Quizes Flashcards
The review of financial statements to assess their fairness and adherence to GAAP is:
Multiple Choice • auditing. • accounting. • accounting system. • management advisory services.
auditing
Which of the following is not a requirement to become a certified bookkeeper?
Multiple Choice
• Pass the national certified bookkeeper exam
• Sign a code of ethics
• Complete a number of required college courses
• Submit evidence of work experience
Complete a number of required college courses
Which of the following is not a common internal control and fraud prevention policy?
Multiple Choice
- requiring written proof that transactions are authorized
- separating duties among employees
- requiring written proof that payments are authorized
- preventing multiple payments to a single creditor from being made in a single day
preventing multiple payments to a single creditor from being made in a single day
Which of the following is not a service typically provided by a public accounting firm?
Multiple Choice • Auditing • Tax accounting • Management advisory services • Investing services
Investing services
The entity that has final authority over the financial reporting of publicly owned corporations is the:
Multiple Choice
• Securities and Exchange Commission (SEC).
• Financial Accounting Standards Board (FASB).
• Federal Trade Commission (FTC).
• Internal Revenue Service (IRS).
Securities and Exchange Commission (SEC).
Which of the following is not a provision of the Sarbanes-Oxley Act?
Multiple Choice
• The Sarbanes-Oxley Act allows accountants to offer a broad range of consulting services to publicly traded companies that they audit.
• The Sarbanes-Oxley Act requires accounting firms to change the lead audit or coordinating partner and the reviewing partner for a company every five years.
• It is a felony to “knowingly” destroy or create documents to “impede, obstruct or influence” any existing or contemplated federal investigation.
• Wall Street investment firms are prohibited from retaliating against analysts who criticize investment-banking clients of the firm.
The Sarbanes-Oxley Act allows accountants to offer a broad range of consulting services to publicly traded companies that they audit.
Which of the following is a user of financial information who is considered to be inside the business?
Multiple Choice • owners • suppliers • customers • unions
owners
The following are all characteristics of a sole proprietorship except:
Multiple Choice
• The owner of a sole proprietorship is legally responsible for the debts of the business.
• A sole proprietorship is legally separate from its owner.
• The owner’s income and the income of the business are combined to compute the total tax responsibility of the owner.
• The life of the business ends when the owner is no longer willing or able to keep the business going.
A sole proprietorship is legally separate from its owner.
Which of the following is not considered to be a social entity?
Multiple Choice • public school • city • for-profit business • public hospital
for-profit business
Which of the following is not a characteristic of an S Corporation?
Multiple Choice
• the corporation’s owners are personally responsible for the debts of the business
• the corporation pays no income tax
• the corporation is a separate entity from its owners
• the corporation has an indefinite life
the corporation’s owners are personally responsible for the debts of the business
What is the purpose of a discussion memorandum written by the FASB?
Multiple Choice
• to describe a proposed statement of financial accounting standards
• to summarize the opinions of interested parties expressed at public hearings
• to explain the topic being considered in anticipation of an upcoming statement of financial accounting standards
• to evaluate public comments about the proposed statement
to explain the topic being considered in anticipation of an upcoming statement of financial accounting standards
Which of the following is not accurate regarding the auditor’s report?
Multiple Choice
• It contains the auditor’s opinion about the fair presentation of the operating results and financial position of the business.
• It confirms that the financial information is prepared in conformity with generally accepted accounting principles.
• It is made available to the public.
• It is excluded from the financial statements.
It is excluded from the financial statements.
Amounts that are owed to a business are known as:
Multiple Choice • accounts receivable. • accounts payable. • capital. • expenses.
accounts receivable.
What does a single line within an amount column of a financial statement indicate?
Multiple Choice
• That the underlined figure is the final amount in a column.
• That the underlined figure is a key item within the financial statement.
• That the amounts above it are being added or subtracted.
• That the amounts below it are being added or subtracted.
That the amounts above it are being added or subtracted.
When the owner invests cash in a business,
Multiple Choice
• assets and revenue increase.
• assets increase and owner’s equity decreases.
• liabilities decrease and owner’s equity increases.
• assets and owner’s equity increase.
assets and owner’s equity increase.
When equipment is purchased for cash,
Multiple Choice
• assets and liabilities increase.
• assets increase and liabilities decrease.
• assets, liabilities, and owner’s equity are all unchanged
• assets and expenses increase.
assets, liabilities, and owner’s equity are all unchanged
When a business purchases supplies on credit:
Multiple Choice
• assets decrease and owner’s equity increase.
• assets increase and revenues increase.
• assets and liabilities increase.
• liabilities increase and owner’s equity decreases.
assets and liabilities increase.
When a business collects an account receivable:
Multiple Choice • total assets do not change. • assets increase and revenues increase. • assets and liabilities increase. • assets increase and owner's equity increases.
total assets do not change.
When the firm pays its utility bill upon receipt of that bill:
Multiple Choice • assets and owner's equity increase. • assets decrease and expenses increase. • assets and liabilities decrease. • expenses increase and owner's equity increases.
assets decrease and expenses increase.
When the owner withdraws cash for personal use:
Multiple Choice
• assets decrease and expenses increase.
• assets decrease and owner’s equity increases.
• assets decrease and owner’s equity decreases.
• owner’s equity decreases and revenue decreases.
assets decrease and owner’s equity decreases.
Assume that, after analyzing its business transaction, a firm has the following ending balances: accounts payable $3,400, accounts receivable $2,000, cash $1,000, capital $3,600, equipment $3,000, prepaid rent $600, and supplies $400. What is the total amount of assets that will be reported on the firm’s balance sheet?
Multiple Choice • $6,400 • $7,000 • $9,800 • $14,000
$7,000
The assets reported on the balance sheet would include: cash $1,000, accounts receivable $2,000, supplies $400, prepaid rent $600, and equipment $3,000. These assets would total $7,000. The fundamental accounting equation remains in balance since assets of $7,000 equal liabilities (accounts payable) of $3,400 plus owner’s equity (capital) of $3,600.
Assume that a firm has the following information in its analysis of its business transactions during its first year of business: fees income of $12,000, an investment by the owner of $3,000, salaries expenses of $9,000, and withdrawals of $5,000. What is the total amount of owner’s equity that will be reported on the firm’s balance sheet?
