Accounting+Practice+problems PDF

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These are practice problems used on previous exams to study for exam...

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MBA Course: BUAD 5006

Module 1 - Accounting

Practice Problems

And

Solutions

By Catherine Gaharan 1

Practice Problems Part 1 - Financial Accounting Accounting Equation True/False 1. An increase in total assets indicates that either liabilities or stockholders' equity or a combination of the two must also increase. True False 2. The amount of stockholders' equity of a company can be measured as the difference between assets and liabilities. True False 3. A company uses $100,000 to pay off debt; its stockholders' equity will increase $100,000. True False 4. A company receives $100,000 in cash for providing services to its customers; its stockholders' equity will increase $100,000. True False 5. A company uses $8,000 to pay rent expense; its stockholders' equity will increase $8,000. True False Multiple Choice 1. What is the accounting equation effect when a company borrows $2,000,000? A. Assets and Liabilities both increase by $2,000,000. B. Assets increase by $2,000,000 and Liabilities decrease by $2,000,000. C. Assets remain unchanged and Liabilities increase by $2,000,000. D. Assets decrease by $2,000,000 and Liabilities increase by $2,000,000. 2. Total liabilities decrease by $49,000 and stockholders' equity increases by $29,000 during a period of time. What is the change in total assets during the same time period? A. $20,000 increase. 2

B $20,000 decrease. C. $78,000 increase. D. $-0-. 3. What is the accounting equation effect when a company pays $7,000,000 on its outstanding debt? A. Assets decrease by $7,000,000, liabilities are unchanged, stockholders' equity decreases by $7,000,000 B. Assets decrease by $7,000,000 and liabilities increase by $7,000,000. C. Assets decrease by $7,000,000, liabilities decrease by $7,000,000, stockholders' equity is unchanged D. Assets decrease by $7,000,000, liabilities and stockholders' equity are both unchanged. 4. During the year, a company generated $4,000,000 in revenues and incurred $3,100,000 in expenses. The company also borrowed $500,000. The total change in stockholders' equity was A. $900,000 increase. B. $1,400,000 increase. C. $400,000 increase. D. $-0-. 5. At the end of last year, the company's assets totaled $240,000 and its liabilities totaled $110,000. During this year, the company's total assets increased by $72,000 and its total liabilities increased by $51,000. At the end of this year, stockholders' equity was A. $130,000. B. $21,000 C. $151,000 D. $281,000.

Accounting cycle – Step 1 – analyze source documents and record transactions True/False 1. Transactions are analyzed, and then source documents are created. True False 2. Each transaction will always increase one account and decreases one account. True False 3. Journal entries show balances in the accounts affected by the transaction. True False

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4. Journal entries that include only debits are often used and are called one-legged entries. True False 5. The journal contains a record of the company's transactions. True False Multiple Choice 1. A company receives $4,000,000 from investors and issues stock to the investors. How are the company’s accounts affected? A. Cash increases and contributed capital decreases. B. Cash decreases and contributed capital increases. C. Both cash and contributed capital decrease. D. Both cash and contributed capital increase. 2. A company pays off its promissory note in the amount of $50,000. How are the company’s accounts affected? A. Both notes payable and cash increase. B. Both notes payable and cash decrease. C. Notes payable increases and cash decreases. D. Notes payable decreases and cash increases. 3. A company buys a building for $800,000 by paying $100,000 cash and signing a promissory note for the remainder. How are the company’s accounts affected? A. Building increases by $800,000; cash increases by $100,000; notes payable increases by $700,000. B. Building increases by $700,000; cash decreases by $100,000; notes payable decreases by $700,000. C. Building increases by $800,000; cash decreases by $100,000; notes payable increases by $700,000. D. Building decreases by $100,000; cash decreases by $100,000; notes payable increases by $800,000. 4. A company provides $5,000 in services to its customers for credit. How are the company’s accounts affected? A. Both accounts receivable and revenues increase. B. Cash increases and accounts receivable decreases. C. Accounts receivable increases and revenues decrease. D. Accounts receivable increases and cash decreases. 5. Transactions should be entered in the journal as follows: 4

A. All debits entered first aligned to the left; all credits entered next indented. B. All credits entered first followed by all debits with both debits and credits aligned to the left. C. All credits entered first aligned to the left; all debits entered next indented. D. Debits and credits can be entered in any order as long as they are indented properly.

