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An organization that has not published accounting standards is the
 
a. American Institute of Certified Public Accountants.
b. Securities and Exchange Commission.
c. Financial Accounting Standards Board.
d. All of these have published accounting standards.
   
The purpose of Statements of Financial Accounting Concepts is to
 
a. establish GAAP.
b. modify or extend the existing FASB Standards Statement.
c. form a conceptual framework for solving existing and emerging problems.
d. determine the need for FASB involvement in an emerging issue.
   
Members of the Financial Accounting Standards Board are
 
a. employed by the American Institute of Certified Public Accountants (AICPA).
b. part-time employees.
c. required to hold a CPA certificate.
d. independent of any other organization.
   
The following are part of the "due process" system used by the FASB in the evolution of a typical
FASB Statement of Financial Accounting Standards:
 
1. Exposure Draft
2. Statement of Financial Accounting Standards
3. Preliminary Views
 
The chronological order in which these items are released is as follows:
a. 1, 2, 3.
b. 1, 3, 2.
c. 2, 3, 1.
d. 3, 1, 2.
   
Generally accepted accounting principles
 
a. include detailed practices and procedures as well as broad guidelines of general application.
b. are influenced by pronouncements of the SEC and IRS.
c. change over time as the nature of the business environment changes.
d. all of these.
   
The most significant current source of generally accepted accounting principles is the
 
a. AICPA.
b. SEC.
c. APB.
d. FASB.
   
Which of the following is not a part of generally accepted accounting principles?
 
a. FASB Interpretations
b. CAP Accounting Research Bulletins
c. APB Opinions
d. All of these are part of generally accepted accounting principles.
   
Which of the following publications does not qualify as a statement of generally accepted accounting principles?
 
a. Statements of financial standards issued by the FASB
b. Accounting interpretations issued by the FASB
c. APB Opinions
d. Accounting research studies issued by the AICPA
   
Rule 203 of the Code of Professional Conduct addresses:
 
a. ethical requirements.
b. financial statements should be based on generally accepted accounting principles.
c. advertising to obtained clients.
d. auditing financial statements.
   
What is the purpose of a FASB Staff Position?
 
a. Provide interpretation of existing standards.
b. Provide a consensus on how to account for new and unusual financial transactions.
c. Provide interpretive guidance.
d. Provide timely guidance on select issues.
   
Which of the following is not considered a component of generally accepted accounting principles?
 
a. FASB Implementation Guides.
b. Widely recognized industry practices.
c. Articles published in CPA journals.
d. AICPA Accounting Interpretations.
   
Financial accounting standard-setting in the United States
 
a. can be described as a social process which reflects political actions of various interested user
groups as well as a product of research and logic.
b. is based solely on research and empirical findings.
c. is a legalistic process based on rules promulgated by governmental agencies.
d. is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable.
   
The purpose of the International Accounting Standards Board is to
 
a. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations.
b. develop a uniform currency in which the financial transactions of companies through-out the world would be measured.
c. promote uniform accounting standards among countries of the world.
d. arbitrate accounting disputes between auditors and international companies.
   
What is not a source of pressure that may influence the accounting standard setting process?
 
a. Congress.
b. Lobbyist.
c. CPA firms.
d. None of the above.
   
What is a possible danger if politics plays too big a role in accounting standard setting?
 
a. Accounting standards that are not truly generally accepted.
b. Individuals may influence the standards.
c. User groups become active.
d. The FASB delegates its authority to elected officials.
   
What is "expectation gap"?
 
a. The difference between what the public thinks the accountant is not doing and what the accountant knows they don't do.
b. The difference between what the public thinks the accountant is doing and what Congress says the accountant is doing.
c. The difference between what the public thinks the accountant is doing and what the accountant thinks they can do.
d. The difference between what the accountant is doing and what the Courts say the accountant should be doing.
   
What is not a reason that accounting standards may differ across countries?
 
a. Governments.
b. Language.
c. Culture.
d. Past Practice.
   
