Exam 2

Name: __________________________ Date: _____________

1. From an accounting standpoint, the acquisition of long-lived assets is essentially a(n)A) accrual of expense.B) accrual of revenue.C) accrual of unearned revenue.D) prepaid expense.

2. Failure to prepare an adjusting entry at the end of a period to record an accruedrevenue would causeA) net income to be overstated.B) an understatement of assets and an understatement of revenues.C) an understatement of revenues and an understatement of liabilities.D) an understatement of revenues and an overstatement of liabilities.

3. Adjusting entries areA) the same as correcting entries.B) needed to ensure that the matching principle is followed.C) optional.D) rarely needed.

4. Maple Tree Inc. purchased a 12-month insurance policy on March 1, 2007 for $900.At March 31, 2007, the adjusting journal entry to record expiration of this asset willincludeA) a debit to Prepaid Insurance and a credit to Cash for $900.B) a debit to Prepaid Insurance and a credit to Insurance Expense for $100.C) a debit to Insurance Expense and a credit to Prepaid Insurance for $75D) a debit to Insurance Expense and a credit to Cash for $75.

5. Using accrual accounting, expenses are recorded and reported onlyA) when they are incurred whether or not cash is paid.B) when they are incurred and paid at the same time.C) if they are paid before they are incurred.D) if they are paid after they are incurred.

6. The time period assumption states thatA) a transaction can only affect one period of time.B) estimates should not be made if a transaction affects more than one time period.C) adjustments to the enterprise's accounts can only be made in the time period

when the business terminates its operations.D) the economic life of a business can be divided into artificial time periods.

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7. Blue Corporation issued a one-year 12% $200,000 note on April 30, 2007. Interestexpense for the year ended December 31, 2007 was?A) $24,000B) $18,000C) $16,000D) $14,000

Use the following to answer question 8:

Sheepskin Company had the following transactions during 2006.

• Sales of $4,500 on account• Collected $2,000 for services to be performed in 2007• Paid $625 cash in salaries• Purchased airline tickets for $250 in December for a trip to take place in 2007

8. What is Sheepskin's 2006 net income using accrual accounting?A) $3,875B) $5,875C) $5,625D) $3,625


Given the following adjusted trial balance:

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9. Net income for the year is:A) $24B) $110C) $137D) $223

10. The first required step in the accounting cycle isA) adjusting entries.B) journalizing transactions.C) analyzing transactions.D) posting transactions.

11. An adjusted trial balanceA) is prepared after the financial statements are completed.B) proves the equality of the total debit balances and total credit balances of ledger

accounts after all adjustments have been made.C) is a required financial statement under generally accepted accounting principles.D) cannot be used to prepare financial statements.

12. A Christmas shop signs a three-month note payable to help finance increases ininventory for the Christmas shopping season. The note is signed on October 1 in theamount of $10,000 with annual interest of 9%. What is the adjusting entry to bemade on December 31 for the interest expense accrued to that date, if no entries havebeen made previously for the interest?A)

B)

C)

D)

13. Why do generally accepted accounting principles require the application of therevenue recognition principle?A) Failure to apply the revenue recognition principle could lead to an overstatement

of revenue.B) It is easy to apply the revenue recognition principle because revenue issues are

always easy to identify and resolve.C) Recording revenue when cash is received is an objective application of the

revenue recognition principle.D) Accounting software has made the revenue recognition easy to apply.

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75

Interest Expense 900Note Payable 900

Interest Expense 75

Interest Expense 150Interest Payable 150

Interest Payable

Interest Expense 225Interest Payable 225

14. An asset–expense relationship exists withA) liability accounts.B) revenue accounts.C) prepaid expense adjusting entries.D) accrued expense adjusting entries.

15. Javier's Tune-Up Shop follows the revenue recognition principle. Javier services acar on August 31. The customer picks up the vehicle on September 1 and mails thepayment to Javier on September 5. Javier receives the check in the mail onSeptember 6. When should Javier show that the revenue was earned?A) August 31B) August 1C) September 5D) September 6

16. Which principle dictates that efforts (expenses) be recorded with accomplishments(revenues)?A) Cost principle.B) Periodicity principle.C) Revenue recognition principle.D) Matching principle.


Use the following information from the Income Statement of the Dirt Poor Laundry Service

17. The entry to close the expense accounts includes aA) credit to Income Summary for $2,050.B) debit to Income Summary for $2,050.C) debit to Wages Expense for $950.D) credit to Retained Earnings for $2,050.

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18. At March 1, 2007, CookieTime Inc. had supplies on hand of $1,500. During themonth, Candy purchased supplies of $1,900 and used supplies of $1,800. The March31 balance sheet should report what balance in the supplies account?A) $1,500B) $1,600C) $1,800D) $1,900

19. All of the following are required steps in the accounting cycle except:A) journalizing and posting closing entries.B) preparing an adjusted trial balance.C) preparing a post-closing trial balance.D) preparing a work sheet.

