Financial Accounting Exam 2 – 40 MCQ’s

Financial Accounting Exam 2

1) The fundamental accounting equation is a reflection of the:
Money measurement concept 
Conservatism concept 
Dual-aspect concept
Historical cost concept

2) The historical cost concept reflects the fact that financial accounting practice favors:
Reliability over relevance
Management’s best guess over historical financial information
Relevance over reliability
Consensus market values over historical financial information

3)  Jon Sports’ inventory account increased from $25,000 on December 31, 2003 to $30,000 on December 31, 2004. Which one of the following items would be included in the operating section of its 2004 indirect method statement of cash flows?
Add increase in inventory $5,000
Subtract increase in inventory ($5,000)
Add inventory balance $20,000
Subtract inventory balance ($20,000) 

4) Turnkey Systems, Inc. began the month of June, 2004 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, 2004 ending balance of prepaid expenses?
A debit balance of $210,000
A credit balance of $210,000
A debit balance of $270,000
A credit balance of $270,000

5) Pentex and Marbro, small companies in the stationery business, each had a dollar gross margin of $20,000 during September 2004. Pentex’s September sales were twice that of Marbro’s. If Pentex’s gross margin as a percentage of sales for September was 10%, Marbro’s gross margin as a percentage of sales for the same period was:
10%     5%       20%     Cannot be calculated

Liability such as ‘Advances from customers’
Accounts payable
Accounts receivable
Prepaid expense

7) Juan Foods pays off a long-term debt in full. Which one of the following statements describes the effect of the sale on Juan Foods?
Current ratio increases; total debt to equity ratio decreases
Current ratio decreases; total debt to equity ratio decreases
Current ratio decreases; total debt to equity ratio increases
Current ratio increases; total debt to equity ratio increases

8) On January 1, 2005, Mansfield Company has a retained earnings balance of $256,000. During 2005, 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, 2005 retained earnings balance is:
$2,12,000        $2,88,000        $3,00,000        $2,24,000

9) 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
Current ratio decreases
No change to Juan Foods’ current ratio
Insufficient information to judge effect on current ratio

10) 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
Debit long-term debt; credit owners’ equity
Debit owners’ equity; credit long-term debt
Debit long-term debt; credit cash

11) On March 31, 2005, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2005, 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 owed to Preston. What is the effect of these April transactions on Preston’s balance sheet?

Accounts receivable increased by $2,000; inventory decreased by $8,000; cash increased by $12,000; retained earnings increased by $12,000.
Cash increased by $12,000; retained earnings decreased by $2,000; inventory decreased 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. 

12) Consider the same scenario as in the previous question: On March 31, 2005, Cars, Inc. owes Preston Devices, one of its suppliers, $25,000 for previous purchases. During April 2005, 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 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 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.
Subtract change in accounts receivable; subtract change in inventory. 

13) Planet Music buys all of its inventory on credit. During 2005, Planet Music’s inventory account increased by $10,000. Which of the following statements must be true for Planet Music during 2005?
It made payments of less than $10,000 to suppliers.
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. 

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

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

$5,600                         $3,600                         $4,600                         Cannot be estimated

Outflow of $15,000
Inflow of $15,000
Outflow of $8,000
Inflow of $8,000

Retained earnings, $4,600
Common stock issued, $3,000
Long-term debt paid, ($3,000)
Cash from financing, $3,000

$10,000           $6,000                         $3,000                         $5,000

$17,000           $14,000           $3,000             Cannot be estimated

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

2.46                 0.41                 1.12                 0.89

5.3       0.19     0.25     4.04

$2,400                         $7,000                         $600    $5,400

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

Matching concept
Entity concept
Materiality concept
Conservatism concept

$4,00,000        $80,000           $2,00,000        $1,00,000

$4,00,000        $80,000           $2,00,000        $1,00,000

Current ratio increases
Current ratio decreases
Current ratio remains unchanged
Insufficient information provided to judge effect on current ratio

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

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

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

The operating section
The financing section
The investing section
Depends on whether cash flow statement is direct or indirect method. 

$50,000 
$18,000 
$1,00,000 
Cannot be determined from the information provided

Debit cash $3,500; credit accounts payable $3,500
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 $3,50

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

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

Debit cash $42,000; debit inventory $16,000; credit accounts payable $58,000;
Debit inventory $100,000; credit cash $58,000; credit accounts payable $42,000
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

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
Debit cash $600; debit accounts receivable $400; credit inventory $1,000

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

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