Acct 504 Quiz

1. Two primary external users of accounting information are investors and creditors. TRUE

2. The economic resources that are owned by a business are called stockholders' equity. FALSE

3. Net income for the period is determined by subtracting total expenses and dividends from revenues. FALSE

4. The heading for the income statement might include the line “As of December 31, 20xx.” TRUE

5. Net income is another term for revenue. FALSE

6. The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company for a specific period of time. TRUE

7. The balance sheet reports assets and claims to those assets at a specific point in time. True?

8. One way of
stating the accounting equation is: Assets + Liabilities = Stockholders' Equity. FALSE

9. Claims of creditors and owners on the assets of a business are called liabilities. TRUE

10. Creditors' rights to assets supersede owners' rights to the assets. True?

11. Long-term investments appear in the property, plant, and equipment section of the balance sheet. FALSE

12. A liability is classified as a current liability if it is to be paid within the coming year. TRUE

13. Stockholders' equity is divided into two parts: common stock and retained earnings. FALSE

14. The retained earnings statement describes the changes in retained earnings during the period. True?

15. Revenues have the effect of increasing retained earnings. TRUE

16. The primary accounting standard-setting body in the United States is the Securities and Exchange Commission. TRUE

17. For information to be useful, it must be both relevant and reliable. TRUE

18. The advantage of accounting information is that it provides exact and completely reliable measures. FALSE

19. The time period assumption states that the business will remain in operation for the foreseeable future. FALSE

20. The economic entity assumption states that economic events can be identified with a particular unit of account stability. True?

21. Revenue increases stockholders' equity and should be recorded whenever cash is received from customers. FALSE

22. Collection on an account receivable will increase both cash and accounts receivable. FALSE

23. The payment of a liability decreases both cash and accounts payable. FALSE

24. If total assets are increased there must be a corresponding increase in liabilities or a decrease in stockholders' equity. False?

25. A debit to an account always indicates an increase in that account. FALSE
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26. If a revenue account is credited the revenue account is increased. TRUE

27. A decrease in a liability account is recorded by a debit. TRUE

28. The normal balance of an asset is a credit. FALSE

29. A debit means that an account has been decreased. FALSE

30. Wages payable is a type of expense. FALSE

31. The time period assumption states that the economic life of a business entity can be divided into artificial time periods. TRUE

32. The revenue recognition principal dictates that revenue be recognized in the accounting period in which it is earned. TRUE

33. The matching principle requires that efforts be related to accomplishments. TRUE

34. The cash basis of accounting is not in accordance with generally accepted accounting principles. TRUE

35. Adjusting entries are often made because some business events are not recorded as they occur. FALSE

36. An adjusting entry to a prepaid expense is required to recognize expired expenses. TRUE

37. An adjusting entry always involves two balance sheet accounts. FALSE

38. Revenue received before it is earned and expenses paid before being used or consumed are both initially recorded as liabilities. FALSE

39. Accrued revenues are revenues that have been received but not yet earned. TRUE

40. The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset. TRUE

41. Sales minus operating expenses equals gross profit. FALSE

42. Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs. TRUE

43. The terms 2/10, net/30 mean that a 2 percent discount is allowed on payments made within the 10 days discount period. TRUE

44. Sales revenues are only earned during the period cash is collected from the buyer. True?

45. The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts. FALSE

46. General and administrative expenses are a category of operating expense. TRUE

47. Gross profit appears on both the single-step and multiple-step forms of an income statement. FALSE

48. Non-operating activities include revenues and expenses that are related to the company's main line of operations. FALSE

49. Raw materials inventories are the goods that a manufacturing company has completed and are ready to be sold to customers. FALSE

50. A manufacturer's inventory consists of raw materials, work in process, and finished goods. TRUE
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51. When the terms of sale are FOB shipping point, legal title to the goods remains with the seller until the goods reach the buyer. FALSE

52. Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods by the buyer. TRUE

53. In accounting for inventory, the assumed flow of costs must match the physical flow of goods. False?

54. The First-in, First-out (FIFO) inventory method results in an ending inventory valued at the most recent cost. TRUE

55. In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO. TRUE

56. In periods of falling prices, FIFO will result in a larger net income than the LIFO method. FALSE

57. The most important element of the fraud triangle is rationalization. False?

58. Employees sometimes commit fraud because of personal financial problems caused by too much debt. TRUE

59. The safeguarding of assets is an objective of a company's system of internal control. True?

60. When one individual is responsible for all related activities, the potential for errors and irregularities is decreased. FALSE

61. Internal control is most effective when several people are responsible for a given task. FALSE

62. The responsibility for keeping the records for an asset should be separate from the physical custody of that asset. TRUE

63. Requiring employees to take vacations is a weakness in the system of internal controls because it does not promote operational efficiency. FALSE

64. Bonding means insuring a company against theft by employees. True?

65. An effective system of internal control requires that at least two individuals be assigned to one cash drawer so that each can serve as check on the other. FALSE

66. A good system of internal control will safeguard its assets and enhance the accuracy and reliability of its accounting records. TRUE

67. A system of internal control cannot be considered good until the possibility of human error has been completely eliminated. False?