20. An architecture firm earned $2,000 for architecture services provided with the fee tobe paid in the future. No entry was made at the time the service was provided. If thefee has not been paid by the end of the accounting period and no adjusting entry ismade, this would causeA) revenues to be overstated.B) net income to be overstated.C) liabilities to be understated.D) revenues to be understated.

21. Younger Corporation purchased a one-year insurance policy in January 2006 for$48,000. The insurance policy is in effect from March 2006 through February 2007.If the company neglects to make the proper year-end adjustment for the expiredinsuranceA) Net income and assets will be understated by $40,000B) Net income and assets will be overstated by $40,000C) Net income and assets will be understated by $8,000D) Net income and assets will be overstated by $8,000

22. If a company fails to adjust for accrued revenuesA) liabilities will be understated and revenues will be understated.B) liabilities will be overstated and revenues will be understated.C) assets will be overstated and revenues will be understated.D) assets will be understated and revenues will be understated.

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Use the following information from the Income Statement of the Dirt Poor Laundry Service

23. The entry to close the Laundry Service Revenue account includes aA) debit to Laundry Service Revenue for $4,500.B) credit to Laundry Service Revenue for $4,500.C) debit to Income Summary for $4,500.D) debit to Retained Earnings for $4,500.


Given the following adjusted trial balance:

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24. After closing entries have been posted, the balance in retained earnings will be:A) $3,195B) $3,281C) $3,415D) $3,329

25. Adjusting entries are requiredA) because some costs expire with the passage of time and have not yet been

journalized.B) when the company's profits are below the budget.C) when expenses are recorded in the period in which they are earned.D) when revenues are recorded in the period in which they are earned.


26. The profit margin ratio would beA) .454.B) .119.C) .238.D) .135.

27. Holt Company sells merchandise on account for $2,000 to Jones Company withcredit terms of 2/10, n/30. Jones Company returns $400 of merchandise that wasdamaged, along with a check to settle the account within the discount period. Whatis the amount of the check?A) $1,960B) $1,968C) $1,600D) $1,568

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28. Gross Profit would beA) $77,000.B) $64,000.C) $70,000.D) $83,000.

29. In a perpetual inventory system, cost of goods sold is recordedA) on a daily basis.B) on a monthly basis.C) on an annual basis.D) each time a sale occurs.

30. Under a perpetual inventory systemA) accounting records continuously disclose the amount of inventory.B) increases in inventory resulting from purchases are debited to purchases.C) there is no need for a year-end physical count.D) the account purchase returns and allowances is credited when goods are returned

to vendors.

31. When a seller records a return of goods, the account that is credited isA) Sales.B) Sales Returns and Allowances.C) Merchandise Inventory.D) Accounts Receivable.

32. Ingrid's Fashions sold merchandise for $38,000 cash during the month of July.Returns that month totaled $800. If the company's gross profit rate is 40%, Ingrid'swill report monthly net sales revenue and cost of goods sold of:A) $38,000 and $22,800.B) $37,200 and $14,880.C) $37,200 and $22,320.D) $38,000 and $22,320.

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33. The collection of a $600 account beyond the 2 percent discount period will result in aA) debit to cash for $588.B) credit to Accounts Receivable for $600.C) credit to Cash for $600.D) debit to Sales Discounts for $12.

34. The form of income statement that derives its name from the fact that the total of allexpenses is deducted from the total of all revenues is called aA) multiple-step statement.B) revenue statement.C) report-form statement.D) single-step statement.

35. A credit sale of $800 is made on April 25, terms 2/10, net/30, on which a return of$50 is granted on April 28. What amount is received as payment in full on May 4?A) $735B) $784C) $800D) $750

36. Under a perpetual inventory system, acquisition of merchandise for resale is debitedtoA) the Merchandise Inventory account.B) the Purchases account.C) the Supplies account.D) the Cost of Goods Sold account.

37. Which of the following would not be classified as a contra account?A) SalesB) Sales Returns and AllowancesC) Accumulated DepreciationD) Sales Discounts

38. The operating cycle of a merchandising company isA) always one year in length.B) ordinarily longer than that of a service company.C) about the same as that of a service company.D) ordinarily shorter than that of a service company.

39. Which of the following accounts has a normal credit balance?A) Sales Returns and AllowancesB) Sales DiscountsC) SalesD) Cost of Goods Sold

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40. If a company is given credit terms of 2/10, n/30, it shouldA) hold off paying the bill until the end of the credit period, while investing the

money at 10% annual interest during this time.B) pay within the discount period and recognize a savings.C) pay within the credit period but don't take the trouble to invest the cash while

waiting to pay the bill.D) recognize that the supplier is desperate for cash and withhold payment until the

end of the credit period while negotiating a lower sales price.

