COMM 217

Question 1

Which of the following events would increase net earnings under the cash basis of accounting but would not increase net earnings under the accrual basis of accounting?
A. The credit sale of inventory at a sales price in excess of the inventory’s cost.
B. The collection of cash from a credit customer.
C. The cash sale of inventory at a sales price in excess of the inventory’s cost
D. The return of defective inventory purchased on account, where full credit was given.
E. Both events B and C.

Answer 1

B. The collection of cash from a credit customer.

Question 2

Which of the following statements is not consistent with international financial reporting standards relating to asset valuation?
A. Assets are originally recorded at their cost to the business entity.
B. Subtracting total liabilities from total assets indicates the value of owners’ equity under current
market conditions.
C. Accountants assume that assets such as office supplies, land and buildings will be used in business
operations, rather than being sold at current market prices.
D. Accountants prefer to base the valuation of assets upon, verifiable evidence rather than upon
appraisals or personal opinion.

Answer 2

B. Subtracting total liabilities from total assets indicates the value of owners’ equity under current

Question 3

Which of the following events will increase retained earnings?
A. Dividends declared by the board of directors.
B. Net loss reported on the statement of earnings for the period.
C. Issuance of shares to investors.
D. Net earnings reported on the statement of earnings for the period.
E. Both events C and D.

Answer 3

D. Net earnings reported on the statement of earnings for the period.

Question 4

Accrued expenses represent:
A. Expenses incurred but not yet recorded or paid.
B. Cash paid in advance for expenses that have not yet been used or consumed to generate revenue.
C. Expenses incurred but not yet paid.
D. Cash received by a company before it is earned.
E. None of the above answers.

Answer 4

A. Expenses incurred but not yet recorded or paid.

Question 5

A legal firm received $5,000 cash on April 1, 2022 for legal services to be rendered in the future. The amount was credited to Deferred Service Revenue. The legal services were provided by December 31, 2022, the end of the firm’s fiscal year, but no adjustment was made at year end. As a result,
A. Expenses would be overstated.
B. Net earnings would be overstated.
C. Liabilities would be understated.
D. Assets would be overstated.
E. Revenues would be understated.

Answer 5

E. Revenues would be understated.

Question 6

Tee Inc. and See Inc. operate in the same industry. In 2022, Tee Inc. reported a receivables turnover ratio of 11.1 and See Inc., reported a ratio of 8.7. Which of the following statements is true?
A. Tee Inc. needs to decrease its ratio in order to improve on the average collection period.
B. See Inc. has done a better job at collecting its receivables than Tee Inc.
C. See Inc. needs to focus on improving its credit and collection processes.
D. Tee Inc. manages its inventory better than See Inc.
E. Both companies collect their receivables within 30 days.

Answer 6

C. See Inc. needs to focus on improving its credit and collection processes.

Question 7

Jimmy Barkout is preparing a bank reconciliation report at January 31. He noticed that a cheque made by his company, JB Inc., to a supplier had not been processed by the bank as at January 31. As a result,
the amount of the cheque should appear in the report as
A. An addition to the cash balance per the books.
B. A deduction from the cash balance per the books.
C. An addition to the cash balance per the bank.
D. A deduction from the cash balance per the bank.
E. A deduction from both the cash balance per the books and the cash balance per the bank.

Answer 7

D. A deduction from the cash balance per the bank.

Question 8

The primary purpose of hiring a public accounting firm to audit the financial statements of a company
is to
A. Assure that no fraud has been committed by the company’s management.
B. Provide assurance that the reported financial information conforms to international financial
reporting standards in all material respects.
C. Detect all accounting errors made by the company’s accounting system and employees.
D. Detect fraud committed by employees.

Answer 8

B. Provide assurance that the reported financial information conforms to international financial

Question 9

Which one of the following is not a qualitative characteristic of useful accounting information?
A. Relevance. B. Verifiability. C. Continuity (going concern). D. Comparability.

