True or False
1. Sales minus operating expenses equals gross profit.
2. Under a perpetual inventory system, the cost of goods sold is determined each time a sale
occurs.
3. A periodic inventory system requires a detailed inventory record of inventory items.
4. If a company changes its inventory valuation method, the effect of the change on net income
should be disclosed in the financial statements.
5. In a period of falling prices, the LIFO method results in a lower cost of goods sold than the
FIFO method.
6. Under the allowance method, Bad Debts Expense is debited when an account is deemed
uncollectible and must be written off.
7. The book value of a plant asset is always equal to its fair market value.
8. Unearned revenues should be classified as Other Revenues and Gains on the Income
Statement
Multiple Choice:
9. Income from operations is gross profit less
a. administrative expenses.
b. operating expenses.
c. other expenses and losses.
d. selling expenses.
10. Cost of goods sold is determined only at the end of the accounting period in
a. a perpetual inventory system.
b. a periodic inventory system.
c. both a perpetual and a periodic inventory system.
d. neither a perpetual nor a periodic inventory system.
11. A credit sale of $800 is made on April 25, terms 2/10, n/30, on which a return of $50 is
granted on April 28. What amount is received as payment in full on May 4?
a. $735
b. $784
c. $800
d $750
12. The journal entry to record a credit sale is
a. Cash
Sales
b. Cash
Service Revenue
c. Accounts Receivable
Service Revenue
d. Accounts Receivable
Sales
13. In the balance sheet, ending merchandise inventory is reported
a. in current assets immediately following accounts receivable.
b. in current assets immediately following prepaid expenses.
c. in current assets immediately following cash.
d. under property, plant, and equipment.
14. If a company changes its inventory valuation method, the effect of the change on net income
should be disclosed in the financial statements.
15. In a period of falling prices, the LIFO method results in a lower cost of goods sold than the
FIFO method.
16. If goods in transit are shipped FOB destination
a. the seller has legal title to the goods until they are delivered.
b. the buyer has legal title to the goods until they are delivered.
c. the transportation company has legal title to the goods while the goods are
in transit.
d. no one has legal title to the goods until they are delivered.
Use the following information for questions 17–19.
At May 1, 2008, Treeline Company had beginning inventory consisting of 100 units with a unit
cost of $7. During May, the company purchased inventory as follows:
200 units at $7
300 units at $8
The company sold 500 units during the month for $12 per unit. Treeline uses the average cost
method.
17. The average cost per unit for May is
a. $7.00.
b. $7.50.
c. $7.60.
d. $8.00.
18. The value of Treeline’s inventory at May 31, 2008 is
a. $700.
b. $750.
c. $800.
d. $4,500.
19. Treeline’s gross profit for the month of May is
a. $2,250.
b. $3,750.
c. $4,500.
d. $6,000.
20. Which one of the following is not a primary problem associated with accounts receivable?
a. Depreciating accounts receivable
b. Recognizing accounts receivable
c. Valuing accounts receivable
d. Disposing of accounts receivable
Use the following information for questions 21–22.
A customer charges a treadmill at Hank's Sport Shop. The price is $2,000 and the financing
charge is 9% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within
30 days and a finance charge is added to the customer's account.
21. What is the amount of the finance charge?
a. $60
b. $15
c. $180
d. $6
22. The accounts affected by the journal entry made by Hank's Sport Shop to record the
finance charge are
a. Accounts Receivable
Cash
b. Cash
Finance Receivable
c. Accounts Receivable
Interest Payable
d. Accounts Receivable
Interest Revenue
23. Which of the following assets does not decline in service potential over the course of its
useful life?
a. Equipment
b. Furnishings
c. Land
d. Fixtures
24. Shawnee Hospital installs a new parking lot. The paving cost $30,000 and the lights to
illuminate the new parking area cost $15,000. Which of the following statements is true
with respect to these additions?
a. $30,000 should be debited to the Land account.
b. $15,000 should be debited to Land Improvements.
c. $45,000 should be debited to the Land account.
d. $45,000 should be debited to Land Improvements.
