Peterson's Clep Prep Flashcards
The business entity concept means that
(A) the owner is part of the business entity
(B) an entity is organized according to state or federal statutes
(C) an entity is organized according to the rules set by the FASB
(D) the entity is an individual economic unit for which data are recorded, analyzed, and
reported
(E) an entity must be a corporation
The correct answer is D.
Under the business entity concept, the activities of a business are recorded separately from the activities of the stakeholders.
The objectivity principle requires that
(A) business transactions must be consistent with the objectives of the entity
(B) the Financial Accounting Standards Board must be fair and unbiased in its
deliberations over new accounting standards
(C) accounting principles must meet the objectives of the Securities and Exchange
Commission
(D) amounts recorded in the financial statements must be based on independently
verifiable evidence
(E) the objective of financial reporting is match revenue and expenses
The correct answer is D.
The objectivity concept requires that the accounting records and reports be based upon objective evidence. For example, amounts paid are verifiable and considered objective.
A debit may signify a(n)
(A) decrease in asset accounts (B) decrease in liability accounts (C) increase in the capital account (D) decrease in the drawing account (E) increase in the revenue account
The correct answer is B.
Debits increase assets, drawing, and expense accounts, and decrease liabilities, capital, and revenue accounts.
Which of the following statements about the rules of debit and credit is true?
(A) Decrease Prepaid Insurance with a credit and the normal balance is a credit.
(B) Increase Accounts Payable with a credit and the normal balance is a debit.
(C) Increase Supplies with a credit and the normal balance is a credit.
(D) Decrease Cash with a debit and the normal balance is a credit.
(E) Increase Supplies Expense with a debit and the normal balance is a debit.
The correct answer is E.
Accounts that are increased with a debit (assets, expenses, and drawing) will normally have a debit balance. Accounts that are increased with a credit (liabilities, capital, and revenue) will normally have a credit balance.
Which of the following entries records the payment of an account payable?
(A) Debit Cash; credit Accounts Payable
(B) Debit Accounts Receivable; credit Cash
(C) Debit Cash; credit Supplies Expense
(D) Debit Accounts Payable; credit Cash
(E) Debit Supplies; credit Accounts Payable
The correct answer is D.
A payment of an account payable is a decrease of cash (an asset) and a decrease of the payable (a liability). Assets are decreased with a credit and liabilities are decreased with a debit.
Office supplies purchased by J’s Appliance Repair on account were returned. Which of the following
entries for J’s Appliance Repair records this transaction?
(A) Cash, debit; Office Supplies, credit
(B) Office Supplies, debit; Accounts Receivable, credit
(C) Accounts Payable, debit; Office Supplies, credit
(D) Office Supplies, debit; Accounts Payable, credit
(E) Accounts Payable, debit; Cash credit
The correct answer is C.
The amount owed (account payable, which is a liability) and the office supplies (an asset) decreased. Assets are decreased with a credit and liabilities are decreased with a debit.
If the effect of the debit portion of an adjusting entry is to increase the balance of an expense account,
which of the following describes the effect of the credit portion of the entry?
(A) Decreases the balance of an owner’s equity account
(B) Increases the balance of a liability account
(C) Increases the balance of an asset account
(D) Decreases the balance of an expense account
(E) Increases the balance of a revenue account
The correct answer is B.
Adjusting entries affect one balance sheet account and one income statement account. Owner’s equity is affected by revenues and expenses, therefore, either assets or liabilities are the balance sheet accounts affected by adjusting entries. An increase to an expense would increase a liability or a contra asset.
The balance in the prepaid rent account before adjustment at the end of the year is $15,000, which
represents three months’ rent paid on December 1. The adjusting entry required on December 31 is
(A) debit Rent Expense, $5,000; credit Prepaid Rent, $5,000
(B) debit Prepaid Rent, $10,000; credit Rent Expense, $5,000
(C) debit Rent Expense, $10,000; credit Prepaid Rent, $5,000
(D) debit Prepaid Rent, $5,000; credit Rent Expense, $5,000
(E) debit Rent Expense, $5,000; credit Cash, $5,000
The correct answer is A.