Answer 9

C. Continuity

Question 10

If a company is successful in acquiring a large building at the end of the year, then the total asset turnover ratio will
A. Decrease. B. Change. C. Increase. D. Not be affected.

Answer 10

A. Decrease

Question 11

If a cheque for $521 clears the bank but is incorrectly recorded on the accounting books for $251, the appropriate treatment on the bank reconciliation to reflect this error would be to
A. Add $270 to the cash balance per the bank.
B. Add $270 to the cash balance per the books.
C. Deduct $270 from the cash balance per the bank.
D. Deduct $270 from the cash balance per the books.

Answer 11

D. Deduct $270 from the cash balance per the books.

Question 12

Which of the following items would not appear in a statement of financial position?
A. Prepaid expenses D. Depreciation expense
B. Salaries payable E. Deferred revenue
C. Office supplies inventory

Answer 12

D. Depreciation expense

Question 13

Which of the following statement is incorrect?
A. A transaction can increase the balance in one account and decrease the balance in another account.
B. A transaction can increase the balance in two accounts.
C. A transaction can increase the balance in two accounts and decrease the balance in one account.
D. A transaction can decrease the balance in two accounts.
E. A transaction must increase the balance in one account and decrease the balance in another account.

Answer 13

E. A transaction must increase the balance in one account and decrease the balance in another account.

Question 14

The bookkeeper of MTX Inc. recorded a sale on account for $500 by debiting Cash for $500 and crediting Accounts Receivable for $500. The journal entry needed to correct this error is:
A. Increase Accounts receivable and increase Sales revenue by $500
B. Increase Accounts receivable by $1,000; increase Sales revenue by $500 and decrease Cash by $500
C. Increase Accounts receivable by $500; and decrease Cash by $500
D. Increase Accounts receivable, $500; increase Sales revenue by $500; and decrease Cash by $250

Answer 14

B. Increase Accounts receivable by $1,000; increase Sales revenue by $500 and decrease Cash by $500

Question 15

The write-off of an uncollectible account affects:
A. The accounts receivable account.
B. Total current assets.
C. Total current liabilities.
D. Net earnings.
E. Both total current assets and net earnings.

Answer 15

A. The accounts receivable account.

Question 16

Which of the following items is added back to net earnings when computing cash flows from operating activities under the indirect method?
A. Accumulated depreciation
B. Gain on disposal of assets
C. Amortization expense
D. Decrease in dividends payable
E. All of the above answers.

Answer 16

C. Amortization expense

Question 17

Which of the following items is not reported in a statement of cash flows?
A. A purchase of cash equivalents for cash.
B. The amount of cash on hand at year end.
C. Cash outflows from investing activities during the year.
D. Cash inflows from financing activities during the year.

Answer 17

A. A purchase of cash equivalents for cash.

Question 18

Total cash inflow in the operating section of the statement of cash flows should include which of the following?
A. Cash received from customers at the point of sale.
B. Cash collections from customer accounts receivable.
C. Cash received in advance of revenue recognition (deferred revenue).
D. Only A and B.
E. All of the above answers.

Answer 18

E. All of the above answers.

Question 19

Which of the following items would not appear in the financing section of the statement of cash flows?
A. The repurchase of the company’s own shares.
B. The receipt of dividends.
C. The repayment of debt.
D. The payment of dividends.

Answer 19

B. The receipt of dividends.

Question 20

Consider the following: Issued new shares for $18,000, sold office equipment for $1,200, paid cash dividends of $4,000, purchased investments for $2,000, and paid accounts payable of $4,000. What was the net cash inflow (outflow) from financing activities?
A. $20,000
B. $14,000
C. ($20,000)
D. ($14,000)
E. None of the other answers.