What would be an advantage of having all countries adopt and follow the same accounting standards?
 
a. Consistency.
b. Comparability.
c. Lower preparation costs.
d. b and c
   
Which of the following is an ethical concern of accountants?
 
a. Earnings manipulation.
b. Conservative accounting.
c. Industry practices.
d. None of the above.
   
Match the publications with their sources.
 
1. Accounting Research Bulletins (1953-1959)    <>           Committee on Accounting Procedure
2. Statements on Auditing Standards                      <>           Auditing Standards Board
3. Statements of Position (SOPs)                                               <>           Accounting Standards Executive Committee
4. Emerging Issues Task Force Statements                            <>           Financial Accounting Standards Board
5. Opinions (1962-1973)                                                               <>           Accounting Principles Board
6. Technical Bulletins                                                                      <>           Financial Accounting Standards Board
7. Statements of Financial Accounting Standards              <>           Financial Accounting Standards Board
8. Statements of Financial Accounting Concepts                <>           Financial Accounting Standards Board
   
A soundly developed conceptual framework enables the FASB to issue more useful and consistent pronouncements over time.
 
True
   
A conceptual framework is a coherent system of concepts that flow from an objective.
 
True
   
The first level of the conceptual framework identifies the recognition, measurement, and disclosure concepts used
in establishing accounting standards.
 
False
   
The IASB has also issued a conceptual framework and the FASB and the IASB have agreed to develop a common
conceptual framework.
 
True
   
Although the FASB has developed a conceptual framework, no Statements of Financial Accounting Concepts have
been issued to date.
 
False
   
The objective of financial reporting is the foundation of the conceptual framework.
 
True
   
Users of financial statements are assumed to need no knowledge of business and financial accounting matters to
understand information contained in financial statements.
 
False
   
Relevance and faithful representation are the two primary qualities that make accounting information useful for decision making.
 
True
   
The idea of consistency does not mean that companies cannot switch from one accounting method to another.
 
True
   
Verifiability and predictive value are two ingredients of faithful representation.
 
False
   
Revenues, gains, and distributions to owners all increase equity.
 
False
   
Comprehensive income includes all changes in equity during a period except those resulting from investments
by owners and distributions to owners.
 
True
   
The historical cost principle would be of limited usefulness if not for the going concern assumption.
 
True
   
The economic entity assumption means that economic activity can be identified with a particular legal entity.
 
False
   
The expense recognition principle states that debits must equal credits in each transaction.
 
False
   
Revenues are realizable when assets received or held are readily convertible into cash or claims to cash.
 
True
   
Supplementary information may include details or amounts that present a different perspective from that adopted
in the financial statements.
 
True
   
In order to justify reguiring a particular measurement or disclosure, the benefits to be derived from it must equal
the costs associated with it.
 
False
   
Prudence or conservatism means when in doubt, choose the solution that will be least likely to overstate liabilities or expenses.
 
False
   
Generally accepted accounting principles
 
a. are fundamental truths or axioms that can be derived from laws of nature.
b. derive their authority from legal court proceedings.
c. derive their credibility and authority from general recognition and acceptance by the accounting profession.
d. have been specified in detail in the FASB conceptual framework.
   
A soundly developed conceptual framework of concepts and objectives should
 
a. increase financial statement users' understanding of and confidence in financial reporting.
b. enhance comparability among companies' financial statements.
c. allow new and emerging practical problems to be more quickly solved.
d. all of these.
   
Which of the following (a-c) are not true concerning a conceptual framework in account-ing?
 
a. It should be a basis for standard-setting.
b. It should allow practical problems to be solved more quickly by reference to it.
c. It should be based on fundamental truths that are derived from the laws of nature.
d. All of the above (a-c) are true.
   
What is a purpose of having a conceptual framework?
 
a. To enable the profession to more quickly solve emerging practical problems.
b. To provide a foundation from which to build more useful standards.
c. Neither a nor b.
d. Both a and b.
   
