Pass PA ( Multiple Choice)

1. The primary objective of financial accounting is to:

Provide accounting information that serves external users.

2. The accounting concept that requires every business to be accounted for separately

from other business entities, including its owner or owners is known as the:

Business entity assumption.

3. If assets are $300,000 and liabilities are $192,000, then equity equals:

$108,000.

4. An example of an operating activity is:

Paying wages.

5. A business's source documents:

Provide objective evidence that a transaction has taken place.

Unearned revenues are generally:

Liabilities created when a customer pays in advance for products or services before the

revenue is earned.

The accounting principle that requires revenue to be recorded when earned is the:

Revenue recognition principle.

A debit is used to record an increase in all of the following accounts except:

Accounts Payable

A double-entry accounting system is an accounting system:

That records the effect of each transaction in at least two accounts with equal debits

and credits

Adjusting entries made at the end of an accounting period accomplish all of the

following except:

Assuring that external transaction amounts remain unchanged.

Profit margin is defined as:

Net income divided by net sales.

The periodic expense created by allocating the cost of plant and equipment to the

periods in which they are used, representing the expense of using the assets, is called:

Depreciation expense.

Which of the following accounts is a temporary account:

Salaries expense.

The special account used only in the closing process to temporarily hold the

amounts of revenues and expenses before the net difference is added to (or

subtracted from) the owner's capital account is the:

Income Summary account.

The assets section of a classified balance sheet usually includes the subgroups:

Current assets, long-term investments, plant assets, and intangible assets.

The current ratio:

Is used to help assess a company's ability to pay its debts in the near future.

Cost of goods sold:

Is the term used for the expense of buying and preparing merchandise for sale.

The credit terms 2/10, n/30 are interpreted as:

2% cash discount if the amount is paid within 10 days, or the balance due in 30 days.

 Sales less sales discounts, less sales returns and allowances equals:

Net sales.

An income statement that includes cost of goods sold as another expense and

shows only one subtotal for total expenses is a:

Single-step income statement.

 Merchandise inventory includes:

All goods owned by a company and held for sale.

During a period of steadily rising costs, the inventory valuation method that yields

the highest reported net income is:

FIFO method.

The understatement of the ending inventory balance causes:

Cost of goods sold to be overstated and net income to be understated.

The inventory turnover ratio:

Reveals how many times a company sells its merchandise inventory during a period.

A promissory note received from a customer in exchange for an account receivable

is recorded by the payee as:

 A note receivable

A finance company or bank that purchases and takes ownership of another

company's accounts receivable is called a:

Factor

 The accounts receivable turnover is calculated by:

Dividing net sales by average accounts receivable.

The expense recognition principle, as applied to bad debts, requires:

The use of the allowance method of accounting for bad debts.

 Plant assets are defined as:

Tangible assets that have a useful life of more than one accounting period and are used

in the operation of a business.

The formula to compute annual straight-line depreciation is:

(Cost minus salvage value) divided by the useful life in years.

Revenue expenditures:

Are additional costs of plant assets that do not materially increase the asset's life or its

productive capabilities.

 Depletion is:

The process of allocating the cost of natural resources to the period when it is

consumed.

 A cost that remains unchanged in total despite variations in volume of activity

within a relevant range is a:

Fixed cost.

 The margin of safety is the excess of:

Expected sales over break-even sales.

The sales level at which a company neither earns a profit nor incurs a loss is the:

Break-even point.

The difference between sales price per unit and variable cost per unit is the:

Contribution margin per unit.

A budget is best described as:

A formal statement of a company's future plans usually expressed in monetary terms.

The usual starting point in the budgeting process is a plan showing the planned

sales units and the revenue expected from these sales. This plan is called the:

Sales budget

A plan that shows the expected cash inflows and cash outflows during the budget

period, including receipts from loans needed to maintain a minimum cash balance

and repayments of such loans, is called a(n):

Cash budget.

Which of the following must be prepared before the direct labor budget?

 Production budget.

The primary objective of financial accounting is to:

Provide information on both the costs and benefits of looking after products and

services.

The accounting concept that requires every business to be accounted for separately

from other business entities, including its owner or owners, is known as the:

 Business entity assumption.

An example of a financing activity is:

Obtaining a long-term loan

Another name for equity is:

Net assets

A record of the increases and decreases in a specific asset, liability, equity, revenue,

or expense is known as a(n):

Account

Unearned revenues are generally:

Liabilities created when a customer pays in advance for products or services before the revenue is earned.

A debit:

Is the left-hand side of a T-account.

Edison Consulting received a $300 utilities bill and immediately paid it. Edison's

general journal entry to record this transaction will include a:

Debit to Utilities Expense for $300

The accounting principle that requires revenue to be recorded when earned is the:

B) Revenue recognition principle.

