Classify each of these items as an asset (A), liability (L), or stockholders’ equity (SE).
_____ a. Accounts receivable
_____ b. Accounts payable
_____ c. Common stock
_____ d. Office supplies
_____ e. Retained earnings
_____ f. Cash
_____ g. Note payable
_____ h. Equipment
True/False Questions
1. _____The cash basis of accounting is not in accordance with generally accepted accounting principles.
2. _____Adjusting entries are often made because some business events are not recorded as they occur.
3. _____Accrued revenues are revenues that have been earned but not yet received.
4. _____Internal control is most effective when several people are responsible for a given task.
5. _____A liability is classified as a current liability if it is to be paid within the coming year.
6. _____The excess of current assets over current liabilities is called working capital.
7. _____The current ratio takes into account the composition of current assets.
8. _____Generally accepted accounting principles are rules and practices that are recognized as a general guide for financial reporting purposes.
9. _____GAAP stands for generally accepted accounting procedures.
10. _____Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period.
Multiple Choice Questions
11. _____An accounting time period that is one year in length is called:
a. a fiscal year.
b. an interim period.
c. the time period assumption.
d. a reporting period.
12. _____The matching principle matches:
a. customers with businesses.
b. expenses with revenues.
c. assets with liabilities.
d. creditors with businesses.
13. _____Two of the major characteristics that make accounting information useful are
a. Relevance and reliability.
b. Verifiability and timeliness.
c. Comparability and flexibility.
d. Understandability and consistency.
14. _____Under the accrual basis of accounting:
a. cash must be received before revenue is recognized.
b. net income is calculated by matching cash outflows against cash inflows.
c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.
15. _____A small company may be able to justify using a cash basis of accounting if they have:
a. sales under $1,000,000.
b. no accountants on staff.
c. few receivables and payables.
d. all sales and purchases on account.
16. _____The general term employed to indicate an expense that has not been paid or revenue that has not been received and has not yet been recognized in the accounts is:
a. contra asset.
b. prepayment.
c. asset.
d. accrual.
17. _____The cost of assets consumed or services used is also known as
a. a revenue.
b. an expense.
c. a liability.
d. an asset.
18. _____Internal controls are concerned with
a. only manual systems of accounting.
b. the extent of government regulations.
c. safeguarding assets.
d. preparing income tax returns.
19. _____In a classified balance sheet, assets are usually classified as:
a. current assets; long-term assets; property, plant, and equipment; and intangible assets.
b. current assets; long-term investments; property, plant, and equipment; and common stocks.
c. current assets; long-term investments; tangible assets; and intangible assets.
d. current assets; long-term investments; property, plant, and equipment; and intangible assets.
20. _____The current ratio is
a. current assets plus current liabilities.
b. current assets minus current liabilities.
c. current assets divided by current liabilities.
d. current assets times current liabilities.
21. _____Working capital is calculated by taking
a. current assets plus current liabilities.
b. current assets minus current liabilities.
c. current assets divided by current liabilities.
d. current assets times current liabilities.
22. _____Long-term creditors are usually most interested in evaluating
a. liquidity and profitability.
b. consistency and profitability.
c. liquidity and solvency.
d. consistency and solvency.
23. _____Which of the following financial statements is divided into major categories of operating, investing, and financing activities?
a. The income statement.
b. The balance sheet.
c. The retained earnings statement.
d. The statement of cash flows.
Problems
24. Use the following data to calculate the current ratio.
Koonce Office Supplies
Balance Sheet
December 31, 2010
Cash $ 65,000 Accounts Payable $ 70,000
Prepaid Insurance 30,000 Salaries Payable 10,000
Accounts Receivable 50,000 Mortgage Payable 80,000
Inventory 70,000 Total Liabilities $160,000
Land held for Investment 75,000
Land 90,000
Building $100,000 Common Stock $120,000
Less Accumulated Retained Earnings 250,000
Depreciation (20,000) 80,000 Total Stockholders’ Equity $370,000
Trademark 70,000 Total Liabilities and
Total Assets $530,000 Stockholders’ Equity $530,000
a. 1.94 : 1.
b. 1.57 : 1.
c. 3.14 : 1.
d. 2.69 : 1.
25. Given the following adjusted trial balance:
Debit Credit
Cash $1,562
Accounts receivable 2,098
Inventory 3,124
Prepaid rent 86
Property, plant & equipment 300
Accumulated depreciation 52
Accounts payable 82
Unearned revenue 122
Common stock 206
Retained earnings 6,610
Service revenue 268
Interest revenue 56
Salary expense 160
Travel expense 66
Total $7,396 $7,396
Net income for the year is:
a. $98
b. $270
c. $324
d. $49
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