Which of the following is not a benefit associated with the FASB Conceptual Framework Project?
 
a. A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting.
b. Practical problems should be more quickly solvable by reference to an existing conceptual framework.
c. A coherent set of accounting standards and rules should result.
d. Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.
   
In the conceptual framework for financial reporting, what provides "the why"--the goals and purposes of accounting?
 
a. Recognition, Measurement measurement,an, and d disclosure recognition concepts, principles, and constraints
b. Qualitative characteristics of accounting information
c. Elements of financial statements
d. Objectives of financial reporting
   
The underlying theme of the conceptual framework is
 
a. decision usefulness.
b. understandability.
c. faithful representationreliability.
d. comparability.
   
Which of the following is not an objective of financial reporting?
 
a. To provide information about economic resources, the claims to those resources, and the changes in them.
b. To provide information that is helpful to investors and creditors and other users in assessing the amounts,
      timing, and uncertainty of future cash flows.
c. To provide information that is useful to those making investment and credit decisions.
d. All of these are objectives of financial reporting.
   
The objectives of financial reporting include all of the following except to provide information that
 
a. is useful to the Internal Revenue Service in allocating the tax burden to the business community.
b. is useful to those making investment and credit decisions.
c. is helpful in assessing future cash flows.
d. identifies the economic resources (assets), the claims to those resources (liabilities), and the changes in those resources and claims.
   
What is a primary objective of financial reporting as indicated in the conceptual framework?
 
a. provide information that is useful to those making investing and credit decisions.
b. provide information that is useful to management.
c. provide information about those investing in the entity.
d. All of the above.
   
What is a primary objective of financial reporting as indicated in the conceptual framework?
 
a. Provide information that is helpful to present and potential investors, creditors, and other users in assessing the amounts,
      timing, and uncertainty of future cash flows.
b. Provide information that is helpful to present investors, creditors and uncertainty of future cash flows.
c. Provide information that is helpful to potential investors, creditors and uncertainty of future cash flows.
d. None of the above.
   
Which of the following is a primary fundamental characteristic of useful accounting information?
 
a. Comparability.
b. Relevance.
c. ConsistencyNeutrality.
d. Materiality.
   
Which of the following is a primary characteristic of useful accounting information?
 
a. Conservatism.
b. Comparability.
c. Reliability Faithful representation.
d. Consistency.
   
What is meant by comparability when discussing financial accounting information?
 
a. Information has predictive or feedback confirmatory value.
b. Information is reasonably free from error.
c. Information that is measured and reported in a similar fashion across companies.
d. Information is timely.
   
What is meant by consistency when discussing financial accounting information?
 
a. Information that is measured and reported in a similar fashion across points in time.
b. Information is timely.
c. Information is measured similarly across the industry.
d. Information is verifiable.
   
Which of the following is an ingredient of relevance?
 
a. Verifiability.
b. Representational faithfulness Neutrality.
c. Neutrality Timeliness.
d. Timeliness Materiality.
   
Which of the following is an ingredient of reliability faithful representation?
 
a. Predictive value.
b. Materiality Timeliness.
c. Neutrality.
d. Feedback Confirmatory value.
   
Changing the method of inventory valuation should be reported in the financial statements under what qualitative characteristic
of accounting information?
 
a. Consistency.
b. Verifiability.
c. Timeliness.
d. Comparability.
   
Company A issuing its annual financial reports within one month of the end of the year is an example of which ingredient of
primary fundamental quality of accounting information?
 
a. Neutrality.
b. Timeliness.
c. Predictive value.
d. Representational faithfulness Completeness.
   
What is the quality of information that enables users to better forecast future operations?
 
a. Reliability Faithful representation.
b. Materiality.
c. Comparability Timeliness.
d. Relevance.
   
Neutrality Representational faithfulness is an ingredient of which primary fundamental quality of information?
 
a. Faithful representation Reliability.
b. Comparability.
c. Relevance.
d. Consistency Understandability.
   
