1) Bank overdrafts, if material, should be

A.reported as a deduction from cash.

B. netted against cash and a net cash amount reported.
C. reported as a deduction from the current asset section.
D.reported as a current liability.

2) A cash equivalent is a short-term, highly liquid investment that is readily convertible

into known amounts of cash and
A.has a current market value that is greater than its original cost.
bears an interest rate that is at least equal to the prime rate of interest at the date of
B.
liquidation.
C. is acceptable as a means to pay current liabilities.
is so near its maturity that it presents insignificant risk of changes in interest
D.
rates.

3) Which of the following is NOT considered cash for financial reporting purposes?
A.Money orders, certified checks, and personal checks
B. Coin, currency, and available funds
C. Petty cash funds and change funds
D.Postdated checks and I.O.U.'s

4) If a company employs the gross method of recording accounts receivable from

customers, then sales discounts taken should be reported as
A.an item of "other expense" in the income statement.
a deduction from accounts receivable in determining the net realizable value of
B.
accounts receivable.
C. a deduction from sales in the income statement.
D.sales discounts forfeited in the cost of goods sold section of the income statement.

5) Which of the following methods of determining bad debt expense does NOT properly
match expense and revenue?
Charging bad debts with an amount derived from a percentage of accounts receivable
A.
under the allowance method.
Charging bad debts with an amount derived from aging accounts receivable under the
B.
allowance method.
C. Charging bad debts with a percentage of sales under the allowance method.
D.Charging bad debts as accounts are written off as uncollectible.

6) Assuming that the ideal measure of short-term receivables in the balance sheet is the
discounted value of the cash to be received in the future, failure to follow this practice
usually does NOT make the balance sheet misleading because
A.the allowance for uncollectible accounts includes a discount element.
B. the amount of the discount is NOT material.
C. most short-term receivables are NOT interest-bearing.
D.most receivables can be sold to a bank or factor.

7) Valuation of inventories requires the determination of all of the following EXCEPT

A.the cost of goods held on consignment from other companies.
B. the physical goods to be included in inventory.
C. the cost flow assumption to be adopted.
D.the costs to be included in inventory.

8) Eller Co. received merchandise on consignment. As of January 31, Eller included the
goods in inventory, but did NOT record the transaction. The effect of this on its financial
statements for January 31 would be
A.net income and current assets were overstated and current liabilities were understated.
B. net income was correct and current assets were understated.
C. net income, current assets, and retained earnings were understated.
D.net income, current assets, and retained earnings were overstated.

9) The accountant for the Orion Sales Company is preparing the income statement for
2007 and the balance sheet at December 31, 2007. Orion uses the periodic inventory
system. The January 1, 2007 merchandise inventory balance will appear
as a deduction in the cost of goods sold section of the income statement and as a
A.
current asset on the balance sheet.
B. only in the cost of goods sold section of the income statement.
as an addition in the cost of goods sold section of the income statement and as a current
C.
asset on the balance sheet.
D.only as an asset on the balance sheet.

10) Assuming no beginning inventory, what can be said about the trend of inventory
prices if cost of goods sold computed when inventory is valued using the FIFO method
exceeds cost of goods sold when inventory is valued using the LIFO method?
A.Prices increased.
B. Prices remained unchanged.
C. Price trend cannot be determined from information given.
D.Prices decreased.
11) The use of a Discounts Lost account implies that the recorded cost of a purchased
inventory item is its
A.invoice price less the purchase discount taken.
B. invoice price plus the purchase discount lost.
C. invoice price less the purchase discount allowable whether taken or not.
D.invoice price.

12) All of the following costs should be charged against revenue in the period in which
costs are incurred EXCEPT for
A.costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
B. costs which will NOT benefit any future period.
costs of normal shrinkage and scrap incurred for the manufacture of a product in
C.
ending inventory.
manufacturing overhead costs for a product manufactured and sold in the same
D.
accounting period.

13) In no case can "market" in the lower-of-cost-or-market rule be more than

estimated selling price in the ordinary course of business less reasonably predictable
A.costs of completion and disposal and an allowance for an approximately normal profit
margin.
estimated selling price in the ordinary course of business less reasonably
B.
predictable costs of completion and disposal.
estimated selling price in the ordinary course of business less reasonably predictable
C. costs of completion and disposal, an allowance for an approximately normal profit
margin, and an adequate reserve for possible future losses.
D.estimated selling price in the ordinary course of business.