Answer 20

B. $14,000

Question 21

The net change in cash as shown near the bottom of the statement of cash flows for the year should agree with which of the following?
A. The difference in retained earnings when reviewing the comparative statements of financial
position.
B. Net earnings or net loss as found on the statement of earnings.
C. The difference in cash when reviewing the comparative statements of financial position.
D. None of the above answers.

Answer 21

C. The difference in cash when reviewing the comparative statements of financial position.

Question 22

Which of the following statements is false concerning the forms of business organizations?
A. A sole proprietorship can be easily formed.
B. Owners of corporations have limited liability while sole proprietorships and partnerships
have personal liability for the debts of the business.
C. A corporation always has tax advantages over the other forms of business organizations.
D. It is more difficult for a sole proprietorship or a partnership to raise large sums of money
than a corporation.

Answer 22

C. A corporation always has tax advantages over the other forms of business organizations.

Question 23

Which of the following users of financial statements are considered external decision makers?
A. Investors, management, employees, government
B. Investors, creditors, suppliers, government
C. Investors, board of directors, creditors, employees
D. Creditors, suppliers, customers, managers

Answer 23

B. Investors, creditors, suppliers, government

Question 24

Which of the following is not a basic financial statement?
A. Statement of earnings
B. Statement of cash flows
C. Statement of financial position
D. Auditor’s report

Answer 24

D. Auditor’s report

Question 25

Payment is made for machinery purchased previously on credit. What effect does this
transaction have on the accounting equation?
A. Assets and liabilities will decrease.
B. Assets and liabilities will increase.
C. Assets and contributed capital will increase.
D. Liabilities will decrease and retained earnings will increase

Answer 25

A. Assets and liabilities will decrease.

Question 26

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 link between these users and the decisions they make. This link is:
A. Relevance B. Verifiability C. Understandability D. Materiality

Answer 26

A. Relevance

Question 27

Nainar Inc. recently purchased a piece of equipment for $2,000 that will be paid within 30 days after delivery. This event should be recorded in Nainar’s accounting system when Nainar
A. signs the agreement with the seller.
B. receives an invoice from the seller.
C. receives the asset from the seller.
D. pays $2,000 to the seller.

Answer 27

C. receives the asset from the seller.

Question 28

Which of the following statements concerning retained earnings is true?
A. Retained earnings is the difference between revenues and expenses.
B. Retained earnings is increased by dividends and decreased by net loss.
C. Retained earnings is reported as a liability on the statement of financial position.
D. Retained earnings represents the accumulated net earnings that have not been distributed as
dividends.

Answer 28

D. Retained earnings represents the accumulated net earnings that have not been distributed as
dividends.

Question 29

Under accrual accounting, which of the following is an appropriate accounting policy regarding recognizing assets as expenses?
A. Assets should be recognized as expenses when the assets are paid for.
B. Assets should be recognized as expenses when the assets are received.
C. Assets should be recognized as expenses when their economic benefits expire.
D. Assets should never be recognized as expenses, because assets are different from expenses.

Answer 29

C. Assets should be recognized as expenses when their economic benefits expire.

Question 30

Which of the following statements is characteristic of accounts payable?
A. Accounts payable always require the payment of interest.
B. Accounts payable arise when a business purchases goods or services on credit.
C. Accounts payable arise when a business promises to purchase goods or services.
D. Accounts payable are reclassified as notes payable when they have not been paid within a year.

Answer 30

B. Accounts payable arise when a business purchases goods or services on credit.

Question 31

Which of the following is not generally an internal control activity?
A. Establishing clear lines of authority to carry out specific tasks.
B. Physically counting inventory at the end of the accounting period.
C. Limiting access to computerized accounting records.
D. Reducing the cost of hiring seasonal employees.

