Lesson 6

1. The Statements of Financial Accounting Standards that automatically become generally

accepted accounting principles are issued by the: a. IRS. b. SEC c. FASB. d. AICPA.
2. In its conceptual framework, the FASB concluded that financial reporting rules should
concentrate on providing information that is helpful to: a. current and potential investors and
creditors in making investment and credit decisions. b. management, tax authorities, and
regulatory agencies. c. Both a and b. d. Neither a nor b.
3. Financial report users need information about: a. profits. b. economic resources (assets). c.
claims against the assets (liabilities and owner's equity). d. All of the above.
4. The SEC's 2003 report to the Congress on "principles-based" accounting observed that the first
characteristic of objectives-based standards, dictated by the Sarbanes-Oxley Act, is that any
standard must be based on: a. the cost-benefit test. b. an improved and consistently applied
framework. c. qualitative characteristics. d. transparency.
5. The Cervantes Company uses the same method of depreciation for its equipment in each fiscal
period. This practice is an example of: a. conservatism. b. consistency. c. materiality. d.
matching.
6. The four assumptions financial statement users should be able to assume that preparers of the
statements have made in preparing the statements that arc listed by the FASB's conceptual
framework are: a. separate economic entity, going concern, monetary unit, and periodicity of
income. b. conservatism, matching principle, revenue recognition principle, and periodicity of
income. c. conservatism, cost-benefit test, full disclosure principal, and industry practice
constTaint. d. matching principle, historical cost basis, materiality realization, and transparency.
7. Which of the following statements is CORRECT? a. Under the accrual basis of accounting,
revenue is recorded in the period in which it is earned. b. Under the accrual basis of accounting,
expenses are recorded in the period in which they are incurred. c. Both of the above statements
are correct. d. Neither of the above statements is correct.
8. Keeping the personal assets of the owner of a business separate from the assets of the firm is
an example of: a. following the going concern assumption. b. applying the realization principle.
c. following the separate entity assumption. d. applying the conservatism convention.
9. Recording land at its cost rather than its appraisal value illustrates the_____ principle. a. full
disclosure. b. cost basis. c. realization. d. matching
10. Depreciating equipment over its useful life is an example of: a. following the objectivity
assumption. b. applying the matching principle. c. applying the realization principle. d.
applying the conservatism convention.
11. The financial statements in the annual report of a corporation contain "notes to the financial
statements" explaining the methods llsed to depreciate the firm's equipment. This practice is an
example of the_____ principle. a. consistency. b. conservatism. c. full disclosure. d. accrual
12. The total that must be paid when a note becomes due is known as the: a. principle. b. face
value. c. note value. d. maturity value.
13. A 3D-day note dated October 15 would be due on November: a. 14. b. 15. c. 16. d. 17.

14. A firm purchased equipment for $6,000 on credit and issued a 120-day note bearing interest
at 9 percent a year as evidence of the debt. To record this transaction, the accountant would debit
and credit a. Equipment for $6,000; Notes Payable for $6,000. b. Equipment for $6,180;
Interest Expense for $180, and Notes Payable for $6,000. c. Equipment for $6,000, and Interest
Expense for $180; Notes Payable for $6,180. d. Equipment for $6,000; Accounts Payable for
$6,000
15. On January 1, a firm purchased equipment for $10,000, signing a 3O-day note bearing
interest at 12 percent a year. The entry to record the payment of the amount due on January 31
will include a debit to Notes Payable for: a. $10,000 and a credit to Cash for $10,000. b. $10,100
and a creditto Cash for $10,100. c. $10,000, a debit to Interest Expense for $1,200, and a credit
to Cash for $11,200. d. $10,000, a debit to Interest Expense for $100, and a credit to Cash for
$10,100.
16. The Jimmy Company accepted an interest-bearing note to settle a past-due account
originating from a sale of merchandise. When the note is collected, the interest earned should be
credited to: a. Interest Income. b. Sales. c. Allowance for Doubtful Accounts. d. Notes
Receivable.
17. The notes Receivable Discounted account: a. is shown as a deduction from Notes
Receivable on the balance sheet. b. has a debit balance. c. is used to record the amounts due on
dishonored notes. d. is lIsed to record the amount of interest deducted by the bank when a note is
discounted.
18. Which of the following statements is CORRECT? a. When a note receivable is discounted,
the proceeds are computed by subtracting the discount from the maturity value of the note. b.
The entry to record the discounting of a note receivable may result in the recognition of interest
income. c. When a note is discounted at a bank, the proceeds are always less than the maturity
value of the note. d. All of these statements me correct.
19. Upon collection of the amount due on a $6,000 face value, 90-day note with interest at 10
percent a year, the Note Receivable account is: a. debited for $6,600. b. credited for $6,000. c.
credited for $6,150. d. debited for $6,000.
20. If the amount due on a note receivable is OT collected at maturity: a. Allowance for Doubtful
Accounts should immediately be debited. b. the note is said to be dishonored. c. the face value
of the note should continue to be carried in the Notes Receivable account until all possible means
of collecting the note have been exhausted. d. Uncollectible Accounts Expense should be
debited.

