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ORANGE COAST COLLEGE FINANCIAL ACCOUNTING 101 PRACTICE EXAM #1 - CHAPTERS 1 AND 2

1. Which of the following financial statements is concerned with the company at a point in time? A) Balance sheet. B) Income statement. C) Retained Earnings statement. D) Statement of cash flows. 2. Generally accepted accounting principles A) are accounting rules formulated by the Internal Revenue Service. B) are sound in theory but rarely used in real life. C) are accounting rules that are recognized as a general guide for financial reporting. D) have eliminated all errors in accounting. 3. Which activities involve putting the resources of the business into action to generate a profit? A) Delivering B) Financing C) Investing D) Operating 4. Trademarks would appear in which balance sheet section? A) Intangible assets B) Investments C) Property, plant, and equipment D) Current assets 5. Earnings available to common stockholders is equal to: A) Total revenues B) Net income + Preferred stock dividends C) Preferred stock dividends Net income D) Net income Preferred stock dividends 6. Two of the major characteristics that make accounting information useful are A) Relevance and reliability. B) Verifiability and timeliness. C) Comparability and flexibility. D) Understandability and consistency.

7. The relationship between current assets and current liabilities is important in evaluating a company's A) profitability. B) liquidity. C) market value. D) solvency. 8. The group of users of accounting information charged with achieving the goals of the business is its A) auditors. B) investors. C) managers. D) creditors. 9. Which of the following is the most appropriate and modern definition of accounting? A) The information system that identifies, records, and communicates the economic events of an organization to interested users B) A means of collecting information C) The interconnected network of subsystems necessary to operate a business D) Electronic collection, organization, and communication of vast amounts of information. 10. Finney Company began the year by issuing $20,000 of common stock for cash. The company recorded revenues of $185,000, expenses of $160,000, and paid dividends of $10,000. What was Finney's net income for the year? A) $15,000 B) $35,000 C) $25,000 D) $45,000 11. External users want answers to all of the following questions except A) Is the company earning satisfactory income? B) Will the company be able to pay its debts as they come due? C) Will the company be able to afford employee pay raises this year? D) How does the company compare in profitability with competitors? 12. Current assets divided by current liabilities is known as the A) working capital. B) current ratio. C) profit margin. D) capital structure.

13. Issuing new shares of common stock will A) increase retained earnings. B) decrease retained earnings. C) increase common stock. D) decrease common stock. 14. Dawson Corporation has the following information available for 2009: (in millions) Issued common stock

$45

Retired common stock $65 Paid dividends

$75

Net income $130 Beginning Common Stock balance

$575

Beginning Retained Earnings balance $425

Based on this information, what is Dawson's Retained Earnings balance at the end of the year? A) $630 B) $480 C) $370 D) $555

15. Use the following data to determine the total dollar amount of assets to be classified as current assets. Koonce Office Supplies Balance Sheet December 31, 2010 Cash $ Accounts Payable 65,000 $ 70,000

Prepaid Insurance 30,000 Salaries Payable 10,000

Accounts Receivable 50,000 Mortgage Payable 80,000

Inventory 70,000 Total Liabilities $160,000

Land held for Investment 75,000

Land

90,000

Building

$100,000

Common Stock

$120,000

Less Accumulated Retained Earnings

250,000

A) $290,000. B) $215,000. C) $180,000. D) $145,000. 16. For 2010 Kuhlman Corporation reported net income of $28,000; net sales $400,000; and average share outstanding 6,000. There were no preferred stock dividends. What was the 2010 earnings per share? A) $4.67 B) $0.25 C) $66.67 D) $14.86

17. Use the following data to determine the total amount of working capital. Koonce Office Supplies Balance Sheet December 31, 2010 Cash Accounts Payable $ 70,000 Prepaid Insurance Salaries Payable 10,000 Accounts Receivable Mortgage Payable 80,000 Inventory Total Liabilities $160,000 Land held for Investment 75,000 $ 65,000

30,000

50,000

70,000

Land

90,000

Building

$100,000

Common Stock

$120,000

Less Accumulated Retained Earnings

250,000

A) $135,000. B) $295,000. C) $75,000. D) $60,000. 18. The liability created by a business when it purchases coffee beans and coffee cups on credit from suppliers is termed a(n) A) account payable. B) account receivable. C) revenue. D) expense. 19. Which of the following is an advantage of corporations relative to partnerships and sole proprietorships? A) Reduced legal liability for investors. B) Harder to transfer ownership. C) Lower taxes. D) Most common form of organization.

20. Using the following balance sheet and income statement data, what is the debt to total assets? Current assets $ 9,000 Net income $ 12,000 Current liabilities Stockholders' equity 27,000 Average assets Total liabilities 6,000 Total assets

4,000

44,000

30,000

Average common shares outstanding was 10,000 A) 13.6 percent B) 20 percent C) 75 percent D) 27.3 percent 21. The operating cycle of a company is the average time that is required to go from cash to A) sales in producing revenues. B) cash in producing revenues. C) inventory in producing revenues. D) accounts receivable in producing revenues. 22. On a classified balance sheet, marketable securities are classified as A) an intangible asset. B) property, plant, and equipment. C) a current asset. D) a long-term investment.

