1. Which of the following is a satisfactory statement of the balance sheet equation?

a. Assets + owners' equity = liabilities

b. Assets = liabilities + owners' equity

c. Assets + liabilities = owners' equity

2. A revenue:

a. increases assets and liabilities.

b. increases assets and owners' equity.

c. decreases assets and increases owners' equity.

3. In accounting, depreciation refers to the:

a. the decline in fair value of an asset.

b. obsolescence of an asset.

c. allocation of asset cost.

4. Gross profit is equal to the difference in:

a. net sales and operating expenses.

b. net sales and cost of goods sold.

c. net sales and operating income.

5. Which of the following does NOT include net income in its computation?

a. Net profit margin

b. Return on equity

c. Total asset turnover

6. What do current assets and current liabilities have in common?

a. Current assets are claims against current liabilities.

b. If current assets increase, there will be a corresponding increase in current liabilities.

c. Current liabilities and current assets are those items that will be satisfied and converted to cash, respectively, in one year or operating cycle, whichever is longer.

7. What does the retained earnings account measure?

a. Cash held by the company since its inception.

b. Financial resources currently available to satisfy obligations.

c. All undistributed earnings.

8. An overstatement of beginning inventory results in:

a. no effect on net income.

b. an overstatement of net income.

c. an understatement of net income.

9. Which inventory method generally results in the most realistic ending inventory figure?



c. Average-cost

10. All else remaining equal, when a LIFO liquidation occurs during a period of rising prices, which of the following statements about the effect on a firm's financial statements is generally true?

a. Cost of goods sold increases.

b. Taxes decrease.

c. Gross profit margin increases.

11. A machine was purchased for $17,000 and has a book value of $9,000.  If annual straight-line depreciation expense is $2,000, the estimated age of the machine is:

a. 4.0 years.

b. 4.5 years.

c. 8.5 years.

12. A truck was purchased for $35,000.  It has a five-year life and a $5,000 residual value.  Under the double-declining-balance method, what is the accumulated depreciation after two years?

a. $19,200

b. $21,200

c. $22,400

13. The amortization of a bond discount will result in reported interest expense for the period that:

a. is less than the amount of cash paid for interest for the period.

b. exceeds the amount of cash paid for interest for the period.

c. equals the amount of cash paid for the period.

14. A $100,000 bond liability with a carrying value of $97,000 is called at 101 and retired.  Which of the following statements is most correct? 

a. No gain or loss is recognized.

b. A loss of $4,000 is recognized.

c. A loss of $1,000 is recognized.

15. With a finance lease, the lessee does NOT recognize which of the following?

a. Rent expense.

b. Lease obligation.

c. Depreciation of leased asset.

16. Under a defined benefit pension plan:

a. the employer guarantees the employees certain benefits upon retirement.

b. retirement payments are based on the amount accumulated in the pension fund.

c. accounting for annual pension expense is simple.

17. Deferred income taxes are justified by what basic concept?

a. Revenue recognition.

b. Matching principle.

c. Conservatism.

18. A loss on the sale of machinery in the ordinary course of business should be presented in the cash flow statement as:

a. addition to net income when using the indirect method.

b. deduction from net income when using the indirect method.

c. cash flow from investing activities when using the direct method.

19. A firm reported sales of $90,000 for the current year.  Accounts receivable was $20,000 at the beginning of the year and $35,000 at year end.  For the year, cash collections from customers were:

a. $70,000.

b. $75,000.

c. 105,000.

20. At the end of last year, a firm recognized an impairment loss on an asset that was acquired 5 years ago.  As compared to last year's return on equity, this year's return on equity is most likely:

a. higher.

b. lower.

c. the same.


1-b, 2-b, 3-c, 4-b, 5-c, 6-c, 7-c, 8-c, 9-b, 10-c, 11-a, 12-c, 13-b, 14-b, 15-a, 16-a, 17-b, 18-a, 19-b, 20-a

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