1. If total liabilities increased by $20,000 during a period of time and owners' (stockholders') equity increased by $5,000 during the same period, the amount and direction (increase or decrease) of the period's change in total assets is:
a. $20,000 increase
b. $20,000 decrease
c. $25,000 increase
d. $25,000 decrease

2. The matching concept requires:
a. Assets be matched with liabilities and owners' equity
b. The income statement be matched with the balance sheet for the same period
c. All financial statements for the same period be matched before any are presented
d. Expenses for the period be matched with the revenues for the same period to determine net income or net loss

3. A business enterprise paid $6,000 to a creditor in payment of an amount owed that was previously accrued. The effect of the transaction on the accounting equation was to
a. Increase one asset, decrease another asset
b. Increase an asset, increase a liability
c. Decrease an asset, decrease a liability
d. Increase an asset, increase owner's equity

4. Which of the following financial statements reports information as of a point in time?
a. Balance sheet
b. Retained earnings statement
c. Income statement

5. The balance in the prepaid rent account before adjustment at the end of the year is $12,000, which represents three months' rent paid on November 1. The adjusting entry required on December 31 is
a. Debit Rent Expense, $8,000; Credit Prepaid Rent, $8,000
b. Debit Rent Expense, $4,000; Credit Prepaid Rent, $4,000
c. Debit Prepaid Rent, $8,000; Credit Rent Expense, $8,000
d. Debit Prepaid Rent, $4,000; Credit Rent Expense, $4,000

6. Which of the following accounts would be found in the stockholders' equity section of a corporation's balance sheet?
a. Accounts Payable
b. Capital Stock
c. Retained Earnings
d. All of the above
e. Only B and C

7. Accrual accounting
a. Is a process used to measure the firm's capital stock
b. Is the identification of revenues and expenses with corresponding time periods
c. May associate revenues and expenses with different accounting periods than would cash-basis accounting
d. All of the above are correct
e. Only (b) and (c) are correct

8. Brown Co. reported the following amounts at the end of the first year of operations: capital stock $40,000; sales revenue $95,000; total assets $80,000; no dividends; and total liabilities $30,000. Owners' equity and total expenses would be
a. Owners' equity $40,000 and total expenses $45,000
b. Owners' equity $80,000 and total expenses $40,000
c. Owners' equity $50,000 and total expenses $65,000
d. Owners' equity $50,000 and total expenses $85,000
e. None of the above is correct

9. Revenues are
a. Increases in net assets due to the principal selling activities of the firm
b. The increases in capital stock
c. Cash inflows less cash outflows including loan proceeds and payments.
d. The reduction of retained earnings

10. A hot-dog vendor sells hot dogs for $.90 each on the corner of Court and Union streets. On Monday, three regular customers forgot to bring their wallets with them and did not pay for their hot dogs (one per customer) until Tuesday. On Tuesday the hot-dog vendor sold a total of 300 hot dogs including 40 hot dogs purchased by a regular customer who promised to bring a check for the hot dogs on Wednesday.
a. If the vendor uses the cash-basis of accounting, revenue for Tuesday is $270.
b. If the vendor uses accrual-basis accounting, revenue is $300 for Tuesday.
c. If the vendor uses accrual-basis accounting, revenue for Tuesday is $270.
d. If the vendor uses cash-basis accounting, revenue for Tuesday is $234.
e. Both (c) and (d) are correct.

11. The balance in retained earnings on 12/31/96 was $75,000. The firm commenced operations on 1/1/92. If dividends paid out over that time period were $50,000, the total net income for the 5-year period was
a. 50,000
b. 125,000
c. 75,000
d. 25,000
e. None of the above is correct

12. If land is acquired by paying $76,000 cash and issuing an $834,000 note payable, then as a result of this transaction
a. Total assets is increased by $910,000
b. Total liabilities is increased by $834,000
c. Stockholders' equity is increased by $76,000
d. All of the above are correct
e. None of the above is correct

13. If one part of a journal entry recording a transaction decreases an asset account, what might the other part of the entry do?
a. Decrease a different asset account
b. Increase a liability account
c. Increase a revenue account
d. All of the above could be the other part of the entry
e. None of the above could be the other part of the entry

14. There are relationships among debits and credits and the five basic types of accounts. Select the best statement from those below that describes parts of these relationships.

a. Increases in all balance sheet accounts (assets, liabilities, and equity) are recorded with debits.
b. Decreases in liabilities, equity, and revenues are recorded with credits.
c. Increases in both income statement accounts (revenues and expenses) are recorded with credits.
d. Increases in liabilities, equity, and revenues are recorded with credits.
e. None of the above is correct.