Decision makers vary widely in the types of decisions they make, the methods of decision making they employ, the information
they already possess or can obtain from other sources, and their ability to process information. Consequently, for information to
be useful there must be a linkage between these users and the decisions they make. This link is If the FIFO inventory method was
used last period, it should be used for the current and following periods because of
 
a. relevance.
b. reliability neutrality.
c. understandability.
d. materiality consistency.
   
The overriding pervasive criterion by which accounting information can be judged is that of
 
a. decision usefulness for decision making.
b. freedom from bias.
c. timeliness.
d. comparability.
   
The two primary fundamental qualities that make accounting information useful for decision making are
 
a. comparability and consistency timeliness.
b. materiality and timeliness neutrality.
c. relevance and reliability faithful representation.
d. reliability and comparability faithful representation and comparability.
   
Accounting information is considered to be relevant when it
 
a. can be depended on to represent the economic conditions and events that it is intended to represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.
   
The quality of information that means the numbers and descriptions match what really existed or happened isgives assurance that
it is reasonably free of error and bias and is a faithful representation is
 
a. relevance.
b. faithful representationreliability.
c. verifiability completeness.
d. neutrality.
   
According to Statement of Financial Accounting Concepts No. 2, which Which of the following does not relates relate to
both relevance and reliability?
 
a. Materiality
b. Understandability Predictive value
c. Usefulness Confirmatory value
d. All of these
   
According to Statement of Financial Accounting Concepts No. 2, timeliness materiality is an ingredient of the primary fundamental
quality of Relevance Reliability Faithful Representation
 
a. Yes, Yes
b. No, Yes
c. Yes, No
d. No, No
   
According to Statement of Financial Accounting Concepts No. 2, verifiability completeness is an ingredient of the fundamental
primary quality of Relevance Faithful Representation Reliability.
 
a. Yes, No
b. Yes, Yes
c. No, No
d. No, Yes
   
According to Statement of Financial Accounting Concepts No. 2, neutrality is an ingredient of the fundamental primary quality of
Relevance Faithful Representation Reliability
 
a. Yes, Yes
b. No, Yes
c. Yes, No
d. No, No
   
Information is neutral if Neutrality means that information
 
a. provides benefits which are at least equal to the costs of its preparation.
b. can be compared with similar information about an enterprise at other points in time.
c. would have no impact on a decision maker.
d. is free from bias toward a predetermined result cannot favor one set of interested parties over another.
   
The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers
using the same measurement methods is
 
a. relevance.
b. faithful representation reliability.
c. verifiability.
d. neutrality.
   
Accrual accounting is used because
 
a. cash flows are considered less important.
b. it provides a better indication of ability to generate cash flows than the cash basis.
c. it recognizes revenues when cash is received and expenses when cash is paid.
d. none of the above.
   
Which perspective is adopted as part of the objective of general-purpose financial reporting?
 
a. Decision-usefulness perspective.
b. Proprietary perspective.
c. Entity perspective.
d. Financial reporting perspective.
   
Accounting principles are "generally accepted" only when
 
a. an authoritative accounting rule-making body has established it in an official pro-nouncement.
b. it has been accepted as appropriate because of its universal application.
c. both a and b.
d. neither a nor b.
   
A common set of accounting standards and procedures are called
 
a. financial accounting standards.
b. generally accepted accounting principles.
c. objectives of financial reporting.
d. statements of financial accounting concepts.
   
Which of the following is a general limitation of "general purpose financial statements"?
 
a. General purpose financial statements may not be the most informative for a specific enterprise.
b. General purpose financial statements are comparable.
c. General purpose financial statements are assumed to present fairly the company's financial operations.
d. None of the above.
   
What is the relationship between the Securities and Exchange Commission and accounting standard setting in the United States?
 
a. The SEC requires all companies listed on an exchange to submit their financial statements to the SEC.
b. The SEC coordinates with the AICPA in establishing accounting standards.
c. The SEC has a mandate to establish accounting standards for enterprises under its jurisdiction.
d. The SEC reviews financial statements for compliance.
   
