The Accounting Process

Question 1

The accounting process involves all of the following except

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identifying economic transactions that are relevant to the business.

analyzing and interpreting financial reports.

communicating financial information to users by preparing financial reports.

recording non-quantifiable economic events.


Question 2

Which of the following would not be considered an internal user of accounting data?


Controller of the company

Production manager

President of the company

Internal Revenue Service


Question 3

Generally Accepted Accounting Principles are


theories that are based on physical laws of the universe.

principles that have been proven correct by academic researchers.

income tax regulations of the Internal Revenue Service.

standards that indicate how to report economic events.


Question 4

The three types of business entities are


proprietorships, partnerships, and corporations.

proprietorships, partnerships, and large businesses.

financial, manufacturing, and service companies.

proprietorships, small businesses, and partnerships.


Question 5

Owner’s equity is equal to


assets minus liabilities.

assets plus liabilities.

assets minus revenues.

revenues minus expenses.


Question 6

The left side of an account


is always the credit side.

is always the debit side.

is always the balance side.

may represent the debit side or the credit side.


Question 7



decrease both assets and liabilities.

increase both assets and liabilities.

decrease both assets and equity.

increase liabilities and decrease assets.


Question 8

The second step in the recording process is


preparing a trial balance.

posting to the general ledger.

analyzing a transaction.

journalizing a transaction.


Question 9

The chart of accounts is a


device used to prove the mathematical accuracy of the ledger.

listing of the accounts and the account numbers that identify their location in the ledger.

required step in the recording process.

list of accounts and their balances at a given time.


Question 10

A list of accounts and their balances at a given point in time is called a


chart of accounts.

trial balance.

general journal.

general ledger.


Question 11

The expense recognition principle matches


assets with owner’s equity.

assets with liabilities

assets with expenses.

expenses with revenues.


Question 12

If a resource has been consumed but a bill has not been received at the end of the accounting period,


it is optional whether to record the expense before the bill is received.

an adjusting entry should be made recognizing the expense.

an expense should be recorded in the next accounting period when the bill is received.

an expense should be recorded when the cash is paid out.


Question 13


An adjusting entry for accrued expenses increases an expense and also increases a liability account.





Question 14

The adjusted trial balance is prepared


after the balance sheet is prepared.

after the adjusting entries are prepared and posted to the ledger.

to prove no errors have been made during the accounting period.

after the financial statements are prepared.


Question 15

If cash received for future services is initially recorded in revenue accounts and the company has not yet performed all of the required services at the end of the accounting period, then failure to make an adjusting entry will cause


liabilities to be overstated.

revenues to be overstated.

revenues to be understated.

accounts receivable to be overstated.


Question 16

Closing entries are necessary for


both permanent and temporary accounts.

temporary accounts only.

permanent or real accounts only.

permanent account only.


Question 17

A post-closing trial balance will contain only


permanent accounts.

temporary accounts.

income statement accounts.

nominal accounts.


Question 18

Correcting entries


may involve any combination of accounts in need of correction.

affect income statement accounts only.

always affect at least one balance sheet account and one income statement account.

affect balance sheet accounts only.


Question 19

All of the following are property, plant, and equipment except







Question 20

Current liabilities


are obligations that the company expects to pay within the coming year or the operating cycle, whichever is longer.

should not include long-term debt that is expected to be paid within the next year.

are listed in the balance sheet in order of their expected maturity.

must reasonably be expected to be paid within one year or the operating cycle, whichever is shorter.


Question 21

Under a perpetual inventory system


freight costs are debited to Freight-Out.

purchase returns are debited to Purchase Returns and Allowances.

purchases on account are debited to Inventory.

purchases on account are debited to Purchases.


Question 22

A company that maintains a perpetual inventory system has an inventory account balance of $50,000. The physical count of goods on hand totals $49,600. Which of the following adjusting entries is correct?


debit Inventory and credit Purchases.

debit Purchases and credit Inventory.

debit Sales Discounts and credit Inventory.

debit Cost of Goods Sold and credit Inventory.


Question 23

Which of the following accounts may be found in the adjustment columns of a worksheet for a merchandiser but not a service company?


Accumulated Depreciation – Equipment

Salaries and Wages Expense

Prepaid Insurance

Cost of Goods Sold


Question 24

When goods are purchased for resale by a company using a periodic inventory system


freight costs are debited to Purchases.

purchases on account are debited to Inventory.

purchases on account are debited to Purchases.

purchase returns are debited to Purchase Returns and Allowances.