Multiple Choice • $1,000 • $3,000 • $10,000 • $15,000
$1,000
The statement of owner’s equity for the first year of operations would report the following: beginning capital of $0 (since it is a new company) plus investments of $3,000 plus net income of $3,000 (or revenues of $12,000 minus expenses of $9,000) less withdrawals of $5,000 equals ending capital of $1,000. That ending capital balance would then appear in the owner’s equity section of the firm’s balance sheet.
Identify the missing figure from the list of account balances shown below for Crowdfunding Company. Cash: $15,000, Accounts Receivable: $3,000, Supplies: $2,000, Equipment: $7,000, Accounts Payable: ????, Daniel Owens, Capital: $26,000.
Multiple Choice • $0 • $1,000 • $27,000 • $54,000
$1,000
The fundamental accounting equation must remain in balance, therefore we can use it here to solve for the missing accounts payable figure. Total assets equal $27,000 ($15,000 cash + $3,000 accounts receivable + $2,000 supplies + $7,000 equipment). When we subtract total owner’s equity of $26,000 from this amount we arrive at accounts payable of $1,000.
Which of the following items appear within multiple financial statements?
Multiple Choice • net income (or net loss) and cash • ending capital balance and net income (or net loss) • cash and withdrawals • ending capital balance and withdrawals
ending capital balance and net income (or net loss)
Financial statements are completed in a specific order, as they are dependent upon one another. Net income, the final figure within the income statement, is needed to complete the statement of owner’s equity. Similarly, the ending capital balance, the final figure within the statement of owner’s equity, is required within the balance sheet. Cash is only reported on the balance sheet and withdrawals are only reported on the statement of owner’s equity.
Carpet Co. paid cash to purchase equipment. To record this transaction, the accountant would:
Multiple Choice
• debit Equipment and credit Cash.
• debit Cash and credit Equipment.
• debit Equipment and credit Accounts Payable.
• debit Accounts Payable and credit Equipment.
debit Equipment and credit Cash.
In this transaction Equipment (an asset) increases and Cash (an asset) decreases. Assets increase via a debit and decrease via a credit, therefore Equipment is debited and Cash is credited as a result of this transaction.
Modern products paid cash to a creditor. To record this transaction, the accountant would:
Multiple Choice
• debit Cash and credit Accounts Payable.
• debit Accounts Receivable and credit Cash.
• debit Accounts Payable and credit Cash.
• credit Cash and credit Accounts Payable.
debit Accounts Payable and credit Cash.
Which of the following account types are listed last within the chart of accounts?
Multiple Choice • income statement accounts • statement of owner’s equity accounts • permanent accounts • balance sheet accounts
income statement accounts
The order in which accounts are listed on the chart of accounts is: balance sheet accounts; statement of owner’s equity accounts; income statement account. Note that income statement accounts (revenue and expense accounts) are temporary accounts, not permanent accounts.
Which of the following types of accounts normally have debit balances?
Multiple Choice • Assets and revenue • Assets, liabilities, and owner's equity • Expenses and assets • Liabilities and owner's equity Explanation
Expenses and assets
Asset, expenses, and the owner’s drawings account normally have debit balances because those accounts increase with debits. On the other hand, liabilities, revenues, and the owner’s capital account normally have credit balances because those accounts increase with credits. Note that “owner’s equity” encompasses both accounts with normal debit balances (owner’s drawings and expenses) and accounts with normal credit balances (owner’s capital and revenues).
Which of the following groups contain only accounts that normally have credit balances?
Multiple Choice • Accounts Receivable and Fees Income • Salaries Expense and Accounts Payable • Fees Income and John Smith, Capital • Accounts Payable and Equipment
Fees Income and John Smith, Capital
Liabilities (such as Accounts Payable), revenues (such as Fees Income), and the owner’s capital account (such as John Smith, Capital) normally have credit balances because those accounts increase with credits.
On the other hand, assets (such as Accounts Receivable and Equipment), expenses (such as Salaries Expense), and the owner’s Drawing account normally have debit balances because those accounts increase with debits.
When using a T account to determine an account balance, which of the following statements is incorrect?
Multiple Choice
• The balance always appears on the side of the T account on which the account increases.
• A footing may be used to total a single side of the T account.
• The balance is placed on the side of the T account with the larger total.
• If a T account contains only one amount, then that amount is the balance.
The balance always appears on the side of the T account on which the account increases.
When using a T account to determine an account balance a footing is often used on one side of the T account to determine the total debits or total credits. The balance within the account is always placed on the side with the larger total, and if only one amount is displayed within the T account then it becomes the balance for the account. However, while it is typical for a balance to appear on the side on which the account increase (the normal balance side), this does not always occur.
If the trial balance totals are not equal, the error may have been caused by a transposition if the difference is evenly divisible by:
Multiple Choice • 2. • 7. • 9. • 5.
9.
A transposition is an accounting error involving misplaced digits in a number. If the difference is evenly divisible by 9, there might be a transposition. A transposition occurs when the digits of a number are switched. For example if 357 is written or input as 375, the difference is 18, which is evenly divisible by 9.
The three financial statements are linked together because the:
Multiple Choice
• net income from the income statement is used on the statement of owner’s equity and the ending balance of the capital account, computed on the statement of owner’s equity, is used on the balance sheet.
• net income that is computed on the statement of owner’s equity is used on the income statement and the ending balance of the capital account, also computed on the statement of owner’s equity, is used on the balance sheet.
• net income from the income statement is used on the statement of owner’s equity and the ending balance of the capital account, computed on the balance sheet, is used on the statement of owner’s equity.
• net income from the balance sheet is used on the income statement and the ending balance of the capital account, computed on the statement of owner’s equity, is used on the balance sheet.
net income from the income statement is used on the statement of owner’s equity and the ending balance of the capital account, computed on the statement of owner’s equity, is used on the balance sheet.
Which of the following statements is accurate regarding the withdrawal of cash by the owner of a company?
Multiple Choice
• The withdrawal leads to a decrease in liabilities
• The withdrawal leads to an increase in owner’s equity
• The withdrawal leads to a decrease in owner’s equity
• The withdrawal leads to an increase in liabilities
The withdrawal leads to a decrease in owner’s equity
When cash is withdrawn by an owner the Cash account (an asset) is reduced, and the owner’s drawing account (an owner’s equity account) increases. Note that there are two owner’s equity account types (drawing and expenses) which reduce total owner’s equity. As a result, this increase in drawing leads to a decrease in owner’s equity.
