Choose the letter corresponding to the response that best completes each of the following statements or

questions.

1. The process of providing financial information to external decision makers is referred to as:
A) Public accounting.
B) Government accounting.
C) Financial accounting.
D) Managerial accounting.

2. Financial statements generally include all but which of the following:

A) Income statement.
B) Federal income tax return.
C) Balance sheet.
D) Statement of cash flows.

3. The primary objective of financial reporting is to provide information:

A) About a firm's financing and investing activities.
B) About a firm's economic resources and obligations.
C) About a firm's product lines.
D) Useful in predicting cash flows.

4. GAAP include which of the following pronouncements:

A) Statements of Financial Accounting Standards.
B) Accounting Research Bulletins.
C) Accounting Principles Board Opinions.
D) All of the above.

5. The SEC exerts a continuing influence on the establishment of accounting standards. It does so primarily
by:
A) Monitoring the development of GAAP within the accounting profession and using its stature
to influence that development.
B) Exercising its statutory authority to prescribe external financial reporting requirements.
C) Allying with the AICPA to lobby the efforts of the FASB.
D) Providing auxiliary funding to the FASB.

6. The documents that set forth fundamental concepts on which financial accounting and reporting
standards will be based are:
A) Financial Accounting Standards.
B) Financial Accounting Concepts.
C) Accounting Principles Board Opinions.
D) All of the above.

7. The two primary decision-specific qualities that make accounting information useful are:
A) Verifiability and representational faithfulness.
B) Predictive value and feedback value.
C) Cost effectiveness and materiality.
D) Relevance and reliability.
8. Relevance requires that information possess predictive and/or feedback value and be:
A) Neutral.
B) Comparable.
C) Timely.
D) Reliable.

9. The qualitative characteristic that means there is agreement between a measure and a real-world
phenomenon is:
A) Verifiability.
B) Representational faithfulness.
C) Neutrality.
D) Materiality.

10. Which of the following is considered a practical constraint on the qualitative characteristics:
A) Verifiability.
B) Conservatism.
C) Cost effectiveness.
D) Timeliness.

11. Which of the following characteristics does not describe an asset:

A) Probable.
B) Controlled by an entity.
C) Requires the payment of cash.
D) Result of a past transaction.

12. Which of the following characteristics does not describe a liability:

A) Result of a past transaction.
B) Probable.
C) Present obligation.
D) Must be legally enforceable.

13. The underlying assumption that presumes a company will continue indefinitely is:
A) Periodicity.
B) Going concern.
C) Economic entity.
D) Monetary unit.

14. The underlying assumption that assumes that the life of a company can be divided into artificial time
periods is:
A) Periodicity.
B) Going concern.
C) Economic entity.
D) Monetary unit.

15. In general, revenue is recognized when the earnings process is virtually complete and:
A) Collection of the sales price is reasonably assured.
B) A purchase order is received.
C) Cash is collected.
D) Production is completed.
16. The primary objective of the matching principle is to:
A) Provide timely information to external decision-makers.
B) Provide full disclosure.
C) Recognize expenses in the same period as the related revenue.
D) All of the above.

Test 2
1. The journal entry to record the borrowing of cash and the signing of a note payable involves:
A) A debit to note payable and a credit to cash.
B) Debits to cash and interest expense and a credit to cash.
C) A debit to cash and a credit to note payable.
D) None of the above.

2. Which of the following is most likely an accrued liability?

A) Depreciation.
B) Interest.
C) Cost of goods sold.
D) Office supplies.

3. A prepaid expense is an expense:

A) Incurred before the cash is paid.
B) Incurred and paid.
C) Paid but not yet incurred.
D) None of the above.

4. The Esquire Clothing Company borrowed a sum of cash on October 1, 2006, and signed a note payable.
The annual interest rate was 12% and the company's year 2006 income statement reported interest
expense of P1,260 related to this note. What was the amount borrowed?
A) P22,000
B) P31,500
C) P10,500
D) P42,000

5. Which of the following adjusting entries creates a decrease in assets?

A) Recording the earned portion of revenue collected in advance.
B) Recording depreciation expense.
C) Accruing unrecorded salaries expense.
D) Accruing unrecorded interest revenue.

6. Which of the following adjusting entries creates an increase in liabilities?

A) Accruing unrecorded interest expense.
B) Recording the amount of expired prepaid insurance.
C) Accruing unrecorded interest revenue.
D) Recording depreciation expense.