What is due process in the context of standard setting at the FASB?
 
a. FASB operates in full view of the public.
b. Public hearings are held on proposed accounting standards.
c. Interested parties can make their views known.
d. All of the above.
   
Which of the following organizations has been responsible for setting U. S. accounting standards?
 
a. Accounting Principles Board.
b. Committee on Accounting Procedure.
c. Financial Accounting Standards Board.
d. All of the above.
   
Why did the AICPA create the Accounting Principles Board?
 
a. The SEC disbanded the previous standard setting organization.
b. The previous standard setting organization did not provide a structured set of accounting principles.
c. No such organization existed in the past.
d. None of the above.
   
Which organization was responsible for issuing Accounting Research Bulletins?
 
a. Accounting Principles Board.
b. Committee on Accounting Procedure.
c. The SEC.
d. AICPA.
   
A characteristic of generally accepted accounting principles include the following:
 
a. common set of standards and principles.
b. standards and principles are based federal statutes.
c. acceptance requires an affirmative vote of Certified Public Accountants.
d. practices that become accepted for at least a year by all industry members.
   
Characteristics of generally accepted accounting principles include all of the following except
 
a. authoritative accounting the rule-making body established a principle of reporting.
b. standards are considered useful by the profession.
c. each principle is approved by the SEC.
d. practice has become universally accepted over time.
   
Why was it believed that accounting standards that were issued by the Financial Accounting Standards Board would carry more weight?
 
a. Smaller membership.
b. FASB board members are well-paid.
c. FASB board members must be CPAs.
d. Due process.
   
The passage of a new FASB Standards Statement requires the support of
 
a. all Board members.
b. three Board members.
c. four Board members.
d. five Board members.
   
What is the purpose of Emerging Issues Task Force?
 
a. Provide interpretation of existing standards.
b. Provide a consensus on how to account for new and unusual financial transactions.
c. Provide interpretive guidance.
d. Provide timely guidance on select issues.
   
Which organization is responsible for issuing Emerging Issues Task Force Statements?
 
a. FASB
b. CAP
c. APB
d. SEC
   
The role of the Securities and Exchange Commission in the formulation of accounting principles can be best described as
 
a. consistently primary.
b. consistently secondary.
c. sometimes primary and sometimes secondary.
d. non-existent.
   
The body that has the power to prescribe the accounting practices and standards to be employed by companies that fall under its jurisdiction is the
 
a. FASB.
b. AICPA.
c. SEC.
d. APB.
   
Companies that are listed on a stock exchange are required to submit their financial statements to the
 
a. AICPA.
b. APB
c. FASB.
d. SEC.
   
The Financial Accounting Standards Board (FASB) was proposed by the
 
a. American Institute of Certified Public Accountants.
b. Accounting Principles Board.
c. Study Group on the Objectives of Financial Statements.
d. Special Study Group on establishment of Accounting Principles (Wheat Committee).
   
The Financial Accounting Standards Board
 
a. has issued a series of pronouncements entitled Statements on Auditing Standards.
b. was the forerunner of the current Accounting Principles Board.
c. is the arm of the Securities and Exchange Commission responsible for setting financial accounting standards.
d. is appointed by the Financial Accounting Foundation.
   
The Financial Accounting Foundation
 
a. oversees the operations of the FASB.
b. oversees the operations of the AICPA.
c. provides information to interested parties on financial reporting issues.
d.  the Financial Accounting Standards Advisory Council provides information to interested parties on financial reporting issues.
   
The major distinction between the Financial Accounting Standards Board (FASB) and its predecessor, the Accounting Principles Board (APB), is
 
a. the FASB issues exposure drafts of proposed standards.
b. all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions.
c. all members of the FASB possess extensive experience in financial reporting.
d. a majority of the members of the FASB are CPAs drawn from public practice.
   