41. The respective normal account balances of Sales, Sales Returns and Allowances, andSales Discounts areA) credit, credit, credit.B) debit, credit, debit.C) credit, debit, debit.D) credit, debit, credit.

42. A company shows the following balances:

What is the gross profit rate?A) 60%B) 36%C) 26%D) 20%

43. Which statement is incorrect?A) Periodic inventory systems provide better control over inventories than perpetual

inventory systems.B) Computers and electronic scanners allow more companies to use a perpetual

inventory system.C) Freight in is debited to merchandise inventory when a perpetual inventory

system is used.D) Regardless of the inventory system that is used, companies should take a

physical inventory count.

44. For a jewelry retailer, which is an example of Other Revenues and Gains?A) repair revenueB) unearned revenueC) gain on sale of display casesD) discount received for paying for merchandise inventory within the discount

period

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45. The Sales Returns and Allowances account does not provide information tomanagement aboutA) possible inferior merchandise.B) the percentage of credit sales versus cash sales.C) inefficiencies in filling orders.D) errors in filling customers.

46. Income from operations is gross profit less1. operating expenses and other expenses and losses.2. operating expenses plus other revenues and gains.3. operating expenses.A) 1B) 2C) 3D) both 1 and 2


47. The profit margin ratio would beA) .520.B) .203.C) .255.D) .184.


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48. The gross profit rate would beA) .454.B) .546.C) .500.D) .538.

49. The operating expenses section of an income statement for a merchandisingcompany would not includeA) Freight-out.B) Utilities expense.C) Cost of goods sold.D) Insurance expense.

50. The Sales Returns and Allowances account is classified as a(n)A) asset account.B) contra asset account.C) expense account.D) contra revenue account.


Tier II Company uses a periodic inventory system. Details for the inventory account for themonth of January 2007 are as follows:

Units Per unit price TotalBalance, 1/1/2007 200 $5.00 $1,000Purchase, 1/15/2007 100 5.30 530Purchase, 1/28/2007 100 5.50 550

An end of the month (1/31/2007) inventory showed that 120 units were on hand.

51. How many units did the company sell during January 2007?A) 80B) 120C) 200D) 280

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Assume a periodic inventory system is used.Nov. 1 Inventory 15 units @ $8.00

8 Purchase 60 units @ $8.6017 Purchase 30 units @ $8.4025 Purchase 45 units @ $8.80

A physical count of merchandise inventory on November 30 reveals that there are 50 units onhand.

52. Ending inventory under LIFO isA) $438B) $421C) $846D) $863


A company just starting business made the following four inventory purchases in June:June 1 150 units $ 780June 10 200 units 1,170June 15 200 units 1,260June 28 150 units 990

$4,200

A physical count of merchandise inventory on June 30 reveals that there are 200 units onhand.

53. Using the LIFO inventory method, the value of the ending inventory on June 30 isA) $1,040.00B) $1,072.50C) $1,305.00D) $1,320.00


Use the following inventory information for the month of July.

July 1 Beginning inventory 10 units at $905 Purchases 60 units @ $84

14 Sale 40 units21 Purchases 30 units at $8730 Sale 28 units

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54. Assuming that a perpetual inventory system is used, what is the cost of goods sold ona LIFO basis.A) $5,802B) $5,772C) $5,796.D) $5,916

55. Many companies use just-in-time inventory methods. Which of the following is notan advantage of this method?A) It limits the risk of having obsolete items in inventory.B) Companies may not have quantities to meet customer demand.C) It lowers inventory levels and costs.D) Companies can respond to individual customer requests.


The following information was available for Hawley Company at December 31, 2007:beginning inventory $80,000; ending inventory $120,000; cost of goods sold $700,000; andsales $1,000,000.

56. Hawley's days in inventory in 2007 wasA) 36.5 days.B) 42.4 days.C) 52.1 days.D) 62.9 days.



July 1 Beginning inventory 10 units at $1205 Purchases 60 units at $112

14 Sale 40 units21 Purchases 30 units at $11530 Sale 28 units

57. Assuming that a periodic inventory system is used, what is the cost of goods sold ona LIFO basis.A) $3,664B) $3,674C) $7,696.D) $7,706

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Cole Industries had the following inventory transactions occur during 2007:

Units Cost/unit2/1/07 Purchase 54 $453/14/07 Purchase 93 $475/1/07 Purchase 66 $49

The company sold 153 units at $63 each and has a tax rate of 30%.