7. If the required adjusting entry for depreciation expense is omitted:

A) Assets will be overstated and income understated.
B) Assets will be overstated and income overstated.
C) Assets will be understated and income overstated.
D) Assets will be understated and income understated.
8. The accumulated depreciation account is a contra (valuation) account to:
A) Owner's equity account.
B) Expense account.
C) Asset account.
D) Liability account.

9. The correct amount of prepaid insurance shown on a company's December 31, 2006, balance sheet was
P900. On July 1, 2007, the company paid an additional insurance premium of P600. In the December 31,
2007, balance sheet, the amount of prepaid insurance was correctly shown as P500. The amount of
insurance expense that should appear in the company's 2007 income statement is:
A) P1,500.
B) P1,400.
C) P1,000.
D) P600.

10. The Wazoo Times Newspaper Company showed a P11,200 liability on its 2006 balance sheet for
subscription revenue received in advance. During 2007, P62,000 was received from customers for
subscriptions and the 2007 income statement reported subscription revenue of P63,700. What is the
liability amount for subscription revenue received in advance that will appear in the 2007 balance sheet?
A) P0
B) P11,200
C) P12,900
D) P9,500

11. On a classified balance sheet, allowance for uncollectible accounts would be classified among:
A) Noncurrent assets.
B) Current liabilities.
C) Current assets.
D) Noncurrent liabilities.

12. On a statement of cash flows, cash received from the issuance of common stock would be classified as
a:
A) Financing activity.
B) Investing activity.
C) Operating activity.
D) Non-cash activity.

13. The closing process involves:

A) Recording year-end adjusting entries.
B) Transferring revenue and expense balances to retained earnings.
C) Closing out the permanent account balances.
D) None of the above.

14. If revenues exceed expenses for the accounting period, the income summary account:
A) Will have a debit balance after closing.
B) Will have a debit balance prior to closing.
C) Will have a credit balance prior to closing.
D) None of the above.
Test 3
1. Which of the following is not a characteristic of the balance sheet?
A) The major classifications of the balance sheet are assets, liabilities, and owners' equity.
B) The balance sheet reports the change in financial position.
C) Assets generally are listed in order of their liquidity.
D) The balance sheet provides information useful in assessing liquidity.

2. The basis used to classify assets as current or noncurrent is:

A) Whether an asset is monetary or nonmonetary.
B) The operating cycle or one year, whichever is shorter.
C) Usually one year, because the operating cycle typically is less than one year.
D) Whether the asset is currently used in the company's operations.

3. An item not generally classified as a current asset is:

A) Patent.
B) Trade receivables.
C) Prepaid rent.
D) Inventories.

4. Included in the category of current liabilities would be:

A) Pension obligations.
B) Lease obligations.
C) Obligations expected to require the creation of other current liabilities.
D) Mortgages payable.

5. An item not generally classified as a current liability is:

A) Revenue received in advance.
B) Accrued interest payable.
C) Accounts payable.
D) Bonds payable.

6. Current assets minus current liabilities equals:

A) Net assets.
B) Working capital.
C) The current ratio.
D) Cash equivalents.

7. Operational assets refer to property, plant, and equipment, and:

A) Receivables.
B) Inventories.
C) Investments.
D) Intangibles.

8. Information not generally disclosed in the summary of significant accounting policies is:
A) The company's depreciation method.
B) The fact that the company uses the FIFO inventory method.
C) A related party transaction.
D) The company's revenue recognition policy.
9. The compensation of directors and top executives is disclosed in:
A) The proxy statement.
B) The annual report.
C) A disclosure note.
D) Interim financial statements.

10. Which ratio most directly indicates the extent of the company's reliance on financial leverage?
A) Times interest earned.
B) Debt to equity.
C) Return on shareholders' equity.
D) Current ratio.

11. The acid-test ratio excludes which of the following elements from the numerator?
A) Short-term investments.
B) Receivables.
C) Cash equivalents.
D) Inventories.

12. For a firm with a current ratio of 2.0, which of the following transactions would most likely cause the
ratio to decrease?
A) The collection of cash from customers on account.
B) The sale of a building for cash.
C) The purchase of inventory on account.
D) The issuance of capital stock.

