Q1.

Which one of the following statements is not true about statements of cash flows prepared
according to U.S. GAAP?

 The operating section of the indirect method starts with the net income of the period.
 In the indirect method statement, the period’s depreciation is added to net income because
it is a source of cash.
 Interest payments are included in the operating section of the direct method statement.
 The investing section of the direct method statement for a period is identical to the
investing section of the indirect method statement for the same period.

Q2. Juan Foods pays off a long-term debt in full. Which one of the following statements
describes the effect of the transaction on Juan Foods?

 Current ratio increases; total debt to equity ratio decreases

 Current ratio decreases; total debt to equity ratio decreases

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 Current ratio decreases; total debt to equity ratio increases
Current ratio increases; total debt to equity ratio increases

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Q3. Jon Sports’ inventory account increased from $25,000 on December 31, 2013, to $30,000 on

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December 31, 2014. Which one of the following items would be included in the operating
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section of its 2014 indirect method statement of cash flows?
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 Add increase in inventory $5,000
 Subtract increase in inventory ($5,000)
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 Add inventory balance $20,000

aC s

 Subtract inventory balance ($20,000)

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Q4. The historical cost concept reflects the fact that financial accounting practice favors

reliability over relevance.

ed d


 management’s best guess over historical financial information.
ar stu

 relevance over reliability.

 consensus market values over historical financial information.
is

Q5. Consider the same scenario as in the previous question: On March 31, 2015, Cars, Inc. owes
Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2015, Preston
Th

sells Cars devices with a sales price of $10,000 and a cost to Preston of $8,000. During April,
Cars pays Preston $12,000 against the amount owed to Preston. If Preston had no other sales and
records no other collections from customers during the month of April, the operating section of
sh

Preston’s indirect method statement of cash flows for April will show the following de-accrual
adjustments to net income:

 Subtract change in accounts receivable; add change in inventory

 Add change in accounts receivable; subtract change in inventory
 Add change in accounts receivable; add change in inventory

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  Subtract change in accounts receivable; subtract change in inventory

Q6. To be recorded as a liability, an item must meet three specific conditions. Two of them are: it
must involve probable future sacrifice of economic resources by the entity, and it must be a
present obligation that arose as a result of a past transaction. Which one of the following is the
third condition?

 The item must reduce the market value of the recording entity.
 It must involve a transfer of resources to another entity.
 It must involve the expenditure of cash now or in the future.
 It must not cause total liabilities to exceed total assets.

Q7. Juan Foods pays off a long-term debt in full. Which one of the following statements best
describes the appropriate book-keeping for this transaction?

 Debit cash; credit long-term debt

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 Debit long-term debt; credit owners’ equity
Debit owners’ equity; credit long-term debt

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 Debit long-term debt; credit cash

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Q8. Baxtra, Inc. pays $20,000 in cash as interest to its lenders during 2015. According to U.S.
rs e
GAAP, in which section of the statement of cash flows would this payment be included?
ou urc
 The operating section
 The financing section
o

 The investing section

aC s

 Depends on whether cash flow statement is direct or indirect method.

vi y re

Q9. How much total depreciation and amortization expense did Patnode record during 2015?

$10,000
ed d


 $6,000
ar stu

 $3,000
 $5,000
is

Q10. Taylor Company had a salaries payable balance of $18,000 on December 31, 2014. During
2015, it paid $50,000 in cash as salaries, and recorded a salary expense of $50,000. What is its
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December 31, 2015, salaries payable balance?

 $50,000
sh

 $18,000
 $100,000
 Cannot be determined from the information provided

Q11. On December 31, 2015, Juan Foods purchases a van for $12,000. How does the purchase of
the van affect Juan Foods’ 2015 income statement?

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  Decreases sales by $12,000
 Increases operating expenses by $12,000
 No material effect
 Increases cost of goods sold by $12,000

Q12. Sandy Robbins is the sole owner of a hair salon. He often takes small amounts of “lunch
money” from the cash register, figuring that “it is my business anyway.” His accountant,
however, insists that Sandy make a note of the cash he takes, and at the end of the each
accounting period, she debits owners’ equity and credits the cash account for the total amount
that Sandy has taken during the period. In recording the cash withdrawals even though Sandy is
sole proprietor, the accountant is correctly applying the _______ concept.

 matching
 entity
 materiality
 conservatism

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Q13. On March 31, 2015, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for

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previous purchases. During April 2015, Preston sells Cars devices with a sales price of $10,000
and a cost to Preston of $8,000. During April, Cars pays Preston $12,000 against the amount

o.
owed to Preston. What is the effect of these April transactions on Preston’s balance sheet?
rs e
ou urc
 Cash increased by $12,000; accounts receivable decreased by $2,000; inventory
decreased by $8,000; retained earnings increased by $2,000
 Accounts receivable increased by $2,000; inventory decreased by $8,000; cash increased
o

by $12,000; retained earnings increased by $12,000

aC s

 Cash increased by $12,000; retained earnings decreased by $2,000; inventory decreased

vi y re

by $10,000; accounts receivable decreased by $12,000

 Cash increased by $2,000; accounts receivable decreased by $2,000; inventory decreased
by $8,000; retained earnings decreased by $12,000
ed d

Q14. When an entity recognizes revenue before it has received cash for the sale, it records an
ar stu

increase in a(n) _______.

 liability such as ‘Advances from customers’

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 accounts payable
 accounts receivable
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 prepaid expense

Q15. What is Patnode’s total debt to equity ratio at the end of 2014 (rounded to two decimal
sh

places)?