The Financial Accounting Standards Board employs a "due process" system which
 
a. is an efficient system for collecting dues from members.
b. enables interested parties to express their views on issues under consideration.
c. identifies the accounting issues that are the most important.
d. requires that all accountants must receive a copy of financial standards.
   
Which of the following is not a publication of the FASB?
 
a. Statements of Financial Accounting Concepts
b. Accounting Research Bulletins
c. Interpretations
d. Technical Bulletins
   
FASB Technical Bulletins
 
a. are similar to FASB Interpretations in that they establish enforceable standards under the AICPA's Code of Professional Ethics.
b. are issued monthly by the FASB to deal with current topics.
c. are not expected to have a significant impact on financial reporting in general and provide guidance when it does not conflict with
     any broad fundamental accounting principle.
d. were recently discontinued by the FASB because they dealt with specialized topics having little impact on financial reporting in general.
   
The purpose of the Emerging Issues Task Force is to
 
a. develop a conceptual framework as a frame of reference for the solution of future problems.
b. lobby the FASB on issues that affect a particular industry.
c. do research on issues that relate to long-term accounting problems.
d. issue statements which reflect a consensus on how to account for new and unusual financial transaction
     that need to be resolved quickly.
   
The American Institute of Certified Public Accountants (AICPA) continues to be involved in all of the following except
 
a. developing and enforcing professional ethics.
b. developing auditing standards.
c. providing professional education programs.
d. all of the above.
   
Which of the following pronouncements were issued by the Accounting Principles Board?
 
a. Accounting Research Bulletins
b.  Opinions
c.  Statements of Position
d.  Statements of Financial Accounting Concepts
   
Which of the following organizations has not been instrumental in the development of financial accounting standards in the United States?
 
a. AICPA
b. FASB
c. IASB
d. SEC
   
On September 15, 2021, Oliver's Mortuary received a $6,000, nine-month note bearing interest at an annual rate of 10%
from the estate of Jay Hendrix for services rendered. Oliver's has a December 31 year-end.
What adjusting entry will the company record on December 31, 2021?
 

Interest receivable	175
Interest revenue		175

 
Explanation:  Accrued interest revenue: $6,000 × 10% × 3.5/12 = $175
   
The debits and credits from the journal entries are posted to the general ledger accounts only for:
 
A) transactions occurring during the reporting period.
B) closing entries.
C) adjusting entries and closing entries.
D) all journal entries.
   
Eve's Apples opened its business on January 1, 2021, and paid for two insurance policies effective that date.
The policy for equipment damage was $36,000 for 18 months, and the crop damage policy was $12,000 for a two-year term.
What is the balance in Eve's prepaid insurance as of December 31, 2021?
 
A) $9,000.
B) $18,000.
C) $30,000.
D) $48,000.
 
Explanation:
For remaining months on the policies:
Prepaid equipment insurance: $36,000 × 6/18              $ 12,000
Prepaid crop damage insurance: $12,000 × 12/24            6,000
Total prepaid insurance at 12/31/2021                           $  18,000
   
Fink Insurance collected premiums of $18,000,000 from its customers during the current year. The adjusted balance in the Deferred premiums revenue account increased from $6 million to $8 million dollars during the year. What is Fink's revenue from insurance premiums recognized for the current year?
A) $10,000,000.
B) $16,000,000.
C) $18,000,000.
D) $20,000,000.
 
Explanation: 

Cash collections	$	18,000,000
Deduct increase in deferred premiums revenue		(2,000,000)
Insurance premium revenue	$	16,000,000

 
On November 1, 2021, Tim's Toys borrows $30,000,000 at 9% to finance the holiday sales season.
The note is for a six-month term and both principal and interest are payable at maturity.
What is the balance of interest payable for the loan as of December 31, 2021?
 
A) $112,500.
B) $225,000.
C) $450,000.
D) $1,350,000.
 