As the assets are used up, they become expenses. Prepaid Rent used during a period becomes Rent Expense.
The cost of office supplies to be used in future periods is ordinarily shown on the balance sheet as a(n)
(A) capital (B) asset (C) contra asset (D) liability (E) drawing
The correct answer is B.
Resources available for use by an entity are considered assets.
Which of the statements below indicates that a company earned a net income for the period?
(A) The sum of the debits exceeds the sum of the credits in the Balance Sheet columns
on the work sheet.
(B) The sum of the credits exceeds the sum of the debits in the Income Statement
columns on the work sheet.
(C) The sum of the debits exceeds the sum of the credits in the Income Statement
columns on the work sheet.
(D) Cash inflows exceeded cash outflows.
(E) The adjusted trial balance columns of the worksheet are equal.
The correct answer is B.
Credits in the Income Statement columns of the work sheet represent revenues and debits in the Income Statement represent expenses. If the total of the credits exceeds the total of the debits, then revenues have exceeded expenses and the result is net income.
Closing entries
(A) need not be journalized if reversing entries are prepared
(B) need not be posted if the financial statements are prepared from the work sheet
(C) are not needed if adjusting entries are prepared
(D) must be journalized and posted
(E) are not required if financial statements are prepared
The correct answer is D.
Account balances are not updated unless journal entries are prepared and posted. Therefore, revenues, expenses, and drawings are not transferred to the owner’s equity unless closing entries are recorded and posted.
If total assets decreased by $47,000 during a period of time and owner’s equity increased by $24,000
during the same period, then the amount and direction (increase or decrease) of the period’s change in
total liabilities is a
(A) $23,000 increase (B) $47,000 decrease (C) $71,000 decrease (D) $71,000 increase (E) $23,000 decrease
The correct answer is C.
The accounting equation must always be in balance; therefore, when the total assets change, there will be an equal change to the total liabilities and owner’s equity. Since the owner’s equity increased and the total assets decreased, the change in total liabilities must be a $71,000 decrease ($47,000 + $24,000) to balance both of those changes.
How does the purchase of supplies on account affect the accounting equation?
(A) Assets increase; owner’s equity decreases
(B) Assets increase; liabilities increase
(C) Assets increase; liabilities decrease
(D) Liabilities increase; owner’s equity decreases
(E) Assets increase and decrease by the same amount
The correct answer is B.
Supplies are an asset until they are used. The purchase increases assets. Because the purchase has not yet been paid for, a liability has been incurred.
Al Shea was the sole owner and operator of SawTooth Company. As of the end of its accounting period,
December 31, 2005, SawTooth Company had assets of $925,000 and liabilities of $285,000. During
2006, Al Shea invested an additional $50,000 and withdrew $30,000 from the business. What was the
amount of net income during 2006, assuming that as of December 31, 2006, assets were $980,000, and
liabilities were $255,000?
(A) $95,000 (B) $65,000 (C) $165,000 (D) $725,000 (E) $55,000
The correct answer is B.
The accounting equation must always be in balance. Therefore, total liabilities can be deducted from total assets to determine owner’s equity. At the end of 2005, the owner’s equity was $640,000. The beginning owner’s equity balance was increased for additional investments and revenues, and decreased for withdrawals and expenses to arrive at the owner’s equity balance at the end of the year. With the investment of $50,000 and the withdrawal of $30,000, the owner’s equity in 2006 should have a net gain of $20,000 and be $660,000. However, the actual owner’s equity at the end of 2006 was $725,000; therefore, the net income during 2006 must be $65,000 ($725,000 – $660,000).
The financial statement that presents a summary of the revenues and expenses of a business for a specific
period of time, such as a month or year, is called a(n)
(A) prior period statement (B) statement of owner’s equity (C) income statement (D) balance sheet (E) statement of cash flows
The correct answer is C.
The income statement shows revenues less expenses to arrive at net income (loss) for the accounting period.