Answer 31

D. Reducing the cost of hiring seasonal employees.

Question 32

. In May 2023, Yang Ltd. received $6,000 in cash for services performed in May 2023 and
$8,000 in cash for services to be performed in June 2023. Yang also received a bill of $1,000 for telecommunication services used in May 2023, but will not pay the amount until mid June 2023. Which of the following combination of amounts should Yang recognize in May 2023 under the accrual basis of accounting?
A. $6,000 of revenue and $1,000 of expense.
B. $14,000 of revenue and $1,000 of expense.
C. $14,000 of revenue and $0 of expense.
D. $6,000 of revenue and $0 of expense.

Answer 32

A. $6,000 of revenue and $1,000 of expense.

Question 33

CaterAll Inc. is a catering service. Conceptually, CaterAll should normally recognize revenue
from its catering service on the date when
A. the customer places the order.
B. the meals are served.
C. the invoice is mailed to the customer.
D. the customer’s payment is received.

Answer 33

B. the meals are served.

Question 34

15. Which of the following statements is incorrect regarding preparing financial statements?
    A. The financial statements are prepared in the following order: 1) the statement of earnings, 2)
    the statement of changes in equity, 3) the statement of financial position.
    B. The statement of earnings and the statement of financial position are related through the
    retained earnings account.
    C. The adjusted trial balance lists only the statement of financial position accounts in a debit
    and credit format.
    D. The adjusted trial balance is the primary source of information to prepare the financial
    statements.

Answer 34

C. The adjusted trial balance lists only the statement of financial position accounts in a debit

Question 35

A company’s current ratio is 2.0. What effect will the purchase of inventory on credit have on this ratio?
A. There will be no net impact on the current ratio.
B. The current ratio will decrease.
C. The current ratio will increase.
D. The current ratio will change but the direction of the change (increase or decrease) can not be determined without knowing the inventory cost.

Answer 35

B. The current ratio will decrease.

Question 36

7. Which of the following statements is false?
   A. Adjusting entries can be classified as accruals or deferrals.
   B. Adjusting entries always affect at least one expense or revenue account and one asset or
   liability account.
   C. The cash account will always be affected by adjusting entries.
   D. Adjusting entries are necessary because timing differences may exit when revenue is
   recognized and cash is received or when an expense is recognized and cash is paid.

Answer 36

C. The cash account will always be affected by adjusting entries.

Question 37

. On October 1, 2022, Xenobia Corp. accepted a note receivable from a customer. The note is due on June 30, 2023. Xenobia’s fiscal year ends on December 31. When should the company recognize interest revenue from the note?
A. On October 1, 2022
B. On December 31, 2022 only
C. On June 30, 2023
D. On December 31, 2022 and June 30, 2023

Answer 37

D. On December 31, 2022 and June 30, 2023

Question 38

Which of the following statements best describes the aging of accounts receivable method?
A. Estimating the appropriate balance of the Allowance for Doubtful Accounts provides the
net amount of accounts receivable that are reported on the statement of financial position.
B. This method estimates bad debt expense by multiplying the net credit sales during the
period by the historical bad debt rate.
C. According to this method, accounts receivable are written off if the customer does not pay
the amount due by the end of the credit period.
D. The precise amount of bad debt expense is computed by multiplying the historical bad debt
rate by the net credit sales made during the period.

Answer 38

A. Estimating the appropriate balance of the Allowance for Doubtful Accounts provides the
net amount of accounts receivable that are reported on the statement of financial position.

Question 39

During May 2023, Tasso Inc. purchased $5,000 of supplies for use in its business. At May 31,
70% of the amount had been paid but only 20% of the supplies were still on hand. Under
accrual accounting, what amounts will appear on the company’s statement of financial position at May 31?
A. Supplies: $1,000; Accounts payable: $1,500
B. Supplies: $1,000; Accounts payable: $5,000
C. Supplies: $4,000; Accounts payable: $1,500
D. Supplies: $5,000; Accounts payable: $3,500

Answer 39

A [$5,000 x 20%; $5,000 x 30%]

Question 40

A company had sales of $80,000, sales discounts of $1,800, sales returns of $3,200, and commissions owed to salespeople of $1,600. What is the amount of net sales?
A. $73,400
B. $78,200
C. $75,000
D. $76,600

Answer 40

C [$80,000 – $1,800 – $3,200]

Question 41

The principal reason for hiring external auditors to audit financial statements is:
A. that management often lacks the required accounting expertise to prepare accurate
financial statements.
B. to ensure proper preparation of the company’s tax return and give management advice on
other accounting and business issues.
C. that the Canada Revenue Agency requires external verification of the company’s
accounting records.
D. to prevent management personnel from acting in their best interests and attempting to
manipulate the information reported in financial statements.