When revenue is earned, which of the following would not be a common result of the transaction?
Multiple Choice
• A debit to the Cash account
• A credit to the Accounts Payable account
• A credit to the Fees Income account
• A debit to the Accounts Receivable account
A credit to the Accounts Payable account
Which of the following accounts would decrease on the debit side of the T account?
Multiple Choice • Equipment • Rent Expense • Andrew Martins, Drawing • Accounts Payable
Accounts Payable
Asset accounts (such as equipment), expense accounts (such as rent expense), and withdrawal accounts (such as Andrew Martins, drawing) increase on the debit side of the T account and decrease on the credit side. Liability accounts, however, increase on the credit side of the T account and decrease on the debit side.
Which of the following statements is accurate?
Multiple Choice
• The income statement contains only temporary accounts
• The balance sheet contains only nominal accounts
• The statement of owner’s equity contains only permanent accounts
• The statement of owner’s equity contains only real accounts
The income statement contains only temporary accounts
Temporary accounts and nominal accounts are synonymous, while permanent accounts and real accounts are also synonymous. The statement of owner’s equity displays the drawing account, which is a temporary account. The balance sheet displays multiple permanent accounts, the balances for which carryover from one period to the next. The incomes statement displays revenue and expense accounts, all of which are temporary accounts.
Which of the following statements about a journal entry is inaccurate?
Multiple Choice
• The description is listed on the final line.
• The debited account(s) are indented.
• The credited account(s) are listed after the debited account(s).
• It is possible for all accounts in a journal entry to increase.
The debited account(s) are indented.
The journal entry to record the payment of cash on account to a creditor should include a:
Multiple Choice
• debit to Cash and a credit to Accounts Payable.
• debit to Cash and a credit to Accounts Receivable.
• debit to Accounts Payable and a credit to Cash.
• debit to Accounts Receivable and a credit to Cash.
debit to Accounts Payable and a credit to Cash.
The journal entry to record the payment of a bill for advertising expense would include a:
Multiple Choice
• debit to Advertising Expense and a credit to Cash.
• debit to Advertising Expense and a credit to Accounts Payable.
• debit to Cash and a credit to Advertising Expense.
• debit to Accounts Payable and a credit to Advertising Expense.
debit to Advertising Expense and a credit to Cash.
The journal entry to record the receipt of cash from clients on account would include a:
Multiple Choice
• debit to Cash and a credit to Fees Income.
• debit to Fees Income and a credit to Cash.
• debit to Cash and a credit to Accounts Receivable.
• debit to Accounts Receivable and a credit to Cash.
debit to Cash and a credit to Accounts Receivable.
The journal entry to record the receipt of cash from clients on account must both increase Cash (via a debit) and reduce Accounts Receivable (via a credit).
The journal entry to record the withdrawal of cash by Sue Snow, the owner, to pay a personal utility bill would include a:
Multiple Choice
• debit to Sue Snow, Capital, and a credit to Cash.
• debit to Utilities Expense and a credit to Cash.
• debit to Sue Snow, Drawing and a credit to Cash.
• debit to Sue Snow, Drawing and a credit to Utilities Expense.
debit to Sue Snow, Drawing and a credit to Cash.
The journal entry to record a payment made in January for rent for the months of February and March would include a:
Multiple Choice
• debit to Sue Snow, Capital, and a credit to Cash.
• debit to Rent Expense and a credit to Cash.
• debit to Prepaid Rent and a credit to Cash.
• debit to Sue Snow, Drawing and a credit to Rent Expense.
debit to Prepaid Rent and a credit to Cash.
Which of the following is not made possible through the use of the audit trail?
Multiple Choice • trace information • analyze results • locate errors • prevent fraud
analyze results
The Posting Reference column of a journal is used to:
Multiple Choice
• record the page number of the ledger account.
• record the date on which an amount is posted to a ledger account.
• record the number of the ledger account to which the information is posted.
• record the source document for the transaction.
record the number of the ledger account to which the information is posted.
The posting reference recorded in the journal is the general ledger account number that was impacted by the account listed in the journal and is used to trace the transaction to its impact on the account balances.
The process of transferring data from the journal to the ledger is known as: Multiple Choice • balancing. • journalizing. • ledgering. • posting.
posting
A firm recorded the receipt of cash on account from a creditor as a debit to Cash and a credit to Accounts Payable. The error was discovered after the data posted. The correcting entry should contain:
Multiple Choice
• a debit to Cash and a credit to Accounts Receivable.
• a debit to Accounts Payable and a credit to Cash.
• a debit to Accounts Receivable and a credit to Accounts Payable.
• a debit to Accounts Payable and a credit to Accounts Receivable.
a debit to Accounts Payable and a credit to Accounts Receivable
To correct this error a correcting entry must be recorded within which the Accounts Payable account is reduced (as it was erroneously credited in the original entry, it must be debited within the correcting entry to reduce its balance), and Accounts Receivable is reduced (as it should have been reduced via a credit in the original entry, it must be reduced within the correcting entry to arrive at the proper balance).
Which of the following statements regarding a compound entry is accurate?
Multiple Choice
• A compound entry contains two or more accounts.
• A compound entry must contain multiple debits and multiple credits.
• The total value of the debits within a compound entry must equal the total value of the credits.
• A compound entry includes all credits on top, with all debits displayed on the lines below.
The total value of the debits within a compound entry must equal the total value of the credits.
Which of the following is not included within a column of the balance ledger form?
Multiple Choice • account number • description • posting reference • date
account number
Which of the following is not a section of a worksheet?
Multiple Choice • Depreciation • Adjustments • Adjusted Trial Balance • Income Statement
Depreciation
Centrum Services purchased $4,400 worth of equipment. The equipment has an estimated useful life of seven years and a salvage value of $200. Using the straight-line method, the depreciation for the first month is:
Multiple Choice • $50. • $52.38. • $600. • $628.57.
$50.
On a worksheet, the adjusting entry to account for depreciation of equipment consists of a:
Multiple Choice
• debit to Depreciation Expense and a credit to Equipment.
• debit to Depreciation Expense and a credit to Accumulated Depreciation.
• debit to Equipment and a credit to Accumulated Depreciation.