Answer:  C
Explanation:  Interest payable = $30,000,000 × 9% × 2/12 = $450,000
   
An economic resource of an entity is:
 
A) A revenue.
B) An asset.
C) A liability.
D) A contra asset until used.
   
Cost of goods sold is:
 
A) An asset account.
B) A revenue account.
C) An expense account.
D) A permanent equity account.
   
The balance in retained earnings at the end of the year is determined by retained earnings at the beginning of the year:
 
A) Plus revenues, minus liabilities.
B) Plus accruals, minus deferrals.
C) Plus net income, minus dividends.
D) Plus assets, minus liabilities.
   
The purpose of “posting” journal entries is
 
A) provide a chronological record of all economic events affecting the firm.
B) ensure that all accounts are up to date prior to preparing financial statements.
C) ensure that debits equal credits in the trial balance.
D) reflect the information in journal entries in ledger accounts.
   
 
Dave's Duds reported cost of goods sold of $2,000,000 this year.
The inventory account increased by $200,000 during the year to an ending balance of $400,000.
What was the cost of merchandise that Dave's purchased during the year?
 
A) $1,600,000.
B) $1,800,000.
C) $2,200,000.
D) $2,400,000.
 
Explanation: 

Inventory
Opening Bal.	200,000	2,000,000	To cost of goods sold
Purchases	?
Ending Bal.	400,000

 
Purchases = $2,000,000 – $200,000 + $400,000 = $2,200,000 
   
Permanent accounts do not include:
 
A) Interest expense.
B) Salaries payable.
C) Prepaid rent.
D) Deferred sales revenue.
   
Permanent accounts do not include:
 
A) Cost of goods sold.
B) Inventory.
C) Current liabilities.
D) Accumulated depreciation.
   
The purpose of closing entries is to transfer:
 
A) Accounts receivable to retained earnings when an account is fully paid.
B) Balances in temporary accounts to a permanent account.
C) Inventory to cost of goods sold when merchandise is sold.
D) Assets and liabilities when operations are discontinued.
   
Temporary accounts do not include:
A) Salaries payable.
B) Depreciation expense.
C) Supplies expense.
D) Cost of goods sold.
   
When converting an income statement from a cash basis to an accrual basis, expenses:
 
A) Exceed cash payments to suppliers.
B) Equal cash payments to suppliers.
C) Are less than cash payments to suppliers.
D) May exceed or be less than cash payments to suppliers.
   
When the amount of revenue collected in advance decreases during an accounting period:
 
A) Accrual-basis revenues exceed cash collections from customers.
B) Accrual-basis net income exceeds cash-basis net income.
C) Accrual-basis revenues are less than cash collections from customers.
D) Accrual-basis net income is less than cash-basis net income.
   
When converting an income statement from a cash basis to an accrual basis, which of the following is incorrect?
A) An adjustment for depreciation reduces net income.
B) A decrease in salaries payable decreases net income.
C) A reduction in prepaid expenses decreases net income.
D) An increase in accrued payables decreases net income.
   
Molly's Auto Detailers maintains its records on the cash basis. During 2021,
Molly's collected $72,000 from customers and paid $21,000 in expenses.
Depreciation expense of $5,000 would have been recorded on the accrual basis.
Over the course of the year, accounts receivable increased $4,000, prepaid expenses decreased $2,000,
and accrued liabilities decreased $1,000. Molly's accrual-basis net income was:
 
A) $38,000.
B) $54,000.
C) $49,000.
D) $42,000.
 
Explanation: 

Collections		$	72,000
Payments for expenses			(21,000
Add: Increase in assets (accounts receivable)			4,000
Deduct:	Decrease in assets (accumulated depreciation)		(5,000
	Decrease in assets (prepaid expenses)		(2,000
Add:	Decrease in liabilities (accrued liabilities)		1,000
Accrual-basis net income		$	49,000

   
Pat's Custom Tuxedo Shop maintains its records on the cash basis.
During this past year Pat's collected $42,000 in tailoring fees, and paid $14,000 in expenses.
Depreciation expense totaled $2,000. Accounts receivable increased $1,500, supplies increased $4,000,
and accrued liabilities increased $2,500. Pat's accrual-basis net income was:
 
A) $18,000.
B) $34,000.
C) $23,000.
D) $29,000.
 