Answer 41

D. to prevent management personnel from acting in their best interests and attempting to
manipulate the information reported in financial statements.

Question 42

The concept that the expenses of a company relate to revenue generated in the same
accounting period is best known as:
A. the periodicity assumption.
B. the relevance concept.
C. the matching process.
D. the recognition principle.
E. the accrual basis of accounting

Answer 42

C. the matching process.

Question 43

Total cash inflow in the operating section of the statement of cash flows should not include
which of the following?
A. Cash received from customers at the point of sale.
B. Cash collections from customer accounts receivable.
C. Cash received in advance of revenue recognition (deferred revenue).
D. Cash received from sale of short-term investments.
E. Both answers C and D.

Answer 43

D. Cash received from sale of short-term investments.

Question 44

The double-entry accounting system means that:
A. each transaction affects at least two accounts, and the sum of the debits should always
equal the sum of the credits.
B. the entity must use both the cash basis and the accrual basis of accounting.
C. each transaction must be recorded twice by two separate accountants in order to ensure the
accuracy of the accounting records.
D. the accountant must use both a manual accounting system and a computerized accounting
system to record each transaction.
E. each transaction must be recorded twice, once for financial reporting purposes and a
second time for income tax purposes.

Answer 44

A. each transaction affects at least two accounts, and the sum of the debits should always
equal the sum of the credits.

Question 45

Which of the following would not be recorded as an asset by a business organization?
A. Land held for future development.
B. Amounts receivable from customers in exchange for goods sold.
C. Office supplies that are expected to be used in the near future.
D. Renewal of a five-year contract with the chief financial officer who improved the
company’s performance significantly.
E. Cash received from a customer for services to be performed in the next accounting period

Answer 45

D. Renewal of a five-year contract with the chief financial officer who improved the
company’s performance significantly.

Question 46

The statement of earnings is a financial statement that:
A. lists the economic resources of a company and the claims on these resources by creditors
and shareholders.
B. shows the results company’s various activities that result in the recognition of revenues
and expenses during the accounting period.
C. shows how the company’s operating, investing, and financing activities affect cash flow
during the accounting period.
D. shows how much of the net earnings has been retained in a company from its inception
until the end of the current accounting period.
E. lists all of the accounts of a company and their corresponding balances at the end of the
accounting period.

Answer 46

D. shows how much of the net earnings has been retained in a company from its inception
until the end of the current accounting period.

Question 47

The Local Games Shop recently gave free cellular phones to the first 10 customers who
entered the store on a Saturday morning. How will these free phones affect the statement of
earnings and the statement of financial position?
A. The Phone Inventory will decrease and Retained Earnings will increase.
B. Sales will increase and the cost of sales will increase.
C. There will be no impact on these statements because the customers did not pay for the
phones.
D. The Phone Inventory will decrease and sales will increase.
E. The Phone Inventory will decrease and the cost of sales will increase.