• debit to Accumulated Depreciation and a credit to Equipment.
debit to Depreciation Expense and a credit to Accumulated Depreciation.
If $3,450 of insurance is purchased for the subsequent six months, what would be the credited account and amount within the necessary adjusting entry after the first month of insurance coverage has expired?
Multiple Choice • Insurance expense for $575 • Insurance Expense for $3,450 • Prepaid Insurance for $575 • Prepaid Insurance for $3,450
Prepaid Insurance for $575
If an adjusting entry relating to prepaid insurance is not entered onto the worksheet, assets on the balance sheet:
Multiple Choice • will be overstated. • will be understated. • will not be affected. • may be either overstated or understated.
will be overstated.
What is the purpose of the adjusting entry related to supplies?
Multiple Choice
• To account for the supplies that were used during the period.
• To account for the supplies purchased during the period.
• To account for the supplies on hand at the beginning of the period.
• To reduce the Supplies account balance to zero in preparation for the beginning of the next period.
To account for the supplies that were used during the period.
The adjusted Accumulated Depreciation balance will appear within which of the following worksheet columns?
Multiple Choice • Income Statement Debit column • Income Statement Credit column • Balance Sheet Debit column • Balance Sheet Credit column
Balance Sheet Credit column
After all account balances have been transferred from the Adjusted Trial Balance section of the worksheet to the financial statement sections, the Income Statement section of the worksheet includes the following totals. The Credit column total is $120,000 and the total of the Debit column is $80,000. The Income Statement section of the worksheet:
Multiple Choice
• is now complete.
• would be completed by entering $40,000 in the Credit column with the words “Net Income” in the Account Name column.
• would be completed by entering $40,000 in the Debit column with the words “Net Income” in the Account Name column.
• must have been completed in error since the two columns do not balance.
would be completed by entering $40,000 in the Debit column with the words “Net Income” in the Account Name column.
The totals of the Income Statement section columns are used to determine the net income or net loss. The smaller column total is subtracted from the larger one and the difference is entered on the line below the smaller total. Then, “Net Income” or “Net Loss” is entered the Account Name column. In this case the total of the Credit column of $120,000 (which represents revenue) exceeds the total of the Debit column of $80,000 (which represents expenses). The difference between the two amounts is a net income of $40,000. The $40,000 would be entered in the in the Debit column of the Income Statement section so the debit and credit columns will balance, with the words “Net Income” added to the Account Name column.
On the worksheet, the Balance Sheet columns should balance:
Multiple Choice
• before the net income amount is added to the Balance Sheet Debit column.
• before the net income amount is added to the Balance Sheet Credit column.
• after the net income amount is added to the Balance Sheet Credit column.
• after the net income amount is added to the Balance Sheet Debit column.
after the net income amount is added to the Balance Sheet Credit column.
If the Supplies account lists $600 in the Trial Balance Debit column of a worksheet, and lists $480 in the Adjustments Credit column of the worksheet, what will appear within the Adjusted Trail Balance columns for the Supplies account?
Multiple Choice
• $120 in the Adjusted Trial Balance Debit column
• $1,080 in the Adjusted Trial Balance Debit column
• $120 in the Adjusted Trial Balance Credit column
• $1,080 in the Adjusted Trial Balance Credit column
$120 in the Adjusted Trial Balance Debit column
Red Company purchased $900 of Prepaid Advertising on September 1, 20X1. The advertising will run for the next three months. What adjusting entry should be recorded on September 30, 20X1 to properly account for this advertising?
Multiple Choice
• Debit Advertising Expense for $300, credit Cash for $300
• Debit Prepaid Advertising for $300, credit Advertising Expense for $300
• Debit Cash for $300, credit Advertising Expense for $300
• Debit Advertising Expense for $300, credit Prepaid Advertising for $300
Debit Advertising Expense for $300, credit Prepaid Advertising for $300
Publications Unlimited purchased machinery for $20,000 on March 1, 20X1. The machinery has an estimated useful life of 10 years and an estimated salvage value of $2,000. As of March 31, 20X1, after the firm has recorded the adjusting entry for depreciation of this machinery, what is the book value of the machinery?
Multiple Choice • $17,850 • $18,000 • $19,850 • $20,000
$19,850
One purpose of closing entries is to
Multiple Choice
• transfer the results of operations to owner’s equity.
• reduce the owner’s capital account balance to zero so that the account is ready for the next period.
• close all accounts so that the ledger is ready for the next accounting period.
• adjust the ledger account balances to provide complete and accurate figures for use on financial statements.
transfer the results of operations to owner’s equity.
Closing entries (1) transfer the results of operations (net income or net loss) to owner’s equity, and (2) reduce revenue, expense, and drawing account balances to zero.
Asset, liability, and owner’s equity accounts appear on the balance sheet at the end of an accounting period. The balances of these accounts are then carried forward to start the new period. Because they continue from one accounting period to the next, these accounts are called permanent accounts or real accounts. As such, the asset, liability and owner’s equity (owner’s capital) accounts are not closed (that is, their balances are not reduced to zero). Also, note that adjusting (rather than closing) entries are made to update accounts for items that were not recorded during the accounting period and, as such, help to ensure that complete and accurate figures appear in the financial statements.
The Supplies Expense account is closed by:
Multiple Choice
• debiting the owner’s capital account and crediting Supplies Expense.
• debiting Income Summary and crediting Supplies Expense.
• debiting Supplies Expense and crediting Income Summary.
• debiting Supplies Expense and crediting the owner’s capital account.
debiting Income Summary and crediting Supplies Expense.
Which of the following journal entries would be used to close a Fees Income account with a $4,200 balance at period-end?
Multiple Choice
A.
Income Summary $ 4,200
Fees Income $ 4,200
B.
Fees Income $ 4,200
Income Summary $ 4,200
C.
H. Jones, Capital $ 4,200
Fees Income $ 4,200
D.
Fees Income $ 4,200
H. Jones, Capital $ 4,200
B.
Fees Income $ 4,200
Income Summary $ 4,200
The entry to close the Fees Income account, a temporary account with a credit balance, includes a debit to the Fees Income account to reduce its balance to zero, and a credit to the Income Summary account to transfer the $4,200 balance from Fees Income to Income Summary. The owner’s capital account is not a component of either the closing entry for revenues or that for expenses. Instead, Income Summary is closed to the owner’s capital account in the third closing entry of the closing process.