58. Assuming that a periodic inventory system is used, what is the company's after-taxincome using LIFO? (rounded to whole dollars)A) $2,316B) $2,544C) $1,782D) $1,621

59. A problem with the specific identification method is thatA) inventories can be reported at actual costs.B) management can manipulate income.C) matching is not achieved.D) the lower of cost or market basis cannot be applied.

60. The consistent application of an inventory costing method enhancesA) conservatism.B) accuracy.C) comparability.D) efficiency.


Ace Industries had the following inventory transactions occur during 2007:



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61. Assuming that a periodic inventory system is used, what is the company's after-taxincome using LIFO? (rounded to whole dollars)A) $772B) $848C) $594D) $540

62. In periods of inflation, phantom or paper profits may be reported as a result of usingtheA) perpetual inventory method.B) FIFO costing assumption.C) LIFO costing assumption.D) periodic inventory method.


Ace Industries had the following inventory transactions occur during 2007:



63. Assuming that a periodic inventory system is used, what is the company's grossprofit using FIFO? (rounded to whole dollars)A) $2,441B) $2,365C) $848D) $772

64. Given equal circumstances, which inventory method would probably be the mosttime consuming?A) FIFOB) LIFOC) Average costD) Specific identification.

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65. Farley Company had beginning inventory of $15,000 at March 1, 2007. During themonth, the company made purchases of $40,000. The inventory at the end of themonth is $17,300. What is cost of goods sold for the month of March?A) $37,700B) $40,000C) $55,000D) $57,300

66. The term "FOB" denotesA) free on board.B) freight on board.C) free only (to) buyer.D) freight charge on buyer.

67. An overstatement of the beginning inventory results inA) no effect on the period's net income.B) an overstatement of net income.C) an understatement of net income.D) a need to adjust purchases.


A company just starting business made the following four inventory purchases in June:June 1 150 units $ 825June 10 200 units 1,120June 15 200 units 1,140June 28 150 units 885

$3,970

A physical count of merchandise inventory on June 30 reveals that there are 250 units onhand.

68. Using the FIFO inventory method, the amount allocated to ending inventory for JuneisA) $1,385.B) $1,425.C) $1,455.D) $1,475.

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69. A company purchased inventory as follows:200 units at $10300 units at $11

The average unit cost for inventory isA) $10.00.B) $10.50.C) $10.60.D) $11.00.


Lansing Company had the following records:

2007 2006 2005Ending inventory $34,580 $27,650 $30,490Cost of goods sold 182,000 163,500 174,200

70. What is Lansing's average days in inventory for 2007? (rounded)A) 62.39 daysB) 64.95 daysC) 61.76 daysD) 2,147 days


Tier II Company uses a periodic inventory system. Details for the inventory account for themonth of January 2007 are as follows:

Units Per unit price TotalBalance, 1/1/2007 200 $5.00 $1,000Purchase, 1/15/2007 100 5.30 530Purchase, 1/28/2007 100 5.50 550

An end of the month (1/31/2007) inventory showed that 120 units were on hand.

71. If the company uses FIFO and sells the units for $10 each, what is the gross profit forthe month?A) $1,376B) $1,424C) $2,800D) $3,000

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72. Of the following companies, which one would not likely employ the specificidentification method for inventory costing?A) Music store specializing in organ salesB) Farm implement dealershipC) Antique shopD) Hardware store

73. An error in the physical count of goods on hand at the end of a period resulted in a$10,000 overstatement of the ending inventory. The effect of this error in the currentperiod is

A)

B)

C)

D)

74. The specific identification method of costing inventories is used when theA) physical flow of units cannot be determined.B) company sells large quantities of relatively low cost homogeneous items.C) company sells large quantities of relatively low cost heterogeneous items.D) company sells a limited quantity of high-unit cost items.



July 1 Beginning inventory 20 units at $20 $ 4007 Purchases 70 units at $21 1,470

22 Purchases 10 units at $22 220$2,090

A physical count of merchandise inventory on July 30 reveals that there are 35 units on hand.

75. Using the average cost method, the value of ending inventory isA) $700.00B) $731.50.C) $735.00D) $770.00

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Overstated

Understated Understated

Understated Overstated

Cost of Goods Sold Net Income

Overstated Understated

Overstated

Answer Key

1. D2. B3. B4. C5. A6. D7. C8. A9. A

10. C11. B12. C13. A14. C15. A16. D17. B18. B19. D20. D21. B22. D23. A24. D25. A26. D27. D28. B29. D30. A31. D32. C33. B34. D35. A36. A37. A38. B39. C40. B41. C42. C43. A44. C45. B46. C47. D48. A

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49. C50. D51. D52. B53. B54. C55. B56. C57. D58. D59. B60. C61. D62. B63. C64. D65. A66. A67. C68. C69. C70. A71. A72. D73. C74. D75. B

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