The system of preparing financial statements based on recognizing revenues when

the cash is received and reporting expenses when the cash is paid is called:

Cash basis accounting.

Profit margin is defined as

Net income divided by net sales.

Unearned revenue is reported in the financial statements as:

A liability on the balance sheet.

When closing entries are made:

All temporary accounts are closed, but permanent accounts are not closed

A classified balance sheet:

Organizes assets and liabilities into important subgroups that provide more information.

 Which of the following is classified as a current asset?

Accounts receivable

Cost of goods sold:

Is the term used for the expense of buying and preparing merchandise for sale

Sales less sales discounts, less sales returns and allowances equals:

Net sales

An income statement that includes cost of goods sold as another expense and

shows only one subtotal for total expenses is a:

Single-step income statement

Merchandise inventory includes:

All goods owned by a company and held for sale

The inventory turnover ratio is calculated as:

Cost of goods sold divided by average merchandise inventory.

The inventory valuation method that identifies each item in ending inventory with a

specific purchase and invoice is the:

Specific identification method.

The maturity date of a note receivable

Is the day the note is due to be repaid

Which of the following is an accounting method that (1) estimates and reports bad

debts expense from credit sales during the period the sales are recorded, and (2)

reports accounts receivable at the estimated amount of cash to be collected?

Allowance method of accounting for bad debts

Depreciation:

Is the process of allocating the cost of a plant asset to expense.

Revenue expenditures:

Are additional costs of plant assets that do not materially increase the asset's life or its productive capabilities.

Amortization is:

The systematic allocation of the cost of an intangible asset to expense over its estimated useful life.

A cost that changes in total in proportion to changes in volume of activity is a(n):

Variable cost

A company's normal operating range, which excludes extremely high or low

operating levels that are not likely to occur, is called the:

Relevant range.

The sales level at which a company neither earns a profit nor incurs a loss is the:

Break-even point

A formal statement of future plans, usually expressed in monetary terms, is a:

Budget

Budgets that are periodically revised and have new periods added to replace those

that have lapsed are called:

Rolling budgets

The master budget of a merchandising company includes a:

Purchases budget.

A plan that reports the units or costs of merchandise to be purchased by a

merchandising company during the budget period is called a:

Merchandise purchases budget.

The area of accounting aimed at serving the decision making needs of internal users

is:

Managerial Accpounting

A corporation is:

A business legally separate from its owners.

Net Income:

Is the excess of revenues over expenses.

The financial statement that identifies a company's cash receipts and cash

payments over a period of time is the:

Statement of cash flows.

 An account used to record the owner's investments in a business is called a(n):

Capital account.

Unearned revenues refer to a(n):

Liability that is settled in the future when a company delivers its products or services.

Identify the statement below that is correct:

The left side of a T-account is the debit side.

Prepaid expenses, depreciation expense, accrued expenses, unearned revenues,

and accrued revenues are all examples of:

Items that require adjusting entries.

An account linked with another account that has an opposite normal balance and

is subtracted from the balance of the related account is a(n):

Contra account.

Incurred but unpaid expenses that are recorded during the adjusting process with

a debit to an expense and a credit to a liability are:

Accrued expenses.

Revenues, expenses, and withdrawals accounts, which are closed at the end of

each accounting period are:

Temporary accounts.

The steps performed each reporting period in preparing financial statements,

starting with analyzing and recording transactions in the journal and continuing

through the post-closing trial balance, is referred to as the:

Accounting cycle

The trial balance prepared after all closing entries have been journalized and

posted is called the:

Post-closing trial balance

A trade discount is:

A reduction in selling price below the list price

 Sales returns:

Refer to merchandise that customers return to the seller after the sale.

Expenses that support the overall operations of a business and include the

expenses relating to accounting, human resource management, and financial

management are called:

General and administrative expenses.

Expenses to promote sales by displaying and advertising merchandise, make

sales, and deliver goods to customers are known as:

Selling expenses

Goods in transit are included in a purchaser's inventory:

When the goods are shipped FOB shipping point.

 The inventory valuation method that tends to smooth out erratic changes in costs

is:

Weighted average

The inventory valuation method that results in the lowest taxable income in a

period of inflation is:

LIFO method.

Quick assets are defined as:

Cash, short-term investments, and current receivables.

The person who signs a note receivable and promises to pay the principal and

interest is the:

Maker.

A finance company or bank that purchases and takes ownership of another

company's accounts receivable is called a:

Factors

The quality of receivables refers to:

The likelihood of collection without loss.

A method of estimating bad debts expense that involves a detailed examination of

outstanding accounts and the length of time past due is the:

Aging of accounts receivable method.

One characteristic of plant assets is that they are

Used in operations

The total cost of an asset less its accumulated depreciation is called:

Book Value