Basic Accounting

MULTIPLE CHOICE
1. The area of accounting that emphasizes developing accounting information for use within a company
is known as __________ accounting.
a. management
b. forensic
c. audit
d. financial
ANS: A
2. Which of the following is an internal user of a company's financial information?
a. Board of directors
b. Stockholders in the company
c. Holders of the company's bonds
d. Creditors with long-term contracts with the company
ANS: A
3. The process of establishing financial accounting standards is
a. a democratic process in that a majority of practicing accountants must agree with a
standard before it becomes implemented.
b. a legislative process based on rules promulgated by government agencies.
c. based solely on economic analysis of the effects each standard will have if it is
implemented.
d. a social process which incorporates political actions of various interested user groups as
well as professional research and logic.
ANS: D
4. Which of the following items is not a modifying convention?
a. Matching
b. Materiality
c. Industry practices
d. Conservatism
ANS: A
5. The assumed continuation of a business entity in the absence of evidence to the contrary is an
example of the accounting concept of
a. accrual.
b. consistency.
c. comparability.
d. going concern.
ANS: D
6. Accounting for inventories by applying the lower-of-cost-or-market is an example of the application
of
a. conservatism.
b. comparability.
c. consistency.
d. materiality.
ANS: A
7. Conservatism is best described as selecting an accounting alternative that
a. understates assets and/or net income.
 b. has the least favorable impact on owners' equity.
c. overstates, as opposed to understates, liabilities.
d. is least likely to mislead users of financial information.
ANS: B
8. An example of an adjusting entry involving a deferred revenue is
a. Debit: Cash; Credit: Unearned Rental Revenue
b. Debit: Rental Revenue; Credit: Cash
c. Debit: Unearned Rental Revenue; Credit: Rental Revenue
d. Debit: Accounts Receivable; Credit: Sales
ANS: C
9. In November and December 2013, Bee Company, a newly organized newspaper publisher, received
P72,000 for 1,000 three-year subscriptions at P24 per year, starting with the January 2, 2014, issue of
the newspaper. How much should Bee report in its 2013 income statement for subscription revenue?
a. 0
b. 12,000
c. 24,000
d. 72,000
ANS: A
10. What is the correct order of the following events in the accounting process?

I Financial statements are prepared.

II Adjusting entries are recorded.
III Nominal accounts are closed.

a. I, II, III
b. II, I, III
c. III, II, I
d. II, III, I
ANS: B
11. Which of the following is true regarding the accounting process?
a. Preparation of the trial balance ensures that all amounts have been posted to the correct
accounts.
b. Preparation of the trial balance is a step in the recording process.
c. Preparation of the trial balance determines that total debits equal total credits.
d. Preparation of the trial balance determines both that total debits equal total credits and that
all amounts have been posted to the correct accounts.
ANS: C
12. A company loaned P6,000 to another corporation on December 1, Year 1, and received a 90-day, 10
percent, interest-bearing note with a face value of P6,000. The lender’s December 31, Year 1,
adjusting entry is
a. Debit: Interest Receivable (P150); Credit: Interest Revenue (P150)
b. Debit: Interest Receivable (P50); Credit: Interest Revenue (P50)
c. Debit: Interest Revenue (P100); Credit: Interest Receivable (P100)
d. Debit: Interest Revenue (P150); Credit: Interest Receivable (P150)
ANS: B
13. Carbon Company’s accounting records provided the following information (all amounts in thousands
of pesos):
 Balances 12/31/2012 Balances 12/31/2013
Current Assets P240 P?
Property, Plant, and Equipment 1,600 1,700
Current Liabilities ? 130
Long-term Liabilities 580 ?

All assets and liabilities of the firm are reported in the schedule above. Working capital of P92
remained unchanged from 2012 to 2013. Net income in 2011 was P64. No dividends were declared
during 2013 and there were no other changes in owners’ equity. Total long-term liabilities at the end
of 2013 would be
a. 340
b. 432
c. 580
d. 616
ANS: D
14. Carlton Company sold equipment for P3,700 that originally cost P22,000. The balance of the
Accumulated Depreciation account related to this equipment was P19,000. The entry to record the
disposal of this equipment would include a
a. debit to Loss on Sale of Equipment of P700.
b. credit to Gain on Sale of Equipment of P700.
c. credit to Equipment of P3,000.
d. debit to Gain on Sale of Equipment of P700.
ANS: B
15. The correct order to present current assets is
a. cash, inventories, prepaid items, accounts receivable.
b. cash, inventories, accounts receivable, prepaid items.
c. cash, accounts receivable, prepaid items, inventories.
d. cash, accounts receivable, inventories, prepaid items.
ANS: D
16. Unearned rent would normally appear on the balance sheet as a
a. plant asset.
b. current liability.
c. long-term liability.
d. current asset.
ANS: B
17. Which of the following is not a long-term investment?
a. Stock held to exert influence on another company
b. Land held for speculation
c. Trademarks
d. Cash surrender value of life insurance
ANS: C
18. Which of the following characteristics may result in the classification of a liability being changed from
current to noncurrent?
a. Violation of a subjective acceleration clause
b. Violation of an objective acceleration clause
c. A demand provision for payment
d. Refinancing after the balance sheet date
ANS: D
19. Songbird Corporation's trial balance included the following account balances at December 31, 2020:

Accounts Payable P45,000

Bonds Payable, due 2021 75,000
Discount on Bonds Payable, due 2021 9,000
Dividends Payable January 31, 2021 24,000
Notes Payable, due January 31, 2018 60,000

What amount should be included in the current liability section of Songbird’s December 31, 2020,
balance sheet?
a. 135,000
b. 153,000
c. 195,000
d. 234,000
ANS: A
20. Information from Brian Company's balance sheet is as follows:

Current assets:
Cash 1,200,000
Investment securities 3,750,000
Accounts receivable 28,800,000
Inventories 33,150,000
Prepaid expenses     600,000
Total current assets 67,500,000
Current liabilities:
Notes payable 750,000
Accounts payable 9,750,000
Accrued expenses 6,250,000
Income taxes payable 250,000
Payments due within one year on long-term debt   1,750,000
Total current liabilities 18,750,000

What is Brian's current ratio?

a. 0.26 to 1
b. 0.30 to 1
c. 1.80 to 1
d. 3.60 to 1
ANS: D
21. Which of the following is an appropriate computation for return on investment?
a. Net income divided by sales
b. Net income divided by total assets
c. Sales divided by total assets
d. Sales divided by stockholders' equity
ANS: B
22. The term “deficit” refers to
a. an excess of current assets over current liabilities.
b. an excess of current liabilities over current assets.
c. a debit balance in Retained Earnings.
d. a loss that is reported as a prior period adjustment.
 ANS: C
23. In a consolidated balance sheet, the minority interest is reported
a. as part of long-term liabilities.
b. between liabilities and stockholders’ equity
c. as part of stockholders’ equity.
d. as part of long-term assets.
ANS: C
24. Under the general rule of revenue recognition, revenue is recognized when
a. marketability and market price are assured.
b. a contractual agreement exists, and cash collection is assured.
c. the earnings process is complete, and a valid promise of payment has been received.
d. all related expenses have been incurred.
ANS: C
25. Which of the following items is reported only in current and future periods?
a. Prior period adjustment
b. Change in accounting principle
c. Change in estimate
d. Effects of changing prices
ANS: C
26. Which of the following events would be considered an extraordinary item?
a. An airline experienced a significant loss due to a strike by employees of the company who
provide its aircraft maintenance.
b. A food cannery was faced with a large loss of inventory of canned soups due to
government condemnation because of possible botulism contamination; the company had
never experienced a similar situation in its history.
c. A company, located on an island which has experienced severe flooding three times in the
past 25 years, was subjected to a heavy loss of physical plant due to flooding.
d. A medical corporation was required to pay damages equal to three times its average net
income to a patient. The corporation had experienced suits of this nature in the past, but
the amount of the losses had never exceeded 5 percent of the corporation's average net
income.
ANS: B
27. If a company anticipates a 40% increase in sales volume, then it is most likely that the company will
need about a 40% increase in
a. property, plant, and equipment.
b. accounts payable.
c. bank loans payable.
d. operating profit.
ANS: B
28. The following information is available for Superior Company for 2020:

Decrease in merchandise inventory 20,000

Increase in accounts payable related to inventory 50,000
Disbursements for purchases of merchandise 580,000

What amount should Superior report as cost of goods sold for 2020?
a. 510,000
b. 550,000
c. 610,000
 d. 650,000
ANS: D
29. Cultivo Corporation's capital stock at December 31 consisted of the following:

a Common stock, P2 par value; 100,000 shares authorized, issued, and outstanding.
b 10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares
authorized, issued, and outstanding.

Cultivo’s common stock, which is listed on a major stock exchange, was quoted at P4 per share on
December 31. Cultivo's net income for the year ended December 31 was P50,000. The yearly
preferred dividend was declared. No capital stock transactions occurred. What was the price earnings
ratio on Cultivo's common stock at December 31?
a. 6 to 1
b. 8 to 1
c. 10 to 1
d. 16 to 1
ANS: C
30. Which of the following best describes the condition(s) that must be present for the recognition of
revenue?
a. The revenue must be earned, measurable, and collected.
b. The revenue must be earned and collectible.
c. The revenue must be earned, measurable, and collectible.
d. The revenue must be measurable and collectible.
ANS: C
31. If a company uses the completed-contract method of accounting for long-term construction
contracts, then during the period of construction, financial information related to a long-term
contract will
a. appear on both the income statement and balance sheet during the construction period.
b. appear only on the income statement during the period of construction.
c. appear only on the balance sheet during the period of construction.
d. not appear on the financial statements.
ANS: C
32. The balance in Wellstocked Company's accounts payable account on December 31, 2014, was
P1,225,000 before the following information was considered:

• Goods shipped FOB destination on December 21, 2014, from a vendor to

Wellstocked were lost in transit. The invoice cost of P45,000 was not recorded by
Wellstocked. On December 28, 2014, Wellstocked notified the vendor of the lost
shipment.
• Goods were in transit from a vendor to Wellstocked on December 31, 2014. The
invoice cost was P60,000, and the goods were shipped FOB shipping point on
December 28, 2014. Wellstocked received the goods on January 6, 2015.