Which of the following accounts typically appears within multiple closing entries?
Multiple Choice • the owner’s capital account • the owner’s drawing account • accumulated depreciation • fees income
the owner’s capital account
The fees income account is closed within the first closing entry of the closing process, while the owner’s drawing account is closed within the fourth closing entry. These accounts do not appear within any other closing entries. The accumulated depreciation account is a permanent account, and therefore never appears within a closing entry. Only the owner’s capital account appears in two closing entries, both in the third closing entry when the balance within Income Summary is transferred to the capital account, and in the fourth closing entry when the balance within the owner’s drawing account is transferred to the capital account. Note that the Income Summary account also appears within multiple closing entries (each of the first three), and therefore also would have been a correct answer had it been one of the available choices.
The entry to close the Income Summary account may include:
Multiple Choice
• a debit to Income Summary and a credit to the owner’s capital account.
• a debit to Income Summary and a credit to Cash.
• a debit to Cash and a credit to Income Summary.
• a debit to Income Summary and a credit to the owner’s drawing account.
a debit to Income Summary and a credit to the owner’s capital account.
After the revenue and expense accounts are closed, if revenues are greater than expenses, the Income Summary account will have a credit balance, which represents the net income. The entry to transfer net income to owner’s equity includes a debit to Income Summary and a credit to the owner’s capital account.
The Cash account, an asset and permanent account, would not appear in any of the closing entries. The entry to close the owner’s drawing account, which has a debit balance, includes a debit to the owner’s capital account and a credit to the owner’s drawing account. That closing entry does not include the Income Summary account because withdrawals do not appear on the income statement and, as such, are not part of the calculation of the net income or loss.
In a circumstance where a firm experiences a net loss, and the owner has made withdrawals during the period, which of the following statements is accurate?
Multiple Choice
• The revenue account(s) will be closed within the second closing entry of the closing process.
• The owner’s drawing account will be debited in the fourth closing entry of the closing process.
• Only three closing entries are necessary to complete the closing process.
• The owner’s capital account will be debited within the third closing entry of the closing process.
The owner’s capital account will be debited within the third closing entry of the closing process.
The revenue account(s) are always closed within the first closing entry, while the drawing account is always closed via a credit to owner’s drawing within the fourth closing entry. The existence of a net loss does not impact the number of closing entries that are necessary, as all four would still be required in this circumstance.
Given that the firm experienced a net loss, the income summary account will have a debit balance after the second closing entry is recorded. In order to close the income summary account within the third closing entry the firm will credit income summary, and record an offsetting debit to the owner’s capital account. This results in a reduction of the owner’s capital account balance, which is a logical result of the firm experiencing a net loss for the period.
Which of the following accounts would be closed within the fourth entry of the closing process? Multiple Choice • the owner’s capital account • fees income • advertising expense • the owner’s drawing account
the owner’s drawing account
Which of the following accounts will appear on the postclosing trial balance?
Multiple Choice • The owner’s drawing account • Fees Income • The owner's capital account • Rent Expense
The owner’s capital account
Asset, liability, and owner’s equity accounts appear on the balance sheet at the end of an accounting period. The balances of these accounts are then carried forward to start the new period. Because they continue from one accounting period to the next, these accounts are called permanent accounts or real accounts. The owner’s capital account, an owner’s equity and permanent account, is not closed.
Note that the owner’s capital account appears in the third closing entry because this entry transfers net income (or net loss) to owner’s equity by crediting (or increasing) the owner’s capital account for the amount of the net income (or debiting the owner’s capital account for the amount of the net loss). Likewise, the fourth closing entry includes the owner’s capital account because this entry transfers the owner’s withdrawals to owner’s equity by debiting (or decreasing) the owner’s capital account for the amount of the withdrawals. (Remember that you don’t want to eliminate the owner’s equity by closing the capital account!)
Revenue and expense accounts appear on the income statement. The drawing account appears on the statement of owner’s equity. These accounts classify and summarize changes in owner’s equity during the period. They are called temporary accounts or nominal accounts because the balances in these accounts are transferred to the capital account at the end of the accounting period. In the next period, these accounts start with zero balances. The owner’s drawing account, Fees Income, and Rent Expense are temporary accounts that must be closed at the end of the period. As such, since they then have zero balances, these accounts would not be listed on the postclosing trial balance.
Which of the following statements about the interpretation of the financial statements is not correct?
Multiple Choice
• Interpreting the financial statements can only be performed by auditors.
• Interpreting the financial statements is the final step in the accounting cycle.
• To interpret the financial statements means to understand and explain the meaning and importance of information in accounting reports.
• Interpreting the financial statements can assist in decision making for the owners of a firm.
Interpreting the financial statements can only be performed by auditors.
Which of the following statements is not correct?
Multiple Choice
• The audit trail can be used to trace data through the accounting records to find and correct errors.
• If the postclosing trial balance does not balance, there are errors in the accounting records.
• The balance of the owner’s capital account on the adjusted trial balance will ordinarily be a different amount than that reported on the postclosing trial balance.
Incorrect
• The postclosing trial balance must include all accounts that appeared on the adjusted trial balance, and may include additional accounts as well.
The postclosing trial balance must include all accounts that appeared on the adjusted trial balance, and may include additional accounts as well.
The postclosing trial balance will include only permanent accounts, as the temporary accounts are closed prior to its completion. Therefore, it will display fewer accounts than did the adjusted trial balance. Also, as the closing entries will likely change the balance within the owner’s capital account, this account will ordinarily have a different balance on the adjusted trial balance and the postclosing trial balance.
The postclosing trial balance, like all other trial balances, should be in balance (total debits should equal total credit). If this is not the case then there are errors in the accounting records, and the audit trail can be used to trace data through the accounting records to find and correct these errors.
Which of the following lists the final three steps of the accounting cycle in the correct order?
Multiple Choice
• prepare a postclosing trial balance; record closing entries; interpret the financial information
• record closing entries; interpret the financial information; prepare a postclosing trial balance
• record closing entries; prepare a postclosing trial balance; interpret the financial information
• interpret the financial information; record closing entries; prepare a postclosing trial balance
record closing entries; prepare a postclosing trial balance; interpret the financial information
The final three steps of the accounting cycle, in order, are to record closing entries, prepare the postclosing trial balance, and interpret the financial results. The closing entries must first be recorded, so that the associated account balances are updated prior to preparing the postclosing trial balance. Similarly, the postclosing trial balance must be prepared next so that the financial records are complete prior to interpreting this financial information.