25. Stories Company purchased equipment and these costs were incurred:
Cash price $22,500
Sales taxes 1,800
Insurance during transit 320
Installation and testing 430
Total costs $25,050
Stories will record the acquisition cost of the equipment as
a. $22,500.
b. $24,300.
c. $24,620.
d. $25,050.
26. A company purchased factory equipment on April 1, 2008 for $64,000. It is estimated that
the equipment will have an $8,000 salvage value at the end of its 10-year useful life.
Using the straight-line method of depreciation, the amount to be recorded as depreciation
expense at December 31, 2008 is
a. $6,400.
b. $5,600.
c. $4,200.
d. $4,800.
27. During the month, a company sells goods for a total of $108,000, which includes sales taxes
of $8,000; therefore, the company should recognize $100,000 in Sales Revenues and
$8,000 in Sales Tax Expense.
28. The relationship between current liabilities and current assets is
a. useful in determining income.
b. useful in evaluating a company's liquidity.
c. called the matching principle.
d. useful in determining the amount of a company's long-term debt.
Use the following information for questions 29-30.
Coffey County Bank agrees to lend Adcock Brick Company $200,000 on January 1. Adcock
Brick Company signs a $200,000, 8%, 9-month note.
29. The entry made by Adcock Brick Company on January 1 to record the proceeds and
issuance of the note is
a. Interest Expense ..................................................................... 12,000
Cash........................................................................................ 188,000
Notes Payable................................................................ 200,000
b. Cash........................................................................................ 200,000
Notes Payable................................................................ 200,000
c. Cash........................................................................................ 200,000
Interest Expense ..................................................................... 12,000
Notes Payable................................................................ 212,000
d. Cash........................................................................................ 200,000
Interest Expense ..................................................................... 12,000
Notes Payable................................................................ 200,000
Interest Payable ............................................................................ 12,000
30. What is the adjusting entry required if Adcock Brick Company prepares financial statements
on June 30?
a. Interest Expense ..................................................................... 8,000
Interest Payable ............................................................. 8,000
b. Interest Expense ..................................................................... 8,000
Cash............................................................................... 8,000
c. Interest Payable ...................................................................... 8,000
Cash............................................................................... 8,000
d. Interest Payable ...................................................................... 8,000
Interest Expense ............................................................ 8,000
31 The interest charged on a $100,000 note payable, at the rate of 6%, on a 60-day note
would be
a. $6,000.
b. $3,333.
c. $1,500.
d. $1,000.
32. Tim's Pharmacy has collected $600 in sales taxes during March. If sales taxes must be
remitted to the state government monthly, what entry will Tim's Pharmacy make to show
the March remittance?
a. Sales Tax Expense ................................................................. 600
Cash............................................................................... 600
b. Sales Taxes Payable ............................................................... 600
Cash............................................................................... 600
c. Sales Tax Expense ................................................................. 600
Sales Taxes Payable ...................................................... 600
d. No entry required.
33. Unearned revenues are
a. received and recorded as liabilities before they are earned.
b. earned and recorded as liabilities before they are received.
c. earned but not yet received or recorded.
d. earned and already received and recorded.
34. Sue Smiley, CPA, has billed her clients for services performed. She subsequently receives
payments from her clients. What entry will Sue make upon receipt of the payments?
a. Debit Unearned Revenue and credit Service Revenue
b. Debit Cash and credit Accounts Receivable
c. Debit Accounts Receivable and credit Service Revenue
d. Debit Cash and credit Service Revenue
35. Al is a barber who does his own accounting for his shop. When he buys supplies he
routinely debits Supplies Expense. Al purchased $1,500 of supplies in January and his
inventory at the end of January shows $400 of supplies remaining. What adjusting entry
should Al make on January 31?
a. Supplies Expense ................................................................... 400
Supplies ......................................................................... 400
b. Supplies Expense ................................................................... 1,500
Cash............................................................................... 1,500
c. Supplies .................................................................................. 400
Supplies Expense .......................................................... 400
d. Supplies Expense ................................................................... 1,100
Supplies ......................................................................... 1,100