Accounting cycle – Step 2 – summarize information in accounts True/False 1. All accounts have a debit side and a credit side. True False 2. An account that is increased by debits and decreased by credits will normally have a credit balance. True False 3. An asset account would not be expected to have a debit balance. True False 4. A revenue account will always have a credit balance because revenues tend to increase owners’ equity. True False 5. A liability account will always be decreased with a debit. True False Multiple choice 1. During its first year of operations, a company provided $80,000 of its services on account. By the end of the year, the company had collected $74,000 of its accounts receivable. What is the balance in accounts receivable: A. $80,000 B. $6,000 C. $74,000 D. ($6,000) 2. Accounts payable had a $4,000 beginning balance. During the month, total debits posted to the account were $18,000 and total credits were $21,000. What is the balance in accounts payable? A. $1,000 debit B. $7,000 credit C. $1,000 credit C. $35,000 debit

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3. A company purchased $5,000 of supplies on account and then paid $800 on the amount due. What is the balance in the supplies account? A. $800 B. $4,200 C. $4,800 D. $5,000 4. A company completed the following three transactions: (1) borrowed $6,000 from the bank; (2). received $14,000 from investors and issued stock; (3) used $3,000 of the cash received from the investors to pay down the bank loan. What is the balance in the following accounts? Cash Notes Payable Contributed Capital A. $17,000 $6,000 $11,000 B. $20,000 $3,000 $14,000 C. $3,000 $9,000 $11,000 D. $17,000 $3,000 $14,000 5. A company purchased $7,000 of equipment by signing a promissory note. Which of the following is the correct effect on the account? A. Cash $7,000 debit B. Equipment $7,000 credit C. Notes Payable $7,000 credit D. Cash $7,000 credit

Accounting cycle – step 3 – evaluate accounts True/False 1. Net income is based, in part, on estimates. True False 2. When the total debits in the trial balance equals the total credits, all accounts are proven to be correct. True False 3. Cash is an account that will not need an adjustment at the end of the accounting period. True False 4. An estimate is used to adjust the net realizable value of accounts receivable. True False 5. The supplies account would not normally need to be adjusted at the end of the accounting period. True False 6

Accounting cycle – step 4 – adjust accounts True/False 1. An adjustment for income tax expense cannot be prepared until all other adjustments are made. True False 2. Each adjusting entry will always include an asset and a liability. True False 3. The adjusted trial balance is completed to check that debits still equal credits after the ending balance of retained earnings is determined. True False 4. A contra-account must be used to adjust the balance of supplies. True False 5. The amounts of all the accounts reported on the income statement can be taken from the adjusted trial balance. True False Multiple Choice 1. The delivery equipment depreciates at a rate of $7,000 per year. The year-end adjusting entry would include A. credit delivery equipment for $7,000 B. debit accumulated depreciation for $7,000 C. debit depreciation expense for $7,000 D. debit delivery equipment for $7,000 2. During the month, a company used $4,500 of its supplies. The month-end adjusting journal entry would: A. decrease supplies and decrease supplies expense by $4,500. B. increase supplies and decrease supplies expense by $4,500. C. increase supplies and increase supplies expenses by $4,500. D. decrease supplies and increase supplies expense by $4,500. 3. Before adjusting entries are prepared, the balance of accounts receivable is $8,000, and the allowance for bad debts has a credit balance of $27. The company estimates that 1% of its accounts will never be collected. Which of the following is correct? A. After adjusting the accounts, the net realizable value of accounts receivable will be $7,920. B. The adjusting entry will include a credit to allowance for bad debts in the amount of $80. 7

C. After adjusting the accounts, the balance of accounts receivable will be $7,920. D. The adjusting entry will include a credit to bad debts expense in the amount of $53. 4. A company’s income before income taxes is $100,000, and its income tax rate is 30%. Which of the following is correct? A. The adjusting entry will include a decrease in the net income account in the amount of $30,000. B. The company’s net income is $70,000. C. The adjusting entry will include a credit to income tax expense in the amount of $30,000. D. The company’s net income is $130,000. 5. At the beginning of October, a company borrowed $20,000 from the bank by signing a 5%, note. Both interest and principal are due in two years. The adjusting entry for December 31 of this year would include: A. debit interest expense $1,000. B. debit interest expense $250. C. credit note payable $1,000. D. credit interest payable $2,000.

