1. Which of the following is a satisfactory statement of the balance sheet equation?
a.  Assets + owner's equity = liabilities
b. Assets = liabilities + owners' equity
c. Assets + liabilities = owners' equity
d.  Revenues - expenses = net income

2. A revenue
a.  increases assets and liabilities.
b. increases assets and owners' equity.
c. increases assets and decreases owners' equity.
d. none of the above.

3. In accounting, depreciation refers to the
a.  wearing away of an asset.
b. obsolescence of an asset.
c. allocation of asset cost.
d. decline in value of an asset.

4. Gross margin 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.
d. none of the above.

5.  Which of the following does NOT include net income in its computation?
a. Profit margin
b.  Return on assets
c.  Debt to equity ratio
d.  Return on equity

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 converted to cash.
d.  Current liabilities and current assets are those items that will be satisfied and converted into 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.  Payments made to shareholders in the form of dividends.
c.  All undistributed earnings.
d.  Financial resources currently available to satisfy financial obligations.

8. An overstatement of beginning inventory results in
a.  no effect on the period's net income.
b.  an overstatement of net income.
c.  an understatement of net income.
d.  a need to adjust the purchases account.

9. Which inventory method generally results in the most realistic ending inventory figure?
a.  LIFO
b.  FIFO
c.  Average-cost
d.  Specific identification

10. All else remaining equal, when a LIFO liquidation occurs during a period of rising prices, which of the following statements about the effects on a firm's financial statements is generally true?
a.  Cost of goods sold increases
b. Taxes decrease
c.  Net income decreases
d.  Gross profit margin increases

11. A machine was purchased for $17,000, has accumulated depreciation of $9,000, and has a depreciable cost of $10,000. Its estimated residual value is
a.  $2,000.
b. $7,000.
c. $8,000.
d.  $9,000.

12. A truck was purchased for $35,000. It had 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
d.  $25,600

13. The amortization of a bond discount will result in reporting an amount of interest expense for an interest period that
a.  is less than the amount of cash to be paid for interest for the period.
b.  exceeds the amount of cash to be paid for interest for the period.
c. equals the amount of cash to be paid for interest for the period.
d.  has no predictable relationship with the amount of cash to be paid for interest for the period.

14. A $100,000 bond issue with a carrying value of $97,000 is called at 101 and retired. Which of the following statements is true?
a.  No gain or loss is recorded.
b.  An extraordinary loss of $4,000 is recorded.
c.  An extraordinary loss of $1,000 is recorded.
d.  An extraordinary gain of $1,000 is recorded.

15. Under a capital lease, the lessee does NOT record which of the following?
a.  Rent expense
b.  Lease obligations
c.  Leased asset
d.  Depreciation on the 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.
d.  actuarial computations are unnecessary.

17. Deferred income taxes are justified by what basic concept?
a.  Revenue recognition
b.  Matching
c.  Conservatism
d. Cash basis accounting

Use the following to answer the next 3 questions:

18. What is net cash flow from operating activities?
a.  ($3,000)
b.  ($1,000)
c.  $5,000
d.  $13,000

19. What is net cash flow from investing activities?
a.  $14,000
b.  ($14,000)
c.  $21,000
d.  ($16,000)

20. What is net cash flow from financing activities?
a.  $15,000
b.  ($15,000)
c.  $17,000
d.  ($14,000)

Answers:

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

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