14) The primary basis of accounting for inventories is cost. A departure from the cost
basis of pricing the inventory is required where there is evidence that when the goods are
sold in the ordinary course of business their
A.selling price will be less than their replacement cost.
B. cost will be less than their replacement cost.
C. replacement cost will be more than their net realizable value.
D.future utility will be less than their cost.

15) An item of inventory purchased this period for $15.00 has been incorrectly written
down to its current replacement cost of $10.00. It sells during the following period for
$30.00, its normal selling price, with disposal costs of $3.00 and normal profit of $12.00.
Which of the following statements is NOT true?
A.The cost of sales of the following year will be understated.
B. The closing inventory of the current year is understated.
C. The current year's income is understated.
D.Income of the following year will be understated.

16) Which of the following is NOT a basic assumption of the gross profit method?
A.The beginning inventory plus the purchases equal total goods to be accounted for.
If the sales, reduced to the cost basis, are deducted from the sum of the opening
B.
inventory plus purchases, the result is the amount of inventory on hand.
C. Goods NOT sold must be on hand.
The total amount of purchases and the total amount of sales remain relatively
D.
unchanged from the comparable previous period.

17) The gross profit method of inventory valuation is invalid when

A.a portion of the inventory is destroyed.
B. there is no beginning inventory because it is the first year of operation.
C. there is a substantial increase in inventory during the year.
D.none of these.

18) When the conventional retail inventory method is used, markdowns are commonly
ignored in the computation of the cost to retail ratio because
A.there may be no markdowns in a given year.
B. markups are also ignored.
C. this tends to give a better approximation of the lower of cost or market.
this tends to result in the showing of a normal profit margin in a period when no
D.
markdown goods have been sold.

19) The debit for a sales tax properly levied and paid on the purchase of machinery
preferably would be a charge to
A.the machinery account.
B. miscellaneous tax expense (which includes all taxes other than those on income).
C. a separate deferred charge account.
D.accumulated depreciation--machinery.

20) The cost of land typically includes the purchase price and all of the following costs
EXCEPT
A.private driveways and parking lots.
B. street lights, sewers, and drainage systems cost.
C. assumption of any liens or mortgages on the property.
D.grading, filling, draining, and clearing costs.
21) Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it
is located with the plan to tear down the Holiday Hotel and build a new luxury hotel on
the site. The cost of the Holiday Hotel should be
A.capitalized as part of the cost of the land.
B. written off as an extraordinary loss in the year the hotel is torn down.
C. capitalized as part of the cost of the new hotel.
depreciated over the period from acquisition to the date the hotel is scheduled to be
D.
torn down.

22) Which of the following assets do NOT qualify for capitalization of interest costs
incurred during construction of the assets?
A.Assets financed through the issuance of long-term debt.
B. Assets intended for sale or lease that are produced as discrete projects.
Assets NOT currently undergoing the activities necessary to prepare them for
C.
their intended use.
D.Assets under construction for an enterprise's own use.

23) Which of the following costs are capitalized for self-constructed assets?
A.Materials and overhead only
B. Labor and overhead only
C. Materials, labor, and overhead
D.Materials and labor only

24) To be consistent with the historical cost principle, overhead costs incurred by an
enterprise constructing its own building should be
A.allocated on an opportunity cost basis.
B. eliminated completely from the cost of the asset.
C. allocated on a pro rata basis between the asset and normal operations.
D.allocated on the basis of lost production.

25) The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset
and the exchange has commercial substance is usually recorded at
the fair value of the asset received if it is equally reliable as the fair value of the asset
A.
given up.
B. the fair value of the asset given up, and a gain but NOT a loss may be recognized.
either the fair value of the asset given up or the asset received, whichever one results in
C.
the largest gain (smallest loss) to the company.
D.the fair value of the asset given up, and a gain or loss is recognized.
26) The King-Kong Corporation exchanges one plant asset for a similar plant asset and
gives cash in the exchange. The exchange is NOT expected to cause a material change in
the future cash flows for either entity. If a gain on the disposal of the old asset is
indicated, the gain will
A.effectively increase the amount to be recorded as the cost of the new asset.
B. effectively reduce the amount to be recorded as the cost of the new asset.
C. be credited directly to the owner's capital account.
D.be reported in the Other Revenues and Gains section of the income statement.

