic entity assumption
a. is inapplicable to unincorporated businesses.
b. recognizes the legal aspects of business organizations. c. requires periodic income measurement.
d. is applicable to all forms of business organizations.
58. Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the
a. economic entity assumption. b. relevance characteristic. c. comparability characteristic. d. neutrality characteristic.
59. During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept?
a. Cost/benefit constraint b. Periodicity assumption c. Conservatism constraint d. Matching principle
60. What accounting concept justifies the usage of accruals and deferrals? a. Going concern assumption
b. Materiality constraint c. Consistency characteristic d. Monetary unit assumption
61. The assumption that a business enterprise will not be sold or liquidated in the near future is known as the
b. monetary unit assumption. c. conservatism assumption. d. none of these.
62. Which of the following is an implication of the going concern assumption? a. The historical cost principle is credible.
b. Depreciation and amortization policies are justifiable and appropriate.
c. The current-noncurrent classification of assets and liabilities is justifiable and signify-cant. d. All of these.
63. Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more
a. reliable. b. relevant.
c. indicative of the entity's purchasing power. d. conservative.
64. Valuing assets at their liquidation values rather than their cost is inconsistent with the a. periodicity assumption.
b. matching principle. c. materiality constraint. d. historical cost principle.
65. Revenue is generally recognized when realized or realizable and earned. This statement describes the
a. consistency characteristic. b. matching principle.
c. revenue recognition principle. d. relevance characteristic.
66. Generally, revenue from sales should be recognized at a point when a. management decides it is appropriate to do so.
b. the product is available for sale to the ultimate consumer.
c. the entire amount receivable has been collected from the customer and there remains no further warranty liability.
d. none of these.
67. Revenue generally should be recognized a. at the end of production.
b. at the time of cash collection. c. when realized.
d. when realized or realizable and earned.
68. Which of the following is not a time when revenue may be recognized? a. At time of sale
b. At receipt of cash c. During production
d. All of these are possible times of revenue recognition.
69. Under Statement of Financial Accounting Concepts No. 5, which of the following, in the most precise sense, means the process of converting noncash resources and rights into cash or claims to cash?
a. Recognition b. Measurement c. Realization d. Allocation
70. "When products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash" is a definition of
a. allocated. b. realized. c. realizable. d. earned.
71. The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a balance sheet and which is based on an estimate of bad debts, is an application of the
a. consistency characteristic. b. matching principle.
c. materiality constraint.
d. revenue recognition principle.
72. The accounting principle of matching is best demonstrated by a. not recognizing any expense unless some revenue is realized. b. associating effort (expense) with accomplishment (revenue). c. recognizing prepaid rent received as revenue.
d. establishing an Appropriation for Contingencies account.
73. Which of the following serves as the justification for the periodic recording of depreciation expense?
a. Association of efforts (expense) with accomplishments (revenue) b. Systematic and rational allocation of cost over the periods benefited c. Immediate recognition of an expense
d. Minimization of income tax liability 74. Application of the full disclosure principle
a. is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.
b. is violated when important financial information is buried in the notes to the financial statements.
c. is demonstrated by the use of supplementary information presenting the effects of changing prices.
d. requires that the financial statements be consistent and comparable.
75. Which of the following statements concerning the cost-benefit relationship is not true? a. Business reporting should exclude information outside of management's expertise.
b. Management should not be required to report information that would significantly harm the company's competitive position.
c. Management should not be required to provide forecasted financial information.
d. If needed by financial statement users, management should gather information not included in the financial statements that would not otherwise be gathered for internal use.
76. Under Statement of Financial Accounting Concepts No. 2, which of the following relates to both relevance and reliability?
a. Cost-benefit constraint c. Verifiability
b. Predictive value d. Representational faithfulness
77. Charging off the cost of a wastebasket with an estimated useful life of 10 years as an expense of the period when purchased is an example of the application of the
a. consistency characteristic. b. matching principle.
c. materiality constraint. d. historical cost principle.
78. Which of the following statements about materiality is not correct? a. An item must make a difference or it need not be disclosed. b. Materiality is a matter of relative size or importance.
c. An item is material if its inclusion or omission would influence or change the judgment of a reasonable person.
d. All of these are correct statements about materiality.
79. Which of the following are considered pervasive constraints by Statement of Financial Accounting Concepts No. 2?
a. Cost-benefit relationship and conservatism b. Timeliness and feedback value
c. Conservatism and verifiability
d. Materiality and cost-benefit relationship
80. The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in favor of understating assets and revenues and overstating liabilities and expenses is known as the
a. conservatism constraint. b. materiality constraint.
c. substance over form principle. d. industry practices constraint.