15. Select the correct journal entry for the following transaction: Sales of $105,000 were made. This includes cash sales of $90,000 and credit sales of $15,000.

a. Cash 105,000  
Sales revenue   105,000
b. Sales revenue 105,000   
 Accounts receivable
c. Sales revenue 105,000  
Accounts payable
d. Cash 90,000  
Sales revenue   90,000
e. Cash
Accounts receivable
Sales revenue   105,000

16. On 11/30 MLS Corp. began negotiations for the purchase of a 1960 Chevrolet for use in firm promotional activities. MLS Corp. and the seller agreed on a sales price of $20,000 on 12/10. The automobile is to be delivered on 12/15. MLS Corp. will make the $20,000 cash payment on 12/15. Select the appropriate entry for MLS Corp. on 11/30.

a. Automobile 20,000  
Note payable   20,000
b. Automobile 20,000  
Cash   20,000
c. Automobile 20,000  
Accounts payable   20,000


The debit to the automobile account in (a), (b), and (c) is correct; however, there is insufficient information given in the problem to determine the correct credit entry on 11/30
e. None of the above is correct.

17. A trial balance is a listing in

a. Ledger account order of the ledger accounts and their respective debit or credit balances
b. Chronological order of the journal entry debit and credit entries to the ledger accounts for the accounting period just completed
c. Alphabetical order of the adjusting entries made to equity accounts during the accounting period just completed
d. Ledger account order of only the ledger accounts whose balances have changed during the accounting period due to end-of-period adjusting entries
e. Chronological order of all accounts that need to be balanced

18. For $50 a month, Reil Co. visits its customers' premises and performs insect control services. If customers experience problems between regularly scheduled visits, Reil makes service calls at no additional charge. Instead of paying monthly, customers may pay an annual fee of $540 in advance. For a customer who pays the annual fee in advance, Reil should recognize the related revenue

a. When the cash is collected
b. At the end of the fiscal year
c. At the end of the contract year after all of the services have been performed
d. Over the contract year as the services are performed

19. On 3/1 Millers Co. borrowed $180,000 from National Bank on a one-year, 11%, interest-bearing note payable. Assume that the note was properly recorded on 3/1 and that no entries have been made since then. The adjusting entry for this note on 12/31 in Millers' journal would be

a. Interest expense 3,300  
Note payable   3,300
b. Cash 16,500  
Note payable   16,500
c. Interest expense
Deferred interest expense
Interest payable
d. Interest expense 16,500  
Interest payable   16,500
e. None of the above is correct

20. On 10/1 RDJ Company paid $8,000 to the AKJ Corp. for rental of an office building. RDJ debited prepaid rent for $8,000 on 10/1. The payment was for rent for the months of October, November and December of the current year and January of next year. RDJ reported net income of $48,000 for the current year but failed to make any adjusting entry regarding the rental payment. RDJ's correct net income for the current year ending on 12/31 is (assume no income taxes)

a. 40,000
b. 42,000
c. 50,000
d. 52,000
e. None of the above is correct


21. In the closing process, ultimately

a. All income statement accounts are closed to retained earnings via income summary
b. The dividends account is closed to retained earnings
c. The dividends account is closed to income summary
d. Both (a) and (b) are correct
e. Both (a) and (c) are correct

22. Following are amounts from an adjusted trial balance. In the closing process, what amount will be closed to retained earnings from income summary?

Cash $20 Retained earnings $12 Interest expense $10
Capital stock 18 Wages expense 10 Rent expense 10
Sales revenue 75 Accounts payable 10 Dividends 15

a. $33
b. $20
c. $30
d. $35
e. $45

23. The following information is given for 1996:

Prepaid insurancebeginning balance $ 2,900
Insurance expense for the period 10,800
Prepaid insurance ending balance 3,500

Cash payments of insurance premiums during 1996 amounted to
a. $10,800
b. $10,200
c. $14,300
d. $11,400
e. $13,700

24. At 12/31/96, Chan Co. (a) failed to reduce supplies inventory and increase supplies expense by $20,000, and (b) did not recognize $8,000 of revenue previously recorded as unearned revenue that had now been earned. The effects of these omissions on the 12/31/96 balance sheet would be
a. Assets overstated
Liabilities overstated

Retained earnings understated

b. Assets overstated
Liabilities overstated

Retained earnings overstated
c. Assets understated
Retained earnings understated
d. Liabilities understated
Retained earnings understated
e. none of the above is correct

25. The following information is available for Ralph's Deli:


  12/31/95 12/31/96
Assets $265,000 $255,000
Liabilities 100,000 110,000
Capital stock ? 130,000
Retained Earnings ? ?

