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Sample Test

 Chapter 03

Exam
Name___________________________________
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
1) Every business, regardless of its size, requires a full-time accountant. 1)
Answer: True False
2) Every business, regardless of its size, should hire an accountant to help it set up its books. 2)
Answer: True False
3) The business form that is equivalent to the personal cash flow statement is the income statement. 3)
Answer: True False
4) The business form that is equivalent to the personal statement of financial position is the income
statement.
4)
Answer: True False
5) The business form that is equivalent to the personal cash flow statement is the balance sheet. 5)
Answer: True False
6) The business form that is equivalent to the personal statement of financial position is the balance
sheet.
6)
Answer: True False
7) A refund of the purchase price, increased warranty, or partial credit on the next purchase would be
listed on the income statement as returns and allowances.
7)
Answer: True False
8) A refund of the purchase price, increased warranty, or partial credit on the next purchase would be
listed on the income statement as cost of goods sold.
8)
Answer: True False
9) Liquidity is how fast an asset can be converted to cash. 9)
Answer: True False
10) U.S. government savings bonds are the most liquid asset that we can own because they can be
converted to cash at any bank.
10)
Answer: True False
11) Joan has a $100,000 mortgage on her commercial building. This would be carried on her balance
sheet as long-term debt.
11)
Answer: True False
12) Joan has a $100,000 mortgage on her commercial building. This would be carried on her balance
sheet as a current liability.
12)
Answer: True False
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13) How owner’s equity is shown on the balance sheet for a partnership is based on the partnership
agreement.
13)
Answer: True False
14) Public corporations have the ability to raise large quantities of cash by selling stocks and bonds. 14)
Answer: True False
15) Partnerships have the ability to raise large quantities of cash by selling stocks and bonds. 15)
Answer: True False
16) The income statement shows the cash flows of a business during the accounting period. 16)
Answer: True False
17) Medicare payments for both the employer and employee are not subject to an annual limit. 17)
Answer: True False
18) The employer’s contribution to Social Security is 6.20% of the employee’s salary. 18)
Answer: True False
19) The statement of cash flows is based on the comparison of two consecutive balance sheets. 19)
Answer: True False
20) The first section of the statement of cash flows is cash flow from financing activities. 20)
Answer: True False
21) An increase in accounts receivables is a cash inflow. 21)
Answer: True False
22) An increase in inventory is a cash outflow. 22)
Answer: True False
23) The general ledger uses a chart of accounts that lists every transaction of the business. 23)
Answer: True False
24) The general ledger uses a chart of accounts that lists only those transactions which are liabilities. 24)
Answer: True False
25) Cash flow from operating activities is the first item on the statement of cash flows. 25)
Answer: True False
26) In order to create a statement of cash flows, depreciation must be subtracted from net income. 26)
Answer: True False
27) An increase in accounts receivable from last year’s balance sheet to this year’s balance sheet
indicates that the business experienced a cash outflow.
27)
Answer: True False
28) Free cash flow is cash flow from operations minus estimated capital expenditures. 28)
Answer: True False
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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
29) Public corporations require independent audits due to requirements established by the 29)
A) Small Business Administration (SBA).
B) Financial Accounting Standards Board (FASB).
C) Securities and Exchange Commission (SEC).
D) Federal Reserve (Fed).
E) Occupational Safety and Health Administration (OSHA).
Answer: C
30) Variable expenses include all of the following EXCEPT 30)
A) insurance.
B) automobile maintenance.
C) clothing.
D) gas.
E) food.
Answer: A
31) Expenses that are contractual in nature and are normally paid every month are 31)
A) monthly expenses.
B) automatic expenses.
C) variable expenses.
D) accounting expenses.
E) fixed expenses.
Answer: E
32) The normal accounting period for a business is one 32)
A) quarter. B) year. C) week. D) month.
Answer: B
33) The income statement shows gross profit, which is equal to 33)
A) gross revenues minus returns and allowances.
B) net sales minus cost of goods sold.
C) earnings before taxes minus taxes.
D) operating income minus operating expenses.
E) operating income minus interest.