27) When funds are borrowed to pay for construction of assets that qualify for
capitalization of interest, the excess funds NOT needed to pay for construction may be
temporarily invested in interest-bearing securities. Interest earned on these temporary
investments should be
A.offset against interest cost incurred during construction.
B. used to reduce the cost of assets being constructed.
multiplied by an appropriate interest rate to determine the amount of interest to be
C.
capitalized.
D.recognized as revenue of the period.

28) If an industrial firm uses the units-of-production method for computing

depreciation on its only plant asset, factory machinery, the credit to accumulated
depreciation from period to period during the life of the firm will
A.be constant.
B. vary with unit sales.
C. vary with sales revenue.
D.vary with production.

29) The major difference between the service life of an asset and its physical life is that
service life refers to the time an asset will be used by a company and physical
A.
life refers to how long the asset will last.
physical life is the life of an asset without consideration of salvage value and service
B.
life requires the use of salvage value.
C. physical life is always longer than service life.
service life refers to the length of time an asset is of use to its original owner, while
D.
physical life refers to how long the asset will be used by all owners.

30) Which of the following most accurately reflects the concept of depreciation as used
in accounting?
 The process of charging the decline in value of an economic resource to income in
A.
the period in which the benefit occurred.
The process of allocating the cost of tangible assets to expense in a systematic
B. and rational manner to those periods expected to benefit from the use of the
asset.
A method of allocating asset cost to an expense account in a manner which closely
C.
matches the physical deterioration of the tangible asset involved.
An accounting concept that allocates the portion of an asset used up during the year
D.to the contra asset account for the purpose of properly recording the fair market value
of tangible assets.

31) Pine Company purchased a depreciable asset for $360,000. The estimated salvage
value is $24,000, and the estimated useful life is 8 years. The double-declining balance
method will be used for depreciation. What is the depreciation expense for the second
year on this asset?
A.$42,000
B. $63,000
C. $67,500
D.$90,000
$360,000 × [(1 ÷ 8) × 2] = $90,000
($360,000 – $90,000) × [(1 ÷ 8) × 2] = $67,500.
32) Harrison Company purchased a depreciable asset for $100,000. The estimated
salvage value is $10,000, and the estimated useful life is 10 years. The straight-line
method will be used for depreciation. What is the depreciation base of this asset?
A.$9,000
B. $10,000
C. $90,000
D.$100,000
$100,000 – $10,000 = $90,000
33) Bigbie Company purchased a depreciable asset for $600,000. The estimated salvage
value is $30,000, and the estimated useful life is 10,000 hours. Bigbie used the asset for
1,100 hours in the current year. The activity method will be used for depreciation. What
is the depreciation expense on this asset?
A.$57,000
B. $62,700
C. $66,000
D.$570,000
[($600,000 – $30,000) ÷ 10,000] × 1,100 = $62,700
34) Riser Corporation was granted a patent on a product on January 1, 1998. To protect
its patent, the corporation purchased on January 1, 2007 a patent on a competing product
which was originally issued on January 10, 2003. Because of its unique plant, Riser
Corporation does NOT feel the competing patent can be used in producing a product. The
cost of the competing patent should be
A.amortized over a maximum period of 11 years.
B. amortized over a maximum period of 20 years.
C. expensed in 2007.
D.amortized over a maximum period of 16 years.

35) Factors considered in determining an intangible asset's useful life include all of the
following EXCEPT
A.any provisions for renewal or extension of the asset's legal life
B. the expected use of the asset.
C. the amortization method used.
D.any legal or contractual provisions that may limit the useful life.

36) Costs incurred internally to create intangibles are

A.expensed as incurred.
B. capitalized.
C. expensed only if they have a limited life.
D.capitalized if they have an indefinite life.

