1. Use the following data to calculate the current ratio.

Koonce Office Supplies

Balance Sheet

December 31, 2012

Cash $130,000 Accounts Payable $140,000

Prepaid Insurance 60,000 Salaries Payable 20,000

Accounts Receivable 100,000 Mortgage Payable 160,000

Inventory 140,000 Total Liabilities $320,000

Land held for Investment 150,000  

Land 180,000  

Buildings $200,000 Common Stock $240,000

Less Accumulated Retained Earnings 500,000

Depreciation (40,000) 160,000 Total Stockholders’ Equity $740,000

Trademarks 140,000 Total Liabilities and  

Total Assets $1,060,000 Stockholders Equity $1,060,000

A. 1.81 : 1.

B. 1.44 : 1.

C. 3.07 : 1.

D. 2.69 : 1.

Answer; D. 2.69 : 1.

2. In horizontal analysis, each item is expressed as a percentage of the

A. stockholders’ equity amount.

B. base-year amount.

C. total assets amount.

D. net income amount.

Answer; B. base-year amount.

3. Common stock is reported on the

A. statement of cash flows.

B. balance sheet.

C. income statement.

D. retained earnings statement.

Answer; B. balance sheet.

4. When a change in depreciation method occurs:

A. the cumulative effect of the change in accounting principle should be classified as an extraordinary item on the income statement.

B. the cumulative effect of the change should be reflected on the income statement as of the beginning of the next year.

C. prior years’ financial statements should be changed to reflect the newly adopted method.

D. the change should be reported in current and future years.

Answer; D. the change should be reported in current and future years.

5. Using accrual accounting, expenses are recorded and reported only:

A. when they are incurred and paid at the same time.

B. if they are paid after they are incurred.

C. when they are incurred whether or not cash is paid.

D. if they are paid before they are incurred.

Answer; C. when they are incurred whether or not cash is paid.

6. An investment by the stockholders in a business increases

A. assets and stockholders’ equity.

B. liabilities and stockholders’ equity.

C. assets and liabilities.

D. assets only.

Answer; A. assets and stockholders’ equity.

7. The reconciliation of the cash register tape with the cash in the register is an example of

A. establishment of responsibility.

B. other controls.

C. segregation of duties.

D. independent internal verification.

Answer; D. independent internal verification.

8. Reed company acquires 80 Holmes 10%, 5 years, $1,000 bonds on January 1, 2012 for $82,000. This includes a brokerage commission of $2,000. The journal entry to record this investment includes a debit to

Answer; B. Debt Investments for $82,000

9. Deposits in transit

A. have not been recorded by the bank or the company.

B. have been recorded by the bank but not yet by the company.

C. have been recorded on the company’s books but not yet by the bank.

D. are customers’ checks that have not yet been received by the company.

Answer; C. have been recorded on the company’s books but not yet by the bank.

10. From an internal control standpoint, the asset most susceptible to improper diversion and use is

A. land.

B. buildings.

C. prepaid insurance.

D. cash.

Answer; D. cash.

11. Which of the following financial statements is divided into major categories of operating, investing, and financing activities?

A. The statement of cash flows.

B. The balance sheet.

C. The income statement.

D. The retained earnings statement.

Answer; A. The statement of cash flows.

12. If the retained earnings account increases from the beginning of the year to the end of the year, then

A. net income is greater than dividends.

B. additional investments are less than net losses.

C. a net loss is less than dividends.

D. net income is less than dividends.

Answer; A. net income is greater than dividends.

13. The Vintage Laundry Company purchased $6,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $2,000 on hand. The adjusting entry that should be made by the company on June 30 is:

A. debit Laundry Supplies Expense, $2,000; credit Laundry Supplies, $2,000.

B. debit Laundry Supplies, $4,500; credit Laundry Supplies Expense, $4,500.

C. debit Laundry Supplies Expense, $4,500; credit Laundry Supplies, $4,500.

D. debit Laundry Supplies, $2,000; credit Laundry Supplies Expense, $2,000

Answer; D. debit Laundry Supplies, $2,000; credit Laundry Supplies Expense, $2,000

14. Why do pension and mutual funds invest in debt and equity securities?

A. They invest for speculative reasons.

B. They invest for strategic reasons.

C. They have excess cash.

D. They want to generate earnings from investment income.

Answer; A. They invest for speculative reasons.

15. Notification by the bank that a deposited customer check was returned NSF requires that the company make the following adjusting entry:

A. Miscellaneous Expense/Accounts Receivable

B. No adjusting entry is necessary

C. Cash/Accounts Receivable

D. Accounts Receivable/Cash

Answer; D. Accounts Receivable/Cash

16. Which of the following items on a bank reconciliation would require an adjusting entry on the company’s books?

A. Outstanding checks.

B. A bank service charge.

C. A deposit in transit.

D. An error by the bank.

Answer; D. An error by the bank.

17. Stockholders’ equity can be described as claims of

A. customers on total assets.

B. owners on total assets.

C. debtors on total assets.

D. creditors on total assets.

Answer; B. owners on total assets.

18. Which of the following statements is true with respect to financial statement reporting for all cases when a company changes from one acceptable accounting method to another?

A. Comparability across periods is impaired.

B. Changes in both depreciation methods and inventory methods are reported retroactively.

C. Only a footnote is required to report the change.

D. Management must indicate that the accounting method change is preferable to the old method.

Answer; D. Management must indicate that the accounting method change is preferable to the old method.

19. Which of the following would be considered a change in accounting principle?

A. Changing the estimated useful life of a plant asset from 5 to 10 years.

B. Changing the inventory costing method used from FIFO to LIFO.

C. Changing the estimated percentage used in calculating bad debt expense.

D. Changing auditing firms to find a more liberal opinion.

Answer; A. Changing the estimated useful life of a plant asset from 5 to 10 years.

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