81. Which of the following best illustrates the accounting concept of conservatism? a. Use of the allowance method to recognize bad debt losses from credit sales b. Use of the lower of cost or market approach in valuing inventories.
c. Use of the same accounting method from one period to the next in computing depreciation expense
d. Utilization of a policy of deliberate understatement of asset values in order to present a conservative net income figure
82. Trade-offs between the characteristics that make information useful may be necessary or beneficial. Issuance of interim financial statements is an example of a trade-off between
a. relevance and reliability. b. reliability and periodicity. c. timeliness and materiality.
d. understandability and timeliness.
83. Allowing firms to estimate rather than physically count inventory at interim (quarterly) periods is an example of a trade-off between
a. verifiability and reliability. b. reliability and comparability. c. timeliness and verifiability. d. neutrality and consistency.
P84. In matters of doubt and great uncertainty, accounting issues should be resolved by choosing the
alternative that has the least favorable effect on net income, assets, and owners' equity. This guidance comes from the
a. materiality constraint.
b. industry practices constraint. c. conservatism constraint. d. full disclosure principle.
MULTIPLE CHOICE—Cash and Receivables
21. Which of the following is not considered cash for financial reporting purposes? a. Petty cash funds and change funds
b. Money orders, certified checks, and personal checks c. Coin, currency, and available funds
d. Postdated checks and I.O.U.'s
22. Which of the following is considered cash? a. Certificates of deposit (CDs)
b. Money market checking accounts c. Money market savings certificates d. Postdated checks
23. Travel advances should be reported as a. supplies.
b. cash because they represent the equivalent of money. c. investments.
d. none of these.
P24. Which of the following items should not be included in the Cash caption on the balance sheet?
a. Coins and currency in the cash register
b. Checks from other parties presently in the cash register c. Amounts on deposit in checking account at the bank d. Postage stamps on hand
S25. A cash equivalent is a short-term, highly liquid investment that is readily convertible into known
amounts of cash and
a. is acceptable as a means to pay current liabilities.
c. bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation.
d. is so near its maturity that it presents insignificant risk of changes in interest rates. 26.Bank overdrafts, if material, should be
a. reported as a deduction from the current asset section. b. reported as a deduction from cash.
c. netted against cash and a net cash amount reported. d. reported as a current liability.
27. Deposits held as compensating balances a. usually do not earn interest.
b. if legally restricted and held against short-term credit may be included as cash.
c. if legally restricted and held against long-term credit may be included among current assets. d. none of these.
28. The category "trade receivables" includes a. advances to officers and employees. b. income tax refunds receivable.
c. claims against insurance companies for casualties sustained. d. none of these.
29. Which of the following should be recorded in Accounts Receivable? a. Receivables from officers
b. Receivables from subsidiaries c. Dividends receivable
d. None of these
S30. What is the preferable presentation of accounts receivable from officers, employees, or affiliated
companies on a balance sheet? a. As offsets to capital.
b. By means of footnotes only.
c. As assets but separately from other receivables.
d. As trade notes and accounts receivable if they otherwise qualify as current assets.
S31. When a customer purchases merchandise inventory from a business organization, she may be
given a discount which is designed to induce prompt payment. Such a discount is called a(n) a. trade discount.
b. nominal discount. c. enhancement discount. d. cash discount.
P32. Trade discounts are
a. not recorded in the accounts; rather they are a means of computing a price. b. used to avoid frequent changes in catalogues.
c. used to quote different prices for different quantities purchased. d. all of the above.
33. If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as
a. a deduction from sales in the income statement. b. an item of "other expense" in the income statement.
c. a deduction from accounts receivable in determining the net realizable value of accounts receivable.
d. sales discounts forfeited in the cost of goods sold section of the income statement.
34. 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. most short-term receivables are not interest-bearing.
b. the allowance for uncollectible accounts includes a discount element. c. the amount of the discount is not material.
d. most receivables can be sold to a bank or factor.
35. Which of the following methods of determining bad debt expense does not properly match expense and revenue?
a. Charging bad debts with a percentage of sales under the allowance method.
b. Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method.
c. Charging bad debts with an amount derived from aging accounts receivable under the allowance method.
d. Charging bad debts as accounts are written off as uncollectible.
36. Which of the following methods of determining annual bad debt expense best achieves the matching concept?
a. Percentage of sales
b. Percentage of ending accounts receivable c. Percentage of average accounts receivable d. Direct write-off
37. Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense?
a. A percentage of sales adjusted for the balance in the allowance b. A percentage of sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in the allowance
38. The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach
a. gives a reasonably correct statement of receivables in the balance sheet. b. best relates bad debt expense to the period of sale.
c. is the only generally accepted method for valuing accounts receivable. d. makes estimates of uncollectible accounts unnecessary.
