CHAPTER 1 c. competition.

d. all of these.

FINANCIAL ACCOUNTING AND 27. An effective capital allocation process

ACCOUNTING STANDARDS a. promotes productivity.
b. encourages innovation.
c. provides an efficient market for buying
and selling securities.
21. General-purpose financial statements are the d. all of these.
product of
a. financial accounting. 28. Financial statements in the early 2000s
b. managerial accounting. provide information related to
c. both financial and managerial a. non-financial measurements.
accounting. b. forward-looking data.
d. neither financial nor managerial c. hard assets (inventory and plant
accounting. assets).
d. none of these.
22. Users of financial reports include all of the
following except 29. Which of the following statements is not an
a. creditors. objective of financial reporting?
b. government agencies. a. Provide information that is useful in
c. unions. investment and credit decisions.
d. All of these are users. b. Provide information about enterprise
resources, claims to those resources,
23. The financial statements most frequently and changes to them.
provided include all of the following except the c. Provide information on the liquidation
a. balance sheet. value of an enterprise.
b. income statement. d. Provide information that is useful in
c. statement of cash flows. assessing cash flow prospects.
d. statement of retained earnings.
30. Accrual accounting is used because
24. The information provided by financial a. cash flows are considered less important.
reporting pertains to b. it provides a better indication of ability
a. individual business enterprises, to generate cash flows than the cash
rather than to industries or an basis.
economy as a whole or to members of c. it recognizes revenues when cash is
society as consumers. received and expenses when cash is
b. business industries, rather than to paid.
individual enterprises or an economy as d. none of the above.
a whole or to members of society as
consumers. 31. One objective of financial reporting is to
c. individual business enterprises, provide
industries, and an economy as a whole, a. information about the investors in the
rather than to members of society as business entity.
consumers. b. information about the liquidation values
d. an economy as a whole and to members of the resources held by the enterprise.
of society as consumers, rather than to c. information that is useful in assessing
individual enterprises or industries. cash flow prospects.
P25. The process of identifying, measuring, d. information that will attract new investors.
analyzing, and communicating financial
information needed by management to plan, 32. Accounting principles are "generally
evaluate, and control an organization’s accepted" only when
operations is called a. an authoritative accounting rule-making
a. financial accounting. body has established it in an official pro-
b. managerial accounting. nouncement.
c. tax accounting. b. it has been accepted as appropriate
d. auditing. because of its universal application.
c. both a and b.
26. Whether a business is successful and thrives d. neither a nor b.
is determined by
a. markets. 33. A common set of accounting standards and
b. free enterprise. procedures are called
 a. financial accounting standards. d. works with the Financial Accounting
b. generally accepted accounting Standards Advisory Council to provide
principles. informa-tion to interested parties on
c. objectives of financial reporting. financial reporting issues.
d. statements of financial accounting
concepts. 40. The major distinction between the Financial
Accounting Standards Board (FASB) and its
34. The role of the Securities and Exchange predecessor, the Accounting Principles Board
Commission in the formulation of accounting
principles can be best described as (APB), is
a. consistently primary. a. the FASB issues exposure drafts of
b. consistently secondary. proposed standards.
c. sometimes primary and sometimes b. all members of the FASB are fully
secondary. remunerated, serve full time, and are
independent of any companies or
d. non-existent.
institutions.
35. The body that has the power to prescribe the c. all members of the FASB possess
accounting practices and standards to be extensive experience in financial
employed by companies that fall under its reporting.
jurisdiction is the d. a majority of the members of the FASB
a. FASB. are CPAs drawn from public practice.
b. AICPA.
c. SEC. 41. The Financial Accounting Standards Board
d. APB. employs a "due process" system which
a. is an efficient system for collecting dues
36. Companies that are listed on a stock from members.
exchange are required to submit their b. enables interested parties to express
financial statements to the their views on issues under
a. AICPA. consideration.
b. APB c. identifies the accounting issues that are
c. FASB. the most important.
d. SEC. d. requires that all accountants must
receive a copy of financial standards.
37. The Financial Accounting Standards Board
(FASB) was proposed by the 42. Which of the following is not a publication of
a. American Institute of Certified Public
the FASB?
Accountants.
a. Statements of Financial Accounting
b. Accounting Principles Board.
Concepts
c. Study Group on the Objectives of b. Accounting Research Bulletins
Financial Statements.
c. Interpretations
d. Special Study Group on
d. Technical Bulletins
establishment of Accounting
Principles (Wheat Committee).
43. FASB Technical Bulletins
38. The Financial Accounting Standards Board a. are similar to FASB Interpretations in that
a. has issued a series of pronouncements they establish enforceable standards
entitled Statements on Auditing under the AICPA's Code of Professional
Standards. Ethics.
b. was the forerunner of the current b. are issued monthly by the FASB to deal
Accounting Principles Board. with current topics.
c. is the arm of the Securities and c. are not expected to have a significant
Exchange Commission responsible for impact on financial reporting in
setting financial accounting standards. general and provide guidance when it
d. is appointed by the Financial does not conflict with any broad
Accounting Foundation. fundamental accounting principle.
d. were recently discontinued by the FASB
39. The Financial Accounting Foundation because they dealt with specialized
a. oversees the operations of the FASB. topics having little impact on financial
b. oversees the operations of the AICPA. reporting in general.
c. provides information to interested parties
on financial reporting issues. 44. The purpose of the Emerging Issues Task
Force is to
 a. develop a conceptual framework as a d. determine the need for FASB
frame of reference for the solution of involvement in an emerging issue.
future problems.
P50.
b. lobby the FASB on issues that affect a Members of the Financial Accounting
particular industry. Standards Board are
c. do research on issues that relate to long- a. employed by the American Institute of
term accounting problems. Certified Public Accountants (AICPA).
d. issue statements which reflect a b. part-time employees.
consensus on how to account for new c. required to hold a CPA certificate.
and unusual financial transactions d. independent of any other
that need to be resolved quickly. organization.

P51.
45. The Governmental Accounting Standards The following published documents are part
Board of the "due process" system used by the
FASB in the evolution of a typical FASB
a. oversees the activities of the SEC.
b. is a private-sector body, which Statement of Financial Accounting
addresses state and local Standards:
governmental reporting issues. 1. Exposure Draft
c. is a division of the Securities and 2. Statement of Financial
Exchange Commission, which oversees Accounting Standards
the corpo-rate accounting in annual 3. Discussion Memorandum
reports.
d. was terminated when the Financial The chronological order in which these items
Accounting Standards Board was are released is as follows:
created. a. 1, 2, 3.
b. 1, 3, 2.
c. 2, 3, 1.
46. The Governmental Accounting Standards d. 3, 1, 2.
Board's main purpose is to develop standards
for P52. In the House of GAAP, is the following on the
a. the General Accounting Office. highest level of authoritative status (meaning
b. the Federal government. among the most authoritative)?
c. state and local government.
d. the Internal Revenue Service. FASB FASB
Statement Statement
47. Which of the following organizations has not FASB of Financial of Financial
been instrumental in the development of Technica Accounting FASB Accounting
financial accounting standards in the United Bulletin Standards Interpretation Concepts
States? a.Yes Yes Yes Yes
a. AICPA b.Yes Yes Yes No
b. FASB c.No Yes No No
c. IASB d.No Yes Yes No
d. SEC
53. Generally Accepted Accounting Principles
48. An organization that has not published include: 1) FASB Technical Bulletins, 2) APB
accounting standards is the Opinions, and 3) Widely-accepted industry
a. American Institute of Certified Public practices. These three items rank from most
Accountants. authoritative to least authoritative as follows:
b. Securities and Exchange Commission. a. 1, 2, 3.
c. Financial Accounting Standards Board. b. 1, 3, 2.
d. All of these have published c. 2, 1, 3.
accounting standards. d. 2, 3, 1.

49. The purpose of Statements of Financial 54. Generally accepted accounting principles
Accounting Concepts is to a. include detailed practices and
a. establish GAAP. procedures as well as broad guidelines of
b. modify or extend the existing FASB general application.
Standards Statement. b. are influenced by pronouncements of the
c. form a conceptual framework for SEC and IRS.
solving existing and emerging c. change over time as the nature of the
problems. business environment changes.
d. all of these.
 c. promote uniform accounting
55. The most significant current source of standards among countries of the
generally accepted accounting principles is world.
the d. arbitrate accounting disputes between
a. AICPA. auditors and international companies.
b. SEC.
c. APB.
d. FASB.

56. The most authoritative category of generally

accepted accounting principles includes all of
the following except
a. Accounting Research Bulletins.
b. APB Opinions.
c. FASB Standards.
d. FASB Technical Bulletins.

57. Which of the following is not a part of

generally accepted accounting principles?
a. FASB Interpretations
b. CAP Accounting Research Bulletins
c. APB Opinions
d. All of these are part of generally
accepted accounting principles.

58. Which of the following publications does not

qualify as a statement of generally accepted
accounting principles?
a. Statements of financial standards issued
by the FASB
b. Accounting interpretations issued by the
FASB
c. APB Opinions
d. Accounting research studies issued
by the AICPA

59. Financial accounting standard-setting in the

United States
a. can be described as a social process
which reflects political actions of
various interested user groups as well
as a product of research and logic.
b. is based solely on research and empirical
findings.
c. is a legalistic process based on rules
promulgated by governmental agencies.
d. is democratic in the sense that a majority
of accountants must agree with a
standard before it becomes enforceable.

