Multiple Choice Questions
1. Which of the following accounts is a liability?
a. Depreciation expense
c. Accumulated depreciation
d. Unearned advertising fees
2. Which of the following is an example of an accrual?
a. Revenue collected in advance
b. Supplies purchased for cash but not yet used
c. Interest expense incurred but not yet paid
d. Payment for insurance policy to be used in the next two years
3. Which of the following is an example of a deferral?
a. Cash has not changed hands and services have not been rendered.
b. Services have been rendered but nothing has been recorded.
c. A business never has enough cash.
d. Resources have been purchased for cash but not yet used.
4. The carrying (book) value of an asset is
a. An account that increases an asset account on the balance sheet.
b. The original cost of an asset minus the accumulated depreciation.
c. The original cost of an asset.
d. Equivalent to accumulated depreciation.
5. Logan Company received $300 from a customer as payment for a credit sale made in a previous accounting period. Logan will record this as
a. $300 in sales revenue.
b. A $300 reduction in accounts payable.
c. A $300 reduction in accounts receivable.
d. A $300 increase in accounts receivable.
6. When a company pays cash in June to a vendor for goods purchased in May, the transaction will
a. Increase cash and decrease inventory.
b. Decrease accounts payable and decrease cash.
c. Decrease accounts receivable and decrease cash.
d. Increase accounts payable and increase inventory.
7. Z Company’s accountant forgot to make an adjustment at the end of the year to record depreciation expense on the equipment. What effect did this omission have on the company’s financial statements?
a. Understated assets and liabilities
b. Overstated assets and shareholders’ equity
c. Understated liabilities and overstated shareholders’ equity
d. Overstated assets and understated shareholders’ equity
8. Phillip’s Camera Store had a retained earnings balance of $1,000 on January 1, 2010. For the year 2010, sales were $10,500 and expenses were $6,500. The company declared and distributed cash dividends of $2,500 on December 31, 2010. What was the amount of retained earnings on December 31, 2010?
9. When prepaid insurance has been used, the following adjustment will be necessary:
a. Increase insurance expense, decrease cash.
b. Increase prepaid insurance, decrease insurance expense.
c. Increase insurance expense, increase prepaid insurance.
d. Increase insurance expense, decrease prepaid insurance.
10. The profit margin on sales ratio indicates how well the firm is
a. Marketing its products for sale.
b. Controlling its accounting records.
c. Managing its accruals and deferrals.
d. Controlling its costs.