During 1996, Ralph's net income was $18,000 and $5,000 in dividends were paid out. The capital stock at 12/31/95 was:
a. $163,000
b. $167,000
c. $165,000
d. $130,000
e. None of the above is correct

26. Madison Corporation purchased land and a building by paying $4,000 in cash and signing a five-year, 12 percent, $46,000 note payable. This transaction will
a. Increase total assets by $50,000
b. Increase total liabilities by $50,000
c. Increase stockholders' equity by $4,000
d. Only (a) and (b) are correct
e. None of the above is correct




Indicate the effect of the following errors on each of the accounting elements described in the column headings. Code your answer using the following:

A = Overstated
B = Understated
C = No Effect
Error Total Revenue Total Expenses Net Income Total Assets Total Liabilities Owner's Equity
Example: Recorded payment for rent as a debit to Salaries Expense. C C C C C C
1. A company recorded the cash purchase of office equipment by debiting office supplies expense and crediting accounts payable. 27. 28. 29. 30. 31. 32.
2. A company failed to accrue interest expense at year-end. 33. 34. 35. 36. 37. 38.
3. A company failed to adjust for expired insurance expense at year-end. 39. 40. 41. 42. 43. 44.





Which of the following accounts would be debited and credited as a result of the following transactions (adjustments)?

A = Expenses
B = Revenues
C = Liabilities
D = Assets
E = Stockholders' Equity


Transaction Debit Credit
1. A credit sale is made. 45. 46.
2. A typewriter is purchased on credit. 47. 48.
3. Cash is collected from the sale of Transaction #1. 49. 50.
4. An invoice for utilities for the previous month is received in the mail. 51. 52.





Classify the following transactions as to their effect on Lindfield Company's 1996 net income if accrual accounting procedures are used. Using the following key:

A = increase in net income
B = decrease in net income
C = no change in net income

  53. Lindfield prepaid 1997's rent of $18,000.
  54. Lindfield collected $12,000 from a customer for goods it purchased on account in 1995.
  55. Dividends of $16,000 are paid to Lindfield's stockholders during 1996.
  56. Credit sales of $19,000 were made during 1996.
  57. Lindfield sold capital stock for $15,000 during 1996.
  58. Wages paid to employees for work performed in 1996.






Indicate which of the following terms correspond to the definitions (A-J) in the right-hand column. Each answer may be used only once, or not at all.

  59. Financial Accounting
  60. Dividends
  61. General Journal
  62. Closing Entries
  63. Adjusting Entries



A. The process of producing accounting information for the internal use of a company's management.
B. A chronological record of all transactions; the place where transactions first enter the accounting records; also called book of original entry.
C. The postponement of the recognition of an expense already paid or incurred, or of a revenue already received.
D. Journal entries made at the end of an accounting period that set the stage for the next accounting perod by clearing the income statement accounts of their balalnces, and that summarize a period's revenues and expenses.
E. The process of generating and communicating accounting information in the form of financial statements to those outside the organization.
F. Entries made to apply accrual accounting to transactions that span more than one accounting period.
G. The recognition of an expense or revenue that has been incurred but has not yet been recorded. 
H. Present obligations of a business to pay cash, transfer assets, or provide services to other entities in the future.
I Distributions to stockholders of assets (usually cash) generated by past earnings.
J Economic resources owned by a business that are expected to benefit future operations.





a = True
b = False

64. Dividends paid are reported as an expense on the income statement.

65. The "prepaid rent" account is reported on the balance sheet as an asset.

66. A trial balance can be prepared in order to test for the equality of debits and credits.

67. The "unearned revenue" account is a liability and is included on the income statement.

68. All transactions must have an impact on at least two of the three elements of the balance sheet (accounting) equation.

69. A transaction is entered in the general journal before being posted to the general ledger.

70. The "retained earnings" account on the balance sheet is the accumulation of the firm's net income earned to date.

71. A corporation prepared a journal entry at year-end to record interest expense which had not yet been paid. This adjusting journal entry is an example of an accrual.

72. The "income summary" account balance (after closing the revenue and expense accounts to the income summary account) represents an organization's net income (loss).

73. A trial balance will have unequal totals if a purchase of supplies on account costing $100 is recorded as a debit to supplies for $1,000 and a credit to cash for $100.

74. A collection of a $1,500 account receivable was recorded as a debit to cash for $1,500 and a credit to revenue for $1,500. This error will cause the trial balance to have unequal totals.