NAME:_____________________________________________________SCORE:_____RATING:_____
WRITE THE LETTER OF YOUR ANSWER BESIDE THE NUMBER.
1 Which one of the following users of accounting
information is considered to be an external user of
accounting information rather than an internal user of
accounting information?
A) Internal auditors.
B) Company managers.
C) Company customers.
D) Officers and directors.
E) Budget officers.
2 A CPA owns a large home and she has divided the
second floor into two separate units: one used as her
personal residence and the other rented out to local
college students as an apartment. On the first floor,
she has her own CPA firm where she meets with and
provides accounting services to clients. If she wishes to
keep separate records for each of these three
activities, the accounting principle to which she is
adhering is?
A) Going-concern principle.
B) Monetary unit principle.
C) Cost principle.
D) Business entity principle.
E) Conservatism principle.
3 The three basic business entities discussed in this
chapter include sole proprietorship, partnership, and
corporation. Which of these entities is considered a
legal entity and is also subject to federal income
taxation at the entity level?
A) Sole proprietorship.
B) Partnership.
C) Corporation.
D) All three entities satisfy both requirements.
E) None of these entities satisfy both requirements.
4 The basic accounting equation is Assets = Liabilities
+ Equity. The Equity term of the equation can be
further broken down into several other terms. Assume
that the entity is a sole proprietorship. Which of the
following statements is correct?
A) Additional investments by the business owner will
increase equity; and revenues will decrease equity.
B) Additional investments by the business owner will
decrease equity; and revenues will increase equity.
C) Increases in expenses will decrease equity; and
owner withdrawals will decrease equity.
D) Revenues will increase equity; and owner
withdrawals will increase equity.
E) Revenues will decrease equity; and owner
withdrawals will increase equity.
5 If at the end of the accounting period, the company's
liabilities total P19,000 and its equity totals P40,000,
then what must be the total of assets?
A) P14,000.
B) P40,000.
C) P21,000.
D) P59,000.
E) None of the above.
6 Company assets total P150,000 and its liabilities
total P30,000. What is the equity of this company?
A) P120,000.
B) P100,000.
C) P150,000.
D) P180,000.
E) None of the above.
7 If during the current accounting period, the
company's assets increased by P24,000 and equity
increased by P5,000, then how did liabilities change?
A) Increased by P29,000.
B) Increased by P24,000.
C) Decreased by P5,000.
D) Decreased by P19,000.
E) Increased by P19,000.
8 Assume that a company's beginning owner's capital
was P20,000. During the period, withdrawals were
P24,000, and the owner made additional investments
during the period of P50,000. The ending capital
balance was P90,000. What was the net income or net
loss for the period?
A) Net income, P56,000.
B) Net loss, P44,000.
C) Net income, P44,000.
D) Net income, P30,000.
E) None of the above.
9 If during the accounting period, the company's
assets decreased by P15,000, and equity increased by
P4,000, then by how much did liabilities change?
A) Increased by P12,000.
B) Increased by P8,000.
C) Decreased by P12,000.
D) Decreased by P19,000.
E) Decreased by P6,000.
10 Which of the following financial statements refers to
a specific date (point in time)?
A) Statement of Income.
B) Statement of owner's equity.
C) Statement of cash flows.
D) Statement of Financial Position.
E) Answers A, B & C are all correct.
11 Total assets and total liabilities of a company are
reported on which of the following?
A) Statement of Income.
B) Statement of Financial Position.
C) Statement of cash flows.
D) Statement of owner's equity.
E) None of the above.
12 A statement of cash flows will report cash flows
from which of the following activities?
A) Operating activities.
B) Investing activities.
C) Financing activities.
D) All of the above.
E) Only A and C are correct.
13 When cash is received from a customer in payment
of an account receivable, how are the elements of the
accounting equation affected?
A) Decrease assets (cash) and increase assets
(accounts receivable).
B) Increase assets (cash) and decrease assets
(accounts receivable).
C) Increase assets and increase liabilities.
D) Increase assets and increase equity.
E) None of the above.
14 The owner's investment of cash in the company will
result in which of the following?
A) An increase in cash and a decrease in equity.
B) An increase in cash and an increase in equity.
C) A decrease in cash and a decrease in liabilities.
D) An increase in fees earned and an increase in
equity.
E) An increase in cash and an increase in liabilities.
15 Purchasing equipment on account (payment to be
made in the future) will have what effect on the
elements of the accounting equation?
A) Increase in equipment (assets) and a decrease in
equity.
B) Increase in equipment (assets) and an increase in
equity.