60. The purpose of the International Accounting

Standards Board is to
a. issue enforceable standards which
regulate the financial accounting and
reporting of multinational corporations.
b. develop a uniform currency in which the
financial transactions of companies
through-out the world would be
measured.
 CHAPTER 2
CONCEPTUAL FRAMEWORK
UNDERLYING FINANCIAL
ACCOUNTING
21. Generally accepted accounting principles
a. are fundamental truths or axioms that
can be derived from laws of nature.
b. derive their authority from legal court
proceedings.
c. derive their credibility and authority
from general recognition and
acceptance by the accounting
profession.
d. have been specified in detail in the FASB
conceptual framework.
22. A soundly developed conceptual framework
of concepts and objectives should
a. increase financial statement users'
understanding of and confidence in
financial reporting.
b. enhance comparability among
companies' financial statements.
c. allow new and emerging practical
problems to be more quickly soluble.
d. all of these.
23. Which of the following (a-c) are not true
concerning a conceptual framework in
account-ing?
a. It should be a basis for standard-setting.
b. It should allow practical problems to be
solved more quickly by reference to it.
c. It should be based on fundamental
truths that are derived from the laws
of nature.
d. All of the above (a-c) are true.
S24. Which of the following is not a benefit
associated with the FASB Conceptual
Framework Project?
a. A conceptual framework should increase
financial statement users' understanding
of and confidence in financial reporting.
b. Practical problems should be more
quickly solvable by reference to an
existing conceptual framework.
c. A coherent set of accounting standards
and rules should result.
d. Business entities will need far less
assistance from accountants because
the financial reporting process will be
quite easy to apply.
25. In the conceptual framework for financial
reporting, what provides "the why"--the goals
and purposes of accounting?
a. Measurement and recognition concepts
such as assumptions, principles, and
constraints
b. Qualitative characteristics of accounting
information
c. Elements of financial statements
d. Objectives of financial reporting
26. The underlying theme of the conceptual
framework is
a. decision usefulness.
b. understandability.
c. reliability.
d. comparability.
27. Which of the following is not an objective of
financial reporting?
a. To provide information about economic
resources, the claims to those resources,
and the changes in them.
b. To provide information that is helpful to
investors and creditors and other users in
assessing the amounts, timing, and
uncertainty of future cash flows.
c. To provide information that is useful to
those making investment and credit
decisions.
d. All of these are objectives of financial
reporting.
P28. The objectives of financial reporting include
all of the following except to provide
information that
a. is useful to the Internal Revenue
Service in allocating the tax burden to
the business community.
b. is useful to those making investment and
credit decisions.
c. is helpful in assessing future cash flows.
d. identifies the economic resources
(assets), the claims to those resources
(liabilities), and the changes in those
resources and claims.
29. 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 linkage between
these users and the decisions they make.
This link is
a. relevance.
b. reliability.
c. understandability.
d. materiality.
30. The overriding criterion by which accounting
information can be judged is that of
a. usefulness for decision making.
b. freedom from bias.
 c. timeliness. b. No Yes
d. comparability. c. Yes No
d. No No
31. The two primary qualities that make
accounting information useful for decision 38. Information is neutral if it
making are a. provides benefits which are at least equal
a. comparability and consistency. to the costs of its preparation.
b. materiality and timeliness. b. can be compared with similar information
c. relevance and reliability. about an enterprise at other points in
d. reliability and comparability. time.
32. Accounting information is considered to be c. would have no impact on a decision
relevant when it maker.
a. can be depended on to represent the d. is free from bias toward a
economic conditions and events that it is predetermined result.
intended to represent.
b. is capable of making a difference in a 39. The characteristic that is demonstrated when
decision. a high degree of consensus can be secured
c. is understandable by reasonably among independent measurers using the
informed users of accounting same measurement methods is
information. a. relevance.
d. is verifiable and neutral. b. reliability.
c. verifiability.
33. The quality of information that gives d. neutrality.
assurance that it is reasonably free of error
and bias and is a faithful representation is 40. According to Statement of Financial
a. relevance. Accounting Concepts No. 2, predictive value
b. reliability. is an ingredient of the primary quality of
c. verifiability. Relevance Reliability
d. neutrality. a. Yes No
b. Yes Yes
34. According to Statement of Financial c. No No
Accounting Concepts No. 2, which of the d. No Yes
following relates to both relevance and
reliability? 41. Under Statement of Financial Accounting
a. Materiality Concepts No. 2, representational faithfulness
b. Understandability is an ingredient of the primary quality of
c. Usefulness Reliability Relevance
d. All of these a. Yes Yes
b. No Yes
35. According to Statement of Financial c. Yes No
Accounting Concepts No. 2, timeliness is an d. No No
ingredient of the primary quality of
Relevance Reliability 42. Financial information does not demonstrate
a. Yes Yes consistency when
b. No Yes a. firms in the same industry use different
c. Yes No accounting methods to account for the
d. No No same type of transaction.
b. a company changes its estimate of the
36. According to Statement of Financial salvage value of a fixed asset.
Accounting Concepts No. 2, verifiability is an c. a company fails to adjust its financial
ingredient of the primary quality of statements for changes in the value of
Relevance Reliability the measuring unit.
a. Yes No d. none of these.
b. Yes Yes
c. No No 43. Financial information exhibits the
d. No Yes characteristic of consistency when
a. expenses are reported as charges
37. According to Statement of Financial against revenue in the period in which
Accounting Concepts No. 2, neutrality is an they are paid.
ingredient of the primary quality of b. accounting entities give accountable
Relevance Reliability events the same accounting treatment
a. Yes Yes from period to period.
 c. extraordinary gains and losses are not b. revenues minus expenses plus gains
included on the income statement. minus losses plus investments by owners
d. accounting procedures are adopted minus distributions to owners.
which give a consistent rate of net c. revenues minus expenses plus gains
income. minus losses plus investments by owners
minus distributions to owners plus assets
44. Information about different entities and about minus liabilities.
different periods of the same entity can be d. none of these.
prepared and presented in a similar manner.
Comparability and consistency are related to 50. Which of the following elements of financial
which of these objectives? statements is not a component of compre-
hensive income?
Comparability Consistency
a. Revenues
a. Entities Entities
b. Distributions to owners
b. Entities Periods
c. Losses
c. Periods Entities
d. Expenses
d. Periods Periods
P51. Which of the following is false with regard to
45. When information about two different
the element "comprehensive income"?
enterprises has been prepared and presented
a. It is more inclusive than the traditional
in a similar manner, the information exhibits
notion of net income.
the characteristic of
b. It includes net income and all other
a. relevance.
changes in equity exclusive of owners'
b. reliability.
invest-ments and distributions to owners.
c. consistency.
d. none of these. c. This concept is not yet being applied in
practice.
d. It excludes prior period adjustments
46. The elements of financial statements include
(transactions that relate to previous
investments by owners. These are increases
periods, such as corrections of
in an entity's net assets resulting from owners'
errors).
a. transfers of assets to the entity. S52. According to the FASB conceptual
b. rendering services to the entity.
framework, earnings
c. satisfaction of liabilities of the entity.
d. all of these. a. are the same as comprehensive income.
b. exclude certain gains and losses that
are included in comprehensive
47. In classifying the elements of financial
income.
statements, the primary distinction between
c. include certain gains and losses that are
revenues and gains is
excluded from comprehensive income.
a. the materiality of the amounts involved.
d. include certain losses that are excluded
b. the likelihood that the transactions
from comprehensive income.
involved will recur in the future.
c. the nature of the activities that gave S53.
rise to the transactions involved. According to the FASB Conceptual
d. the costs versus the benefits of the Framework, the elementsassets, liabilities,
alternative methods of disclosing the and equitydescribe amounts of resources
transactions involved. and claims to resources at/during a
Moment in Time Period of Time
48. A decrease in net assets arising from a. Yes No
peripheral or incidental transactions is called b. Yes Yes
a(n) c. No Yes
a. capital expenditure. d. No No
b. cost.
c. loss. S54. Which of the following basic accounting
d. expense. assumptions is threatened by the existence of
severe inflation in the economy?
49. One of the elements of financial statements is a. Monetary unit assumption.
comprehensive income. As described in b. Periodicity assumption.
Statement of Financial Accounting Concepts c. Going-concern assumption.
No. 6, "Elements of Financial Statements," d. Economic entity assumption.
comprehensive income is equal to
a. revenues minus expenses plus gains S55. During the lifetime of an entity accountants
minus losses. produce financial statements at artificial
 points in time in accordance with the concept c. The current-noncurrent classification of
of assets and liabilities is justifiable and
signify-cant.
Objectivity Periodicity d. All of these.
a. No No
b. Yes No 63. Proponents of historical cost ordinarily
c. No Yes
maintain that in comparison with all other
d. Yes Yes valuation alternatives for general purpose
financial reporting, statements prepared
56. Under current GAAP, inflation is ignored in using historical costs are more
accounting due to the a. reliable.
a. economic entity assumption. b. relevant.
b. going concern assumption. c. indicative of the entity's purchasing
c. monetary unit assumption.
power.
d. periodicity assumption. d. conservative.
57. The economic entity assumption 64. Valuing assets at their liquidation values
a. is inapplicable to unincorporated rather than their cost is inconsistent with the
businesses. a. periodicity assumption.
b. recognizes the legal aspects of business b. matching principle.
organizations. c. materiality constraint.
c. requires periodic income measurement. d. historical cost principle.
d. is applicable to all forms of business
organizations.
65. Revenue is generally recognized when
realized or realizable and earned. This
58. Preparation of consolidated financial statement describes the
statements when a parent-subsidiary a. consistency characteristic.
relationship exists is an example of the b. matching principle.
a. economic entity assumption. c. revenue recognition principle.
b. relevance characteristic. d. relevance characteristic.
c. comparability characteristic.
d. neutrality characteristic. 66. Generally, revenue from sales should be
recognized at a point when
59. During the lifetime of an entity, accountants a. management decides it is appropriate to
produce financial statements at arbitrary do so.
points in time in accordance with which basic b. the product is available for sale to the
accounting concept? ultimate consumer.
a. Cost/benefit constraint c. the entire amount receivable has been
b. Periodicity assumption
collected from the customer and there
c. Conservatism constraint remains no further warranty liability.
d. Matching principle d. none of these.
60. What accounting concept justifies the usage 67. Revenue generally should be recognized
of accruals and deferrals? a. at the end of production.
a. Going concern assumption
b. at the time of cash collection.
b. Materiality constraint c. when realized.
c. Consistency characteristic d. when realized or realizable and
d. Monetary unit assumption earned.
61. The assumption that a business enterprise 68. Which of the following is not a time when
will not be sold or liquidated in the near future revenue may be recognized?
is known as the a. At time of sale
a. economic entity assumption. b. At receipt of cash
b. monetary unit assumption. c. During production
c. conservatism assumption. d. All of these are possible times of
d. none of these. revenue recognition.
62. Which of the following is an implication of the 69. Under Statement of Financial Accounting
going concern assumption? Concepts No. 5, which of the following, in the
a. The historical cost principle is credible. most precise sense, means the process of
b. Depreciation and amortization policies converting noncash resources and rights into
are justifiable and appropriate. cash or claims to cash?
 a. Recognition
b. Measurement
c. Realization
d. Allocation
70. "When products (goods or services),
merchandise, or other assets are exchanged
for cash or claims to cash" is a definition of
a. allocated.
b. realized.
c. realizable.
d. earned.
71. The allowance for doubtful accounts, which
appears as a deduction from accounts
receivable on a balance sheet and which is
based on an estimate of bad debts, is an
application of the
a. consistency characteristic.
b. matching principle.
c. materiality constraint.
d. revenue recognition principle.
72. The accounting principle of matching is best
demonstrated by
a. not recognizing any expense unless
some revenue is realized.
b. associating effort (expense) with
accomplishment (revenue).
c. recognizing prepaid rent received as
revenue.
d. establishing an Appropriation for
Contingencies account.
73. Which of the following serves as the
justification for the periodic recording of
depreciation expense?
a. Association of efforts (expense) with
accomplishments (revenue)
b. Systematic and rational allocation of
cost over the periods benefited
c. Immediate recognition of an expense
d. Minimization of income tax liability
74. Application of the full disclosure principle
a. is theoretically desirable but not practical
because the costs of complete disclosure
exceed the benefits.
b. is violated when important financial
information is buried in the notes to the
financial statements.
c. is demonstrated by the use of
supplementary information
presenting the effects of changing
prices.
d. requires that the financial statements be
consistent and comparable.
75. Which of the following statements
concerning the cost-benefit relationship is
not true?
a. Business reporting should exclude
information outside of management's
expertise.
b. Management should not be required to
report information that would significantly
harm the company's competitive
position.
c. Management should not be required to
provide forecasted financial information.
d. If needed by financial statement
users, management should gather
information not included in the
financial statements that would
not otherwise be gathered for internal
use.
76. Under Statement of Financial Accounting
Concepts No. 2, which of the following relates
to both relevance and reliability?
a. Cost-benefit constraint
b. Predictive value
c. Verifiability
d. Representational faithfulness
77. Charging off the cost of a wastebasket with an
estimated useful life of 10 years as an
expense of the period when purchased is an
example of the application of the
a. consistency characteristic.
b. matching principle.
c. materiality constraint.
d. historical cost principle.
78. Which of the following statements about
materiality is not correct?
a. An item must make a difference or it need
not be disclosed.
b. Materiality is a matter of relative size or
importance.
c. An item is material if its inclusion or
omission would influence or change the
judgment of a reasonable person.
d. All of these are correct statements
about materiality.
79. Which of the following are considered
pervasive constraints by Statement of
Financial Accounting Concepts No. 2?
a. Cost-benefit relationship and
conservatism
b. Timeliness and feedback value
c. Conservatism and verifiability
d. Materiality and cost-benefit
relationship
80. The basic accounting concept that refers to
the tendency of accountants to resolve
uncertainty in favor of understating assets
and revenues and overstating liabilities and
expenses is known as the
a. conservatism constraint.
b. materiality constraint.
c. substance over form principle.
 d. industry practices constraint.

81. Which of the following best illustrates the

accounting concept of conservatism?
a. Use of the allowance method to
recognize bad debt losses from credit
sales
b. Use of the lower of cost or market
approach in valuing inventories.
c. Use of the same accounting method from
one period to the next in computing
depreciation expense
d. Utilization of a policy of deliberate
understatement of asset values in order
to present a conservative net income
figure

82. Trade-offs between the characteristics that

make information useful may be necessary or
beneficial. Issuance of interim financial
statements is an example of a trade-off
between
a. relevance and reliability.
b. reliability and periodicity.
c. timeliness and materiality.
d. understandability and timeliness.

83. Allowing firms to estimate rather than

physically count inventory at interim
(quarterly) periods is an example of a trade-
off between
a. verifiability and reliability.
b. reliability and comparability.
c. timeliness and verifiability.
d. neutrality and consistency.
P84. In matters of doubt and great uncertainty,
accounting issues should be resolved by
choosing the alternative that has the least
favorable effect on net income, assets, and
owners' equity. This guidance comes from
the
a. materiality constraint.
b. industry practices constraint.
c. conservatism constraint.
d. full disclosure principle.
 CHAPTER 3
18. Which of the following is a recordable event
or item?
THE ACCOUNTING INFORMATION a. Changes in managerial policy
SYSTEM b. The value of human resources
c. Changes in personnel
d. None of these
11. Factors that shape an accounting information 19. Which of the following is not an internal
system include the
event?
a. nature of the business.
a. Depreciation
b. size of the firm.
b. Using raw materials in the production
c. volume of data to be handled.
process
d. all of these.
c. Dividend declaration and subsequent
payment
12. Maintaining a set of accounting records is
d. All of these are internal transactions.
a. optional.
b. required by the Internal Revenue
20. An accounting record into which the essential
Service.
facts and figures in connection with all
c. required by the Foreign Corrupt Practices
transactions are initially recorded is called the
Act.
a. ledger.
d. required by the Internal Revenue
b. account.
Service and the Foreign Corrupt Practices
c. trial balance.
Act.
d. none of these.
13. Debit always means
21. The debit and credit analysis of a transaction
a. right side of an account.
normally takes place
b. increase. a. before an entry is recorded in a
c. decrease. journal.
d. none of these.
b. when the entry is posted to the ledger.
c. when the trial balance is prepared.
14. The double-entry accounting system means
d. at some other point in the accounting
a. Each transaction is recorded with two
cycle.
journal entries.
b. Each item is recorded in a journal entry,
22. A trial balance
then in a general ledger account.
c. The dual effect of each transaction is a. proves that debits and credits are equal
recorded with a debit and a credit. in the ledger.
d. More than one of the above. b. supplies a listing of open accounts and
their balances that are used in preparing
15. When a corporation pays a note payable and financial statements.
interest, c. is normally prepared three times in the
a. the account notes payable will be accounting cycle.
increased.
d. all of these.
b. the account interest expense will be
decreased.
c. they will debit notes payable and 23. A trial balance may prove that debits and
interest expense. credits are equal, but
d. they will debit cash. a. an amount could be entered in the wrong
account.
16. Stockholders’ equity is not affected by all b. a transaction could have been entered
a. cash receipts. twice.
b. dividends.
c. a transaction could have been omitted.
c. revenues.
d. expenses. d. all of these.

