THEORY OF ACCOUNTS Exam

1. Accounting concepts are not derived from:

(a) inductive reasoning
(b) experience

(c) pragmatism
(d) laws of nature

2. The recognition of periodic depreciation expense on company-owned automobiles

requires estimating both salvage or residual value, and the useful life of the vehicles.
The use of estimates in this case is an example of:
(a) conservatism
(b) maintaining consistency
(c) invoking the materiality constraint rather than the cost benefit constraint
(d) providing relevant data at the expense of reliability
D
3. Theoretically, at the date of a service which is not immediately consumed, the cost of
such service is a (an):
(a) accrued expense
(c) expense
(b) deferred revenue
(d) asset
D
4. Which is not a current asset?
(a) office supplies inventory
(b) short-term investment
D

(c) petty cash (undeposited) cash

(d) cash surrender value of life insurance

5. A change in the unit of depletion rate would be accounted for as a:

(a) correction of an accounting error
(c) change in accounting estimate
(b) change in accounting principle
(d) change in accounting entity
C
6. Under the installment method of revenue recognition, when interest is charged, each
cash collection made after the sale is composed of:
(a) interest
(c) interest, cost and profit
(b) interest and profit
(d) interest and cost
C
7. In reconciling the bank balance with the book balance, which of the following would not
cause the bank balance shown on the bank statement to be lower than the unadjusted
book balance?
(a) cash on hand at the company
(b) NSF checks from a customer, as reported on the bank statement
(c) interest credited to the account by the bank
(d) deposits in transit
C
8. When a promissory note is issued, you would expect to find:
(a) notes payable and interest expense in the financial statements of the maker of the
note throughout the life of the note
(b) notes receivable and interest revenue in the financial statements of the maker of the
note throughout the life of the note
(c) notes receivable in the financial statements of the maker of the note throughout the
life of the note, but interest revenue only when interest payments are received
(d) notes payable in the financial statements of the payee of the note throughout the life
of the note, but interest expense only when interest payments are made
A
9. Which of the following statements is true?
(a) All operational assets are subject to either depreciation, depletion or amortization.
(b) The matching principle does not require depreciation on an operational asset donated
to a company because no purchase cost was incurred at acquisition.
(c) The only requirement an asset must meet to be considered an operational asset is
that its useful life extend over more than one accounting period.
(d) The determination of cost is conceptually consistent between operational assets and
inventory in regard to the accounting treatment of cash discounts.
D
10. The cost of inventories of items that are not ordinarily interchangeable and goods or
services produced and segregated for specific projects should be assigned by using what
method?
(a) last-in, first-out
(c) weighted average
(b) first-in, first-out
(d) specific identification
D