 5.30
 0.19
 0.25
 4.04

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 Q16. A company raised $50,000 in cash by taking a one-year loan of $10,000 and a 5-year loan
of $40,000. Which of the following is the correct journal entry to record this transaction?

 Debit short-term debt $40,000; debit retained earnings $10,000; credit cash $50,000
 Debit short-term debt $50,000; credit cash $50,000
 Debit cash $50,000; credit long-term debt $50,000
 Debit cash $50,000; credit short-term debt $10,000; credit long-term debt $40,000

Q17. Patnode’s 2015 statement of cash flows contains four items in the financing section. Three
of them are Short-term debt issued, $15,000; Short-term debt paid, ($10,000); and Dividends
paid, ($1,000). What is the fourth item in the financing section?

 Retained earnings, $4,600

 Common stock issued, $3,000
 Long-term debt paid, ($3,000)
 Cash from financing, $3,000

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Q18. Planet Music buys all of its inventory on credit. During 2015, Planet Music’s inventory

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account increased by $10,000. Which of the following statements must be true for Planet Music
during 2015?

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 rs e
It made payments of less than $10,000 to suppliers.
ou urc
 It made cash payments of $10,000 to suppliers.
 It made more cash payments to its suppliers than it recorded as cost of goods sold.
 It paid less cash to suppliers than it recorded as cost of goods sold.
o
aC s

Q19. During 2015, Sunrise Foods, Inc. records an interest expense of $5,000, and pays $2,000 of
vi y re

it in cash. How should this accounting transaction be recorded?

 Debit interest expense $5,000; credit cash $2,000; credit taxes payable $3,000
Debit interest expense $5,000; credit cash $2,000; credit interest payable $3,000
ed d


 Debit various debt accounts $5,000; credit cash $2,000; credit interest payable $3,000
ar stu

 Debit interest expense $5,000; credit cash $2,000; credit various debt accounts $3,000

Q20. What is Patnode’s current ratio at the end of 2014?

is

 2.46
Th

 0.41
 1.12
 0.89
sh

Q21. The fundamental accounting equation is a reflection of the _______ concept.

 money measurement
 conservatism
 dual-aspect

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  historical cost

Q22. Which one of the following items will not appear in the operating section of Patnode’s 2015
indirect method cash flow statement?

 Deduct: increase in accounts receivable $3,000

 Add: decrease in accounts payable $1,000
 Add: increase in taxes payable $2,400
 Add: decrease inventories $6,000

Q23. During 2015, Patnode recorded sales of $17,000. How much cash did it collect from its
customers?

 $17,000
 $14,000
 $3,000

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 Cannot be estimated

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Q24. Annie’s Fitness sells a set of free weights to a customer for $1,000. The customer pays
$600 in cash and puts the rest on her store credit account. Which one of the following statements

o.
describes the most appropriate accounting for the transaction?
rs e
ou urc
 Debit cash $600; debit accounts receivable $400; credit cost of good sold $1000
 Debit cash $600; debit accounts receivable $400; credit revenues $1,000
 Debit revenues $1,000; credit cash $600; credit accounts receivable $400
o

 Debit cash $600; debit accounts receivable $400; credit inventory $1,000
aC s
vi y re

Q25. Turnkey Systems, Inc. began the month of June, 2014 with a prepaid expenses balance of
$240,000. During the month, debits totaling $110,000 and credits totaling $80,000 were made to
the prepaid expenses account. What was the June, 2014 ending balance of prepaid expenses?
ed d

 A debit balance of $210,000

ar stu

 A credit balance of $210,000

 A debit balance of $270,000
 A credit balance of $270,000
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Q26. On January 1, 2015, Mansfield Company has a retained earnings balance of $256,000.
Th

During 2015, its net income is $44,000 and it announces and pays $12,000 in dividends. There is
no other dividend-related activity during the year. Its December 31, 2015, retained earnings
balance is _______.
sh

 $212,000
 $288,000
 $300,000
 $224,000

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 Q27. Anderson Electronics’ 2015 return on sales percentage is 20%. Its 2015 net income is
$40,000. What is its 2015 sales?