Allowance for Doubtful Accounts has a credit balance of $800 at the end of the year (before adjustment),
and an analysis of accounts in the customer’s ledger indicates Doubtful Accounts of $15,000. Which of
the following entries records the proper provision for Doubtful Accounts?
(A) Debit Uncollectible Accounts Expense, $800; credit Allowance for Doubtful
Accounts, $800
(B) Debit Uncollectible Accounts Expense, $14,200; credit Allowance for Doubtful
Accounts, $14,200
(C) Debit Allowance for Doubtful Accounts, $800; credit Uncollectible Accounts
Expense, $800
(D) Debit Allowance for Doubtful Accounts, $15,800; credit Uncollectible Accounts
Expense, $15,800
(E) Debit Uncollectible Accounts Expense, $14,200; credit Accounts Receivable,
$14,200
The correct answer is B.
When the estimate for doubtful accounts is based on the amount and the age of the receivable accounts at the end of the period, the adjusting entry is recorded so that the balance of the allowance account will equal the estimated doubtful accounts at the end of the period.
Allowance for Doubtful Accounts has a debit balance of $500 at the end of the year (before adjustment),
and uncollectible accounts expense is estimated at 3% of net sales. If net sales are $600,000, the amount
of the adjusting entry to record the provision for Doubtful Accounts is
(A) $18,500 (B) $17,500 (C) $18,000 (D) $19,000 (E) None of the above
The correct answer is C.
When the estimate for doubtful accounts is based on the amount of sales for the period, the adjusting entry is made without regard to the balance of the allowance account. Therefore, the adjusting entry is: 0.03 × $600,000 = $18,000.
A 60-day, 10% note for $8,000, dated April 15, is received from a customer on account. The face value
of the note is
(A) $8,600 (B) $7,200 (C) $8,800 (D) $8,000 (E) $8,133
The correct answer is D.
The face value of a promissory note is the amount borrowed.
Under which method of cost flows is the inventory assumed to be composed of the most recent costs?
(A) Average cost (B) Last-in, first-out (C) First-in, first-out (D) Weighted average (E) Specific identification
The correct answer is C.
Under the FIFO method the oldest inventory is assumed to be sold first, leaving the most recent purchases in ending inventory.
The inventory data for an item for November are
Using the perpetual system, costing by the last-in, first-out method, what is the cost of the merchandise
inventory of 30 units on November 30?
(A) $640 (B) $610 (C) $620 (D) $630 (E) $660
The correct answer is D.
Under the LIFO method, the newest inventory is assumed to be sold first, leaving the oldest costs in ending inventory. In a perpetual inventory system, the cost of the inventory is determined after each transaction. At the end November, there were 10 units from the Nov. 1 inventory (at $20), 10 units from the Nov. 10 purchase (at $21), and 10 units from the Nov. 30 purchase (at $22). Therefore, the cost of the merchandise inventory on November 30 is: (10 × $20) + (10 × $21) + (10 × $22) = $200 + $210 + $220 = $630.
The following lots of a particular commodity were available for sale during the year
The firm uses the periodic system and there are 20 units of the commodity on hand at the end of the year.
What is the amount of inventory at the end of the year according to the first-in, first-out method?
(A) $1,030 (B) $1,140 (C) $1,170 (D) $1,060 (E) $1,080
The correct answer is C.
Under the FIFO method, the oldest inventory is assumed to be sold first, leaving the most recent purchases in ending inventory. In a periodic system, the cost of the inventory is determined at the end of the period. At the end of the year, there were 15 units from the third purchase (at $60) and 5 units from the second purchase (at $54). Therefore, the amount of inventory is: (15 × $60) + (5 × $54) = $900 + $270 = $1,170.
During a period of consistently rising prices, the method of inventory that will result in reporting the
greatest cost of merchandise sold is
(A) FIFO (B) LIFO (C) average cost (D) weighted average (E) lower of cost or market
The correct answer is B.
Under the LIFO method, the newest inventory is assumed to be sold first. These costs become cost of merchandise sold. If prices are consistently rising, the newest inventory will always be the most expensive.
