Accounting is an information and measurement system that does all of the following except:

Does not use technology to improve accuracy in reporting.

The primary objective of financial accounting is:

To provide financial statements to help external users analyze an organization's activities.

The private group that currently has the authority to establish generally accepted accounting principles in the United States is the:


The rule that requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold, unless evidence shows that it will not continue, is the:

Going-concern assumption.

Revenue is properly recognized:

Upon completion of the sale or when services have been performed and the business obtains the right to collect the sales price.

The accounting process begins with:

Analysis of business transactions and events from source documents.

An account used to record the owner's investments in the business is called a(n):

Capital account

Unearned revenues are:

Liabilities created when a customer pays in advance for products or services before the revenue is earned.

A debit:

Is the left-hand side of a T-account.

Rocky Industries received its telephone bill in the amount of $300, and immediately paid it. Rocky's general journal entry to record this transaction will include a

Debit to Telephone Expense for $300.

The main purpose of adjusting entries is to:

Record internal transactions and events.

The accrual basis of accounting:

Is generally accepted for external reporting because it is more useful than cash basis for most business decisions.

A company made no adjusting entry for accrued and unpaid employee wages of $28,000 on December 31. This oversight would:

Overstate net income by $28,000.

On April 1, a company paid the $1,350 premium on a three-year insurance policy with benefits beginning on that date. What will be the insurance expense on the annual income statement for the year ended December 31? (Round your answer to 1 decimal places.)


Unearned revenue is reported in the financial statements as:

A liability on the balance sheet.

Revenues, expenses, and withdrawals accounts, which are closed at the end of each accounting period are:

Temporary accounts.

Closing the temporary accounts at the end of each accounting period does all of the following except:

Has no effect on the owner's capital account.

The closing process is necessary in order to:

ensure that net income or net loss and owner withdrawals for the period are closed into the owner's capital account.

The usual order for the asset section of a classified balance sheet is:

Current assets, long-term investments, plant assets, intangible assets.

The current ratio:

Is used to help evaluate a company's ability to pay its debts in the near future.

Cost of goods sold:

Is the term used for the cost of buying and preparing merchandise for sale.

A company had sales of $695,000 and cost of goods sold of $278,000. Its gross margin equals:


Merchandise inventory:

Is a current asset.

The current period's ending inventory is:

The next period's beginning inventory.

Beginning inventory plus net purchases is:

Merchandise available for sale.

Damaged and obsolete goods that can be sold:

Are included in inventory at their net realizable value.

Merchandise inventory includes:

All goods owned by a company and held for sale.

Goods in transit are included in a purchaser's inventory:

When the purchaser is responsible for paying freight charges.

Goods on consignment:

Are goods shipped by the owner to the consignee who sells the goods for the owner.

Based on the above information, the correct balance for ending inventory on December 31 is:

156,000. Start with beginning inventory of $215,000. The information in the first bullet point was handled correctly, although the explanation for why is incorrect. No adjustment. For the second bullet point, the $44,000 of goods should not have been included in ending inventory since the goods were shipped FOB destination. Subtract $44,000. For the third bullet point, ending inventory should not include goods held on consignment from another company. Subtract $15,000. The information in the fourth bullet point was handled correctly.

Source documents:

Provide the basic information processed by an accounting system.

The sales journal is used for recording:

Credit sales.

The purchases journal is used for recording:

Credit purchases.

A subsidiary ledger:

Is a listing of individual accounts and amounts with a common characteristic.

An accounts receivable ledger is:

A subsidiary ledger that contains an account for each credit customer.

An internal control system consists of all of the following policies and procedures except ones designed to:

Guarantee a return to investors.

Principles of internal control include all of the following except:

Maintain minimal assets.

When two clerks share the same cash register it is a violation of which internal control principle?

Establish responsibilities.

Cash equivalents:

Are short-term, highly liquid investment assets.

A check that was outstanding on last period's bank reconciliation was not among the cancelled checks returned by the bank this period. As a result, in preparing this period's reconciliation, the amount of this check should be:

Deducted from the bank balance of cash.