Which of the following statements regarding the income summary account is accurate?
Multiple Choice
• The income summary account appears above revenue accounts within the adjusted trial balance.
• The income summary account is a permanent account.
• The income summary account can only be used in two of the four closing entries of the closing process.
• The income summary account is an owner’s equity account.
The income summary account is an owner’s equity account.
The income summary account is a temporary owner’s equity account that is used only in the closing process to summarize results of operations. It is not used prior to the closing process (and therefore does not appear within the adjusted trial balance) and has a zero balance after the completion of the closing process. During the closing process it is used within each of the first three closing entries, first to close the revenue account(s), second to close the expense account(s), and third to transfer its balance to the capital account (and to close the income summary account in the process of doing so).
A firm that sells goods that it purchases for re-sale is a:
Multiple Choice • service business. • merchandising business. • manufacturing business. • non-profit business.
merchandising business.
The Sales Returns and Allowances account is classified as:
Multiple Choice • an asset account. • an expense account. • a revenue account. • a contra revenue account.
a contra revenue account.
The Sales Returns and Allowances account has the effect of reducing revenue and is, therefore, a contra revenue account. It has a debit balance, which is contrary, or opposite to the normal balance for a revenue account.
At the end of the month, after the equality of the debits and credits recorded in the sales journal is proved by comparing the column totals, the summary posting from the sales journal would include a:
Multiple Choice
• debit to Accounts Receivable, a credit to Sales Tax Payable, and a credit to Sales.
• debit to Cash and a credit to Sales.
• debit to Cash, a credit to Sales Tax Payable, and a credit to Sales.
• debit to Sales Tax Payable, a debit to Sales, and a credit to Accounts Receivable.
debit to Accounts Receivable, a credit to Sales Tax Payable, and a credit to Sales.
Detailed information about the transactions with credit customers and the balances owed by such customers is provided by:
Multiple Choice • the general journal. • the sales journal. • the general ledger. • the accounts receivable subsidiary ledger.
the accounts receivable subsidiary ledger.
When posting a transaction, which of the following is entered within the Post. Ref. column of the accounts receivable subsidiary ledger?
Multiple Choice • an abbreviation indicating the journal and page number from which the transaction was posted • a check mark • an account number • a sales slip number
an abbreviation indicating the journal and page number from which the transaction was posted
After all postings have been made, the total of the schedule of accounts receivable should equal:
Multiple Choice
• the balance of the Accounts Receivable account in the general ledger.
• the total of Cash in the general ledger.
• the total of all sales on account for the accounting period.
Incorrect
• the total amount collected during the accounting period.
the balance of the Accounts Receivable account in the general ledger.
The accounts receivable account serves as the link between the subsidiary ledger and the general ledger. The balance is a summary of the balances in the related individual customers’ accounts. At the end of each month the balances in the accounts receivable ledger are proved against the balance of the accounts receivable general ledger account through the completion of the schedule of accounts receivable.
When a customer returns a product for which he has not yet paid, and for which sales tax was charged, which of the following journal entries is recorded?
Multiple Choice
• debit accounts receivable, credit sales returns and allowances, credit sales tax payable
• debit accounts receivable, credit sales returns and allowances
• debit sales returns and allowances, credit accounts receivable
• debit sales returns and allowances, debit sales tax payable, credit accounts receivable
debit sales returns and allowances, debit sales tax payable, credit accounts receivable
When goods are returned the company must increase the contra-revenue account sales returns and allowances (via a debit), reduce the sales tax payable that was associated with the sale (via a debit), and reduce the accounts receivable (via a credit) as the amount is no longer owed.
Suppose the list price of goods is $1,600 and the trade discount is 15 percent. What is the amount of the discount and what is the net price to be recorded in the sales journal?
Multiple Choice • $240; $1,840 • $240; $1,360 • $240; $1,600 • $1,360; $240
$240; $1,360
The amount of the discount is $240 ($1,600 × 15%) and the net price to be shown on the invoice and recorded in the sales journal is $1,360 ($1,600 − $240).
Merchandise is sold on credit for $1,700 plus 8 percent sales tax. The entry to record the sale will include a debit to Accounts Receivable for:
Multiple Choice • $136. • $1,564. • $1,700. • $1,836.
$1,836.
The correct entry includes a debit to accounts receivable for $1,836 (8% × $1,700 = $136 sales tax; $1,700 + $136 = $1,836 accounts receivable).
When a sales tax return is prepared, the amount of a firm’s taxable gross sales for the month are computed as:
Multiple Choice
• Cash sales plus Credit sales less Sales returns and allowances.
• Credit sales less Sales returns and allowances from credit customers.
• Cash sales plus Credit sales.
• Cash sales plus Credit sales plus Sales returns and allowances.
Cash sales plus Credit sales less Sales returns and allowances.
When a sales return is recorded in the general journal, the transaction must be posted to:
Multiple Choice
• The customer’s account in the accounts receivable ledger.
• The appropriate accounts in the general ledger.
• Both the customer’s account in the accounts receivable ledger and the appropriate accounts in the general ledger.
• None of these answers is correct.
Both the customer’s account in the accounts receivable ledger and the appropriate accounts in the general ledger.
A credit memorandum is issued to a customer for returned merchandise. The merchandise was originally sold for $400, plus a sales tax of 5%. What is the amount of the credit memorandum?
Multiple Choice • $380. • $400. • $405. • $420.
$420.
The credit memorandum will be for $420 (5% × $400 = $20 sales tax; $400 + $20 = $420.)
A company has sales of $98,000 and sales returns and allowances of $2,000. What is the amount of net sales?
Multiple Choice • $100,000. • $96,000. • $98,000. • None of these answers is correct.
$96,000.
Net sales are $96,000 ($98,000 − $2,000 = $96,000).
If the list price of goods is $2,500, with trade discounts of 25 and 20 percent, what is the invoice price?
Multiple Choice • $1,500. • $1,375. • $2,000. • None of these answers is correct.
$1,500.
