1. The fundamental accounting equation is a reflection of the:
Money measurement 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:
Cannot be calculated
6. When an entity recognizes revenue before it has received cash for the sale, it records an increase in a(n):
none of the above
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:
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?
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 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.
14. On December 31, 2005, Juan Foods purchases a van for $12,000. How does the purchase of the van affect Juan Foods’ 2005 income statement?
Decreases sales by $12,000
Increases operating expenses by $12,000
No material effect
Increases cost of goods sold by $12,000
15. 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
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