13. The following information pertains to questions 13 through 15:

Sanchez Corporation Selected Financial Information
12/31/06 12/31/05
Cash $ 20,000 $ 25,000
Accounts receivable (net) 100,000 110,000
Inventories 190,000 155,000
Total current assets 310,000 290,000
Noncurrent assets 230,000 210,000
Current liabilities 200,000 190,000
Long-term liabilities 40,000 50,000
Shareholders' equity 300,000 260,000

Net income P40,000

Interest expense 10,000
Income tax expense 20,000

The acid-test ratio for 2006 is:

A) 0.8
B) 1.6
C) 0.6
D) 0.34

14. The debt to equity ratio for 2006 is:

A) .80
B) .44
C) .67
D) .13
15. The times interest earned ratio is:
A) 4.0 times
B) 5.0 times
C) 6.0 times
D) 7.0 times
Test 4

1. Which of the following captions would more likely be found in a multiple-step income statement?
A) Total expenses.
B) Total revenues and gains.
C) Gross profit.
D) None of the above.

2. An item typically included in the income from continuing operations section of the income statement is:
A) Discontinued operations.
B) Extraordinary gain.
C) Prior period adjustment.
D) Restructuring costs.

3. The application of intraperiod income taxes requires that income taxes be apportioned to each of the
following items except:
A) Income from continuing operations.
B) Operating income.
C) Discontinued operations.
D) Extraordinary gains and losses.

4. For a manufacturing company, all of the following items would be considered nonoperating income for
income statement purposes except:
A) Income from investments.
B) Cost of goods sold.
C) Interest expense.
D) Gain on sale of operating assets.

5. On May 31, 2006, the Arlene Corporation adopted a plan to sell its cosmetics line of business, considered
a component of the entity. The assets of the component were sold on October 13, 2006, for P1,120,000.
The component generated operating income from January 1, 2006, through disposal of P300,000. In its
income statement for the year ended December 31, 2006, the company reported before-tax income from
operations of a discontinued component of P620,000. What was the book value of the assets of the
cosmetics component?
A) P800,000
B) P1,420,000
C) P300,000
D) None of the above.

6. The Compton Press Company reported income before taxes of P250,000. This amount included a
P50,000 extraordinary loss. The amount reported as income before extraordinary items, assuming a tax
rate of 40%, is:
A) P250,000
B) P180,000
C) P120,000
D) P150,000
7. Which of the following material items would not be reported as an extraordinary item?
A) A loss caused by an unusual and infrequent hurricane.
B) A loss caused by an unusual and infrequent volcano.
C) A loss caused by obsolescence of inventory.
D) All of the above would be reported as extraordinary items.

8. The Stibbe Construction Company switched from the completed contract method to the percentage-of-
completion method of accounting for its long-term construction contracts. This is an example of:
A) A change in accounting principle.
B) A change in accounting estimate.
C) An infrequent but not unusual item.
D) An extraordinary item.

9. In 2006, the Perasso Meat Packing Company revised the useful life of its equipment from eight years to
six years. Depreciation recorded in prior years on existing equipment was P126,000 applying the eight-year
useful life. Depreciation in prior years would have been P186,000 if the six-year useful life had been used.
Assuming an income tax rate of 40%, Perasso's increase in 2006's beginning retained earnings would be:
A) P60,000
B) P36,000
C) P24,000
D) Zero.

10. Earnings per share should be reported for each of the following income statement captions except:
A) Income from continuing operations.
B) Extraordinary gains and losses.
C) Operating income.
D) Discontinued operations.

11. The following items appeared on the 2006 year-end trial balance for the Brown Coffee Company:
Revenues P600,000
Operating expenses 420,000
Gain from the early retirement of debt* 200,000
Restructuring costs 100,000
Interest expense 20,000
Gain on sale of operating assets 30,000
*Considered unusual and infrequent in this instance.
Income tax expense has not yet been accrued. The company's income tax rate is 40%. What amount should
be reported in the company's year 2006 income statement as income before extraordinary items?

A) P90,000
B) P66,000
C) P34,800
D) P54,000
12. Selected information from the 2006 accounting records of Dunn's Auto Dealers is as follows:

Cost of furniture purchased for cash P 8,000

Proceeds from bank loan 100,000
Repayment of bank loan (includes interest of P4,000) 44,000
Proceeds from sale of equipment 5,000
Cash collected from customers 320,000
Purchase of stock of another corporation as an investment 20,000
Common stock issued for cash 200,000
In its 2006 statement of cash flows, Dunn's should report net cash inflows from financing activities of:

A) P260,000
B) P265,000
C) P60,000
D) P256,000

13. Using the information in question 12, Dunn's should report net cash outflows from investing activities
of:
A) P27,000
B) P32,000
C) P28,000
D) P23,000

14. Which of the following items would not be included as a cash flow from operating activities on a
statement of cash flows?
A) Collections from customers.
B) Interest on note payable.
C) Purchase of equipment.
D) Purchase of inventory.

POSITIVE THINGS HAPPEN TO POSITIVE PEOPLE.