17. Which of the following criteria must be met 24.Which of the following is a real (permanent)
before an event or item should be recorded account?
for accounting purposes? a. Goodwill
a. The event or item can be measured b. Sales
objectively in financial terms. c. Accounts Receivable
b. The event or item is relevant and reliable. d. Both Goodwill and Accounts
c. The event or item is an element. Receivable
d. All of these must be met.
25. Which of the following is a nominal c. before the balance sheet date, but dated
(temporary) account? as of the balance sheet date.
a. Unearned Revenue d. before the balance sheet date, and dated
b. Salary Expense after the balance sheet date.
c. Inventory
d. Retained Earnings 33. At the time a company prepays a cost
a. it debits an asset account to show the
26. Nominal accounts are also called service or benefit it will receive in the
a. temporary accounts. future.
b. permanent accounts. b. it debits an expense account to match the
c. real accounts. expense against revenues earned.
d. none of these. c. its credits a liability account to show the
obligation to pay for the service in the future.
27. External events do not include d. more than one of the above.
a. interaction between an entity and its
environment. 34. How do these prepaid expenses expire?
b. a change in the price of a good or service
that an entity buys or sells, a flood or Rent
earthquake. Supplies
c. improvement in technology by a a. With the passage of
competitor. time
d. using buildings and machinery in
operations. Through use and consumption
b. With the passage of
28. A general journal time With the passage of time
a. chronologically lists transactions and c. Through use and
other events, expressed in terms of consumption
debits and credits. Through use and consumption
b. contains one record for each of the asset, d. Through use and
liability, stockholders’ equity, revenue, consumption
and expense accounts. With the passage of time
c. lists all the increases and decreases in
each account in one place. 35. Recording the adjusting entry for depreciation
d. contains only adjusting entries. has the same effect as recording the adjusting
entry for
29. A journal entry to record the sale of inventory a. an unearned revenue.
on account will include a b. a prepaid expense.
a. debit to inventory. c. an accrued revenue.
b. debit to accounts receivable. d. an accrued expense.
c. debit to sales.
d. credit to cost of goods sold. 36. Unearned revenue on the books of one
company is likely to be
30. A journal entry to record a payment on a. a prepaid expense on the books of the
account will include a company that made the advance payment.
a. debit to accounts receivable. b. an unearned revenue on the books of
b. credit to accounts receivable. the company that made the advance
c. debit to accounts payable. payment.
d. credit to accounts payable. c. an accrued expense on the books of the
company that made the advance payment.
31. A journal entry to record a receipt of rent d. an accrued revenue on the books of the
revenue in advance will include a company that made the advance payment.
a. debit to rent revenue.
b. credit to rent revenue.
c. credit to cash.
d. credit to unearned rent.

32. Adjustments are often prepared

a. after the balance sheet date, but dated
as of the balance sheet date.
b. after the balance sheet date, and dated
after the balance sheet date.
37.To compute interest expense for an adjusting 42. When an item of revenue is collected and
entry, the formula is principal X rate X a recorded in advance, it is normally called a(n)
fraction. The numerator and denominator of ___________ revenue.
the fraction are: a. accrued
b. prepaid
Numerator Denomintor c. unearned
a. Length of time note has been d. cash
outstanding
12 months 43. An accrued expense can best be described
b. Length of as an amount
note 12 months a. paid and currently matched with
c. Length of time until note earnings.
matures b. paid and not currently matched with
Length of note earnings.
d. Length of time note has been outstanding c. not paid and not currently matched with
Length of note earnings.
d. not paid and currently matched with
38. Adjusting entries are necessary to earnings.
1. obtain a proper matching of 44. If, during an accounting period, an expense
revenue and expense. item has been incurred and consumed but not
yet paid for or recorded, then the end-of-
2. achieve an accurate
period adjusting entry would involve
statement of assets and equities. a. a liability account and an asset account.
3. adjust assets and liabilities b. an asset or contra asset account and an
to their fair market value. expense account.
a. 1 c. a liability account and an expense
b. 2 account.
c. 3 d. a receivable account and a revenue
d. 1 and 2 account.

45. Which of the following must be considered in

39. Why are certain costs of doing business
estimating depreciation on an asset for an
capitalized when incurred and then accounting period?
depreciated or amortized over subsequent a. The original cost of the asset
accounting cycles? b. Its useful life
a. To reduce the federal income tax liability c. The decline of its fair market value
b. To aid management in cash-flow analysis d. Both the original cost of the asset and
c. To match the costs of production with its useful life.
revenues as earned
46. Which of the following would not be a correct
d. To adhere to the accounting constraint of
form for an adjusting entry?
conservatism a. A debit to a revenue and a credit to a
liability
40. When an item of expense is paid and b. A debit to an expense and a credit to a
recorded in advance, it is normally called a(n) liability
a. prepaid expense. c. A debit to a liability and a credit to a
b. accrued expense. revenue
c. estimated expense. d. A debit to an asset and a credit to a
liability
d. cash expense.
47. Year-end net assets would be overstated and
41. When an item of revenue or expense has current expenses would be understated as a
been earned or incurred but not yet collected result of failure to record which of the
or paid, it is normally called a(n) following adjusting entries?
____________ revenue or expense. a. Expiration of prepaid insurance
a. prepaid b. Depreciation of fixed assets
b. adjusted c. Accrued wages payable
d. All of these
c. estimated
d. none of these 48. A prepaid expense can best be described as
an amount
 a. paid and currently matched with
revenues.
b. paid and not currently matched with
revenues.
c. not paid and currently matched with
revenues.
d. not paid and not currently matched with
revenues.
49. An accrued revenue can best be described as
an amount
a. collected and currently matched with
expenses.
b. collected and not currently matched with
expenses.
c. not collected and currently matched
with expenses.
d. not collected and not currently matched
with expenses.
50. An unearned revenue can best be described
as an amount
a. collected and currently matched with
expenses.
b. collected and not currently matched
with expenses.
c. not collected and currently matched with
expenses.
d. not collected and not currently matched
with expenses.
51. An adjusted trial balance
a. is prepared after the financial statements
are completed.
b. proves the equality of the total debit
balances and total credit balances of
ledger accounts after all adjustments
have been made.
c. is a required financial statement under
generally accepted accounting principles.
d. cannot be used to prepare financial
statements.
c. Credited
Debited
d. Credited
Credited
54. If the inventory account at the end of the year
is understated, the effect will be to
a. overstate the gross profit on sales.
b. understate the net purchases.
c. overstate the cost of goods sold.
d. overstate the goods available for sale.
*55. Under the cash basis of accounting, revenues
are recorded
a. when they are earned and realized.
b. when they are earned and realizable.
c. when they are earned.
d. when they are realized.
*56. When converting from cash basis to accrual
basis accounting, which of the following
adjustments should be made to cash receipts
from customers to determine accrual basis
service revenue?
a. Subtract ending accounts receivable.
b. Subtract beginning unearned service
revenue.
c. Add ending accounts receivable.
d. Add cash sales.
*57. When converting from cash basis to accrual
basis accounting, which of the following
adjustments should be made to cash paid for
operating expenses to determine accrual
basis operating expenses?
a. Add beginning accrued liabilities.
b. Add beginning prepaid expense.
c. Subtract ending prepaid expense.
d. Subtract interest expense.

52. Which type of account is always debited

during the closing process? *58. Reversing entries are
a. Dividends. 1. normally prepared for
b. Expense. prepaid, accrued, and estimated items.
c. Revenue. 2. necessary to achieve a
d. Retained earnings. proper matching of revenue and expense.
3. desirable to exercise
53. When a company uses a periodic inventory consistency and establish standardized
system, the year-end entry to adjust the procedures.
inventory account will debit and credit a. 1
inventory as follows: b. 2
Beginning Inventory c. 3
Amount d. 1 and 2
Ending Inventory Amount
a. Debited *59. Adjusting entries that should be reversed
Credited include those for prepaid or unearned items
b. Debited that
Debited a. create an asset or a liability account.
 b. were originally entered in a revenue or
expense account.
c. were originally entered in an asset or
liability account.
d. create an asset or a liability account
and were originally entered in a
revenue or expense account.

*60. Adjusting entries that should be reversed

include
a. all accrued revenues.
b. all accrued expenses.
c. those that debit an asset or credit a
liability.
d. all of these.
 CHAPTER 4
INCOME STATEMENT AND RELATED
INFORMATION
21. The major elements of the income statement
are
a. revenue, cost of goods sold, selling
expenses, and general expense.
b. operating section, nonoperating section,
discontinued operations, extraordinary
items, and cumulative effect.
c. revenues, expenses, gains, and
losses.
d. all of these.
22. Information in the income statement helps
users to
a. evaluate the past performance of the
enterprise.
b. provide a basis for predicting future
performance.
c. help assess the risk or uncertainty of
achieving future cash flows.
d. all of these.
23. Limitations of the income statement include
all of the following except
a. items that cannot be measured reliably
are not reported.
b. only actual amounts are reported in
determining net income.
c. income measurement involves judgment.
d. income numbers are affected by the
accounting methods employed.
S24. Which of the following would represent the
least likely use of an income statement
prepared for a business enterprise?
a. Use by customers to determine a
company's ability to provide needed
goods and services.
b. Use by labor unions to examine earnings
closely as a basis for salary discussions.
c. Use by government agencies to
formulate tax and economic policy.
d. Use by investors interested in the
financial position of the entity.
S25.
The income statement reveals
a. resources and equities of a firm at a
point in time.
b. resources and equities of a firm for a
period of time.
c. net earnings (net income) of a firm at
a point in time.
d. net earnings (net income) of a firm
for a period of time.
26. The single-step income statement
emphasizes
a. the gross profit figure.
b. total revenues and total expenses.
c. extraordinary items and accounting
changes more than these are
emphasized in the multiple-step income
statement.
d. the various components of income from
continuing operations.
27. Which of the following is an acceptable
method of presenting the income statement?
a. A single-step income statement
b. A multiple-step income statement
c. A consolidated statement of income
d. All of these
28. Which of the following is not a generally
practiced method of presenting the income
statement?
a. Including prior period adjustments in
determining net income
b. The single-step income statement
c. The consolidated statement of income
d. Including gains and losses from
discontinued operations of a component
of a business in determining net income
29. The occurrence which most likely would have
no effect on 2007 net income (assuming that
all amounts involved are material) is the
a. sale in 2007 of an office building
contributed by a stockholder in 1983.
b. collection in 2007 of a receivable from
a customer whose account was
written off in 2006 by a charge to the
allowance account.
c. settlement based on litigation in 2007 of
previously unrecognized damages from
a serious accident which occurred in
2005.
d. worthlessness determined in 2007 of
stock purchased on a speculative basis
in 2003.
S30.
The occurrence that most likely would have
no effect on 2007 net income is the
a. sale in 2007 of an office building
contributed by a stockholder in 1961.
b. collection in 2007 of a dividend from an
investment.
c. correction of an error in the financial
statements of a prior period
discovered subsequent to their
issuance.
d. stock purchased in 1993 deemed
worthless in 2007.
P31. Which of the following is not a selling expense?
a. Advertising expense
 b. Office salaries expense
c. Freight-out
d. Store supplies consumed
P32. The accountant for the Orion Sales Company
is preparing the income statement for 2007
and the balance sheet at December 31, 2007.
The January 1, 2007 merchandise inventory
balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section
of the income statement.
c. as a deduction in the cost of goods sold
section of the income statement and as a
current asset on the balance sheet.
d. as an addition in the cost of goods sold
section of the income statement and as a
current asset on the balance sheet.
33. In order to be classified as an extraordinary
item in the income statement, an event or
transaction should be
a. unusual in nature, infrequent, and
material in amount.
b. unusual in nature and infrequent, but it
need not be material.
c. infrequent and material in amount, but it
need not be unusual in nature.
d. unusual in nature and material, but it
need not be infrequent.
34. Classification as an extraordinary item on the
income statement would be appropriate for
the
a. gain or loss on disposal of a component
of the business.
b. substantial write-off of obsolete
inventories.
c. loss from a strike.
d. none of these.
35. Which of these is generally an example of an
extraordinary item?
a. Loss incurred because of a strike by
employees.
b. Write-off of deferred marketing costs
believed to have no future benefit.
c. Gain resulting from the devaluation of the
U.S. dollar.
d. Gain resulting from the state
exercising its right of eminent domain
on a piece of land used as a parking
lot.
36. Under which of the following conditions would
material flood damage be considered an
extraordinary item for financial reporting
purposes?
a. Only if floods in the geographical area
are unusual in nature and occur
infrequently.
b. Only if the flood damage is material in
amount and could have been reduced by
prudent management.
c. Under any circumstances as an
extraordinary item.
d. Flood damage should never be classified
as an extraordinary item.
37. An item that should be classified as an
extraordinary item is
a. write-off of goodwill.
b. gains from transactions involving foreign
currencies.
c. losses from moving a plant to another
city.
d. gains from a company selling the only
investment it has ever owned.
38. How should an unusual event not meeting the
criteria for an extraordinary item be disclosed
in the financial statements?
a. Shown as a separate item in operating
revenues or expenses if material and
supple-mented by a footnote if
deemed appropriate.
b. Shown in operating revenues or expenses
if material but not shown as a separate
item.
c. Shown net of income tax after ordinary
net earnings but before extraordinary
items.
d. Shown net of income tax after
extraordinary items but before net
earnings.
39. Which of the following is a change in
accounting principle?
a. A change in the estimated service life of
machinery
b. A change from FIFO to LIFO
c. A change from straight-line to double-
declining-balance
d. A change from FIFO to LIFO and a
change from straight-line to double-
declining- balance
40. Which of the following is never classified as
an extraordinary item?
a. Losses from a major casualty.
b. Losses from an expropriation of assets.
c. Gain on a sale of the only security
investment a company has ever owned.
d. Losses from exchange or translation
of foreign currencies.
41. Which of the following is a required disclosure
in the income statement when reporting the
disposal of a component of the business?
a. The gain or loss on disposal should be
reported as an extraordinary item.
 b. Results of operations of a discontinued d. extraordinary items and prior period
component should be disclosed adjustments.
immediately below extraordinary items.
c. Earnings per share from both P47. A correction of an error in prior periods'
continuing operations and net income income will be reported
should be disclosed on the face of the
income statement. In the income statement Net of tax
d. The gain or loss on disposal should not be a. Yes Yes
segregated, but should be reported b. No No
together with the results of continuing c. Yes No
d. No Yes
operations.