What amount should Wellstocked report as accounts payable in its December 31, 2014, balance
sheet?
a. P1,330,000
b. P1,285,000
c. P1,270,000
d. P1,225,000
 ANS: B
33. If the balance shown on a company's bank statement is less than the correct cash balance, and
neither the company nor the bank has made any errors, there must be
a. deposits credited by the bank but not yet recorded by the company.
b. outstanding checks.
c. bank charges not yet recorded by the company.
d. deposits in transit.
ANS: D
34. When a specific customer's account is written off by a company using the allowance method, the
effect on net income and the net realizable value of the accounts receivable is
a. Net income (Increase); Net realizable value of accounts receivable (Increase)
b. Net income (Decrease); Net realizable value of accounts receivable (Decrease)
c. Net income (None); Net realizable value of accounts receivable (None)
d. Net income (Decrease); Net realizable value of accounts receivable (None)
ANS: C
35. When the allowance method of recognizing bad debt expense is used, the entries at the time of
collection of a small account previously written off would
a. increase net income.
b. increase the allowance for doubtful accounts.
c. decrease net income.
d. decrease the allowance for doubtful accounts.
ANS: B
36. The following is not a major component of the financial statements:
a. auditor’s opinion
b. annual report
c. explanatory notes
d. balance sheet
ANS: B
37. Interested parties receive information about a company’s past performance from:
a. CEO’s
b. the SEC
c. financial reporting
d. financial news
ANS: C
38. The overall objective of financial reporting is to provide information
a. that is useful for decision making.
b. about an enterprise's assets, liabilities, and owners' equity.
c. about an enterprise's financial performance during a period.
d. that allows owners to assess management's performance.
ANS: A
39. Which of the following is not normally an objective of financial reporting?
a. To provide information about an entity's assets and claims against those assets
b. To provide information that is useful in assessing an entity's sources and uses of cash
c. To provide information that is useful in lending and investing decisions
d. To provide information about an entity's liquidation value
ANS: D
40. Proper application of accounting principles is most dependent upon the
a. existence of specific guidelines.
 b. oversight of regulatory bodies.
c. external audit function.
d. professional judgment of the accountant.
ANS: D
41. Accounting standards help accountants meet the information demands of interested parties by
providing:
a. legislation introduction pertaining to financial reporting
b. limits and guidance for financial reporting
c. improved operating plans to the Board
d. reports to the Media
ANS: B
42. The primary purpose of the Securities and Exchange Commission is to
a. regulate the issuance and trading of securities.
b. issue accounting and auditing regulations for publicly held companies.
c. prevent the trading of speculative securities.
d. enforce generally accepted accounting principles.
ANS: A
43. A conceptual framework of accounting should
a. lead to uniformity of financial statements among companies within the same industry.
b. eliminate alternative accounting principles and methods.
c. guide in developing generally accepted auditing standards.
d. define the basic objectives, terms, and concepts of accounting.
ANS: D
44. When a large number of individuals, using the same measurement method, demonstrate that a high
degree of consensus can be secured among independent measurers, then the result exhibits the
characteristic of
a. verifiability.
b. neutrality.
c. relevance.
d. reliability.
ANS: A
45. Financial information exhibits the characteristic of consistency when
a. accounting procedures are adopted which smooth net income and make results consistent
between years.
b. extraordinary gains and losses are shown separately on the income statement.
c. accounting entities give similar events the same accounting treatment each period.
d. expenditures are reported as expenses and netted against revenue in the period in which
they are paid.
ANS: C
46. What accounting concept justifies the use of accruals and deferrals?
a. Going-concern assumption
b. Corporate form of organization
c. Consistency characteristic
d. Arm's-length transactions
ANS: A
47. Which of the following is not a purpose of the conceptual framework of accounting?
a. To provide definitions of key terms and fundamental concepts
b. To provide specific guidelines for resolving situations not covered by existing accounting
 standards
c. To assist accountants and others in selecting among alternative accounting and reporting
methods
d. To assist the accounting body in the standard-setting process
ANS: B
48. Which of the following is not an implication of the going-concern assumption?
a. The historical cost principle is credible.
b. Depreciation and amortization policies are justifiable and appropriate.
c. The current/noncurrent classification of assets and liabilities is justifiable and significant.
d. Amortizing research and development costs over multiple periods is justifiable and
appropriate.
ANS: D
49. Recording the purchase price of a paper shredder (with an estimated useful life of 10 years) as an
expense of the current period is justified by the
a. going-concern assumption.
b. materiality constraint.
c. matching principle.
d. comparability principle.
ANS: B
50. The accrual basis of accounting is based primarily on
a. conservatism and revenue realization.
b. conservatism and matching.
c. consistency and matching.
d. revenue realization and matching.
ANS: D