The invoice price is $1,500, computed as follows:
List price $ 2,500.00
Less first discount (25% × $2,500) 625.00
Difference 1,875.00
Less second discount (20% × $1,875) 375.00
Invoice price $ 1,500.00
What type of sales are reported on the state sales tax return?
Multiple Choice • Only sales on credit. • Only sales for cash. • Both sales on credit and sales for cash. • None of these answers is correct.
Both sales on credit and sales for cash.
The entry to record a return of merchandise purchased on credit includes:
Multiple Choice
• a debit to Purchases Returns and Allowances and a credit to Accounts Payable.
• a debit to Accounts Payable and a credit to Purchases Returns and Allowances.
• a debit to Purchases and a credit to Accounts Payable.
• a debit to Accounts Payable and a credit to Purchases.
a debit to Accounts Payable and a credit to Purchases Returns and Allowances.
Which of the following statements is correct?
Multiple Choice
• The purchase requisition is the form sent to a supplier to order goods.
• The Purchases account is reported as an asset on the balance sheet.
• To the customer, a supplier’s invoice is a sales invoice.
• The credit terms, 2/10, n/30, allow the customer to take a 2 percent discount if payment is made within 10 days.
The credit terms, 2/10, n/30, allow the customer to take a 2 percent discount if payment is made within 10 days.
The Purchases account is a:
Multiple Choice • permanent account. • temporary account. • subsidiary account. • liability account.
temporary account.
Which of the following is not a column within the purchases journal?
Multiple Choice • accounts payable credit • purchases debit • purchases returns and allowances credit • freight in debit
purchases returns and allowances credit
If the accounts payable subsidiary ledger account for Sam’s Textiles displays a beginning balance of $2,000, a purchase of $3,100, and a credit memorandum of $1,400, what is the ending balance for this account?
Multiple Choice • $300 • $1,700 • $3,700 • $6,500
$3,700
Detailed information about the individual accounts for all creditors is provided by:
Multiple Choice • the general journal. • the purchases journal. • the general ledger. • the accounts payable subsidiary ledger.
the accounts payable subsidiary ledger.
Purchases returns and allowances granted by suppliers are usually entered in the:
Multiple Choice • general journal. • sales journal. • purchases journal. • none of the choices are correct.
general journal.
Purchases returns and allowances are usually recorded in the general journal or, in certain circumstances, may be recorded in a special purchases returns and allowances journal.
Which of the following would not be performed when posting a purchases return or allowance to the supplier’s account?
Multiple Choice
• enter the credit memorandum number in the description column
• enter the general journal page number in the posting reference column
• enter the date
• enter the amount of the return or allowance in the credit column
enter the amount of the return or allowance in the credit column.
When posting a purchases return or allowance to the supplier’s account, the amount of the return or allowance is entered in the debit column, not the credit column.
The net delivered cost of purchases is calculated as follows:
Multiple Choice
• Purchases plus Freight In plus Purchases Returns and Allowances.
• Purchases less Freight In less Purchases Returns and Allowances.
• Purchases plus Freight In less Purchases Returns and Allowances.
• Purchases less Freight In plus Purchases Returns and Allowances.
Purchases plus Freight In less Purchases Returns and Allowances.
Which of the following is an objective of internal control of purchases?
Multiple Choice
• To create written proof that purchases and payments are authorized.
• To create a disciplined work environment.
• To make the sales process more complex.
• To create more organized invoices.
To create written proof that purchases and payments are authorized.
A payment on account to a vendor is recorded in the:
Multiple Choice • Purchases journal. • Sales journal. • Cash receipts journal. • Cash payments journal.
Cash payments journal.
The Purchases Returns and Allowances account is a
Multiple Choice
• Contra cost of goods sold account with a normal debit balance.
• Contra cost of goods sold account with a normal credit balance.
• Contra revenue account with a normal debit balance.
• Contra revenue account with a normal credit balance.
Contra cost of goods sold account with a normal credit balance.
The total on the schedule of accounts payable should agree with:
Multiple Choice
• the balance of the Purchases account in the general ledger.
• the balance of the Sales account in the general ledger.
• the balance of the Accounts Receivable account in the general ledger.
• the balance of the Accounts Payable account in the general ledger.
the balance of the Accounts Payable account in the general ledger.
A company has the following account balances: Purchases, $20,000; Freight In, $1,000; and Purchases Returns and Allowances, $800. What is the amount of the net delivered cost of purchases?
Multiple Choice • $20,200 • $21,800 • $18,200 • $19,800
$20,200
Which of the following is not an effective internal control?
Multiple Choice
• The same individual who ordered the goods should also sign the check to pay for them.
• All purchases should be made only after proper authorization has been received.
• The computation on the vendor invoice should be checked for accuracy.
• Prenumbered forms should be used for purchase requisitions, purchase orders, and checks.
The same individual who ordered the goods should also sign the check to pay for them.
A cash sale of merchandise would be recorded in the:
Multiple Choice
• sales journal with a debit to the sales account.
• sales journal with a credit to the sales account.
Incorrect
• cash receipts journal with a debit to the sales account.
• cash receipts journal with a credit to the sales account.
cash receipts journal with a credit to the sales account.
Upon collection of the amount due on an interest-bearing promissory note from a customer, the accountant would debit Cash, credit Notes Receivable, and:
Multiple Choice • debit Interest Expense. • credit Interest Income. • credit Interest Expense. • debit Interest Income.
credit Interest Income.
Which of the following is true concerning online banking?
Multiple Choice
• Electronic fund transfers cannot replace writing checks.
• Payment of taxes to government agencies must be in the form of a check.
• Bank customers can receive security alerts from the bank by postal mail only.
• Log-in information, such as user identification and passwords, should be changed frequently.
Log-in information, such as user identification and passwords, should be changed frequently
Which of the following statements is correct?
Multiple Choice
• The entry to record the payment of an invoice within the cash discount period would include a debit to the Purchases Discounts account.
• The entry to record a cash purchase of merchandise would include a debit to Purchases and a credit to Cash.
• A transaction that is properly recorded in the cash payments journal will always include the recording of an amount in the Cash Debit column.
• Purchase discounts is a contra revenue account.
The entry to record a cash purchase of merchandise would include a debit to Purchases and a credit to Cash.
Which of the following journal entries is recorded when a firm makes payment for a $500 purchase invoice, assuming that it is taking advantage of a 2% cash discount?