39. At the beginning of 2006, Finney Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Finney reported this note as a $1,000 trade note receivable on its 2006 year-end statement of financial position and $1,000 as sales revenue for 2006. What effect did this accounting for the note have on Finney's net earnings for 2006, 2007, 2008, and its retained earnings at the end of 2008, respectively? a. Overstate, overstate, understate, zero
b. Overstate, understate, understate, understate c. Overstate, overstate, overstate, overstate d. None of these
40. Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables.
d. The financing cost (interest expense) should be recognized ratably over the collection period of the receivables.
S41. Which of the following statements is incorrect regarding the classification of accounts and notes
receivable?
a. Segregation of the different types of receivables is required if they are material. b. Disclose any loss contingencies that exist on the receivables.
c. Any discount or premium resulting from the determination of present value in notes receivable transactions is an asset or liability respectively.
d. Valuation accounts should be appropriately offset against the proper receivable accounts.
S42. Of the following conditions, which is the only one that is not required if the transfer of receivables
with recourse is to be accounted for as a sale?
a. The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible.
b. The transferor surrenders control of the future economic benefits of the receivables. c. The transferee cannot require the transferor to repurchase the receivables.
d. The transferor's obligation under the recourse provisions can be reasonably estimated.
a. number of times the average balance of accounts receivable is collected during the period. b. percentage of accounts receivable turned over to a collection agency during the period. c. percentage of accounts receivable arising during certain seasons.
d. number of times the average balance of inventory is sold during the period. 44. The accounts receivable turnover ratio is computed by dividing
a. gross sales by ending net receivables. b. gross sales by average net receivables. c. net sales by ending net receivables. d. net sales by average net receivables. *45. Which of the following is not true?
a. The imprest petty cash system in effect adheres to the rule of disbursement by check.
b. Entries are made to the Petty Cash account only to increase or decrease the size of the fund or to adjust the balance if not replenished at year-end.
c. The Petty Cash account is debited when the fund is replenished. d. All of these are not true.
*46. A Cash Over and Short account a. is not generally accepted.
b. is debited when the petty cash fund proves out over. c. is debited when the petty cash fund proves out short. d. is a contra account to Cash.
*47. The journal entries for a bank reconciliation
a. are taken from the "balance per bank" section only.
b. may include a debit to Office Expense for bank service charges. c. may include a credit to Accounts Receivable for an NSF check. d. may include a debit to Accounts Payable for an NSF check. *48. When preparing a bank reconciliation, bank credits are
a. added to the bank statement balance. b. deducted from the bank statement balance. c. added to the balance per books.
d. deducted from the balance per books.
MULTIPLE CHOICE—Valuation of Inventories 21. When using a perpetual inventory system,
a. no Purchases account is used.
b. a Cost of Goods Sold account is used. c. two entries are required to record a sale. d. all of these.
22. Goods in transit which are shipped f.o.b. shipping point should be a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company. d. none of these.
23. Goods in transit which are shipped f.o.b. destination should be a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company. d. none of these.
24. Which of the following items should be included in a company's inventory at the balance sheet date?
a. Goods in transit which were purchased f.o.b. destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at his or her convenience.
d. None of these.
During 2007 Foley Corporation transferred inventory to Kline Corporation and agreed to repurchase the merchandise early in 2008. Kline then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Foley. In 2008 when Foley repurchased the inventory, Kline used the proceeds to repay its bank loan.
25. This transaction is known as a(n) a. consignment.
b. installment sale.
c. assignment for the benefit of creditors. d. product financing arrangement.
26. On whose books should the cost of the inventory appear at the December 31, 2007 balance sheet date?
a. Foley Corporation b. Kline Corporation c. Norwalk Bank
d. Kline Corporation, with Foley making appropriate note disclosure of the transaction 27. Goods on consignment are
a. included in the consignee's inventory.
b. recorded in a Consignment Out account which is an inventory account. c. recorded in a Consignment In account which is an inventory account. d. all of these
S28. Valuation of inventories requires the determination of all of the following except
a. the costs to be included in inventory.
b. the physical goods to be included in inventory.
c. the cost of goods held on consignment from other companies. d. the cost flow assumption to be adopted.
P29. 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. only as an asset on the balance sheet.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
d. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
P30. 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. overstatement, understatement, overstatement.
b. overstatement, understatement, no effect. c. understatement, overstatement, overstatement. d. understatement, overstatement, no effect.
S31. The failure to record a purchase of merchandise on account even though the goods are properly
included in the physical inventory results in a. an overstatement of assets and net income. b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of assets. d. an understatement of liabilities and an overstatement of owners' equity.
32. Belle Co. received merchandise on consignment. As of March 31, Belle had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be
a. no effect.
b. net income was correct and current assets and current liabilities were overstated. c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.
33. 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