23. Which of the following is not a liability? A) Unearned Revenue B) Accounts Payable C) Accounts Receivable D) Interest Payable 24. The TNT Company has five plants nationwide that cost $300 million. The current market value of the plants is $500 million. The plants will be reported as assets at A) $200 million. B) $800 million. C) $300 million. D) $500 million. 25. Which of the following is the best definition of an internal user of accounting information? A) Investors who use accounting information to decide whether to buy or sell stock. B) Creditors like banks that use accounting information to evaluate the risk of lending money. C) Labor unions who use accounting information to examine the ability of the company to pay increased wages and benefits. D) Managers who use accounting information to plan, organize, and run a business. 26. The retained earnings statement shows all of the following except: A) The amounts of changes in retained earnings during the period. B) The causes of changes in retained earnings during the period. C) The time period following the one shown for the income statement. D) Beginning retained earnings on the first line of the statement. 27. When expenses exceed revenues, which of the following is true? A) a net loss results B) a net income results C) assets equal liabilities D) assets are increased 28. Which of the following is not classified properly as a current asset? A) Supplies B) Marketable securities C) A fund to be used to purchase a building within the next year D) A receivable from the sale of an asset to be collected in two years

29. Henson Company began the year with retained earnings of $175,000. During the year, the company recorded revenues of $250,000, expenses of $190,000, and paid dividends of $20,000. What was Henson's retained earnings at the end of the year? A) $255,000 B) $215,000 C) $405,000 D) $235,000 30. Adherence to the procedure of choosing the accounting method that will be least likely to overstate assets and income is an example of the constraint of A) relevance. B) reliability. C) conservatism. D) comparability. 31. Resources owned by a business are referred to as A) stockholders' equity. B) liabilities. C) assets. D) revenues. 32. Kingery Corporation has current assets of $1,250,000 and current liabilities of $750,000. If they pay $250,000 of their accounts payable what will their new current ratio be? A) 2.0:1 B) 1.7:1 C) 2.5:1 D) 1.25:1 33. Which of the following is not considered a measure of liquidity? A) Current ratio B) Working capital C) Debt to total assets ratio D) Each of the above are liquidity measures 34. A small neighborhood barber shop that is operated by its owner would likely be organized as a A) joint venture. B) partnership. C) corporation. D) proprietorship.

35. Debt and obligations of a business are referred to as A) assets. B) equities. C) liabilities. D) expenses. 36. In a study session, a classmate makes this statement Dividends are listed as expenses on the income statement. What is your best response to this statement? A) I've been struggling with that concept and I feel that dividends should be shown on the balance sheet as assets. B) You are right. Revenues and expenses are shown on the income statement. Dividends are a cost of generating revenues and that makes them an expense. Why else would a corporation pay dividends? C) Dividends represent a portion of corporate profits that are paid to the shareholders. They belong on the retained earnings statement. D) Dividends are deducted from retained earnings on the balance sheet. 37. Using the following balance sheet and income statement data, what is the earnings per share? Current assets $ 7,000 Net income $ 12,000 Current liabilities Stockholders' equity 27,000 Average assets Total liabilities 9,000 Total assets

4,000

40,000

30,000

Average common shares outstanding was 10,000 A) $3.60 B) $4.00 C) $1.20 D) $0.83

38. To show how successfully your business performed during a period of time, you would report its revenues and expense in the A) balance sheet. B) income statement. C) statement of cash flows. D) retained earnings statement. 39. The retained earnings statement would not show A) the retained earnings beginning balance. B) revenues and expenses. C) dividends. D) the ending retained earning balance. 40. What is the order in which assets are generally listed on a classified balance sheet? A) current and long-term B) current; property, plant and equipment; long-term investments; intangibles C) current; property, plant and equipment; intangibles; long-term investments D) current; long-term investments; property, plant and equipment, intangibles 41. A measure of profitability is the A) current ratio. B) debt to total assets ratio. C) earnings per share. D) working capital. 42. Why should the income statement be prepared first? A) The statement of cash flows should be prepared first because it determines the sources of cash. That information is then used in preparing the income statement. B) Net income from the income statement flows into the retained earnings statement. The ending retained earnings balance then flows into the balance sheet. C) The income statement does not have to be prepared first. Financial statements can be prepared in any order. D) None of these statements is correct. 43. Common stock is reported on the A) statement of cash flows. B) retained earnings statement. C) income statement. D) balance sheet.

44. Bathlinks Corporation has a debt to total assets ratio of 73%. This tells the user of Bathlinks's financial statements A) Bathlinks is getting a 27% return on its assets. B) There is a risk that Bathlinks cannot pay its debts as they come due. C) 73% of the assets are financed by the stockholders. D) Based on this measure, the user should not invest in Bathlinks. 45. Which of the following is a measure of liquidity? A) Working capital B) Profit margin C) Earnings per share D) Debt to equity ratio 46. The accounting equation may be expressed as: A) Assets = Stockholders' Equity Liabilities. B) Assets = Liabilities + Stockholders' Equity. C) Assets + Liabilities = Stockholders' Equity. D) Assets + Stockholders' Equity = Liabilities. 47. Wilton Corporation had beginning retained earnings of $764,000 and ending retained earnings of $833,000. During the year they issued common stock totaling $47,000. What was their net income for the year? A) $69,000 B) $22,000 C) $116,000 D) $91,000 48. Dividends are reported on the A) income statement. B) retained earnings statement. C) balance sheet. D) income statement and balance sheet. 49. Jack and Jill form a partnership. Jack runs the business in New York, while Jill vacations in Hawaii. During the time Jill is away from the business, Jack increases the debts of the business by $20,000. Which of the following statements is true regarding this debt? A) Only Jack is personally liable for the debt, since he has been the managing partner during that time. B) Only Jill is personally liable for the debt of the business, since Jack has been working and she has not. C) Both Jack and Jill are personally liable for the business debt. D) Neither Jack nor Jill is personally liable for the business debt, since the partnership is a separate legal entity.

50. Which of the following is not a principal type of business activity? A) Operating B) Investing C) Financing D) Delivering

Answer Key
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. A C D A D A B C A C C B C B B A A A A B B C C C D C A D B C C A C D C C C B B D C B D B A B A B C D