FINANCIAL ACCOUNTING

1) The fundamental accounting equation is a reflection of the:

Money measurement concept

Conservatism concept

Dual-aspect concept

Historical cost concept

2) The historical cost concept reflects the fact that financial accounting practice favors:

Reliability over relevance

Management’s best guess over historical financial information

Relevance over reliability

Consensus market values over historical financial information

3) Jon Sports’ inventory account increased from $25,000 on December 31, 2003 to $30,000 on December 31, 2004. Which one of the following items would be included in the operating section of its 2004 indirect method statement of cash flows?

Add increase in inventory $5,000

Subtract increase in inventory ($5,000)

Add inventory balance $20,000

Subtract inventory balance ($20,000)

4) Turnkey Systems, Inc. began the month of June, 2004 with a prepaid expenses balance of $240,000. During the month, debits totaling $110,000 and credits totaling $80,000 were made to the prepaid expenses account. What was the June, 2004 ending balance of prepaid expenses?

A debit balance of $210,000

A credit balance of $210,000

A debit balance of $270,000

A credit balance of $270,000

5) Pentex and Marbro, small companies in the stationery business, each had a dollar gross margin of $20,000 during September 2004. Pentex’s September sales were twice that of Marbro’s. If Pentex’s gross margin as a percentage of sales for September was 10%, Marbro’s gross margin as a percentage of sales for the same period was:

10% 5% 20% Cannot be calculated
6) When an entity recognizes revenue before it has received cash for the sale, it records an increase in a(n):
Liability such as ‘Advances from customers’

Accounts payable

Accounts receivable

Prepaid expense

7) Juan Foods pays off a long-term debt in full. Which one of the following statements describes the effect of the sale on Juan Foods?

Current ratio increases; total debt to equity ratio decreases

Current ratio decreases; total debt to equity ratio decreases

Current ratio decreases; total debt to equity ratio increases

Current ratio increases; total debt to equity ratio increases

8) On January 1, 2005, Mansfield Company has a retained earnings balance of $256,000. During 2005, its net income is $44,000 and it announces and pays $12,000 in dividends. There is no other dividend-related activity during the year. Its December 31, 2005 retained earnings balance is:

$2,12,000 $2,88,000 $3,00,000 $2,24,000

9) Juan Foods makes a cash sale with a positive gross margin. Which one of the following statements describes the effect of the sale on Juan Foods?

Current ratio increases

Current ratio decreases

No change to Juan Foods’ current ratio

Insufficient information to judge effect on current ratio

10) Juan Foods pays off a long-term debt in full. Which one of the following statements best describes the appropriate book-keeping for this transaction?

Debit cash; credit long-term debt

Debit long-term debt; credit owners’ equity

Debit owners’ equity; credit long-term debt

Debit long-term debt; credit cash

11) On March 31, 2005, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2005, Preston sells Cars devices with a sales price of $10,000 and a cost to Preston of $8,000. During April Cars pays Preston $12,000 against the amount owed to Preston. What is the effect of these April transactions on Preston’s balance sheet?
Cash increased by $12,000; accounts receivable decreased by $2,000; inventory decreased by $8,000; retained earnings increased by $2,000.
Accounts receivable increased by $2,000; inventory decreased by $8,000; cash increased by $12,000; retained earnings increased by $12,000.

Cash increased by $12,000; retained earnings decreased by $2,000; inventory decreased by $10,000; accounts receivable decreased by $12,000.

Cash increased by $2,000; accounts receivable decreased by $2,000; inventory decreased by $8,000; retained earnings decreased by $12,000.

12) Consider the same scenario as in the previous question: On March 31, 2005, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2005, Preston sells Cars devices with a sales price of $10,000 and a cost to Preston of $8,000. During April Cars pays Preston $12,000 against the amount owed to Preston. If Preston had no other sales and records no other collections from customers during the month of April, the operating section of Preston’s indirect method statement of cash flows for April will show the following de-accrual adjustments to net income:

Subtract change in accounts receivable; add change in inventory.

Add change in accounts receivable; subtract change in inventory

Add change in accounts receivable; add change in inventory.

Subtract change in accounts receivable; subtract change in inventory.

13) Planet Music buys all of its inventory on credit. During 2005, Planet Music’s inventory account increased by $10,000. Which of the following statements must be true for Planet Music during 2005?

It made payments of less than $10,000 to suppliers.

It made cash payments of $10,000 to suppliers.

It made more cash payments to its suppliers than it recorded as cost of goods sold.

It paid less cash to suppliers than it recorded as cost of goods sold.
14) On December 31, 2005, Juan Foods purchases a van for $12,000. How does the purchase of the van affect Juan Foods’ 2005 income statement?
Decreases sales by $12,000

Increases operating expenses by $12,000

No material effect

Increases cost of goods sold by $12,000
15) To be recorded as a liability, an item must meet three specific conditions. Two of them are: it must involve probable future sacrifice of economic resources by the entity, and it must be a present obligation that arose as a result of a past transaction. Which one of the following is the third condition?
The item must reduce the market value of the recording entity

It must involve a transfer of resources to another entity

It must involve the expenditure of cash now or in the future

It must not cause total liabilities to exceed total assets
16) The next 9 questions are based on Patnode Inc.’s balance sheets at year end 2004 and 2005.

During 2005, Patnode announced and paid dividends of $1,000, the only dividend-related activity during the year. What was its 2005 net income?
$5,600 $3,600 $4,600 Cannot be estimated
17) During 2005, Patnode had a cash outflow of $15,000 for investing activities and a cash inflow of $7,000 from financing activities. Its 2005 cash flow from operations was:
Outflow of $15,000

Inflow of $15,000

Outflow of $8,000

Inflow of $8,000
18) Patnode’s 2005 statement of cash flows contains four items in the financing section. Three of them are: Short-term debt issued, $15,000; Short-term debt paid, ($10,000) and Dividends paid, ($1,000). What is the fourth item in the financing section?
Retained earnings, $4,600

Common stock issued, $3,000

Long-term debt paid, ($3,000)

Cash from financing, $3,000
19) How much total depreciation and amortization expense did Patnode record during 2005?
$10,000 $6,000 $3,000 $5,000
20) During 2005, Patnode recorded sales of $17,000. How much cash did it collect from its customers?
$17,000 $14,000 $3,000 Cannot be estimated
21) Which one of the following items will not appear in the operating section of Patnode’s 2005 indirect method cash flow statement?
Deduct: increase in accounts receivable $3,000

Add: decrease in accounts payable $1,000

Add: increase in taxes payable $2,400

Add: decrease inventories $6,000
22) What is Patnode’s current ratio at the end of 2004?
2.46 0.41 1.12 0.89
23) What is Patnode’s total debt to equity ratio at the end of 2004 (rounded to two decimal places)?
5.3 0.19 0.25 4.04
24) Patnode recorded a 2005 tax expense of $3,000. What amount did it pay to the tax authorities during 2005?
$2,400 $7,000 $600 $5,400
25) Kirby, Inc. records a sale with a gross margin of $1,400. Which one of the following statements correctly describes the effect of such a sale on its balance sheet?
Common stock increases by $1,400

The sales revenue account increases by $1,400

The gross margin account increases by $1,400

The retained earnings account increases by $1,400
26) Sandy Robbins is the sole owner of a hair salon. He often takes small amounts of “lunch money” from the cash register, figuring that “it is my business anyway.” His accountant, however, insists that Sandy make a note of the cash he takes, and at the end of the each accounting period, she debits owners’ equity and credits the cash account for the total amount that Sandy has taken during the period.

 

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