Accounting cycle – Step 5 – Prepare financial statements True/False 1. Net income is determined by subtracting income tax expense and dividends from income before income tax expense. True False 2. Since revenues increase a company’s assets, revenues are reported on the balance sheet. True False 3. Contributed capital increases net income. True False 4. The ending balance of retained earnings should equal total assets. True False 5. In the statement of cash flows, daily activities involved in running a business such as buying supplies and paying wages are operating activities. True False Multiple Choice From the following adjusted trial balance, determine the correct answers to problems 1 – 4. 8

Accounts Cash Supplies Equipment Accumulated depreciation, equipment Accounts payable Notes payable Contributed capital Retained earnings, beginning balance Dividends Revenues Operating expenses Interest expense Totals

Debit 2,400 300 6,000

Credit

1,500 700 3,000 1,900 1,100 300 3,400 2,500 100 11,600

11,600

1. Net income is A. $800 B. $900 C. $11,600 D. $500 2. Total assets are A. $11,600 B. $7,200 C. $8,700 D. $10,100 3. Total liabilities are A. $5,200 B. $3,700 C. $11,600 D. $8,200 4. The ending balance of retained earnings is A. $1,100 B. $-0C. $1,900 D. $1,600

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5. Investing activities on the Statement of Cash Flows include transactions A. of buying or selling the company’s buildings and equipment B. of borrowing cash and repaying those loans C. involved with the daily operations of the business D. of paying dividends to stockholders

Accounting cycle - Step 6 – closing entries True/False 1. One purpose of closing entries is to transfer net income and dividends to retained earnings. True False 2. One purpose of closing entries is to bring the balances of all of a company’s accounts to zero at the end of the accounting period in order to start the next accounting period. True False 3. A post-closing trial balance should include only permanent (continuing) accounts. True False 4. Included in the entry to close revenue and expense accounts is a credit to retained earnings implying that the company produced net income for the year. True False 5. The entry to close the dividends account will always debit retained earnings. True False Multiple Choice 1. Which of the following is correct with respect to the effect of the closing entries on the cash account? The balance of cash A. will be increased by the amount of net income. B. will be decreased by the amount of dividends. C. will not be affected. D. may increase if stockholders invest more cash into the business. 2. The two journal entries required to close the accounts are A. (1) close revenues; (2) close expenses B. (1) close temporary accounts; (2) close permanent accounts C. (1) close assets; (2) close liabilities D. (1) close revenue and expense accounts; (2) close dividends 3. Dividends for the year total $4,500. During the closing process 10

A. Retained earnings will increase by $4,500. B. The dividends account will not change. C. Contributed capital will decrease by $4,500. D. The dividends account will be brought to zero. 4. A company produced net income of $7,800 for the year. The beginning balance in its retained earnings account was $32,000 and its ending balance was $38,200. Which of the following is correct? A. Dividends totaled $1,600. B. The total increase in cash was $6,200. C. Contributed capital decreased by $6,200. D. Contributed capital increased by $6,200. 5. Which of the following is correct? A. The only asset-type of accounts affected by the closing process are contra-assets. B. The only liability affected by the closing process is interest payable. C. The net income account is closed to retained earnings. D. Asset accounts are not affected by the closing process.