Which of the following should a company typically do before updating the appropriate ledger accounts?
(A) Construct a trial balance (B) Record transactions in the journal (C) Prepare adjusting entries (D) Prepare an adjusted trial balance (E) None of the above
The correct answer is B.
Before a company posts journal entries to the appropriate ledger accounts, it should record transactions in the journal. Recording transactions in the journal is the first step in the accounting cycle.
A building with an appraisal value of $137,000 is made available at an offer price of $142,000. The
purchaser acquires the property for $30,000 in cash, a 90-day note payable for $40,000, and a mortgage
amounting to $60,000. The cost basis recorded in the buyer’s accounting records to recognize this
purchase is
(A) $137,000 (B) $142,000 (C) $130,000 (D) $100,000 (E) $70,000
The correct answer is C.
The cost basis of an asset is the amount paid. In this case, that includes the cash used and the face value of the notes ($30,000 + $40,000 + $60,000 = $130,000).
The method of determining depreciation that yields successive reductions in the periodic depreciation
charge over the estimated life of the asset is
(A) units-of-production (B) declining-balance (C) straight-line (D) time-valuation (E) All of the above
The correct answer is B.
The declining-balance method provides a declining periodic expense over the estimated useful life of the asset. The straight-line rate is doubled and then multiplied by the book value of the asset to determine the depreciation expense for the period.
Equipment with a cost of $160,000 has an estimated residual value of $10,000 and an estimated life of 5
years or 12,000 hours. It is to be depreciated by the straight-line method. What is the amount of
depreciation for the first full year, during which the equipment was used 3,300 hours?
(A) $30,000 (B) $32,500 (C) $34,000 (D) $40,000 (E) $64,000
The correct answer is A.
Under the straight-line method, depreciation expense is determined by deducting the residual value from the cost, then dividing by the estimated life of the asset (in years). In this case the depreciation expense is: ($160,000 – $10,000) ÷ 5 = $150,000 ÷ 5 = $30,000.
A fixed asset with a cost of $40,000 and accumulated depreciation of $36,500 is traded for a similar asset
priced at $60,000. Assuming a trade-in allowance of $3,000, the recognized loss on the trade is
(A) $1,000 (B) $3,500 (C) $500 (D) $1,500 (E) $20,000
The correct answer is C.
The book value of the asset is: $40,000 – $36,500 = $3,500. The trade-in allowance was less than the book value of the asset by $500; therefore, there is a $500 loss recorded on the transaction.
On June 8, Acme Co. issued an $80,000, 6%, 120-day note payable to Still Co. What is the maturity
value of the note?
(A) $80,100 (B) $84,800 (C) $81,600 (D) $81,200 (E) $80,000
The correct answer is C.
The maturity value of the note includes the face value ($80,000) and the interest incurred (6% for 120 days, or $1,600). Therefore, the maturity value is: $80,000 + $1,600 = $81,600.
The journal entry a company uses to record the estimated accrued product warranty liability is
(A) debit Product Warranty Expense; credit Product Warranty Payable
(B) debit Product Warranty Payable; credit Cash
(C) debit Product Warranty Expense; credit Cash
(D) debit Product Warranty Payable; credit Product Warranty Expense
(E) debit Cash; credit Product Warranty Expense
The correct answer is A.
If a company grants a warranty on a product, an estimated warranty expense and liability should be recorded in the period of the sale.
If the straight-line method of amortization of bond premium or discount is used, which of the following
statements is true?
(A) Annual interest expense will increase over the life of the bonds with the
amortization of bond premium.
(B) Annual interest expense will remain the same over the life of the bonds with the
amortization of bond discount.
(C) Annual interest expense will decrease over the life of the bonds with the
amortization of bond discount.
(D) Annual interest expense will increase over the life of the bonds with the
amortization of bond discount.
(E) Annual interest expense will decrease over the life of the bonds with the
amortization of bond premium.
The correct answer is B.
The straight-line method of amortizing a bond discount provides for amortization in equal periodic amounts. This is added to the interest payments (which are also equal periodic amounts) to determine interest expense.