37) General Products Company bought Special Products Division in 2006 and
appropriately booked $250,000 of goodwill related to the purchase. On December 31,
2007, the fair value of Special Products Division is $2,000,000 and it is carried on
General Product's books for a total of $1,700,000, including the goodwill. An analysis of
Special Products Division's assets indicates that goodwill of $200,000 exists on
December 31, 2007. What goodwill impairment should be recognized by General
Products in 2007?
A.$50,000.
B. $0.
C. $300,000.
D.$200,000.
Since $2,000,000 > $1,700,000, $0 impairment
38) During 2007, Bond Company purchased the net assets of May Corporation for
$950,000. On the date of the transaction, May had $300,000 of liabilities. The fair value
of May's assets when acquired were as follows:
Current assets $ 540,000
Noncurrent assets 1,260,000
$1,800,000
How should the $550,000 difference between the fair value of the net assets acquired
($1,500,000) and the cost ($950,000) be accounted for by Bond?
 The current assets should be recorded at $375,000 and the noncurrent assets should be
A.
recorded at $875,000.
B. The $550,000 difference should be credited to retained earnings.
A deferred credit of $550,000 should be set up and then amortized to income over a
C.
period NOT to exceed forty years.
D.The $550,000 difference should be recognized as an extraordinary gain.
$1,500,000 – $950,000 = $550,000 extraordinary gain
39) Twilight Corporation acquired End-of-the-World Products on January 1, 2008 for
$2,000,000, and recorded goodwill of $375,000 as a result of that purchase. At December
31, 2008, the End-of-the-World Products Division had a fair value of $1,700,000. The net
identifiable assets of the Division (excluding goodwill) had a fair value of $1,450,000 at
that time. What amount of loss on impairment of goodwill should Twilight record in
2008?
A.$175,000
B. $ -0-
C. $300,000
D.$125,000
$1,700,000 – $1,450,000 = $250,000
$375,000 – $250,000 = $125,000
40) When a patent is amortized, the credit is usually made to
A.the Patent account.
B. an Accumulated Amortization account.
C. an expense account.
D.a Deferred Credit account.

41) Purchased goodwill should

A.be written off as soon as possible against retained earnings.
B. be written off as soon as possible as an extraordinary item.
C. not be amortized.
be written off by systematic charges as a regular operating expense over the period
D.
benefited.

42) The reason goodwill is sometimes referred to as a master valuation account is

because
A.it represents the purchase price of a business that is about to be sold.
it is the difference between the fair market value of the net tangible and identifiable
B.
intangible assets as compared with the purchase price of the acquired business.
it is the only account in the financial statements that is based on value, all other
C.
accounts are recorded at an amount other than their value.
D.the value of a business is computed without consideration of goodwill and then
 goodwill is added to arrive at a master valuation.

43) If a short-term obligation is excluded from current liabilities because of refinancing,

the footnote to the financial statements describing this event should include all of the
following information EXCEPT
A.a general description of the financing arrangement.
B. the terms of the new obligation incurred or to be incurred.
C. the number of financing institutions that refused to refinance the debt, if any.
D.the terms of any equity security issued or to be issued.

44) Among the short-term obligations of Lance Company as of December 31, the balance
sheet date, are notes payable totaling $250,000 with the Madison National Bank. These
are 90-day notes, renewable for another 90-day period. These notes should be classified
on the balance sheet of Lance Company as
A.current liabilities.
B. deferred charges.
C. intermediate debt.
D.long-term liabilities.

45) Stock dividends distributable should be classified on the

A.income statement as an expense.
B. balance sheet as an asset.
C. balance sheet as an item of stockholders' equity.
D.balance sheet as a liability.

46) Simson Company has 35 employees who work 8-hour days and are paid hourly. On
January 1, 2006 the company began a program of granting its employees 10 days of paid
vacation each year. Vacation days earned in 2006 may first be taken on January 1, 2007.
Information relative to these employees is as follows:
Hourly Vacation Days Earned by Each Vacation Days Used by Each
Year
Wages Employee Employee
2006 $25.80 10 0
2007 27.00 10 8
2008 $28.50 10 10
What is the amount of expense relative to compensated absences that should be reported
on Simson's income statement for 2006?
A.$0.
B. $68,880.
C. $72,240.
D.$75,600.