 C) Increase in equipment (assets) and an increase in
liabilities.
D) Increase in equipment (assets) and a decrease in
liabilities.
E) None of the above.
16 In Luca Pacioli's 15th century book "The Summa"
the accounting system he describes uses three books.
Which of the books are not used in today's accounting
system?
A) Memorandum
B) Ledger
C) Journal
D) All the books are still used today.
17 A company that only prepares financial statements
when it is convenient for the management of the firm
is violating which of the following accounting concepts.
A) business entity concept
B) going concern concept
C) monetary unit concept
D) periodicity concept
18 The owner of a dry cleaning business has only one
checking account and writes checks for both his
business and his personal affairs from this checking
account. This best describes a violation of the:
A) business entity concept
B) going concern concept
C) monetary unit concept
D) periodicity concept
19 In its annual report the BRHC Trailer Corp reported
the number of trailers it had in stock, rather than the
cost in pesos of the trailers. This violates which of the
following concepts:
A) business entity concept
B) going concern concept
C) monetary unit concept
D) periodicity concept
20 Mutual agency and unlimited liability is the
characteristic of which of the following business entity?
A) corporation
B) sole proprietorship
C) partnership
D) merchandiser
21 Because this type of business is considered a
separate legal entity it rather than its owners are
taxed.
A) sole proprietorship
B) corporation
C) partnership
D) manufacturer
22 Which of the following statements about the use of
accounting information by the marketing function is
true?
A) People in the marketing function use market rather
than accounting information to set selling prices.
B) Accounting information would be needed to select
the best alternative for getting the firm's product to its
customers.
C) The marketing function would let the accounting
function make pricing decision for a product when the
product cost was involved in making the pricing
decision.
D) Consumer preference is used in place of accounting
information when making product-selection decisions.
23 Which of the following is not an example of a
liability?
A) An amount that must be paid to a supplier that sold
the firm supplies.
B) The claims of the owners on the firm's net assets.
C) Agreeing to a long-term payment plan to pay for
equipment purchased by the business.
D) Received 1 years rent in advance from a tenant.
24 One of the following is not one of the financial
statements required for external reporting today.
A) Statement of INcome
B) Statement of Financial Position
C) Statement of Cash Flows
D) Statement of Changes in Owners' Equity
E) All of the above are required financial statements.
25 Which of the following is not true about the
relationships between the financial statements?
A) The ending balances of the retained earnings found
in the Statement of Changes in Stockholders' Equity
are found on the Balance Sheet.
B) The net income reported on the Income Statement
is also found on the Statement of Cash Flows.
C) The cash inflows identified on the Statement of
Cash Flows are reported on the Income Statement.
D) The cash reported on the Balance Sheet is reported
on the Statement of Cash Flows
26 Amounts that a business must pay in the future are
known as
A) accounts receivable.
B) accounts payable.
C) capital.
D) expenses.
27 The balance sheet is also called
A) the statement of owner's equity
B) the income statement
C) the statement of operations
D) the statement of financial position
28 When the owner invests cash in a business,
A) assets and revenue increase.
B) assets increase and owner's equity decreases.
C) liabilities decrease and owner's equity increases.
D) assets and owner's equity increase.
29 When equipment is purchased on credit,
A) assets and liabilities increase.
B) assets increase and liabilities decrease.
C) assets and owner's equity increase.
D) assets and expenses increase.
30
When a business sells services on credit
A) assets decrease and owner's equity increase.
B) assets increase and revenues increase.
C) assets and liabilities increase.
D) liabilities increase and owner's equity decreases.
31 When a business collects an account receivable
A) total assets do not change.
B) assets increase and revenues increase.
C) assets and liabilities increase.
D) assets increase and owner's equity increases.
32 When the firm pays its utility bill upon receipt of
that bill
A) assets and owner's equity increase.
B) assets decrease and expenses increase.
C) assets and liabilities decrease.
D) expenses increase and owner's equity increases.
33 When the owner withdraws cash for personal use
A) assets decrease and expenses increase.
B) assets decrease and owner's equity increases.
C) assets decrease and owner's equity decreases.
D) owner's equity decreases and revenue decreases.
34 Assume that, after analyzing its business
transaction, a firm has the following ending balances:
accounts payable P3,400, accounts receivable P2,000,
cash P1,000, capital P3,600, equipment P3,000,
prepaid rent P600, and supplies P400. What is the total
amount of assets that will be reported on the firm's
balance sheet?