Lesson 7
1. In periods of rising prices, the inventory valuation procedure that results in the highest net
income is the method. a. lower of cost or market. b. LIFO. c. average cost. d. FIFO.
2. A firm that sells a single product had a beginning inventory of 4,000 units with a total cost of
$28,000. Early in the year, 10,000 units were purchased at $9 each. Using FIFO, what is the
value of the ending inventory of 3,000 units? a. $27,000. b. $24,000. c. $21,000. d. $36,000.

3. A firm that sells a single product had a beginning inventory of 4,000 units with a total cost of
$16,000. Early in the year, 8,000 units were purchased at $6 each. Using LIFO, what is the value
of the ending inventory of 2,000 units? a. $12,000. b. $10,000. c. $8,000 .d. $24,000.
4. The accountant for a company whose inventory was destroyed by fire determined from
undamaged records that the cost of goods available for sale was $100,000 and the net sales were
$80,000 up to the date of the fire. The accountant also determined that the company's normal
gross profit rate is 40 percent of net sales. From this data, the accountant estimated the cost of the
inventory destroyed by the fire to be: a. $60,000. b. $52,000. c. $32,000. d. $20,000.
5. The merchandise available for sale cost a company $90,0CJ0 and was marked to sell at a retail
price of $125,000. Sales during the period totaled $80,000. If the retail method is used, the
estimated cost of the ending inventory is: a. $32,400. b. $12,600. c. $22,400. d. $45,000.
6. The modifying constraint of conservatism requires that inventory be presented on the balance
sheet at: a. cost. b. market value. c. either cost or market value, whichever is lower. d. average
cost during the period.
7. The cost of the earliest merchandise purchased is assigned to ending inventory when a
company uses the method. a. LIFO. b. FIFO .c. average cost. d. lower of cost or market.
8. The use of the FIFO method of inventory valuation results in: a. a matching of current
inventory costs against sales revenue. b. the most current costs in ending inventory. c. a
lowest reported net income in a time of rising prices. d. a highest reported net income in a time
of falling prices.
9. The use of the LI FO method of inventory valuation: a. assigns the cost of the most recent
purchases to the ending inventory. b. results in the same valuation as the specific identification
method in a time of rising prices. c. results in the lowest reported net income in a time of
rising prices. d. results in the highest reported net income in a time of rising prices.
10. The firm had a beginning inventory of 50 units with a unit cost of $10. Purchases during the
year were as follows: March-50 units with a unit cost of $12; July-60 units with a unit cost of
$15. If the average cost method is used, the value of the ending inventory of 45 units is: a. $675.
b. $563. c. $450. d. $555.
11. The price a business would pay for its inventory is: a. assessed value. b. sales price. c.
replacement cost. d. discount price.
12. An assumption necessary to the use of the Cross Profit method is that the: a. Gross Profit
amount is constant from period to period. b. inventory level remains constant. c. rate of Gross
Profit is constant from period to period. d. Gross Profit percentage increases at the rate of
inflation.
13. The difference between the cost and the initial retail price of merchandise is: a. markup. b.
markon. c. markdown. d. market price.
14. The weighted average cost of an inventory item is calculated by: a. dividing the sum of the
unit cost on the purchase invoices by the number of units purchased. b. dividing the cost of
goods available for sale by the number of units on the ending inventory. c. dividing the cost of
goods available for sale by the number of units available during the period. d. dividing the
cost of goods sold by the number of units available during the period.

15. Under which of the costing methods is ending inventory higher when costs are rising? a.
Average Costing. b. First in, first out. c. Last in, first out. d. Cannot be determined.
16. Under which of the costing methods is cost of goods sold higher when costs are rising? a.
Average Costing. b. First in, first out. c. Last in, first out. d. Cannot be determined.
17. Which of the following inventory costing methods if used for federal tax purposes must also
be adopted for financial accounting purposes? a. Average Costing. b. First in, first out. c. Last in,
first out. d. Cannot be determined
18. Which of the following inventory costing methods is NOT generally accepted in some
countries? a. Average Costing. b. First in, first out. c. Last in, first out. d. Cannot be determined
19. Use the data below regarding XYZ Company's inventory at year end to answer questions 19
and 20.