42. When a company discontinues an operation
and disposes of the discontinued operation
(component), the transaction should be
included in the income statement as a gain or
loss on disposal reported as
a. a prior period adjustment.
b. an extraordinary item.
c. an amount after continuing
operations and before extraordinary
items.
d. a bulk sale of plant assets included in
income from continuing operations.
43. Income taxes are allocated to
a. extraordinary items.
b. discontinued operations.
c. prior period adjustments.
d. all of these.
44. Which of the following is true about
intraperiod tax allocation?
a. It arises because certain revenue and
expense items appear in the income
statement either before or after they are
included in the tax return.
b. It is required for extraordinary items and
cumulative effect of accounting changes
but not for prior period adjustments.
c. Its purpose is to allocate income tax
expense evenly over a number of
accounting periods.
d. Its purpose is to relate the income tax
expense to the items which affect the
amount of tax.
45. A material item which is unusual in nature or
infrequent in occurrence, but not both should
be shown in the income statement
Net of Tax Disclosed Separately
a. No No
b. Yes Yes
c. No Yes
d. Yes No
S46. Earnings per share should always be shown
separately for
a. net income and gross margin.
b. net income and pretax income.
c. income before extraordinary items.
48. Which of the following items will not appear in
the retained earnings statement?
a. Net loss
b. Prior period adjustment
c. Discontinued operations
d. Dividends
49. Which one of the following types of losses is
excluded from the determination of net
income in income statements?
a. Material losses resulting from
transactions in the company's
investments account.
b. Material losses resulting from unusual
sales of assets not acquired for resale.
c. Material losses resulting from the write-
off of intangibles.
d. Material losses resulting from
correction of errors related to prior
periods.
50. Shank Corporation made a very large
arithmetical error in the preparation of its
year-end financial statements by improper
placement of a decimal point in the calculation
of depreciation. The error caused the net
income to be reported at almost double the
proper amount. Correction of the error when
discovered in the next year should be treated
as
a. an increase in depreciation expense for
the year in which the error is discovered.
b. a component of income for the year in
which the error is discovered, but
separately listed on the income
statement and fully explained in a note to
the financial statements.
c. an extraordinary item for the year in
which the error was made.
d. a prior period adjustment.
51. Comprehensive income includes all of the
following except
a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.
52. The approach most companies use to provide
information related to the components of
other comprehensive income is a
a. second separate income statement.
b. combined income statement of
comprehensive income.
c. separate column in the statement of
changes in stockholders’ equity.
d. footnote disclosure.
 CHAPTER 5 a. Cash, accounts receivable, prepaid
items, inventories.
b. Cash, accounts receivable,
BALANCE SHEET AND STATEMENT inventories, prepaid items.
OF CASH FLOWS c. Cash, inventories, accounts receivable,
prepaid items.
d. Cash, inventories, prepaid items,
21. Which of the following is a limitation of the accounts receivable.
balance sheet?
a. Many items that are of financial value are 28. The basis for classifying assets as current or
omitted. noncurrent is conversion to cash within
b. Judgments and estimates are used. a. the accounting cycle or one year,
c. Current fair value is not reported. whichever is shorter.
d. All of these b. the operating cycle or one year,
whichever is longer.
22. The balance sheet is useful for analyzing all c. the accounting cycle or one year,
of the following except whichever is longer.
a. liquidity. d. the operating cycle or one year,
b. solvency. whichever is shorter.
c. profitability.
d. financial flexibility. 29. The basis for classifying assets as current or
noncurrent is the period of time normally
S23. The balance sheet contributes to financial required by the accounting entity to convert
reporting by providing a basis for all of the cash invested in
following except a. inventory back into cash, or 12 months,
a. computing rates of return. whichever is shorter.
b. evaluating the capital structure of the b. receivables back into cash, or 12 months,
enterprise. whichever is longer.
c. determining the increase in cash due c. tangible fixed assets back into cash, or
to operations. 12 months, whichever is longer.
d. assessing the liquidity and financial d. inventory back into cash, or 12
flexibility of the enterprise. months, whichever is longer.

S24. One criticism not normally aimed at a balance 30. The current assets section of the balance
sheet prepared using current accounting and sheet should include
reporting standards is a. machinery.
a. failure to reflect current value b. patents.
information. c. goodwill.
b. the extensive use of separate d. inventory.
classifications.
c. an extensive use of estimates. 31. Which of the following is a current asset?
d. failure to include items of financial value a. Cash surrender value of a life insurance
that cannot be recorded objectively. policy of which the company is the bene-
ficiary.
b. Investment in equity securities for the
P25. The amount of time that is expected to elapse purpose of controlling the issuing
until an asset is realized or otherwise company.
converted into cash is referred to as c. Cash designated for the purchase of
a. solvency. tangible fixed assets.
b. financial flexibility. d. Trade installment receivables
c. liquidity. normally collectible in 18 months.
d. exchangeability.
32. Which of the following should not be
26. The net assets of a business are equal to considered as a current asset in the balance
a. current assets minus current liabilities. sheet?
b. total assets plus total liabilities. a. Installment notes receivable due over 18
c. total assets minus total stockholders' months in accordance with normal trade
equity. practice.
d. none of these. b. Prepaid taxes which cover assessments
of the following operating cycle of the
27. The correct order to present current assets is business.
 c. Equity or debt securities purchased with
cash available for current operations.
d. The cash surrender value of a life
insurance policy carried by a
corporation, the beneficiary, on its
president.
33. Equity or debt securities held to finance future
construction of additional plants should be
classified on a balance sheet as
a. current assets.
b. property, plant, and equipment.
c. intangible assets.
d. long-term investments.
34. When a portion of inventories has been
pledged as security on a loan,
a. the value of the portion pledged should
be subtracted from the debt.
b. an equal amount of retained earnings
should be appropriated.
c. the fact should be disclosed but the
amount of current assets should not
be affected.
d. the cost of the pledged inventories
should be transferred from current assets
to noncurrent assets.
35. Which of the following is not a long-term
investment?
a. Cash surrender value of life insurance
b. Franchise
c. Land held for speculation
d. A sinking fund
36. A generally accepted method of valuation is
1. trading securities at market
value.
2. accounts receivable at net
realizable value.
3. inventories at current cost.
a. 1
b. 2
c. 3
d. 1 and 2
37. Which item below is not a current liability?
a. Unearned revenue
b. Stock dividends distributable
c. The currently maturing portion of long-
term debt
d. Trade accounts payable
38. Working capital is
a. capital which has been reinvested in the
business.
b. unappropriated retained earnings.
c. cash and receivables less current
liabilities.
d. none of these.
39. An example of an item which is not an
element of working capital is
a. accrued interest on notes receivable.
b. goodwill.
c. goods in process.
d. temporary investments.
40. Long-term liabilities include
a. obligations not expected to be liquidated
within the operating cycle.
b. obligations payable at some date beyond
the operating cycle.
c. deferred income taxes and most lease
obligations.
d. all of these.
41. Which of the following should be excluded
from long-term liabilities?
a. Obligations payable at some date
beyond the operating cycle
b. Most pension obligations
c. Long-term liabilities that mature within
the operating cycle and will be paid from
a sinking fund
d. None of these
42. Treasury stock should be reported as a(n)
a. current asset.
b. investment.
c. other asset.
d. reduction of stockholders' equity.
43. Which of the following should be reported for
capital stock?
a. The shares authorized
b. The shares issued
c. The shares outstanding
d. All of these
44. Which of the following would be classified in a
different major section of a balance sheet
from the others?
a. Capital stock
b. Common stock subscribed
c. Stock dividend distributable
d. Stock investment in affiliate
45. The stockholders' equity section is usually
divided into what three parts?
a. Preferred stock, common stock, treasury
stock
b. Preferred stock, common stock, retained
earnings
c. Capital stock, additional paid-in
capital, retained earnings
d. Capital stock, appropriated retained
earnings, unappropriated retained
earnings
46. Which of the following is not an acceptable
major asset classification?
a. Current assets
 b. Long-term investments 54. The financial statement which summarizes
c. Property, plant, and equipment operating, investing, and financing activities
d. Deferred charges of an entity for a period of time is the
a. retained earnings statement.
P47. Which of the following is a contra account? b. income statement.
a. Premium on bonds payable c. statement of cash flows.
b. Unearned revenue d. statement of financial position.
c. Patents
d. Accumulated depreciation S55. The statement of cash flows provides
answers to all of the following questions
S48. except
Which of the following balance sheet
classifications would normally require the a. Where did the cash come from during the
greatest amount of supplementary period?
disclosure? b. What was the cash used for during the
a. Current assets period?
b. Current liabilities c. What is the impact of inflation on the
c. Plant assets cash balance at the end of the year?
d. Long-term liabilities d. What was the change in the cash
balance during the period?
49. Which of the following is not a method of
disclosing pertinent information? 56. Making and collecting loans and disposing of
a. Supporting schedules property, plant, and equipment are
b. Parenthetical explanations a. operating activities.
c. Cross reference and contra items b. investing activities.
d. All of these are methods of disclosing c. financing activities.
pertinent information. d. liquidity activities.

50. Significant accounting policies may not be 57. In preparing a statement of cash flows, sale of
a. selected on the basis of judgment. treasury stock at an amount greater than cost
b. selected from existing acceptable would be classified as a(n)
alternatives. a. operating activity.
c. unusual or innovative in application. b. financing activity.
d. omitted from financial-statement c. extraordinary activity.
disclosure. d. investing activity.