Answer: B
34) The income statement shows net profit, which is equal to 34)
A) gross revenues minus returns and allowances.
B) operating income minus operating expenses.
C) net sales minus cost of goods sold.
D) earnings before taxes minus taxes.
E) operating income minus interest.
Answer: D
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35) The income statement shows net sales, which is equal to 35)
A) earnings before taxes minus taxes.
B) gross revenues minus returns and allowances.
C) operating income minus operating expenses.
D) operating income minus interest.
E) net sales minus cost of goods sold.
Answer: B
36) The income statement shows earnings before taxes, which is equal to 36)
A) net sales minus cost of goods sold.
B) operating income minus interest.
C) gross revenues minus returns and allowances.
D) operating income minus operating expenses.
E) earnings before taxes minus taxes.
Answer: B
37) For a retail firm that sells clothing, which of the following would be considered part of the cost of
goods sold?
37)
A) price paid for dresses to be sold
B) freight
C) wages paid to sales clerks
D) A and B above
E) all of the above
Answer: D
38) For a manufacturing firm that makes computers, which of the following would NOT be considered
part of the cost of goods sold?
38)
A) speakers
B) accountant’s wages
C) disk drives
D) assembly line wages
E) memory chips
Answer: B
39) Which of the following would be considered to be an operating expense for a computer
manufacturing firm?
39)
A) assembly line wages
B) accountant’s wages
C) disk drives
D) speakers
E) memory chips
Answer: B
4
40) For most businesses, operating expenses include 40)
A) salaries for executives and administrative personnel, raw materials used in manufacturing,
rent, insurance, utilities, and advertising expenses.
B) salaries for executives and administrative personnel, cost of merchandise to be sold, rent,
insurance, utilities, and advertising expenses.
C) salaries for executives and administrative personnel, rent, freight on items to be sold,
insurance, utilities, and advertising expenses.
D) salaries for executives, administrative personnel, and assembly line workers; rent; insurance;
utilities; and advertising expenses.
E) salaries for executives and administrative personnel, rent, insurance, utilities, and advertising
expenses.
Answer: E
41) Net income on the income statement is obtained after subtracting taxes for the 41)
A) sole proprietorship.
B) corporation.
C) partnership.
D) Subchapter S corporation.
E) all of the above.
Answer: B
42) The personal statement of financial position and the balance sheet show the position of the
individual or firm
42)
A) for a period of time, which is normally one year.
B) for the accounting period, as determined by the business firm.
C) with a beginning and ending date.
D) as of a specific date.
E) for the accounting period, as determined by the Internal Revenue Service.
Answer: D
43) Current assets are assets that will normally be converted to cash during 43)
A) the current month.
B) the next business year.
C) the next week.
D) the accounting year.
E) all of the above.
Answer: D
44) The formula for the basic accounting equation is 44)
A) OWNER’S EQUITY = TOTAL LIABILITIES – TOTAL ASSETS.
B) OWNER’S EQUITY = TOTAL ASSETS + TOTAL LIABILITIES.
C) TOTAL ASSETS = TOTAL LIABILITIES + OWNER’S EQUITY.
D) TOTAL ASSETS = TOTAL LIABILITIES – OWNER’S EQUITY.
E) TOTAL LIABILITIES = TOTAL ASSETS + OWNER’S EQUITY.
Answer: C
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45) Current assets include 45)
A) inventory.
B) accounts receivable.
C) savings.
D) cash.
E) all of the above.
Answer: E
46) Current assets include all of the following EXCEPT 46)
A) buildings.
B) cash.
C) savings.
D) inventory.
E) accounts receivable.
Answer: A
47) Fixed assets are listed on the business balance sheet at the ________ and on the individual’s
statement of financial position at the ________.
47)
A) price paid for the asset; price paid for the asset
B) current market value; current market value
C) current market value; price paid for the asset
D) price paid for the asset; current market value
Answer: D
48) Which of the following fixed assets are always carried on the business books at the price paid for
the asset, and cannot be depreciated?