68. Only large companies need to be concerned with a system of internal control. FALSE

69. Under an effective system of internal control, errors occur only as a result of fraud or dishonesty. False?

70. The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals. TRUE

71. Trade receivables can be an account receivable or a note receivable. True?

72. Other receivables include non-trade receivables such as loans to company officers. TRUE

73. Advances to employees are referred to as accounts receivable. True?

74. Both accounts receivable and notes receivable represent claims that are expected to be collected in cash. TRUE

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75.
Accounts receivable are one of a company's least liquid assets. FALSE

76. The two accounting problems with accounts receivable are: (1) recognizing and (2) disposing. True?

77. Receivables are valued and reported in the balance sheet at their gross amount less any sales returns and allowances and less any cash discounts. FALSE

78. The allowance method of accounting for bad debts violates the matching principle. FALSE

79. Uncollectible accounts must be estimated because it is not possible to know which accounts will not be collected. TRUE

80. If a company uses the allowance method to account for uncollectible accounts, the entry to write off an uncollectible account only involves balance sheet accounts. TRUE

81. The percentage of receivables basis of estimating uncollectible accounts ignores the existing balance in the allowance account when the bad debt adjusting entry is recorded. True?

82. All plant assets (fixed assets) must be depreciated for accounting purposes. False?

83. When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account. FALSE

84. Land improvements are generally charged to the Land account.
FALSE

85. The book value of a plant asset is always equal to its fair market value. False?

86. Recording depreciation on plant assets affects the balance sheet and the income statement. TRUE

87. Recording depreciation each period is an application of the matching principle. TRUE

88. In calculating depreciation, both plant asset cost and useful life are based on estimates. FALSE

89. When a change in estimate is made, there is no correction of previously recorded depreciation expense. TRUE

90. If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs. TRUE

91. Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer. TRUE

92. Interest expense is reported under Other Expenses and Losses in the income statement. TRUE

93. Notes payable usually require the borrower to pay interest. TRUE

94. Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year. True?

95. Unearned revenues should be classified as Other Revenues and Gains on the income statement. FALSE

96. In a monthly mortgage payment, the same amount is recorded as interest expense as in the previous month's payment. ????

97. When a monthly mortgage payment is made and recorded, the debit to Mortgage Payable represents the reduction in the principal balance. TRUE

98. A corporation is not an entity that is separate and distinct from its owners. FALSE

99. The liability of a stockholder is usually limited to the stockholder's investment in the corporation. TRUE

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100. The sale of shares in a corporation by one stockholder to another affects the total capital of the corporation. FALSE

101.
A corporation can be organized for the purpose of making a profit or it may be nonprofit. TRUE

102. A corporation must be incorporated in each state in which it does business. FALSE

103. A stockholder has the right to vote in the election of the board of directors. TRUE

104. When no-par value stock does not have a stated value, the entire proceeds from the issuance of the stock become legal capital. TRUE

105. As soon as a corporation is authorized to sell stock, an accounting journal entry should be made recording the total value of the shares authorized. FALSE

106. The par value of common stock must always be equal to its market value on the date the stock is issued. FALSE

107. For accounting purposes, stated value is treated the same way as par value. TRUE

108. Paid-in capital is the amount paid in to the corporation by stockholders in exchange for shares of ownership. TRUE

109. The acquisition of treasury stock by a corporation increases total assets and total stockholders' equity. FALSE

110. Treasury stock should not be classified as a current asset. TRUE

111. Treasury stock is a contra stockholders' equity account.
TRUE

112. The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement. TRUE

113. A statement of cash flows indicates the sources and uses of cash during a period. TRUE

114. Operating activities include the cash effects of transactions that create revenues and expenses. TRUE

115. The statement of cash flows explains the difference between net income, as shown on the income statement, and the net cash flows generated from operations. TRUE

116. The receipt of dividends from long-term investments in stock is classified as a cash inflow from investing activities. FALSE

117. The payment of interest on bonds payable is classified as a cash outflow from operating activities. TRUE

118. A loss on sale of equipment is added to net income in determining cash provided by operations under the indirect method. TRUE

119. Cash provided by operations is generally equal to operating income. FALSE

120. Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations. TRUE