47) Wellman Company self insures its property for fire and storm damage. If the
company were to obtain insurance on the property, it would cost them $1,000,000 per
year. The company estimates that on average it will incur losses of $800,000 per year.
During 2007, $350,000 worth of losses were sustained. How much total expense and/or
loss should be recognized by Wellman Company for 2007?
A.$0 in losses and $800,000 in insurance expense
B. $350,000 in losses and no insurance expense
C. $350,000 in losses and $450,000 in insurance expense
D.$0 in losses and $1,000,000 in insurance expense

48) A company offers a cash rebate of $1 on each $4 package of batteries sold during
2007. Historically, 10% of customers mail in the rebate form. During 2007, 6,000,000
packages of batteries are sold, and 210,000 $1 rebates are mailed to customers. What is
the rebate expense and liability, respectively, shown on the 2007 financial statements
dated December 31?
A.$390,000; $390,000
B. $600,000; $600,000
C. $600,000; $390,000
D.$210,000; $390,000

49) Which of the following sets of conditions would give rise to the accrual of a
contingency under current generally accepted accounting principles?
A.Event is unusual in nature and occurrence of event is probable.
B. Amount of loss is reasonably estimable and event occurs infrequently.
C. Amount of loss is reasonably estimable and occurrence of event is probable.
D.Event is unusual in nature and event occurs infrequently.

50) Mark Ward is a farmer who owns land which borders on the right-of-way of the
Northern Railroad. On August 10, 2007, due to the admitted negligence of the Railroad,
hay on the farm was set on fire and burned. Ward had had a dispute with the Railroad for
several years concerning the ownership of a small parcel of land. The representative of
the Railroad has offered to assign any rights which the Railroad may have in the land to
Ward in exchange for a release of his right to reimbursement for the loss he has sustained
from the fire. Ward appears inclined to accept the Railroad's offer. The Railroad's 2007
financial statements should include the following related to the incident:
A.creation of a liability only.
B. recognition of a loss and creation of a liability for the value of the land.
C. recognition of a loss only.
D.disclosure in note form only.

51) A contingent liability

A.is NOT disclosed in the financial statements.
B. definitely exists as a liability but its amount and due date are indeterminable.
C. is accrued even though NOT reasonably estimated.
D.is the result of a loss contingency.

52) The covenants and other terms of the agreement between the issuer of bonds and the
lender are set forth in the
A.registered bond.
B. bond indenture.
C. bond debenture.
D.bond coupon.

53) An example of an item which is NOT a liability is

A.dividends payable in stock.
B. advances from customers on contracts.
C. the portion of long-term debt due within one year.
D.accrued estimated warranty costs.

54) If bonds are issued initially at a premium and the effective-interest method of
amortization is used, interest expense in the earlier years will be
A.greater than if the straight-line method were used.
B. greater than the amount of the interest payments.
C. less than if the straight-line method were used.
D.the same as if the straight-line method were used.

55) Which of the following is a correct statement of one of the capitalization criteria?
A.The lease transfers ownership of the property to the lessor.
B. The lease contains a purchase option.
The minimum lease payments (excluding executory costs) equal or exceed 90% of the
C.
fair value of the leased property.
The lease term is equal to or more than 75% of the estimated economic life of the
D.
leased property.

56) Which of the following best describes current practice in accounting for leases?
A.Leases are NOT capitalized.
B. Leases similar to installment purchases are capitalized.
C. All leases are capitalized.
D.All long-term leases are capitalized.

57) An essential element of a lease conveyance is that the

A.lessor conveys less than his or her total interest in the property.
B. lessee provides a sinking fund equal to one year's lease payments.
C. term of the lease is substantially equal to the economic life of the leased property.
property that is the subject of the lease agreement must be held for sale by the lessor
D.
prior to the drafting of the lease agreement.

58) If the residual value of a leased asset is guaranteed by a third party

A.it is treated by the lessee as no residual value.
B. the third party is also liable for any lease payments NOT paid by the lessee.
it is treated by the lessee as an additional payment and by the lessor as realized at the
C.
end of the lease term.
D.the net investment to be recovered by the lessor is reduced.

59) In order to properly record a direct-financing lease, the lessor needs to know how to
calculate the lease receivable. The lease receivable in a direct-financing lease is best
defined as
the amount of funds the lessor has tied up in the asset which is the subject of the direct-
A.
financing lease.
the difference between the lease payments receivable and the fair market value of the
B.
leased property.
the total book value of the asset less any accumulated depreciation recorded by the
C.
lessor prior to the lease agreement.
D.the present value of minimum lease payments.

60) The amount to be recorded as the cost of an asset under capital lease is equal to the
present value of the minimum lease payments plus the present value of any
A.
unguaranteed residual value.
B. present value of the minimum lease payments.
present value of the minimum lease payments or the fair value of the asset, whichever
C.
is lower.
D.carrying value of the asset on the lessor's books.