51. A general description of the depreciation
methods applicable to major classes of
depreci-able assets
a. is not a current practice in financial
reporting.
b. is not essential to a fair presentation of
financial position.
c. is needed in financial reporting when
company policy differs from income tax
policy.
d. should be included in corporate
financial statements or notes thereto.
52. It is mandatory that the essential provisions of
which of the following be clearly stated in the
notes to the financial statements?
a. Stock option plans
b. Pension obligations
c. Lease contracts
d. All of these
53. A generally accepted account title is
a. Prepaid Revenue.
b. Appropriation for Contingencies.
c Earned Surplus.
d. Reserve for Doubtful Accounts.
58. In preparing a statement of cash flows, cash
flows from operating activities
a. are always equal to accrual accounting
income.
b. are calculated as the difference between
revenues and expenses.
c. can be calculated by appropriately
adding to or deducting from net
income those items in the income
statement that do not affect cash.
d. can be calculated by appropriately
adding to or deducting from net income
those items in the income statement that
do affect cash.
59. In preparing a statement of cash flows, which
of the following transactions would be
considered an investing activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of a cash dividend
d. Issuance of bonds payable at a discount
60. Preparing the statement of cash flows
involves all of the following except
determining the
a. cash provided by operations.
 b. cash provided by or used in investing and
financing activities.
c. change in cash during the period.
d. cash collections from customers
during the period.

61. The cash debt coverage ratio is computed by

dividing net cash provided by operating
activities by
a. average long-term liabilities.
b. average total liabilities.
c. ending long-term liabilities.
d. ending total liabilities.

62. The current cash debt coverage ratio is often

used to assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.
63. A measure of a company’s financial flexibility
is the
a. cash debt coverage ratio.
b. current cash debt coverage ratio.
c. free cash flow.
d. cash debt coverage ratio and free
cash flow.

64. Free cash flow is calculated as net cash

provided by operating activities less
a. capital expenditures.
b. dividends.
c. capital expenditures and dividends.
d. capital expenditures and depreciation.
S65. One of the benefits of the statement of cash
flows is that it helps users evaluate financial
flexibility. Which of the following explanations
is a description of financial flexibility?
a. The nearness to cash of assets and
liabilities.
b. The firm's ability to respond and adapt to
financial adversity and unexpected
needs and opportunities.
c. The firm's ability to pay its debts as they
mature.
d. The firm's ability to invest in a number of
projects with different objectives and
costs.
P66. Net cash provided by operating activities
divided by average total liabilities equals the
a. current cash debt coverage ratio.
b. cash debt coverage ratio.
c. free cash flow.
d. current ratio.
 CHAPTER 6
ACCOUNTING AND THE TIME VALUE
OF MONEY
21.Which of the following transactions would require
the use of the present value of an annuity due
concept in order to calculate the present value
of the asset obtained or liability owed at the
date of incurrence?
a. A capital lease is entered into with the
initial lease payment due upon the
signing of the lease agreement.
b. A capital lease is entered into with the
initial lease payment due one month
subse-quent to the signing of the lease
agreement.
c. A ten-year 8% bond is issued on January
2 with interest payable semiannually on
July 1 and January 1 yielding 7%.
d. A ten-year 8% bond is issued on January
2 with interest payable semiannually on
July 1 and January 1 yielding 9%.
22. Which of the following tables would show the
smallest value for an interest rate of 5% for six
periods?
a. Future value of 1
b. Present value of 1
c. Future value of an ordinary annuity of 1
d. Present value of an ordinary annuity of 1
23. Which table would you use to determine how
much you would need to have deposited three
years ago at 10% compounded annually in
order to have $1,000 today?
a. Future value of 1 or present value of 1
b. Future value of an annuity due of 1
c. Future value of an ordinary annuity of 1
d. Present value of an ordinary annuity of 1
24. Which table would you use to determine how
much must be deposited now in order to
provide for 5 annual withdrawals at the
beginning of each year, starting one year
hence?
a. Future value of an ordinary annuity of 1
b. Future value of an annuity due of 1
c. Present value of an annuity due of 1
d. None of these
25. Which table has a factor of 1.00000 for 1
period at every interest rate?
a. Future value of 1
b. Present value of 1
c. Future value of an ordinary annuity of
1 b. Michener Co. rents a warehouse for 7
d. Present value of an ordinary annuity of 1
26. Which table would show the largest factor for
an interest rate of 8% for five periods?
a. Future value of an ordinary annuity of 1
b. Present value of an ordinary annuity of 1
c. Future value of an annuity due of 1
d. Present value of an annuity due of 1
27. Which of the following tables would show the
smallest factor for an interest rate of 10% for
six periods?
a. Future value of an ordinary annuity of 1
b. Present value of an ordinary annuity
of 1
c. Future value of an annuity due of 1
d. Present value of an annuity due of 1
28. The figure .94232 is taken from the column
marked 2% and the row marked three periods
in a certain interest table. From what interest
table is this figure taken?
a. Future value of 1
b. Future value of annuity of 1
c. Present value of 1
d. Present value of annuity of 1
S29. Which of the following tables would show the
largest value for an interest rate of 10% for 8
periods?
a. Future amount of 1 table.
b. Present value of 1 table.
c. Future amount of an ordinary annuity
of 1 table.
d. Present value of an ordinary annuity of 1
table.
S30.
On June 1, 2006, Walsh Company sold some
equipment to Fischer Company. The two
companies entered into an installment sales
contract at a rate of 8%. The contract
required 8 equal annual payments with the
first payment due on June 1, 2006. What type
of compound interest table is appropriate for
this situation?
a. Present value of an annuity due of 1
table.
b. Present value of an ordinary annuity of 1
table.
c. Future amount of an ordinary annuity of
1 table.
d. Future amount of 1 table.
31. Which of the following transactions would
best use the present value of an annuity due
of 1 table?
a. Diamond Bar, Inc. rents a truck for 5
years with annual rental payments of
$20,000 to be made at the beginning of
each year.
years with annual rental payments of
 $120,000 to be made at the end of each
year. 36. If the number of periods is known, the interest
c. Durant, Inc. borrows $20,000 and has
rate is determined by
agreed to pay back the principal plus a. dividing the future value by the
interest in three years. present value and looking for the
d. Babbitt, Inc. wants to deposit a lump sum quotient in the future value of 1 table.
to accumulate $50,000 for the
b. dividing the future value by the present
construction of a new parking lot in 4 value and looking for the quotient in the
years. present value of 1 table.
P32. c. dividing the present value by the future
A series of equal receipts at equal intervals of
value and looking for the quotient in the
time when each receipt is received at the future value of 1 table.
beginning of each time period is called an d. multiplying the present value by the
a. ordinary annuity.
future value and looking for the product
b. annuity in arrears.
in the present value of 1 table.
c. annuity due.
d. unearned receipt.
37. Present value is
P33. In the time diagram below, which concept is a. the value now of a future amount.
being depicted? b. the amount that must be invested now to
produce a known future value.
c. always smaller than the future value.
d. all of these.

0 1 2 3 4 Which of the following statements is true?
$ $ $ $
1 1 1 1
PV
a. Present value of an ordinary annuity
b. Present value of an annuity due
c. Future value of an ordinary annuity
d. Future value of an annuity due
P34. On December 1, 2007, Michael Hess
Company sold some machinery to Shawn
Keling Company. The two companies entered
into an installment sales contract at a
predetermined interest rate. The contract
required four equal annual payments with the
first payment due on December 1, 2007, the
date of the sale. What present value concept
is appropriate for this situation?
a. Future amount of an annuity of 1 for four
periods
b. Future amount of 1 for four periods
c. Present value of an ordinary annuity of 1
for four periods
d. Present value of an annuity due of 1
for four periods.
35. An amount is deposited for eight years at
8%. If compounding occurs quarterly, then
the table value is found at
a. 8% for eight periods.
b. 2% for eight periods.
c. 8% for 32 periods.
d. 2% for 32 periods.
P38.
a. The higher the discount rate, the higher
the present value.
b. The process of accumulating interest on
interest is referred to as discounting.
c. If money is worth 10% compounded
annually, $1,100 due one year from
today is equivalent to $1,000 today.
d. If a single sum is due on December 31,
2010, the present value of that sum
decreases as the date draws closer to
December 31, 2010.
P39
If the interest rate is 10%, the factor for the
future value of annuity due of 1 for n = 5, i =
10% is equal to the factor for the future value
of an ordinary annuity of 1 for n = 5, i = 10%
a. plus 1.10.
b. minus 1.10.
c. multiplied by 1.10.
d. divided by 1.10.
40. Which of the following is true?
a. Rents occur at the beginning of each
period of an ordinary annuity.
b. Rents occur at the end of each period of
an annuity due.
c. Rents occur at the beginning of each
period of an annuity due.
d. None of these.
41. Which statement is false?
a. The factor for the future value of an
annuity due is found by multiplying the
ordinary annuity table value by one plus
the interest rate.
b. The factor for the present value of an
annuity due is found by multiplying
 the ordinary annuity table value by
one minus the interest rate.
c. The factor for the future value of an
annuity due is found by subtracting
1.00000 from the ordinary annuity table
value for one more period.
d. The factor for the present value of an
annuity due is found by adding 1.00000
to the ordinary annuity table value for one
less period.
42. Ed Sloan wants to withdraw $20,000
(including principal) from an investment fund
46.
at the end of each year for five years. How
should he compute his required initial
investment at the beginning of the first year if
the fund earns 10% compounded annually?
a. $20,000 times the future value of a 5-
year, 10% ordinary annuity of 1.
b. $20,000 divided by the future value of a
5-year, 10% ordinary annuity of 1.
c. $20,000 times the present value of a 5-
year, 10% ordinary annuity of 1.
d. $20,000 divided by the present value of a
5-year, 10% ordinary annuity of 1.
43. Ann Ruth wants to invest a certain sum of
money at the end of each year for five years.
The investment will earn 6% compounded
annually. At the end of five years, she will
need a total of $40,000 accumulated. How
should she compute her required annual
invest-ment?
a. $40,000 times the future value of a 5-
year, 6% ordinary annuity of 1.
b. $40,000 divided by the future value of
a 5-year, 6% ordinary annuity of 1.
c. $40,000 times the present value of a 5-
year, 6% ordinary annuity of 1.
d. $40,000 divided by the present value of a
5-year, 6% ordinary annuity of 1.
a. the present value of the annuity due is
less than the present value of the
ordinary annuity.
b. the present value of the annuity due is
greater than the present value of the
ordinary annuity.
c. the future value of the annuity due is
equal to the future value of the ordinary
annuity.
d. the future value of the annuity due is less
than the future value of the ordinary
annuity.
Which of the following is false?
a. The future value of a deferred annuity is
the same as the future value of an
annuity not deferred.
b. A deferred annuity is an annuity in which the
rents begin after a specified number of
periods.
c. To compute the present value of a
deferred annuity, we compute the
present value of an ordinary annuity of 1
for the entire period and subtract the
present value of the rents which were not
received during the deferral period.
d. If the first rent is received at the end of
the sixth period, it means the ordinary
annuity is deferred for six periods.

44. An accountant wishes to find the present

value of an annuity of $1 payable at the
beginning of each period at 10% for eight
periods. The accountant has only one
present value table which shows the present
value of an annuity of $1 payable at the end
of each period. To compute the present
value, the accountant would use the present
value factor in the 10% column for
a. seven periods.
b. eight periods and multiply by (1 + .10).
c. eight periods.
d. nine periods and multiply by (1 – .10).