The reported inventory at lower of cost or market if the lower of cost or market rule is applied to
total inventory versus total market would be: a. $3,941.25. b. $3,985.50. c $4,023.25. d.
$4,061.25.
20. The reported inventory at lower of cost or market if the lower of cost or market rule is
applied for each item separately would be: a. $3,941.25. b. $3,985.50. c. $4,023.25. d. $4,061.25.
Lesson 8
1. A firm purchi.lses an asset for $50,000 and estimates that it will have a useful life of five years
and a salvage value of $5,000. Under the doubledeclining-balance method, the depreciation
expense for the first year of the asset's useful life is: a. $9,000. b. $18,000. c. $10,000. d.
$20,000.
2. The method of depreciation that results in the same amount of depreciation expense each year
is the method. a. units-of-output. b. straight-line. c. sum-of-the-years'-digits. d. decliningbalance.
3. The book value of an asset is the: a. market value of the asset. b. portion of the asset's cost
that has not yet been charged to expense. c. acquisition cost shown in the asset account less
the estimated salvage value. d. replacement cost of the asset.
4. An asset that cost $14,000 was sold for $9,000 cash. Accumulated depreciation on the asset
was $7,000. The entry to record this transaction includes the recognition of: a. a gain of $2,000.
b. a loss of $5,000. c. neither a gain nor a loss. d. a loss of $2,000.
5. Assume that a business trades in an old cash register for a new one. Under the income tax
method: a. a gain may be recognized, but a loss cannot be recorded. b. the cost of the new asset is
recorded as the cash paid for the new asset. c. the asset account is debited for the difference
between the original cost of the old asset and the fair market value of the new asset. d. the cost
of the new asset is recorded as the book value of the old asset plus the cash amount paid or
to be paid.

6. Equipment that cost $20,000 was sold for $12,000 cash. Accumulated depreciation on the
asset was $14,000. The entry to record the sale includes a credit to the Equipment account for: a.
$6,000. b. $12,000. c. $20,000. d. $14,000.
7. Equipment that cost $20,000 was sold for $12,000 cash. Accumulated depreciation on the
asset was $14,000. The entry to record the sale includes a debit to the Accumulated Depreciation
account for: a. $6,000. b. $12,000. C. $20,000. d. $14,000.
8. Equipment that cost $20,000 was sold for $12,000 cash. Accumulated depreciation on the
asset was $14,000. The net book value of the equipment at the time of the sale was: a. $6,000.
--b. $12,000. c. $20,000. d. $14,000.
9. A company purchased equipment for $16,000 cash. In addition, the company paid $1,000 to
have the equipment delivered and $500 to have it installed. The cost of this asset for financial
accounting purposes is: a. $16,000. b. $17,000. c. $17,500. d. $16,500.
10. An example of real property is: a. machinery. b. factory equipment. c. computer equipment.
d. buildings.
11. The amount of a long-term asset's impairment is the: a. difference between the asset's current
market value and historical cost. b. estimated net cash flows from the asset's future use less its
accumulated depreciation. c. current market value of the asset. d. amount by which the asset's
book value exceeds its market value.
12. The process by which the cost of natural resources extracted are allocated to expense is; a.
depreciation. b. amortization. c. depletion. d. evaluation.
13. The steps in the process of determining an impairment loss in their proper order are: a. apply
the recoverability test, review circumstances that suggest impairment, and compute the amollnt
of the impairment. b. apply the recoverability test, review circumstances that suggest
impairment, and record the amount of the impairment. c. review circumstances that suggest
impairment, apply the recoverability test, and compute the amount of the impairment. d.
review circumstances that suggest impairment, apply the recoverability test, and record the
amount of the impairment.
14. Intangible assets may be purchased or developed. If developed, they are categorized as
Research and Development and: a. depreciated over their Llsefullife. b. amortized over their
useful life. c. depleted over their useful life. d. expensed.
15. Amortization is the periodic transfer of an intangible's cost to expense done on a basis. a.
straight-line or unit-of-production. b. straight-line or sum-of-the years. c. declining basis or
percentage depletion. d. percentage depletion or straight-line
16. When computing depreciation, the salvage value should be ignored if a company uses the
method. a. units-of-output. b. sum-of-the-years'-digits. c. declining-balance. d. straight-line
17. On January 2, 2010, the Hanover Company purchased some office equipment for $20,000.
The equipment is expected to have a useful life of five years and a salvage value of $2,000. The
depreciation to be recorded for the year at the end of 2010, assuming use of the straight line
method, is: a. $3,600. b. $8,000. c. $6,000. d. $4,800.

18. On January 2, 2010, the Hanover Company purchased some office equipment for $20,(X)().
The equipment is expected to have a useful life of five years and a salvage value of $2,(X)(). The
depreciation to be recorded for the year at the end of 2010, assuming lise of the doubledecliningbalance method, is: a. $3,600. b. $8,000. c. $6,000. d. $4,800.
19. On January 2, 2010, the Hanover Company purchased some office equipment for $20,000
The equipment is expected to have a useful life of five years and a salvage value of S2,000. The
depreciation to be recorded for the year at the end of 2011, assuming use of the double-decliningbalance method, is: a. $3,600. b. $8,000. c. $6,000. d. $4,800.
20 .On January 2, 2010, the Hanover Company purchased some office equipment for $20,000.
The equipment is expected to have a useful life of five years and a salvage value of $2,000. The
depreciation to be recorded for the year at the end of 2011, assuming use of the straight-line
method, is: a. $3,600. b. $8,000. c. $6,000. d. $4,800.