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ACG 3100: Financial Reporting and Accounting Principles Practice Questions and Answers

Practice questions and solutions covering financial reporting and accounting principles.

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    ACG 3100: Financial Reporting and Accounting Principles Practice Questions and Answers ACG 3100 Correct Answers 1. 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 2. As independent (or external) auditors, CPAs are primarily responsible for a. preparing financial statements in conformity with GAAP. b. certifying the accuracy of financial statements. c. expressing an opinion as to the fairness of financial statements. d. filing financial statements with the SEC. 3. 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. 4. According to the FASB's conceptual framework, the process of reporting an item in the financial statements of an entity is a. realization. b. recognition. c. matching. d. allocation. 5. Generally accepted accounting principles a. are accounting adaptations based on the laws of economic science. b. derive their credibility and authority from legal rulings and court precedents. c. derive their credibility and authority from the federal government through the financial reporting section of the SEC. d. derive their credibility and authority from general recognition and acceptance by the accounting profession. 6. On June 30, a company paid $3,600 for insurance premiums for the current year and debited the amount to Prepaid Insurance. At December 31, the bookkeeper forgot to record the amount expired. The omission has the following effect on the financial statements prepared December 31: a. overstates owners' equity. b. overstates assets. c. understates net income. d. overstates both owners’ equity and assets. 7. Which of the following criteria must be met before an event should be recorded for accounting purposes? a. The event must be an arm's - length transaction. b. The event must be repeatable in a future period. c. The event must be measurable in financial terms. d. The event must be disclosed in the reported footnotes. 8. Adjusting entries normally involve a. real accounts only. b. nominal accounts only. c. real and nominal accounts. d. liability accounts only. 9. If an inventory account is understated at year end, the effect will be to overstate the a. net purchases. b. gross margin. c. cost of goods available for sale. d. cost of goods sold.

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    10. Beginning and ending Accounts Receivable balances were $28,000 and $24,000, respectively. If collections from clients during the period were $80,000, then total services rendered on account were apparently a. $76,000. b. $84,000. c. $104,000. d. $108,000. 11. The following balances have been excerpted from Edwards' balance sheets: December 31, 2013 December 31, 2012 Prepaid Insurance ............ $ 6,000 $ 7,500 Interest Receivable .......... 3,700 14,500 Salaries Payable ............. 61,500 53,000 Edwards Company paid or collected during 2013 the following items: Insurance premiums paid ...... $ 41,500 Interest collected ........... 123,500 Salaries paid ................ 481,000 The interest revenue on the income statement for 2013 was a. $90,500. b. $112,700. c. $117,500. d. $156,500. 12. Comet Corporation's liability account balances at June 30, 2013, included a 10 percent note payable. The note is dated October 1, 2011, and carried an original principal amount of $600,000. The note is payable in three equal annual payments of $200,000 plus interest. The first interest and principal payment was made on October 1, 2012. In Comet's June 30, 2013, balance sheet, what amount should be report ed as Interest Payable for this note? a. $10,000 b. $15,000 c. $30,000 d. $45,000 13. 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. 14. Unearned rent would normally appear on the balance sheet as a a. plant asset. b. current liability. c. long - term liability. d. current asset. 15. 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 16. The operating cycle a. measures the time elapsed between cash disbursement for inventory and cash collection of the sales price. b. refers to the seasonal variations experienced by business enterprises. c. should be used to classify assets and liabilities as current if it is less than one year. d. cannot exceed one year.