Question 25

In a period of rising prices, FIFO will result in


lower income tax expense than LIFO.

lower net purchases than LIFO.

lower net income than LIFO.

lower cost of goods sold than LIFO.


Question 26

Rickety Company purchased 1,000 widgets and has 200 widgets in its ending inventory at a cost of $91 each and a current replacement cost of $80 each. The ending inventory under lower-of-cost-or-market is







Question 27

The following information is available for Tye Company at December 31: Beginning inventory $80,000; Ending inventory $120,000; Cost of goods sold $1,200,000; and Sales Revenue $1,600,000. Tye’s inventory turnover is


15 times.

10 times.

12 times.

16 times.


Question 28

Each of the following is a subsidiary ledger except the


accounts payable ledger.

customers’ ledger.

general ledger.

accounts receivable ledger.


Question 29

Which one of the following accounts is a control account?



Accounts Payable.

Owner’s Capital.



Question 30

Which of the following is not an element of the fraud triangle?



Segregation of duties.


Financial pressure.


Question 31

An employee authorized to sign checks should not record


mail receipts.

cash disbursement transactions.

owner cash contributions.

sales transactions.


Question 32

On a bank reconciliation, deposits in transit are


added to the book balance.

deducted from the bank balance.

added to the bank balance.

deducted from the book balance.


Question 33

Receivables are frequently classified as


accounts receivable, notes receivable, and other receivables.

accounts receivable, notes receivable, and employee receivables.

accounts receivable and general receivables.

accounts receivable, company receivables, and other receivables.


Question 34

The sale of receivables by a business


is an indication that the business is owned by a factor.

can be a quick way to generate cash for operating needs.

is generally the major revenue item on its income statement.

indicates that the business is in financial difficulty.


Question 35

Foti Co. accepts a $1,000, 3-month, 12% promissory note in settlement of an account with Bartelt Co. The entry to record this transaction is as follows:


Notes Receivable1,020

Accounts Receivable 1,020


Notes Receivable 1,000

Accounts Receivable 1,000


Notes Receivable1,000

Sales Revenue 1,000


Notes Receivable1,030

Accounts Receivable1,030


Question 36

A company purchased land for $70,000 cash. Real estate brokers’ commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the historical cost principle, the cost of land would be recorded at







Question 37

The entry to record depletion expense


decreases assets and increases liabilities.

decreases owner’s equity and assets.

decreases assets and liabilities.

decreases net income and increases liabilities.


Question 38

Which of the following statements concerning current liabilities is incorrect?


Current liabilities include salaries and wages payable.

Current liabilities include unearned revenue.

A company that has more current liabilities than current assets is usually the subject of some concern.

Current liabilities include prepaid expenses.


Question 39

The entry to record the issuance of an interest-bearing note includes a credit to Notes Payable for the note’s


market value.

cash realizable value.

face value.

maturity value.


Question 40

Working capital is


current assets plus current liabilities.

current assets minus current liabilities.

current assets multiplied by current liabilities.

current assets divided by current liabilities.


Question 41

The current ratio is


current assets plus current liabilities.

current assets minus current liabilities.

current assets multiplied by current liabilities.

current assets divided by current liabilities.


Question 42

Companies determine net pay by subtracting payroll deductions from gross earnings.





Question 43

Which one of the following payroll taxes does not result in a payroll tax expense for the employer?


FICA tax

Federal income tax

Federal unemployment tax

State unemployment tax


Question 44

Employer payroll taxes do not include


federal unemployment taxes.

FICA taxes.

state unemployment taxes.

Federal income taxes


Question 45

Partnership dissolution occurs whenever a partner withdraws or a new partner is admitted.





Question 46

Salaries to partners and interest on partners’ capital are expenses of the partnership.





Question 47

The balance sheet of a partnership will


report retained earnings below the partnership capital accounts.

show a separate drawing account for each partner.

show the amount of income that was distributed to each partner.

show a separate capital account for each partner.


Question 48

Which of the following is not a necessary action that the partnership must take upon the death of a partner?


Prepare financial statements.

Determine net income or net loss for the year to date.

Discontinue business operations.

Close the books.


Question 49

Dividends are declared out of


capital stock.

treasury stock.

retained earnings.

paid-in capital in excess of par value.


Question 50

Common stockholders have the right to share in the distribution of corporate income before preferred stockholders.





Question 51

Which of the following is not reported under Additional paid-in capital?


Common stock.

Paid-in Capital in Excess of Par–Common Stock.

Paid-in Capital in Excess of Stated Value–Common Stock.

Paid-in Capital from Treasury stock.To continue with the answer check on

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