A) P6,400
B) P7,000
C) P9,800
D) P14,000
35 Assume that a firm has the following information in
its analysis of its business transactions during its first
year of business: fees income of P7,000, an
investment by the owner of P5,000, salaries expenses
of P4,000, and withdrawals of P2,000. What is the total
amount of owner's equity that will be reported on the
firm's balance sheet?
A) P3,000
B) P6,000
C) P9,000
D) The amount cannot be determined from the
information provided.
36. The principle or assumption dictating that efforts
(expenses) be matched with accomplishments
(revenues) is the:
A. matching principle.
B. cost principle.
C. periodicity principle.
D. revenue recognition principle.
37. One of the following statements about the accrual
basis of accounting is false. The false statement is:
A. Events that change a company's financial
statements are recorded in the periods in which the
events occur.
B. Revenue is recognized in the period in which it is
earned.
C. This basis is in accord with generally accepted
accounting principles.
D. Revenue is recorded only when cash is received,
and expense is recorded only when cash is paid.
38. Which of the following is not a step in the
accounting process?
A. identification.
B. verification.
C. recording.
D. communication.
39. Which of the following statements about users of
accounting information is incorrect?
A. Management is an internal user.
B. Taxing authorities are external users.
C. Present creditors are external users.
D. Regulatory authorities are internal users.
40. The cost principle states that:
A. assets should be initially recorded at cost and
adjusted when the market value changes.
B. activities of an entity are to be kept separate and
distinct from its owner.
C. assets should be recorded at their cost.
D. only transaction data capable of being expressed in
terms of money be included in the accounting records.
41. Which of the following statements about basic
assumptions is incorrect?
A. Basic assumptions are the same as accounting
principles.
B. The economic entity assumption states that there
should be a particular unit of
accountability.
C. The monetary unit assumption enables accounting
to measure economic events.
D. An important part of the monetary unit assumption
is the stable monetary unit assumption.
42. Performing services on account will have the
following effects on the components of the basic
accounting equation:
A. increase assets and decrease owners' equity.
B. increase assets and increase owners' equity.
C. increase assets and increase liabilities.
D. increase liabilities and increase stockholders' equity.
43. As of December 31, 2005, Tetrick Company has
assets of P3,500 and owner's equity of P2,000. What
are the liabilities for Tetrick Company as of December
31, 2005?
A. P1,500.
B. P1,000.
C. P2,500.
D. P2,000.
44. On the last day of the period, Jim Otto Company
buys a P700 machine on credit. This transaction will
affect the:
A. income statement only.
B. balance sheet only.
C. income statement and retained earnings statement
only.
D. income statement, retained earnings statement,
and balance sheet.
45. A check is issued to pay the rent for six months in
advance. The cash account will be credited. What
account will be debited for this transaction?
A. Prepaid Rent
B. Rent Expense
C. Unearned Rent
D. Rent Payable
46 A proprietorship employs one full-time accountant.
This person is considered an employee. On the desk in
front of her are five different business documents.
Which one of the following would not be considered an
original source document from the proprietorship's
point of view?
A) A bank receipt for P10,000 evidencing yesterday's
cash receipts deposited in the bank.
B) The original copy of the insurance policy taken out
by the proprietorship to insure the vehicle it purchased
during its first month of operations. The annual
insurance premium of P500 was printed within the
contract.
C) The invoice received by the proprietorship from
Samsung Electronics when the proprietorship
purchased its first lot of inventory to be sold to its
customers.
D) A cancelled check for P500 representing payment
in full for the annual insurance premium mentioned in
item B above.
E) A copy of the Statement of Financial Position at
the end of the company's first year of existence.
47 At any given point in time, it is possible to describe
general ledger accounts as having an expected or
"normal" balance: either a debit balance or a credit
balance. This normal balance is on the side of the
account, that is, the debit side or credit side, which
represents the "increase" side of the account. In order,
what is the normal balance for the Equipment account,
the Owner's Equity account, and the Sales Revenue
account?
A) Debit, credit, credit.
B) Debit, debit, debit.
C) Credit, debit, credit.
D) Credit, credit, debit.
E) Debit, debit, credit.
48 The Baker sole proprietorship started operations on
January 1, 2011 and uses a calendar-year accounting
period. On February 7, 2011, the company purchases
an automobile with an invoice cost of P10,000. To
settle this transaction, the company immediately pays
P3,000 cash to the automobile dealership and signs a
three-month note payable for the P7,000 purchase
price balance. A partial general journal entry is given
below. Which item accurately describes the partial
entry from Baker's viewpoint?
A) Cash is debited for P3,000 and Notes Payable is
credited for P7,000.
B) The asset account Vehicles is debited for P7,000
and Cash is credited for P3,000.