48)
A) store fixtures
B) land
C) machinery
D) equipment
E) buildings
Answer: B
49) Current assets are assets ________ and fixed assets are assets ________. 49)
A) converted to cash during the accounting year; converted to cash during the accounting year
B) that have an expected life in excess of one year; that have an expected life in excess of one
year
C) that have an expected life in excess of one year; converted to cash during the accounting year
D) converted to cash during the accounting year; that have an expected life in excess of one year
Answer: D
50) Alex bought $50,000 worth of computers for his firm; he will pay the vendor for these computers
on the fifteenth of next month. These items would be carried on the ________ and listed as
________.
50)
A) balance sheet; accounts payable
B) balance sheet; notes payable
C) income statement; notes payable
D) income statement; accounts payable
E) none of the above
Answer: A
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51) Total assets on the balance sheet include 51)
A) current assets + fixed assets + depreciation.
B) current assets + fixed assets – depreciation.
C) current assets – fixed assets + depreciation.
D) current assets – fixed assets – depreciation.
E) none of the above.
Answer: B
52) The Tom Smith Corporation has the following items: Cash, $5,000; Machinery, $50,000; Building,
$150,000; Note payable bank, $10,000; Savings, $10,000; Long-term debt, $50,000; Accounts
payable, $30,000; Taxes payable, $5,000; Accounts receivable, $30,000; Inventory, $10,000;
Depreciation Building, $35,000; Depreciation Machinery, $25,000; Land $50,000. Current assets for
this Corporation are
52)
A) $45,000. B) $55,000. C) $95,000. D) $155,000. E) $190,000.
Answer: B
53) The Tom Smith Corporation has the following items: Cash, $5,000; Machinery, $50,000; Building,
$150,000; Note payable bank, $10,000; Savings, $10,000; Long-term debt, $50,000; Accounts
payable, $30,000; Taxes payable, $5,000; Accounts receivable, $30,000; Inventory, $10,000;
Depreciation Building, $35,000; Depreciation Machinery, $25,000; Land $50,000. Current liabilities
for this Corporation are
53)
A) $45,000. B) $55,000. C) $95,000. D) $155,000. E) $190,000.
Answer: A
54) The Tom Smith Corporation has the following items: Cash, $5,000; Machinery, $50,000; Building,
$150,000; Note payable bank, $10,000; Savings, $10,000; Long-term debt, $50,000; Accounts
payable, $30,000; Taxes payable, $5,000; Accounts receivable, $30,000; Inventory, $10,000;
Depreciation Building, $35,000; Depreciation Machinery, $25,000; Land $50,000. Owner’s equity for
this Corporation are
54)
A) $45,000. B) $55,000. C) $95,000. D) $155,000. E) $190,000.
Answer: D
55) The Tom Smith Corporation has the following items: Cash, $5,000; Machinery, $50,000; Building,
$150,000; Note payable bank, $10,000; Savings, $10,000; Long-term debt, $50,000; Accounts
payable, $30,000; Taxes payable, $5,000; Accounts receivable, $30,000; Inventory, $10,000;
Depreciation Building, $35,000; Depreciation Machinery, $25,000; Land $50,000. Total liabilities for
this Corporation are
55)
A) $45,000. B) $55,000. C) $95,000. D) $155,000. E) $190,000.
Answer: C
56) The Tom Smith Corporation has the following items: Cash, $5,000; Machinery, $50,000; Building,
$150,000; Note payable bank, $10,000; Savings, $10,000; Long-term debt, $50,000; Accounts
payable, $30,000; Taxes payable, $5,000; Accounts receivable, $30,000; Inventory, $10,000;
Depreciation Building, $35,000; Depreciation Machinery, $25,000; Land $50,000. Fixed assets for
this Corporation are
56)
A) $45,000. B) $55,000. C) $95,000. D) $155,000. E) $190,000.
Answer: E
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57) The Tom Smith Corporation has the following items: Cash, $5,000; Machinery, $50,000; Building,
$150,000; Note payable bank, $10,000; Savings, $10,000; Long-term debt, $50,000; Accounts
payable, $30,000; Taxes payable, $5,000; Accounts receivable, $30,000; Inventory, $10,000;
Depreciation Building, $35,000; Depreciation Machinery, $25,000; Land $50,000. Total assets for this
Corporation are
57)
A) $55,000. B) $95,000. C) $155,000. D) $190,000. E) $245,000.