Accounts receivable information for specific customers is important because it reveals:

How much each customer has purchased on credit.
How much each customer has paid.
How much each customer still owes.
The basis for sending bills to customers.

A credit sale of $3,275 to a customer would result in:

A debit to the Accounts Receivable account in the general ledger and a debit to the customer's account in the accounts receivable subsidiary ledger.

A promissory note received from a customer in exchange for an account receivable:

Is a note receivable for the recipient.

The person who signs a note receivable and promises to pay the principal and interest is the:


A promissory note:

Is a written promise to pay a specified amount of money at a certain date.

Plant assets are:

Tangible assets used in the operation of a business that have a useful life of more than one accounting period.


Is the process of allocating to expense the cost of a plant asset.

The useful life of a plant asset is:

The length of time it is productively used in a company's operations.


Refers to a plant asset that is no longer useful in producing goods and services with a competitive advantage.

A machine originally had an estimated useful life of 5 years, but after 3 complete years, it was decided that the original estimate of useful life should have been 10 years. At that point the remaining cost to be depreciated should be allocated over the remaining:

7 years

Obligations due to be paid within one year or the company's operating cycle, whichever is longer, are:

Current liabilities.

Obligations not expected to be paid within the longer of one year or the company's operating cycle are reported as:

Long-term liabilities.

All of the following statements regarding uncertainty in liabilities are true except:

A company only records liabilities when it knows whom to pay, when to pay, and how much to pay.


Must sometimes be estimated.

Amounts received in advance from customers for future products or services:

Are liabilities.

The right of common shareholders to protect their proportionate interest in a corporation by having the first opportunity to buy additional proportionate shares of common stock issued by the corporation is called a:

Preemptive right.

Buying stock in a corporation is attractive to investors because:

Stockholders are not liable for the corporate acts or debts.
Stock is easily transferred.
A corporation has unlimited life.
Shareholders are not mutual agents of the corporation.

A proxy is:

A document that gives a designated agent of a stockholder the right to vote the stock.

Par value of a stock refers to the:

Value assigned per share of stock by the corporate charter.

The total amount of cash and other assets received by a corporation from its stockholders in exchange for its stock is:

Referred to as paid-in capital.

Sinking fund bonds:

Require the issuer to set aside assets to retire the bonds at maturity.

Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:

Callable bonds.

A bond traded at 102½ means that:

The bond traded at $1,025 per $1,000 bond.

The contract between the bond issuer and the bondholders, which identifies the rights and obligations of the parties, is called a(n):

Bond indenture.

Bonds that mature at different dates with the result that the entire principal amount is repaid gradually over a number of periods are known as:

Serial bonds.

A cash equivalent is an investment that:

Is readily convertible to a known amount of cash.
Is sufficiently close to its maturity date so its market value is unaffected by interest rate changes.
Generally is within 3 months of its maturity date.
Is highly liquid.

A company's transactions with its creditors to borrow money and/or to repay the principal amounts of both short- and long-term debt are reported as cash flows from:

Financing activities.

Investing activities include the:

Purchase of plant assets.
Lending and collecting on notes receivable.
Sale of short-term investments other than cash equivalents.
Sale of plant assets.

Accounting standards:

Require that companies include a statement of cash flows in a complete set of financial statements.

The statement of cash flows is:

A financial statement that reports the cash inflows and cash outflows for an accounting period, and that classifies those cash flows as operating activities, investing activities, or financing activities.

Financial statement analysis:

Is the application of analytical tools to general-purpose financial statements and related data for making business decisions.
Involves transforming accounting data into useful information for decision-making.
Helps users to make better decisions.
Helps to reduce uncertainty in decision-making.

External users of financial information:

Are not directly involved in operating the company.

The ability to meet short-term obligations and to efficiently generate revenues is called:

Liquidity and efficiency.

The comparison of a company's financial condition and performance across time is known as:

Horizontal analysis.

Financial statements with data for two or more successive accounting periods placed in columns side by side, sometimes with changes shown in dollar amounts and percents, are referred to as:

Comparative statements.

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