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    17. Wolfe Co. was incorporated on July 1, 2014, with $200,000 from the issuance of stock and borrowed funds of $30,000. During the first year of operations, net income was $10,000. On December 15, Wolfe paid an $800 cash dividend. No additional activities affected owners' equity in 2014. At December 31, 2014, Wolfe's liabilities had increased to $37,600. In Wolfe's December 31, 2014, balance sheet, total assets should be reported at a. $239,200. b. $240,000. c. $246,800. d. $276,800. 18. Volta Electronics Inc. reported the following items on its December 31, 2014, trial balance: Accounts Payable ........................................ $108,900 Advances to Employees ................................... 4,500 Unearned Rent Revenue ................................... 28,800 Estimated Liability Under Warranties .................... 25,800 Cash Surrender Value of Officers' Life Insurance ........ 7,500 Bonds Payable ........................................... 555,000 Discount on Bonds Payable ............................... 22,500 Trademarks .............................................. 3,900 The amount that should be recorded on Volta’s balance sheet as total liabilities is a. $696,000. b. $700,500. c. $703,500. d. $741,000. 19. In contrast with a multiple - step income statement, a single - step income statement does not show the amount of a. income taxes on continuing operations. b. cost of goods sold. c. gross profit. d. earnings per share. 20. The term "comprehensive income" as defined by the FASB a. must be reported on the face of the income statement. b. includes all changes in equity during a period except those resulting from investments by and distributions to owners. c. is the net change in owners' equity for the period. d. is synonymous with the term "net income." 21. The following amounts are from Silverton Co.'s 2014 income statement: Sales ................................................. $340,000 Sales returns and allowances .......................... 5,000 Cost of goods sold .................................... 132,000 Utilities expense ..................................... 66,000 Interest revenue ...................................... 1,000 Income tax on operations .............................. 28,000 Extraordinary loss due to earthquake, net of tax ...... 5,000 Interest expense ...................................... 4,000 Salaries expense ...................................... 46,000 Loss on sale of investments ........................... 3,000 What amount would Silverton show for income from continuing operations on a multiple - step format income statement? a. $52,000 b. $68,000 c. $57,000 d. $96,000 22. Saginaw Inc. decided on August 1, 2014, to dispose of a component of its business. The component was sold on November 30, 2014. Saginaw's income for 2014 included income of $250,000 from operating the discontinued segment from January 1 to the sale date. S aginaw incurred a loss on the November 30 sale of $220,000. Ignoring income taxes, what amount should be reported in the 2014 income statement as the net income or loss under "Discontinued Operations"? a. $220,000 loss b. $30,000 loss c. $30,000 income d. $250,000 income

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    23. The financial statements of Mannassass Corporation for 2014 and 2015 contained the following errors: 2014 2015 Ending Inventory $14,000 overstated $20,000 understated Rent Expense $4,800 understated $6,600 overstated Assuming that none of the errors were detected or corrected, by what amount will 2014 operating income be overstated or understated? a. $9,200 overstated b. $9,200 understated c. $18,800 understated d. $18,800 overstated 24. In a statement of cash flows, receipts from sales of property, plant, and equipment would be classified as cash inflows from a. liquidating activities. b. operating activities. c. investing activities. d. financing activities. 25. In a statement of cash flows (indirect method), depreciation is treated as an adjustment to reported net income because depreciation a. is an inflow of cash to a reserve account for asset replacement. b. reduces the reported net income and involves an inflow of cash. c. reduces the reported net income but does not involve an outflow of cash. d. usually represents a significant portion of operating expenses. 26. Which of the following statements regarding cash equivalents is correct? a. A one - year Treasury note could not qualify as a cash equivalent. b. All investments meeting the FASB's criteria for cash equivalents must be reported as such. c. The date a security is purchased determines its "original maturity" for cash equivalent classification purposes. d. Once established, management's policy for classifying items as cash equivalents cannot be changed. 27. Which of the following would not be classified as an operating activity? a. Interest income b. Income tax expense c. Dividend income d. Payment of dividends 28. The amount reported as "Cash" on a company's balance sheet normally should exclude a. postdated checks that are payable to the company. b. cash in a payroll account. c. undelivered checks written and signed by the company. d. petty cash. 29. 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 Net Realizable Value Net Income of Accounts Receivable a. Increase Increase b. Decrease Decrease c. None None d. Decrease None 30. The following information is from the records of Sumter, Inc. for the year ended December 31, 2014. Allowance for Doubtful Accounts, January 1, 2014 .. $ 6,000 (cr) Sales, 2014 ....................................... 2,920,000 Sales Returns and Allowances, 2014 ................ 32,000

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