Answer:  D
Explanation: 

Collections		$	42,000
Payments for expenses			(14,000)
Payments for expenses			(14,000
Add:	Increase in assets (accounts receivable)		1,500
	Increase in assets (supplies)		4,000
Deduct: Decrease in assets (accumulated depreciation)			(2,000
Deduct: Increase in liabilities (accrued liabilities)			(2,500
Accrual-basis net income		$	29,000

   
The Hamada Company sales for 2021 totaled $150,000 and purchases totaled $95,000.
Selected January 1, 2021, balances were: accounts receivable, $18,000; inventory, $14,000;
and accounts payable, $12,000. December 31, 2021, balances were: accounts receivable, $16,000; inventory, $15,000;
and accounts payable, $13,000. Net cash flows from these activities were:
 
A) $45,000.
B) $55,000.
C) $58,000.
D) $74,000.
   
When the amount of interest receivable decreases during an accounting period:
 
A) Accrual-basis interest revenue exceeds cash collection from borrowers.
B) Accrual-basis net income exceeds cash-basis net income.
C) Accrual-basis interest revenue is less than cash collection from borrowers.
D) Accrual-basis net income is less than cash-basis net income.
   
When converting an income statement from a cash basis to an accrual basis, cash received for services:
 
A) Exceeds service revenue.
B) May exceed or be less than service revenue.
C) Is less than service revenue.
D) Equals service revenue.
   
Compared to the accrual basis of accounting, the cash basis of accounting produces a higher amount
of income by the net decrease during the accounting period of:
 

	Accounts Receivable	Accrued Liabilities
a.	Yes	No
b.	No	Yes
c.	Yes	Yes
d.	No	No

 
A) Option a
B) Option b
C) Option c
D) Option d
   
On June 1, Royal Corp. began operating a service company with an initial cash investment by shareholders of $2,000,000.
The company provided $6,400,000 of services in June and received full payment in July. Royal also incurred expenses of $3,000,000
in June that were paid in August. During June, Royal paid its shareholders cash dividends of $1,000,000. What was the company's income
 before income taxes for the two months ended July 31 under the following methods of accounting?
 

	Cash Basis			Accrual Basis
a.	$	3,400,000		$	3,400,000
b.	$	5,400,000		$	2,400,000
c.	$	6,400,000		$	3,400,000
d.	$	6,400,000		$	2,400,000

 
A) Option a
B) Option b
C) Option c
D) Option d
 
Explanation: 

Collections	$	6,400,000		(Cash basis income)
Expenses incurred but not paid		(3,000,000	)
Accrual basis net income	$	3,400,000

 
Investment by shareholders and dividends to shareholders do not affect net income for either basis of accounting.
   
When Castle Corporation pays insurance premiums, the transaction is recorded as a debit to prepaid insurance.
Additional information for the year ended December 31 is as follows:
 

Prepaid insurance at January 1	$	52,500
Insurance expense recognized during the year		218,750
Prepaid insurance at December 31		61,250

 
What was the total amount of cash paid by Castle for insurance premiums during the year?
A) $218,750
B) $166,250
C) $210,000
D) $227,500
 
Explanation: 

Prepaid Insurance
Beg. Bal.	52,500	218,750	Insurance expense
Cash paid	?
Bal.	61,250

 
Cash paid for insurance = $218,750 – $52,500 + $61,250 = $227,500 
   
The accounting processing cycle:
 
A) Is a three-wheeled vehicle used to deliver audit papers to clients.
B) Deals only with internal transactions.
C) Is the process of bringing the company's financial information up to date before preparing the financial statements.
D) Is the process used to identify, analyze, record, and summarize transactions and prepare financial statements.