Understanding the Financial Statements True/False 1. When a company produces net income for the year, its net cash flow from operating activities will always be positive. True False 2. In the retained earnings statement, the amount of dividends will be added. True False 3. Cash, merchandise inventory, and accounts receivable should be included as current assets in the balance sheet. True False 4. Contributed capital is included in the owners’ equity section of the balance sheet. True False 5. Revenues are reported as cash inflows from investing activities in the statement of cash flows. True False Multiple Choice 1. Which of the following is true concerning the income statement? 11

A. The statement heading indicates how the statement was prepared. B. Incidental revenues and expenses are usually not included in the income statement. C. Income tax expense is normally reported in the statement separately from other expenses. D. Revenues reported on the income statement must always be greater than expenses. 2. Which of the following is true concerning the statement of retained earnings? A. The ending balance of retained earnings indicates the value added to the company because of this year’s operating activity. B. If a company produces net income for the year, the ending balance of retained earnings will always be greater than its beginning balance. C. The statement of retained earnings is not necessary when dividends are included in the income statement. D. The statement of retained earnings reveals the change in retained earnings because of business operations and because of the distribution of dividends to owners. 3. Which of the following is true concerning the balance sheet? A. The balance sheet is, essentially, the year-end accounting equation for the company. B. Related assets and liabilities are often netted in order to reduce the size of the balance sheet. C. For balance sheet presentation, a contra-asset such as accumulated depreciation can be subtracted from the related asset or can be included with liabilities. D. Retained earnings is often included in the balance sheet, but since it is included in the statement of retained earnings, it is not required to be included in the balance sheet. 4. Which of the following is true concerning the statement of cash flows? A. The purpose of the Statement of Cash Flows is to explain what caused the balance of cash to change from the beginning of the period to the end of the period. B. The three sections of the statement of cash flows are cash flows from operating activities, from equity activities, and from investing activities. C. The statement can be produced from an analysis of the expense accounts and the retained earnings account. D. The cash flows from investing activities section reports increases in cash from the acquisition of operating assets and investments. 5. Every financial statement has a heading which includes the following information: A. the company name, the preparer’s name, the date the statement was prepared. B. the company name, the company address, the date the IRS approved the statement C. the preparer’s name, the purpose of the statement, the year-end date or the time period related to the statement. D. the company name, the type of financial statement, the year-end date or the time period related to the statement. 12

Merchandise Procedures True/False 1. When a merchandising company purchases merchandise for sale, it charges an expense account. True False 2. The difference between revenues produced from selling merchandise and the company’s cost of that merchandise is called gross profit. True False 3. For a merchandising company, the greatest source of revenue is from selling its merchandise. True False 4. When inventory items are sold, their cost reduces the value of revenues reported in the income statement. True False 5. The merchandise inventory of a company is the company’s asset, and its value is included in the current assets section of the balance sheet. True False

Internal Control Procedures True/False 1. Good internal control procedures will support an ethical business environment. True False 2. Internal controls include all procedures that a company uses to safeguard its assets, to assure that company policies as well as applicable laws and contractual obligations are followed, to promote efficient and effective operations, and to strengthen the integrity of the financial statements and other financial information. True False 3. Establishing and maintaining effective internal controls will prevent employees from initiating any type of fraudulent activity. True False 4. Internal controls are limited to financial activity. True False 5. For internal controls to be effective, management must fully support them. True False

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Multiple Choice 1. Which of the following is NOT an element of the fraud triangle? A. Opportunity B. Acceptance C. Rationalization D. Pressure 2. Which of the following are good internal control practices? A. Segregation of duties B. Sharing a cash drawer so each employee can keep watch over the other C. Independent auditors must count the cash each evening D. Both A and C 3. The internal control element, control activities, consists of two categories of activities, which are A. Preventive controls and fraud triangle controls B. Verification controls and detective controls C. Preventive controls and detective controls D. Documentation controls and verification controls 4. Which of the following is NOT considered an internal control procedure? A. Controlled access B. Embezzlement procedures C. Establishment of responsibility D. Establishment of a paper trail 5. The internal control procedure “documentation” means A. All fraudulent activities must be documented B. Employees must document their activities C. All prenumbered records should be accounted for D. Accounting department personnel must document their certifications

Financial Terms and Concepts True/False 1. The accounts used by a company are contained in the general ledger. True False

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2. A transaction is an economic activity that directly affects the components of the accounting equation of a company. True False 3. A credit is the right side of an acco...