C) The asset account Vehicles is credited for P10,000
and Cash is credited for P3,000.
D) Cash is credited for P3,000 and Notes Payable is
credited for P7,000.
E) Notes Payable is credited for P7,000 and the asset
Vehicles is credited for P3,000.
49 Amelia Company received its telephone bill on
February 15, 2011 in the amount of P325. This bill
covered the period from January 1, 2011 through
January 31, 2011. Amelia paid this bill immediately.
The company uses a calendar year accounting period
and prepares its financial statements only once a year
at the end of the year. The general journal entry to
record this transaction includes:
A) A debit to the Cash account for P325.
B) A credit to the Telephone Expense account for
P325.
C) A debit to the Telephone Expense account for
P325.
D) A credit to Accounts Payable for P325.
E) A debit to Accounts Payable for P325.
50 On March 1, 2011, a company collects a P500
deposit from a customer for the installation of a home-
theater system. The installation is scheduled for May 5,
2009. How should the company record this entry on
March 1, 2011?
A) The Cash account is credited for P500.
B) The Sales Revenue account is credited for P500.
C) The Unearned Sales Revenue account is credited
for P500.
D) The Unearned Sales Revenue account is debited
for P500.
E) None of the above are correct.
51 A company which sells and services medical
insurance policies received one payment of P14,000
cash from a customer for insurance coverage for the
next two years. Recording the receipt of this cash
when it is received will require which of the following?
A) Withdrawals to be debited, an asset to be credited
B) A liability to be debited, an asset to be credited
C) An asset to be debited, capital to be credited
D) An asset to be debited, a liability to be credited
E) One asset to be debited, another asset to be
credited
52 Olivia, the proprietor, deposited P40,000 in the
company's bank account. She received the money as
the result of a settlement of a class action lawsuit and
decided to invest it in her business to help with
expansion. Recording the transaction on the company
books will require which of the following?
A) An asset to be debited, a liability to be credited.
B) A liability to be debited, an asset to be credited.
C) An asset to be debited, capital to be credited.
D) Withdrawals to be debited, an asset to be
credited.
E) One asset to be debited, another asset to be
credited.
53 Which of the following statements is true?
A) Revenue accounts are increased by debit entries.
B) Journalizing entries occurs after posting entries.
C) Debit entries are entries involving the right-hand
side on an account.
D) An account shows increases and decreases and an
account balance.
E) Journalizing errors should be erased and a correct
entry made.
54 The personal residence of Samuel Leonard was
landscaped with all new trees, shrubs, and flowers.
This improvement was paid for with a check written
against Samuel's business checking account. The
landscaping provides no benefit to Samuel's business.
What account should be debited for this transaction?
A) Samuel Leonard, Capital.
B) Samuel Leonard, Withdrawals.
C) Landscaping Improvements.
D) Landscaping Expense.
E) None of the above.
55 One of your company's business checks clears the
bank at its correct amount of P500. The transaction
that underlies this check was the cash purchase of
office supplies. The entry was recorded as a debit to
Insurance Expense for P50 and a credit to Cash for
P50. The correcting entry should include which of the
following?
A) A debit to Accounts Receivable for P450.
B) A credit to Supplies Expense for P500.
C) A credit to Cash for P50.
D) A credit to Cash for P450.
E) A credit to Cash for P540.
56 Double-entry accounting requires which of the
following?
A) All journal entries must be posted twice.
B) At least two accounts are involved, with at least
one debit and one credit.
C) The total amount debited must equal the total
amount credited.
D) Both A and C are correct.
E) Both B and C are correct.
57 Cash of P100 received at the time the service was
rendered was journalized and posted as a debit to
Cash P100 and a credit to Accounts Receivable P100.
Assuming the incorrect entry is not reversed, the
correcting entry is:
A. debit Service Revenue P100 and credit Accounts
Receivable P100.
B. debit Cash P100 and credit Service Revenue P100.
C. debit Accounts Receivable P100 and credit Service
Revenue P100.
D. debit Accounts Receivable P100 and credit Cash
P100.
58 Debits:
A. increase both assets and liabilities.
B. decrease both assets and liabilities.
C. increase assets and decrease liabilities.
D. decrease assets and increase liabilities.
59 A revenue account:
A. is increased by debits.
B. is decreased by credits.
C. has a normal balance of a debit.
D. is increased by credits.
60 Accounts that normally have debit balances are:
A. assets, expenses, and revenues.
B. assets, expenses, and owner's capital.
C. assets, liabilities, and owner's drawings.
D. assets, owner's drawings, and expenses.