Multiple Choice
• debit accounts payable $500; credit purchases discounts $10; credit cash $490
• debit accounts payable $490; debit purchases discounts $10; credit cash $500
• debit cash $490; debit purchases discounts $10; credit accounts payable $500
• debit cash $500; credit purchases discounts $10; credit accounts payable $490
debit accounts payable $500; credit purchases discounts $10; credit cash $490
At the end of the month, after the equality of the debits and credits in the cash payments journal is proved by comparing the column totals, the summary posting from the cash payments journal includes a:
Multiple Choice
• debit to Accounts Payable, a credit to Purchases Discounts and a credit to Cash. In addition, amounts in the “Other Accounts Debit Amount” column would also be posted as debits to those accounts.
• debit to Accounts Payable, a credit to Purchases Discounts and a credit to Cash. In addition, amounts in the “Other Accounts Credit Amount” column would also be posted as credits to those accounts.
• debit to Accounts Payable, a debit to Purchases Discounts and a credit to Cash. In addition, amounts in the “Other Accounts Debit Amount” column would also be posted as credits to those accounts.
• debit to Accounts Payable, a debit to Purchases Discounts and a credit to Cash. In addition, amounts in the “Other Accounts Credit Amount” column would also be posted as credits to those accounts.
debit to Accounts Payable, a credit to Purchases Discounts and a credit to Cash. In addition, amounts in the “Other Accounts Debit Amount” column would also be posted as debits to those accounts.
The entry to replenish a petty cash fund which was established at $200, currently contains $88 cash on hand, and for which the petty cash analysis sheet displays payments of $70 for supplies and $42 for freight in would include:
Multiple Choice
• a debit to cash for $112, a credit to supplies for $70, and a credit to freight in for $42.
• a debit to cash for $200, a credit to supplies for $70, a credit to freight in for $42, and a credit to petty cash fund for $88.
• a debit to supplies for $70, a debit to freight in for $42, and a credit to cash for $112.
• a debit to supplies for $70, a debit to freight in for $42, a debit to petty cash fund for $88, and a credit to cash for $200.
a debit to supplies for $70, a debit to freight in for $42, and a credit to cash for $112.
A check issued for $890 to pay a vendor on account was recorded in the firm’s records as $980; the canceled check was properly listed on the bank statement at $890. On a bank reconciliation statement, the error should be:
Multiple Choice • added to the book balance. • added to the bank statement balance. • deducted from the book balance. • deducted from the bank statement balance.
added to the book balance.
A firm’s bank reconciliation shows, in part, a book balance of $15,820, a deposit in transit of $300, an NSF check of $400, outstanding checks totaling $10,000, and a service charge of $20. Its adjusted book balance is:
Multiple Choice • $16,240. • $15,400. • $15,440. • $16,200.
$15,400.
If a check written by a firm is not canceled by the bank and returned with the month’s bank statement, the firm should:
Multiple Choice
• adjust the balance in the firm’s checkbook to reflect the data that appears in the bank’s records.
• immediately notify the bank requesting that it correct its records.
• consider this check as outstanding when preparing the bank reconciliation.
• consider this check to be lost and issue a replacement check.
consider this check as outstanding when preparing the bank reconciliation.
Which of the following is true concerning the Cash Short or Over account?
Multiple Choice
• If it has a credit balance, it is treated as expense.
• If it has a debit balance, it is treated as expense.
• If it has a debit balance, it is treated as revenue.
• All answers are correct.
If it has a debit balance, it is treated as expense.
Which of the following is not true concerning posting from the cash receipts journal?
Multiple Choice
• At end of month, the cash receipts journal is totaled and the equality of debits and credits proven before amounts are posted.
• Posting to the general ledger accounts should be performed once, at end of month.
• Posting to the general ledger accounts should be performed daily.
• Posting to the customer’ accounts in the accounts receivable ledger should be performed daily.
Posting to the general ledger accounts should be performed daily.
Which of the following is not an example of good internal control procedures over cash?
Multiple Choice
• The employee who records cash receipts should also make the bank deposit.
• The person who prepares the bank reconciliation should not also record cash payments.
• Cash receipts should be kept in a cash register, locked cash drawer, or a safe while on the premises.
• The employee who records cash payments should not also write the checks.
The employee who records cash receipts should also make the bank deposit.
The drawer of a check is:
Multiple Choice
• the written order authorizing the bank to make payment.
• the individual who signs the check instructing the bank to pay a specific sum of money to a designated person or business.
• the party to whom payment is made.
• the bank on which the check is drawn.
the individual who signs the check instructing the bank to pay a specific sum of money to a designated person or business.
The journal entry to record an NSF check received from a customer:
Multiple Choice
• debits Cash and credits Accounts Receivable.
• debits Cash and credits Sales.
• debits Accounts Receivable and credits Cash.
• debits Accounts Receivable and credits Sales.
debits Accounts Receivable and credits Cash.
Which of the following statements is not correct?
Multiple Choice
• The amount of social security tax withheld depends on an employee’s gross earnings, marital status, and number of withholding allowances.
• Federal law requires that social security, Medicare, and federal income taxes be deducted from the gross pay of most employees.
• Medicare taxes are levied in an equal amount on both employers and employees.
• Once an employee’s year-to-date wages reach a certain amount prescribed by law, social security tax is no longer withheld.
The amount of social security tax withheld depends on an employee’s gross earnings, marital status, and number of withholding allowances.
Which of the following statements is correct?
Multiple Choice
• A company is required to withhold various employee taxes from amounts paid independent contractors.
• The accountant who performs the independent audit for a company is an employee of the company.
• All employees must be paid at the minimum wage rate set by the Fair Labor Standards Act.
Incorrect
• Disability benefits for the worker and the worker’s dependents are provided by the Federal Insurance Contributions Act.
Disability benefits for the worker and the worker’s dependents are provided by the Federal Insurance Contributions Act.
Which of the following statements is not correct?
Multiple Choice
• The FUTA tax provides benefits for employees who become unemployed.
• The FUTA tax is both withheld from employees’ earnings and paid by the employer.
• The FUTA tax rate can be as low as 0.6%.
• The state unemployment taxes are paid entirely by the employer.
The FUTA tax is both withheld from employees’ earnings and paid by the employer.
Neither the FUTA tax nor the SUTA tax is withheld from employee earnings. Both of these taxes are paid solely by the employer.