Answer 47

E. The Phone Inventory will decrease and the cost of sales will increase.

Question 48

AMC Inc. made cash sales of $48,000 and credit sales of $90,000 during 2021. All but $6,000 of the credit sales were collected by year-end. The company incurred expenses of $75,500 during the year, and paid for all but $9,000 of these expenses. No dividends were declared during 2021. How will AMC’s shareholders’ equity change as a result of these transactions?
A. It will increase by $62,500.
B. It will increase by $65,500.
C. It will decrease by $27,500.
D. It will decrease by $18,500.
E. The change cannot be determined without knowing the beginning and ending balances of
shareholders’ equity

Answer 48

A [$48,000 + $90,000 – $75,500]

Question 49

If a company’s bookkeeper forgets to record the journal entry to accrue interest expense, then:
A. expenses will be understated, and liabilities will be overstated.
B. expenses will be overstated,
C. and liabilities will be understated.
D. both expenses and liabilities will be overstated.
E. both expenses and liabilities will be understated.

Answer 49

D. both expenses and liabilities will be overstated.

Question 50

The bank erroneously charged Tropical Services’ account for $450.50 for a cheque that was correctly recorded by Tropical Services’ bookkeeper as $540.50. To reconcile the balances of cash shown in the company’s records compared to the bank statement, the bookkeeper would:
A. add $90 to the cash balance according to the bank statement.
B. add $90 to the cash balance according to Tropical Services’ records.
C. deduct $90 from the cash balance according to the bank statement.
D. deduct $90 from the cash balance according to the Tropical Services’ records.
E. not include this error in the bank reconciliation report because the bank should correct
their mistake.

Answer 50

C. deduct $90 from the cash balance according to the bank statement.

Question 51

The concept of prudence can be described as follows:
A. Very little information is reported in the financial statements and additional information is
disclosed in the notes to the financial statements.
B. Accounting records are updated only when enough transactions have accumulated in order
to use the accountant’s time efficiently.
C. Financial statements disclose the lowest reasonable amount for assets and the highest
reasonable amount for liabilities.
D. The information disclosed in the financial statements is presented fairly and does not
favour one group of users over others.

Answer 51

C. Financial statements disclose the lowest reasonable amount for assets and the highest
reasonable amount for liabilities

Question 52

A good system of internal control for cash should include a number of procedures that would facilitate the discovery of mishandling of cash by employees. Which of the following
statements reflects a weak internal control procedure?
A. All cash receipts should be deposited in a bank on a daily basis.
B. All major disbursements should be made by issuing serially numbered cheques.
C. Bank accounts should be reconciled monthly.
D. The function of receiving cash should be separated from the function of disbursing cash.
E. Only one person should handle both cash receipts and cash disbursements so as to reduce
labour costs and limit access to cash.

Answer 52

E. Only one person should handle both cash receipts and cash disbursements so as to reduce
labour costs and limit access to cash.

Question 53

Which of the following transactions will cause an increase on both sides (left and right) of the
basic accounting equation?
A. Collection of cash from a customer who purchased merchandise on account.
B. Payment to a supplier for inventory purchased on account.
C. Providing services that were paid for in advance.
D. Purchase of equipment for cash.

Answer 53

B. Payment to a supplier for inventory purchased on account.

Question 54

Which of the following statements is correct in computing the net cash flows from operating
activities?
A. Depreciation expense should be added back to net earnings.
B. Depreciation expense should not be subtracted from net earnings because it is a non-cash
expense.
C. Net earnings should not be adjusted for the loss on sale of land because it relates to an
investing activity, not an operating activity.
D. The loss on sale of land should be added to net earnings, but the depreciation expense
should be subtracted from net earnings.

Answer 54

A. Depreciation expense should be added back to net earnings.

Question 55

Cash payment for interest is classified as
A. an investing activity.
B. an operating activity.
C. a financing activity.
D. either a financing or an operating activity.
E. Either an operating or investing activity.

Answer 55

D. either a financing or an operating activity.

Question 56

Which of the following transactions would be reported on the statement of cash flows as a
financing activity?
A. The increase in accounts payable due to purchases of inventory on account.
B. The purchase of equipment in exchange for a note payable.
C. The issuance of additional common shares for cash.
D. The collection of a long-term note receivable.
E. The sale of investments for cash.

Answer 56

C. The issuance of additional common shares for cash.