 $400,000
 $80,000
 $200,000
 $100,000

Q28. Which one of the following statements describes the rules about posting transactions into T-
accounts in the ledger?

 For assets, debits are entered on the left; for liabilities, credits are entered on the left
 For assets, credits are entered on the left; for liabilities, debits are entered on the left
 Debits on the left; credits on the right
 Credits on the left; debits on the right

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Q29. Barnaby & Sons receives a large shipment of goods from its supplier. It pays $58,000 at the
time of delivery and promises to pay the remaining $42,000 within the next two months. What is

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appropriate journal entry for this transaction?

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 Debit cash $42,000; debit inventory $16,000; credit accounts payable $58,000
 rs e
Debit inventory $100,000; credit cash $58,000; credit accounts payable $42,000
ou urc
 Debit accounts payable $58,000; credit cash $42,000; credit inventory $16,000
 Debit accounts payable $58,000; debit cash $42,000; credit inventory $100,000
o

Q30. This question is based on Patnode Inc.’s balance sheets at year end 2014 and 2015. During
aC s

2015, Patnode announced and paid dividends of $1,000, the only dividend-related activity during
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the year. What was its 2015 net income?

 $5,600
$3,600
ed d


 $4,600
ar stu

 Cannot be estimated

Q31. During June 2015, Bextra Inc. recorded sales of $55,000 but only $20,000 was collected in
is

cash from customers. Cost of goods sold was $38,000. What was the effect of these sales on
Bextra’s current ratio?
Th

 Current ratio increases

 Current ratio decreases
sh

 Current ratio remains unchanged

 Insufficient information provided to judge effect on current ratio

Q32. On June 1, 2015, Planet Music has accounts payable of $45,000. During the month, debits
of $3,000 and credits of $11,000 were made to the account. At the end of June 2015, what was
the accounts payable balance?

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  A credit balance of $53,000
 A debit balance of $42,000
 A credit balance of $56,000
 A debit balance of $53,000

Q33. Sardi Company estimates its 2015 tax expense to be $80,000. It makes a cash payment of
$20,000 to the tax authorities on December 31, 2015. How should this transaction be recorded by
Sardi?

 Debit tax expense $80,000; credit cash $60,000; credit taxes payable $20,000
 Debit tax expense $80,000; credit cash $20,000; credit taxes payable $60,000
 Debit tax expense $80,000; credit cash $20,000
 Debit tax expense $80,000; credit cash $20,000; credit accounts payable $60,000

Q34. Pentex and Marbro, small companies in the stationery business, each had a dollar gross
margin of $20,000 during September 2014. Pentex’s September sales were twice that of

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Marbro’s. If Pentex’s gross margin as a percentage of sales for September was 10%, what was
Marbro’s gross margin as a percentage of sales for the same period?

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 10%

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 5%
 20% rs e
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 Cannot be calculated

Q35. Kirby, Inc. records a sale with a gross margin of $1,400. Which one of the following
o

statements correctly describes the effect of such a sale on its balance sheet?
aC s
vi y re

 Common stock increases by $1,400

 The sales revenue account increases by $1,400
 The gross margin account increases by $1,400
The retained earnings account increases by $1,400
ed d


ar stu

Q36. On April 30, 2015, Zono Electronics, Inc. made a payment of $3,500 to Imperial
Distributors, a supplier. Choose the statement that best describes the recording of this financial
transaction by Imperial Distributors.
is

 Debit cash $3,500; credit accounts payable $3,500

Th

 Debit accounts receivable $3,500; credit cash $3,500

 Debit accounts payable $3,500; credit cash $3,500
 Debit cash $3,500; credit accounts receivable $3,500
sh

Q37. Annie’s Fitness sells a set of free weights to a customer for which Annie’s had paid $750.
Which one of the following statements describes the most appropriate accounting for the
transaction?

 Debit cost of goods sold expense $750; credit cash $750

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  Debit inventory $750; credit cost of goods sold expense $750
 Debit cost of goods sold expense $750; credit inventory $750
 Debit inventory $750; credit accounts payable $750

Q38. During 2015, Patnode had a cash outflow of $15,000 for investing activities and a cash
inflow of $7,000 from financing activities. Its 2015 cash flow from operations was an _______.

 outflow of $15,000
 inflow of $15,000
 outflow of $8,000
 inflow of $8,000

Q39. Juan Foods makes a cash sale with a positive gross margin. Which one of the following
statements describes the effect of the sale on Juan Foods?

 Current ratio increases

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 Current ratio decreases
No change to Juan Foods’ current ratio

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 Insufficient information to judge effect on current ratio

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Q40. Patnode recorded a 2015 tax expense of $3,000. What amount did it pay to the tax
authorities during 2015? rs e
ou urc
 $2,400
 $7,000
o

 $600
aC s

 $5,400
vi y re
ed d
ar stu
is
Th
sh

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