Answer: E
58) The actual value of a business can easily be found by finding 58)
A) book value on the cash flow statement.
B) book value on the income statement.
C) book value on the balance sheet.
D) all of the above.
E) none of the above.
Answer: E
59) Janet has a company that pays all employees a salary on the first and the fifteenth of the month.
Her normal payroll is $10,000 per pay period. On the last day of the month she would have shown
59)
A) $10,000 as cost of goods sold on the income statement.
B) $10,000 as payroll payable on the balance sheet.
C) $10,000 as a cash flow from operating expenses on the statement of cash flows.
D) $10,000 as an operating expense under salaries on the income statement.
Answer: B
60) Janet has a company that pays all employees a salary on the first and the fifteenth of the month.
Her normal payroll is $10,000 per pay period. On the last day of the month she would have shown
60)
A) $10,000 as payroll payable on the balance sheet.
B) $20,000 as a cash flow from operating expenses on the statement of cash flows.
C) $20,000 as an operating expense under salaries on the income statement.
D) All of the above.
E) Not enough information is provided to answer this question.
Answer: D
61) Cash received from the sale of stocks or bonds and the actual cash paid to others in the form of
dividends to owners and the payment of long-term debt would show up on the cash flow
statement under the category of
61)
A) cash flows from financing activities.
B) cash flows from investing activities.
C) cash flows from operating activities.
D) A and B above.
E) B and C above.
Answer: A
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62) Cash paid in the acquisition of land, buildings, or equipment; loans to other companies; and the
proceeds from the sale of land, buildings, or equipment will show up on the cash flow statement
under the category of
62)
A) cash flows from financing activities.
B) cash flows from investing activities.
C) cash flows from operating activities.
D) A and B above.
E) B and C above.
Answer: B
63) Cash payments made to employees for wages and salaries; payments made to vendors for the
purchase of merchandise; taxes paid to government agencies; payments for rent, utilities, and
insurance will show up on the statement of cash flows under the category of
63)
A) cash flows from financing activities.
B) cash flows from investing activities.
C) cash flows from operating activities.
D) A and B above.
E) B and C above.
Answer: C
64) Depreciation expense 64)
A) is subtracted from the statement of cash flows.
B) is added to the statement of cash flows because it is not an expenditure.
C) is listed on the income statement as a variable expense.
D) appears only on the income statement.
Answer: B
65) Which of the following is a cash outflow? 65)
A) a decrease in accounts receivable B) an increase in accounts receivable
C) an increase in accounts payable D) a decrease in inventory
Answer: B
66) A company’s net cash from operating activities is lower than its net income indicating that 66)
A) too little cash is being spent.
B) the company had less available funds than its net income.
C) too much cash is being spent.
D) none of the above.
Answer: B
67) The final step in generating a statement of cash flows is to 67)
A) sum up cash flow from operations, financing, and investment activities and transfer it to the
balance sheet.
B) sum up cash flow from operations and transfer it to the balance sheet.
C) sum up cash flow from investing activities and transfer it to the balance sheet.
D) none of the above.
Answer: A
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68) Which of the following is true for free cash flow?
I. Free cash flow is easier to calculate than operating cash flow.
II. Estimated capital expenditures are subtracted from operating cash flow.
III. Estimated capital expenditures are added to operating cash flow.
IV. A negative free cash flow indicates that the company needs additional financing.
68)
A) III & IV B) II & IV C) I, II, & III D) I & III
Answer: B
69) The primary objective of Sarbanes-Oxley is to protect investors by
I. improving the accuracy of corporate disclosures.
II. loosening the reins on how information is reported.
III. improving the reliability of corporate disclosures.
IV. holding executive officers liable for the accuracy of corporate financial statements.
69)
A) II only B) I, II, & IV C) I, III, &IV D) I, II, & III
Answer: C
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