45. If an annuity due and an ordinary annuity

have the same number of equal payments
and the same interest rates, then
 CHAPTER 7 b. if legally restricted and held against
short-term credit may be included as
cash.
CASH AND RECEIVABLES c. if legally restricted and held against long-
term credit may be included among
21. Which of the following is not considered cash current assets.
for financial reporting purposes? d. none of these.
a. Petty cash funds and change funds
b. Money orders, certified checks, and 28. The category "trade receivables" includes
personal checks a. advances to officers and employees.
c. Coin, currency, and available funds b. income tax refunds receivable.
d. Postdated checks and I.O.U.'s c. claims against insurance companies for
casualties sustained.
22. Which of the following is considered cash? d. none of these.
a. Certificates of deposit (CDs)
b. Money market checking accounts 29. Which of the following should be recorded in
c. Money market savings certificates Accounts Receivable?
d. Postdated checks a. Receivables from officers
b. Receivables from subsidiaries
23. Travel advances should be reported as c. Dividends receivable
a. supplies. d. None of these
b. cash because they represent the S30.
equivalent of money. What is the preferable presentation of
c. investments. accounts receivable from officers,
d. none of these. employees, or affiliated companies on a
balance sheet?
P24. Which of the following items should not be a. As offsets to capital.
included in the Cash caption on the balance b. By means of footnotes only.
sheet? c. As assets but separately from other
a. Coins and currency in the cash register receivables.
b. Checks from other parties presently in d. As trade notes and accounts receivable if
the cash register they otherwise qualify as current assets.
c. Amounts on deposit in checking account S31.
at the bank When a customer purchases merchandise
d. Postage stamps on hand inventory from a business organization, she
may be given a discount which is designed to
S25. A cash equivalent is a short-term, highly liquid induce prompt payment. Such a discount is
investment that is readily convertible into called a(n)
known amounts of cash and a. trade discount.
a. is acceptable as a means to pay current b. nominal discount.
liabilities. c. enhancement discount.
b. has a current market value that is greater d. cash discount.
than its original cost P32.
c. bears an interest rate that is at least Trade discounts are
equal to the prime rate of interest at the a. not recorded in the accounts; rather they
date of liquidation. are a means of computing a price.
d. is so near its maturity that it presents b. used to avoid frequent changes in
insignificant risk of changes in catalogues.
interest rates. c. used to quote different prices for different
quantities purchased.
26. Bank overdrafts, if material, should be d. all of the above.
a. reported as a deduction from the current
asset section. 33. If a company employs the gross method of
b. reported as a deduction from cash. recording accounts receivable from
c. netted against cash and a net cash customers, then sales discounts taken should
amount reported. be reported as
d. reported as a current liability. a. a deduction from sales in the income
statement.
27. Deposits held as compensating balances b. an item of "other expense" in the income
a. usually do not earn interest. statement.
 c. a deduction from accounts receivable in
determining the net realizable value of
accounts receivable.
d. sales discounts forfeited in the cost of
goods sold section of the income
statement.
34. Assuming that the ideal measure of short-
term receivables in the balance sheet is the
discounted value of the cash to be received in
the future, failure to follow this practice usually
does not make the balance sheet misleading
because
a. most short-term receivables are not
interest-bearing.
b. the allowance for uncollectible accounts
includes a discount element.
c. the amount of the discount is not
material.
d. most receivables can be sold to a bank
or factor.
35. Which of the following methods of
determining bad debt expense does not
properly match expense and revenue?
a. Charging bad debts with a percentage of
sales under the allowance method.
b. Charging bad debts with an amount
derived from a percentage of accounts
receivable under the allowance method.
c. Charging bad debts with an amount
derived from aging accounts receivable
under the allowance method.
d. Charging bad debts as accounts are
written off as uncollectible.
36. Which of the following methods of
determining annual bad debt expense best
achieves the matching concept?
a. Percentage of sales
b. Percentage of ending accounts
receivable
c. Percentage of average accounts
receivable
d. Direct write-off
37. Which of the following is a generally accepted
method of determining the amount of the
adjustment to bad debt expense?
a. A percentage of sales adjusted for the
balance in the allowance
b. A percentage of sales not adjusted for
the balance in the allowance
c. A percentage of accounts receivable not
adjusted for the balance in the allowance
d. An amount derived from aging accounts
receivable and not adjusted for the
balance in the allowance
38. The advantage of relating a company's bad
debt expense to its outstanding accounts
receivable is that this approach
a. gives a reasonably correct statement
of receivables in the balance sheet.
b. best relates bad debt expense to the
period of sale.
c. is the only generally accepted method for
valuing accounts receivable.
d. makes estimates of uncollectible
accounts unnecessary.
39. At the beginning of 2006, Finney Company
received a three-year zero-interest-bearing
$1,000 trade note. The market rate for
equivalent notes was 8% at that time. Finney
reported this note as a $1,000 trade note
receivable on its 2006 year-end statement of
financial position and $1,000 as sales
revenue for 2006. What effect did this
accounting for the note have on Finney's net
earnings for 2006, 2007, 2008, and its
retained earnings at the end of 2008,
respectively?
a. Overstate, overstate, understate, zero
b. Overstate, understate, understate,
understate
c. Overstate, overstate, overstate,
overstate
d. None of these
40. Which of the following is true when accounts
receivable are factored without recourse?
a. The transaction may be accounted for
either as a secured borrowing or as a
sale, depending upon the substance of
the transaction.
b. The receivables are used as collateral for
a promissory note issued to the factor by
the owner of the receivables.
c. The factor assumes the risk of
collectibility and absorbs any credit
losses in collecting the receivables.
d. The financing cost (interest expense)
should be recognized ratably over the
collection period of the receivables.
S41. Which of the following statements is incorrect
regarding the classification of accounts and
notes receivable?
a. Segregation of the different types of
receivables is required if they are
material.
b. Disclose any loss contingencies that
exist on the receivables.
c. Any discount or premium resulting
from the determination of present
value in notes receivable transactions
is an asset or liability respectively.
d. Valuation accounts should be ap-
propriately offset against the proper
receivable accounts.
42.Of the following conditions, which is the only one c. may include a credit to Accounts
that is not required if the transfer of Receivable for an NSF check.
receivables with recourse is to be accounted d. may include a debit to Accounts Payable
for as a sale? for an NSF check.
a. The transferor is obligated to make a
genuine effort to identify those receiv- *48. When preparing a bank reconciliation, bank
ables that are uncollectible. credits are
b. The transferor surrenders control of the a. added to the bank statement balance.
future economic benefits of the b. deducted from the bank statement
receivables. balance.
c. The transferee cannot require the c. added to the balance per books.
transferor to repurchase the receivables. d. deducted from the balance per books.
d. The transferor's obligation under the
recourse provisions can be reasonably
estimated.
P
43. The accounts receivable turnover ratio
measures the
a. number of times the average balance
of accounts receivable is collected
during the period.
b. percentage of accounts receivable
turned over to a collection agency during
the period.
c. percentage of accounts receivable
arising during certain seasons.
d. number of times the average balance of
inventory is sold during the period.

44. The accounts receivable turnover ratio is

computed by dividing
a. gross sales by ending net receivables.
b. gross sales by average net receivables.
c. net sales by ending net receivables.
d. net sales by average net receivables.

*45. Which of the following is not true?

a. The imprest petty cash system in effect
adheres to the rule of disbursement by
check.
b. Entries are made to the Petty Cash
account only to increase or decrease the
size of the fund or to adjust the balance if
not replenished at year-end.
c. The Petty Cash account is debited
when the fund is replenished.
d. All of these are not true.

46. A Cash Over and Short account

a. is not generally accepted.
b. is debited when the petty cash fund
proves out over.
c. is debited when the petty cash fund
proves out short.
d. is a contra account to Cash.

*47. The journal entries for a bank reconciliation

a. are taken from the "balance per bank"
section only.
b. may include a debit to Office Expense
for bank service charges.
 CHAPTER 8
VALUATION OF INVENTORIES:
A COST-BASIS APPROACH
21. When using a perpetual inventory system,
a. no Purchases account is used.
b. a Cost of Goods Sold account is used.
c. two entries are required to record a sale.
d. all of these.
22. Goods in transit which are shipped f.o.b.
shipping point should be
a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping
company.
d. none of these.
23. Goods in transit which are shipped f.o.b.
destination should be
a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping
company.
d. none of these.
24. Which of the following items should be
included in a company's inventory at the
balance sheet date?
a. Goods in transit which were purchased
f.o.b. destination.
b. Goods received from another company
for sale on consignment.
c. Goods sold to a customer which are
being held for the customer to call for at
his or her convenience.
d. None of these.
Use the following information for questions 25 and 26.
During 2007 Foley Corporation transferred inventory to
Kline Corporation and agreed to repurchase the
merchandise early in 2008. Kline then used the
inventory as collateral to borrow from Norwalk Bank,
remitting the proceeds to Foley. In 2008 when Foley
repurchased the inventory, Kline used the proceeds to
repay its bank loan.
25. This transaction is known as a(n)
a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.
26. On whose books should the cost of the
inventory appear at the December 31, 2007
balance sheet date?
a. Foley Corporation
b. Kline Corporation
c. Norwalk Bank
d. Kline Corporation, with Foley making
appropriate note disclosure of the
transaction
27. Goods on consignment are
a. included in the consignee's inventory.
b. recorded in a Consignment Out
account which is an inventory
account.
c. recorded in a Consignment In account
which is an inventory account.
d. all of these
S28.
Valuation of inventories requires the deter-
mination of all of the following except
a. the costs to be included in inventory.
b. the physical goods to be included in
inventory.
c. the cost of goods held on consign-
ment from other companies.
d. the cost flow assumption to be adopted.
P29.
The accountant for the Orion Sales Company
is preparing the income statement for 2007
and the balance sheet at December 31, 2007.
Orion uses the periodic inventory system. The
January 1, 2007 merchandise inventory
balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section
of the income statement.
c. as a deduction in the cost of goods sold
section of the income statement and as a
current asset on the balance sheet.
d. as an addition in the cost of goods sold
section of the income statement and as a
current asset on the balance sheet.
P30.
If the beginning inventory for 2006 is
overstated, the effects of this error on cost of
goods sold for 2006, net income for 2006, and
assets at December 31, 2007, respectively,
are
a. overstatement, understatement,
overstatement.
b. overstatement, understatement, no
effect.
c. understatement, overstatement,
overstatement.
d. understatement, overstatement, no
effect.
S31. The failure to record a purchase of mer-
chandise on account even though the goods
are properly included in the physical inventory
results in
a. an overstatement of assets and net
income.
b. an understatement of assets and net
income.
 c. an understatement of cost of goods sold
and liabilities and an overstatement of
assets.
d. an understatement of liabilities and an
overstatement of owners' equity.
32. Belle Co. received merchandise on
consignment. As of March 31, Belle had
recorded the transaction as a purchase and
included the goods in inventory. The effect of
this on its financial statements for March 31
would be
a. no effect.
b. net income was correct and current
assets and current liabilities were
overstated.
c. net income, current assets, and current
liabilities were overstated.
d. net income and current liabilities were
overstated.
33. Eller Co. received merchandise on
consignment. As of January 31, Eller included
the goods in inventory, but did not record the
transaction. The effect of this on its financial
statements for January 31 would be
a. net income, current assets, and
retained earnings were overstated.
b. net income was correct and current
assets were understated.
c. net income and current assets were
overstated and current liabilities were
understated.
d. net income, current assets, and retained
earnings were understated.
34. Cross Co. accepted delivery of merchandise
which it purchased on account. As of
December 31, Cross had recorded the
transaction, but did not include the
merchandise in its inventory. The effect of this
on its financial statements for December 31
would be
a. net income, current assets, and
retained earnings were understated.
b. net income was correct and current
assets were understated.
c. net income was understated and current
liabilities were overstated.
d. net income was overstated and current
assets were understated.
35. On June 15, 2007, Tolon Corporation
accepted delivery of merchandise which it
pur-chased on account. As of June 30, Tolon
had not recorded the transaction or included
the merchandise in its inventory. The effect of
this on its balance sheet for June 30, 2007
would be
a. assets and stockholders' equity were
overstated but liabilities were not
affected.
b. stockholders' equity was the only item
affected by the omission.
c. assets, liabilities, and stockholders'
equity were understated.
d. none of these.
36. Which of the following is correct?
a. Selling costs are product costs.
b. Manufacturing overhead costs are
product costs.
c. Interest costs for routine inventories are
product costs.
d. All of these.
37. All of the following costs should be charged
against revenue in the period in which costs
are incurred except for
a. manufacturing overhead costs for a
product manufactured and sold in the
same accounting period.
b. costs which will not benefit any future
period.
c. costs from idle manufacturing capacity
resulting from an unexpected plant
shutdown.
d. costs of normal shrinkage and scrap
incurred for the manufacture of a
product in ending inventory.
38. Which of the following types of interest cost
incurred in connection with the purchase or
manufacture of inventory should be
capitalized as a product cost?
a. Purchase discounts lost
b. Interest incurred during the
production of discrete projects such
as ships or real estate projects
c. Interest incurred on notes payable to
vendors for routine purchases made on a
repetitive basis
d. All of these should be capitalized.
39. The use of a Discounts Lost account implies
that the recorded cost of a purchased
inventory item is its
a. invoice price.
b. invoice price plus the purchase discount
lost.
c. invoice price less the purchase discount
taken.
d. invoice price less the purchase
discount allowable whether taken or
not.
40. The use of a Purchase Discounts account
implies that the recorded cost of a purchased
inventory item is its
a. invoice price.
b. invoice price plus any purchase discount
lost.
c. invoice price less the purchase discount
taken.
 d. invoice price less the purchase discount
S44.
allowable whether taken or not. Costs which are inventoriable include all of
the following except
Use the following information for questions 41 and 42. a. costs that are directly connected with the
bringing of goods to the place of business
During 2007, which was the first year of operations, of the buyer.
Luther Company had merchandise purchases of b. costs that are directly connected with the
$985,000 before cash discounts. All purchases were converting of goods to a salable
made on terms of 2/10, n/30. Three-fourths of the condition.
items purchased were paid for within 10 days of c. buying costs of a purchasing department.
purchase. All of the goods available had been sold at d. selling costs of a sales department.
year end.
P45. Which inventory costing method most closely
41. Which of the following recording procedures approximates current cost for each of the
would result in the highest cost of goods sold following:
Ending Inventory Cost of Goods Sold
for 2007? a. FIFO FIFO
1. Recording purchases at gross b. FIFO LIFO
amounts c. LIFO FIFO
2. Recording purchases at net d. LIFO LIFO
amounts, with the amount of
discounts not taken shown 46. In situations where there is a rapid turnover,
an inventory method which produces a
under "other expenses" in the
balance sheet valuation similar to the first-in,
income statement first-out method is
a. 1 a. average cost.
b. 2 b. base stock.
c. Either 1 or 2 will result in the same cost c. joint cost.
of goods sold. d. prime cost.
d. Cannot be determined from the
information provided. 47. The pricing of issues from inventory must be
deferred until the end of the accounting period
42. Which of the following recording procedures under the following method of inventory
would result in the highest net income for valuation:
2007? a. moving average.
1. Recording purchases at gross b. weighted-average.
amounts c. LIFO perpetual.
d. FIFO.
2. Recording purchases at net
amounts, with the amount of 48. An inventory pricing procedure in which the
discounts not taken shown oldest costs incurred rarely have an effect on
under "other expenses" in the the ending inventory valuation is
income statement a. FIFO.
a. 1 b. LIFO.
b. 2 c. base stock.
c. Either 1 or 2 will result in the same net d. weighted-average.
income.
d. Cannot be determined from the 49. Which method of inventory pricing best
information provided. approximates specific identification of the
actual flow of costs and units in most
43. When using the periodic inventory system, manufacturing situations?
which of the following generally would not be a. Average cost
separately accounted for in the computation b. First-in, first-out
of cost of goods sold? c. Last-in, first-out
a. Trade discounts applicable to d. Base stock
purchases during the period
b. Cash (purchase) discounts taken during 50. Assuming no beginning inventory, what can
the period be said about the trend of inventory prices if
c. Purchase returns and allowances of cost of goods sold computed when inventory
merchandise during the period is valued using the FIFO method exceeds
d. Cost of transportation-in for merchandise cost of goods sold when inventory is valued
purchased during the period using the LIFO method?
 a. Prices decreased.
b. Prices remained unchanged. 56. The acquisition cost of a certain raw material
c. Prices increased. changes frequently. The book value of the
d. Price trend cannot be determined from inventory of this material at year end will be
information given. the same if perpetual records are kept as it
would be under a periodic inventory method
51. In a period of rising prices, the inventory only if the book value is computed under the
method which tends to give the highest a. weighted-average method.
reported net income is b. moving average method.
a. base stock. c. LIFO method.
b. first-in, first-out. d. FIFO method.
c. last-in, first-out.
d. weighted-average. 57. When a company uses LIFO for external
reporting purposes and FIFO for internal
52. In a period of rising prices, the inventory reporting purposes, an Allowance to Reduce
method which tends to give the highest Inventory to LIFO account is used. This
reported inventory is account should be reported
a. FIFO. a. on the income statement in the Other
b. moving average. Revenues and Gains section.
c. LIFO. b. on the income statement in the Cost of
d. weighted-average. Goods Sold section.
c. on the income statement in the Other
53. Quayle Corporation's inventory cost on its Expenses and Losses section.
balance sheet was lower using first-in, first- d. on the balance sheet in the Current
out than it would have been using last-in, first- Assets section.
out. Assuming no beginning inventory, in
S58.
what direction did the cost of purchases move Which of the following statements is not true
during the period? as it relates to the dollar-value LIFO inventory
a. Up method?
b. Down a. It is easier to erode LIFO layers using
c. Steady dollar-value LIFO techniques than it is
d. Cannot be determined with specific goods pooled LIFO.
b. Under the dollar-value LIFO method, it is
54. In a period of rising prices, the inventory possible to have the entire inventory in
method which tends to give the highest only one pool.
reported cost of goods sold is c. Several pools are commonly employed in
a. FIFO. using the dollar-value LIFO inventory
b. average cost. method.
c. LIFO. d. Under dollar-value LIFO, increases and
d. none of these. decreases in a pool are determined and
measured in terms of total dollar value,
55. Which of the following statements is not valid not physical quantity.
as it applies to inventory costing methods?
S59.
a. If inventory quantities are to be Which of the following is not considered an
maintained, part of the earnings must be advantage of LIFO when prices are rising?
invested (plowed back) in inventories a. The inventory will be overstated.
when FIFO is used during a period of b. The more recent costs are matched
rising prices. against current revenues.
b. LIFO tends to smooth out the net income c. There will be a deferral of income tax.
pattern by matching current cost of goods d. A company's future reported earnings will
sold with current revenue, when not be affected substantially by future
inventories remain at constant quantities. price declines.
c. When a firm using the LIFO method fails
to maintain its usual inventory position 60. Which of the following is true regarding the
(reduces stock on hand below customary use of LIFO for inventory valuation?
levels), there may be a matching of old a. If LIFO is used for external financial
costs with current revenue. reporting, then it must also be used for
d. The use of FIFO permits some control internal reports.
by management over the amount of b. For purposes of external financial
net income for a period through reporting, LIFO may not be used with the
controlled purchases, which is not lower of cost or market approach.
true with LIFO.
 c. If LIFO is used for external financial
reporting, then it cannot be used for tax
purposes.
d. None of these.

61. If inventory levels are stable or increasing, an

argument which is not an advantage of the
LIFO method as compared to FIFO is
a. income taxes tend to be reduced in
periods of rising prices.
b. cost of goods sold tends to be stated at
approximately current cost on the income
statement.
c. cost assignments typically parallel
the physical flow of goods.
d. income tends to be smoothed as prices
 CHAPTER 9
INVENTORIES: ADDITIONAL
VALUATION ISSUES
21.Which of the following is true about lower-of-cost-
or-market?
a. It is inconsistent because losses are
recognized but not gains.
b. It usually understates assets.
c. It can increase future income.
d. All of these.
22. The primary basis of accounting for
inventories is cost. A departure from the cost
basis of pricing the inventory is required
where there is evidence that when the goods
are sold in the ordinary course of business
their
a. selling price will be less than their
replacement cost.
b. replacement cost will be more than their
net realizable value.
c. cost will be less than their replacement
cost.
d. future utility will be less than their
cost.
23. When valuing raw materials inventory at
lower-of-cost-or-market, what is the meaning
of the term "market"?
a. Net realizable value
b. Net realizable value less a normal profit
margin
c. Current replacement cost
d. Discounted present value
24. In no case can "market" in the lower-of-cost-
or-market rule be more than
a. estimated selling price in the ordinary
course of business.
b. estimated selling price in the ordinary
course of business less reasonably
predictable costs of completion and
disposal.
c. estimated selling price in the ordinary
course of business less reasonably
predictable costs of completion and
disposal and an allowance for an
approximately normal profit margin.
d. estimated selling price in the ordinary
course of business less reasonably
predictable costs of completion and
disposal, an allowance for an
approximately normal profit margin, and
an adequate reserve for possible future
losses.
25. Designated market value
a. is always the middle value of
replacement cost, net realizable value,
and net realizable value less a normal
profit margin.
b. should always be equal to net realizable
value.
c. may sometimes exceed net realizable
value.
d. should always be equal to net realizable
value less a normal profit margin.
26. Lower-of-cost-or-market
a. is most conservative if applied to the total
inventory.
b. is most conservative if applied to major
categories of inventory.
c. is most conservative if applied to
individual items of inventory.
d. must be applied to major categories for
taxes.
27. An item of inventory purchased this period for
$15.00 has been incorrectly written down to
its current replacement cost of $10.00. It sells
during the following period for $30.00, its
normal selling price, with disposal costs of
$3.00 and normal profit of $12.00. Which of
the following statements is not true?
a. The cost of sales of the following year will
be understated.
b. The current year's income is
understated.
c. The closing inventory of the current year
is understated.
d. Income of the following year will be
understated.
S28. When the direct method is used to record
inventory at market
a. there is a direct reduction in the selling
price of the product that results in a loss
being recorded on the income statement
prior to the sale.
b. a loss is recorded directly in the inventory
account by crediting inventory and
debiting loss on inventory decline.
c. only the portion of the loss attributable to
inventory sold during the period is
recorded in the financial statements.
d. the market value figure for ending
inventory is substituted for cost and
the loss is buried in cost of goods
sold.
S29. Recording inventory at net realizable value is
permitted, even if it is above cost, when there
are no significant costs of disposal involved
and
a. the ending inventory is determined by a
physical inventory count.
b. a normal profit is not anticipated.
c. there is a controlled market with a
quoted price applicable to all
quantities.
 d. the internal revenue service is assured
that the practice is not used only to distort
reported net income.
30. When inventory declines in value below
original (historical) cost, and this decline is
considered other than temporary, what is the
maximum amount that the inventory can be
valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Net realizable value reduced by a normal
profit margin
31. Net realizable value is
a. acquisition cost plus costs to complete
and sell.
b. selling price.
c. selling price plus costs to complete and
sell.
d. selling price less costs to complete
and sell.
32. If a unit of inventory has declined in value
below original cost, but the market value
exceeds net realizable value, the amount to
be used for purposes of inventory valuation is
a. net realizable value.
b. original cost.
c. market value.
d. net realizable value less a normal profit
margin.
33. Inventory may be recorded at net realizable
value if
a. there is a controlled market with a quoted
price.
b. there are no significant costs of disposal.
c. the inventory consists of precious metals
or agricultural products.
d. all of these.
34. If a material amount of inventory has been
ordered through a formal purchase contract at
the balance sheet date for future delivery at
firm prices,
a. this fact must be disclosed.
b. disclosure is required only if prices have
declined since the date of the order.
c. disclosure is required only if prices have
since risen substantially.
d. an appropriation of retained earnings is
necessary.
35. The credit balance that arises when a net loss
on a purchase commitment is recognized
should be
a. presented as a current liability.
b. subtracted from ending inventory.
c. presented as an appropriation of retained
earnings.
d. presented in the income statement.
P36.
In 2006, Lucas Manufacturing signed a
contract with a supplier to purchase raw
materials in 2007 for $700,000. Before the
December 31, 2006 balance sheet date, the
market price for these materials dropped to
$510,000. The journal entry to record this
situation at December 31, 2006 will result in a
credit that should be reported
a. as a valuation account to Inventory on
the balance sheet.
b. as a current liability.
c. as an appropriation of retained earnings.
d. on the income statement.
S
37. Which of the following is not a basic
assumption of the gross profit method?
a. The beginning inventory plus the
purchases equal total goods to be
accounted for.
b. Goods not sold must be on hand.
c. If the sales, reduced to the cost basis, are
deducted from the sum of the opening
inventory plus purchases, the result is the
amount of inventory on hand.
d. The total amount of purchases and the
total amount of sales remain relatively
unchanged from the comparable
previous period.
38. The gross profit method of inventory valuation
is invalid when
a. a portion of the inventory is destroyed.
b. there is a substantial increase in
inventory during the year.
c. there is no beginning inventory because
it is the first year of operation.
d. none of these.
39. Which statement is not true about the gross
profit method of inventory valuation?
a. It may be used to estimate inventories for
interim statements.
b. It may be used to estimate inventories
for annual statements.
c. It may be used by auditors.
d. None of these.
40. A major advantage of the retail inventory
method is that it
a. provides reliable results in cases where
the distribution of items in the inventory is
different from that of items sold during the
period.
b. hides costs from competitors and
customers.
c. gives a more accurate statement of
inventory costs than other methods.
d. provides a method for inventory
control and facilitates determination
 of the periodic inventory for certain
types of companies.
41. An inventory method which is designed to
approximate inventory valuation at the lower
of cost or market is
a. last-in, first-out.
b. first-in, first-out.
c. conventional retail method.
d. specific identification.
42. The retail inventory method is based on the
assumption that the
a. final inventory and the total of goods
available for sale contain the same
proportion of high-cost and low-cost
ratio goods.
b. ratio of gross margin to sales is
approximately the same each period.
c. ratio of cost to retail changes at a
constant rate.
d. proportions of markups and markdowns
to selling price are the same.
43. Which statement is true about the retail
inventory method?
a. It may not be used to estimate
inventories for interim statements.
b. It may not be used to estimate
inventories for annual statements.
c. It may not be used by auditors.
d. None of these.
44. When the conventional retail inventory
method is used, markdowns are commonly
ignored in the computation of the cost to retail
ratio because
a. there may be no markdowns in a given
year.
b. this tends to give a better
approximation of the lower of cost or
market.
c. markups are also ignored.
d. this tends to result in the showing of a
normal profit margin in a period when no
markdown goods have been sold.
45. To produce an inventory valuation which
approximates the lower of cost or market
using the conventional retail inventory
method, the computation of the ratio of cost to
retail should
a. include markups but not markdowns.
b. include markups and markdowns.
c. ignore both markups and markdowns.
d. include markdowns but not markups.
*46. When calculating the cost ratio for the retail
inventory method,
a. if it is the conventional method, the
beginning inventory is included and
markdowns are deducted.
b. if it is the LIFO method, the beginning
inventory is excluded and markdowns
are deducted.
c. if it is the LIFO method, the beginning
inventory is included and markdowns are
not deducted.
d. if it is the conventional method, the
beginning inventory is excluded and
markdowns are not deducted.
S47. Which of the following is not required when
using the retail inventory method?
a. All inventory items must be
categorized according to the retail
markup percentage which reflects the
item's selling price.
b. A record of the total cost and retail value
of goods purchased.
c. A record of the total cost and retail value
of the goods available for sale.
d. Total sales for the period.
S48.
Which of the following is not a reason the
retail inventory method is used widely?
a. As a control measure in determining
inventory shortages
b. For insurance information
c. To permit the computation of net income
without a physical count of inventory
d. To defer income tax liability
P49. Which of the following statements is false
regarding an assumption of inventory cost
flow?
a. The cost flow assumption need not
correspond to the actual physical flow of
goods.
b. The assumption selected may be
changed each accounting period.
c. The FIFO assumption uses the earliest
acquired prices to cost the items sold
during a period.
d. The LIFO assumption uses the earliest
acquired prices to cost the items on hand
at the end of an accounting period.
P50. The average days to sell inventory is
computed by dividing
a. 365 days by the inventory turnover
ratio.
b. the inventory turnover ratio by 365 days.
c. net sales by the inventory turnover ratio.
d. 365 days by cost of goods sold.
51. The inventory turnover ratio is computed by
dividing the cost of goods sold by
a. beginning inventory.
b. ending inventory.
c. average inventory.
d. number of days in the year.
*52. When using dollar-value LIFO, if the
incremental layer was added last year, it
should be multiplied by
a. last year's cost ratio and this year's index.
b. this year's cost ratio and this year's index.
c. last year's cost ratio and last year's
index.
d. this year's cost ratio and last year's index.
 CHAPTER 10
ACQUISITION AND DISPOSITION OF
PROPERTY, PLANT, AND
EQUIPMENT
21.Plant assets may properly include
a. deposits on machinery not yet received.
b. idle equipment awaiting sale.
c. land held for possible use as a future
plant site.
d. none of these.
22. Which of the following is not a major
characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for resale
c. Acquired for use
d. Yields services over a number of years
23. Which of these is not a major characteristic of
a plant asset?
a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a
plant asset.
24. Cotton Hotel Corporation recently purchased
Holiday Hotel and the land on which it is
located with the plan to tear down the Holiday
Hotel and build a new luxury hotel on the site.
The cost of the Holiday Hotel should be
a. depreciated over the period from
acquisition to the date the hotel is
scheduled to be torn down.
b. written off as an extraordinary loss in the
year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new
hotel.
25. The cost of land does not include
a. costs of grading, filling, draining, and
clearing.
b. costs of removing old buildings.
c. costs of improvements with limited lives.
d. special assessments.
26. The cost of land typically includes the
purchase price and all of the following costs
except
a. grading, filling, draining, and clearing
costs.
b. street lights, sewers, and drainage
systems cost.
c. private driveways and parking lots.
d. assumption of any liens or mortgages on
the property.
27. If a corporation purchases a lot and building
and subsequently tears down the building and
uses the property as a parking lot, the proper
accounting treatment of the cost of the
building would depend on
a. the significance of the cost allocated to
the building in relation to the combined
cost of the lot and building.
b. the length of time for which the building
was held prior to its demolition.
c. the contemplated future use of the
parking lot.
d. the intention of management for the
property when the building was acquired.
28. The debit for a sales tax properly levied and
paid on the purchase of machinery preferably
would be a charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which
includes all taxes other than those on
income).
d. accumulated depreciation--machinery.
29. Fences and parking lots are reported on the
balance sheet as
a. current assets.
b. land improvements.
c. land.
d. property and equipment.
S30.
Historical cost is the basis advocated for
recording the acquisition of property, plant,
and equipment for all of the following reasons
except
a. at the date of acquisition, cost reflects fair
market value.
b. property, plant, and equipment items are
always acquired at their original historical
cost.
c. historical cost involves actual trans-
actions and, as such, is the most reliable
basis.
d. gains and losses should not be
anticipated but should be recognized
when the asset is sold.
S31.
To be consistent with the historical cost
principle, overhead costs incurred by an
enterprise constructing its own building
should be
a. allocated on the basis of lost production.
b. eliminated completely from the cost of
the asset.
c. allocated on an opportunity cost basis.
d. allocated on a pro rata basis between the
asset and normal operations.
32. Which of the following costs are capitalized
for self-constructed assets?
a. Materials and labor only
b. Labor and overhead only
c. Materials and overhead only
d. Materials, labor, and overhead
33. Which of the following assets do not qualify
for capitalization of interest costs incurred
during construction of the assets?
a. Assets under construction for an
enterprise's own use.
b. Assets intended for sale or lease that are
produced as discrete projects.
c. Assets financed through the issuance of
long-term debt.
d. Assets not currently undergoing the
activities necessary to prepare them for
their intended use.
b. The amount of interest cost capitalized
during the period should not exceed the
actual interest cost incurred.
c. When excess borrowed funds not
immediately needed for construction are
temporarily invested, any interest earned
should be offset against interest cost
incurred when determining the amount of
interest cost to be capitalized.
d. The minimum amount of interest to be
capitalized is determined by multiplying a
weighted average interest rate by the
amount of average accumulated
expenditures on qualifying assets during
the period.

34. Assets that qualify for interest cost

capitalization include
a. assets under construction for a
company's own use.
b. assets that are ready for their intended
use in the earnings of the company.
c. assets that are not currently being used
because of excess capacity.
d. All of these assets qualify for interest cost
capitalization.

35. When computing the amount of interest cost

to be capitalized, the concept of "avoidable
interest" refers to
a. the total interest cost actually incurred.
b. a cost of capital charge for stockholders'
equity.
c. that portion of total interest cost which
would not have been incurred if
expenditures for asset construction had
not been made.
d. that portion of average accumulated
expenditures on which no interest cost
was incurred.

36. The period of time during which interest must

be capitalized ends when
a. the asset is substantially complete and
ready for its intended use.
b. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully
depreciated.
d. the activities that are necessary to get the
asset ready for its intended use have
begun.

37. Which of the following statements is true

regarding capitalization of interest?
a. Interest cost capitalized in connection
with the purchase of land to be used as a
building site should be debited to the land
account and not to the building account.
38. Construction of a qualifying asset is started on
April 1 and finished on December 1. The
fraction used to multiply an expenditure made
P43.
on April 1 to find weighted-average
accumulated expenditures is
a. 8/8.
b. 8/12.
c. 9/12.
d. 11/12.
39. When funds are borrowed to pay for
construction of assets that qualify for
capitalization of interest, the excess funds not
needed to pay for construction may be
temporarily invested in interest-bearing
securities. Interest earned on these
temporary investments should be
a. offset against interest cost incurred
during construction.
b. used to reduce the cost of assets being
constructed.
c. multiplied by an appropriate interest rate
to determine the amount of interest to be
capitalized.
d. recognized as revenue of the period.
results in the largest gain (smallest loss)
to the company.
The King-Kong Corporation exchanges one
plant asset for a similar plant asset and gives
cash in the exchange. The exchange is not
expected to cause a material change in the
future cash flows for either entity. If a gain on
the disposal of the old asset is indicated, the
gain will
a. be reported in the Other Revenues and
Gains section of the income statement.
b. effectively reduce the amount to be
recorded as the cost of the new asset.
c. effectively increase the amount to be
recorded as the cost of the new asset.
d. be credited directly to the owner's capital
account.

40. Interest cost that is capitalized should

a. be written off over the remaining term of
the debt.
b. be accumulated in a separate deferred
charge account and written off equally
over a 40-year period.
c. not be written off until the related asset is
fully depreciated or disposed of.
d. none of these.
S41. Which of the following is not a condition that
must be satisfied before interest capitalization
can begin on a qualifying asset?
a. Interest cost is being incurred.
b. Expenditures for the assets have been
made.
c. The interest rate is equal to or greater
than the company's cost of capital.
d. Activities that are necessary to get the
asset ready for its intended use are in
progress.
S42. The cost of a nonmonetary asset acquired in
exchange for another nonmonetary asset and
the exchange has commercial substance is
usually recorded at
a. the fair value of the asset given up, and a
gain or loss is recognized.
b. the fair value of the asset given up, and a
gain but not a loss may be recognized.
c. the fair value of the asset received if it is
equally reliable as the fair value of the
asset given up.
d. either the fair value of the asset given up
or the asset received, whichever one
44. Plant assets purchased on long-term credit
contracts should be accounted for at
a. the total value of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these.
45. When a plant asset is acquired by issuance of
common stock, the cost of the plant asset is
properly measured by the
a. par value of the stock.
b. stated value of the stock.
c. book value of the stock.
d. market value of the stock.
46. When a closely held corporation issues
preferred stock for land, the land should be
recorded at the
a. total par value of the stock issued.
b. total book value of the stock issued.
c. total liquidating value of the stock issued.
d. fair market value of the land.
47. Accounting recognition should be given to
some or all of the gain realized on a
nonmonetary exchange of plant assets
except when the exchange has
a. no commercial substance and additional
cash is paid.
b. no commercial substance and additional
cash is received.
c. commercial substance and additional
cash is paid.
d. commercial substance and additional
cash is received.
48. For a nonmonetary exchange of plant assets,
accounting recognition should not be given to
a. a loss when the exchange has no
commercial substance.
b. a gain when the exchange has
commercial substance.
c. part of a gain when the exchange has no
commercial substance and cash is paid.
d. part of a gain when the exchange has no
commercial substance and cash is
received.
49. When an enterprise is the recipient of a
donated asset, the account credited may be a
a. paid-in capital account.
b. revenue account.
c. deferred revenue account.
d. all of these.
50. A plant site donated by a township to a
manufacturer that plans to open a new factory
should be recorded on the manufacturer's
books at
a. the nominal cost of taking title to it.
b. its market value.
c. one dollar (since the site cost nothing but
should be included in the balance sheet).
d. the value assigned to it by the company's
directors.
51. In order for a cost to be capitalized (capital
expenditure), the following must be present:
a. The useful life of an asset must be
increased.
b. The quantity of assets must be
increased.
c. The quality of assets must be increased.
d. Any one of these.
52. An improvement made to a machine
increased its fair market value and its
production capacity by 25% without extending
the machine's useful life. The cost of the
improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated
depreciation and the machine account.
53. Which of the following is a capital
expenditure?
a. Payment of an account payable
b. Retirement of bonds payable
c. Payment of Federal income taxes
d. None of these
54. Which of the following is not a capital
expenditure?
a. Repairs that maintain an asset in
operating condition
b. An addition
c. A betterment
d. A replacement
P55.
In accounting for plant assets, which of the
following outlays made subsequent to
acquisition should be fully expensed in the
period the expenditure is made?
a. Expenditure made to increase the
efficiency or effectiveness of an existing
asset
b. Expenditure made to extend the useful
life of an existing asset beyond the time
frame originally anticipated
c. Expenditure made to maintain an existing
asset so that it can function in the manner
intended
d. Expenditure made to add new asset
services
S56.
An expenditure made in connection with a
machine being used by an enterprise should
be
a. expensed immediately if it merely
extends the useful life but does not
improve the quality.
 b. expensed immediately if it merely
improves the quality but does not extend
the useful life.
c. capitalized if it maintains the machine in
normal operating condition.
d. capitalized if it increases the quantity of
units produced by the machine.
S57. When a plant asset is disposed of, a gain or
loss may result. The gain or loss would be
classified as an extraordinary item on the
income statement if it resulted from
a. an involuntary conversion and the
conditions of the disposition are unusual
and infrequent in nature.
b. a sale prior to the completion of the
estimated useful life of the asset.
c. the sale of a fully depreciated asset.
d. an abandonment of the asset.

58. The sale of a depreciable asset resulting in a

loss indicates that the proceeds from the sale
were
a. less than current market value.
b. greater than cost.
c. greater than book value.
d. less than book value.

59. Which of the following statements about

involuntary conversions is false?
a. An involuntary conversion may result
from condemnation or fire.
b. The gain or loss from an involuntary
conversion may be reported as an
extraordinary item.
c. The gain or loss from an involuntary
conversion should not be recognized
when the enterprise reinvests in
replacement assets.
d. All of these.