Acct 301

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Test 1 Chapters 1-4
Student: ___________________________________________________________________________ 1. A cause-and-effect relationship is implicit in the: 
A. Realization principle.
B. Historical cost principle.
C. Matching principle.
D. Going concern assumption.
 
2. Accounting standard setting has been characterized as:  A. A political process.
B. Using the scientific method.
C. Pure deductive reasoning.
D. Pure inductive reasoning.
 
3. The FASB's conceptual framework's qualitative characteristics of accounting information include:  A. Historical cost.
B. Realization.
C. Faithful representation.
D. Full disclosure.
 
4. Fundamental qualitative characteristics of accounting information are:  A. Relevance and comparability.
B. Comparability and consistency.
C. Faithful representation and relevance.
D. Neutrality and consistency.
 
5. The possibility that the capital markets' focus on periodic profits may tempt a company's management to bend or even break accounting rules to inflate reported net income is an example of:  A. An ethical dilemma.

B. An accounting theory issue.
C. A technical accounting issue.
D. None of the above is correct.
 
6. The assumption that in the absence of contrary information a business entity will continue indefinitely is the:  A. Periodicity assumption.
B. Entity assumption.
C. Going concern assumption.
D. Historical cost assumption.
 
7. Ace Bonding Company purchased merchandise inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should Ace record the purchase?    
A. Option A
B. Option B
C. Option C
D. Option D
 Note: The $3,000 sales price is irrelevant for this example as no sale takes place. Here we are only concerned with recording the acquisition of inventory. 8. The adjusting entry required when amounts previously recorded as unearned revenues are earned includes:  A. A debit to a liability.

B. A debit to an asset.
C. A credit to a liability.
D. A credit to an asset.
The original entry to record the unearned revenue would have been: Cash x
Unearned Revenue x
When the money is earned, which is what this question is asking, the journal entry would be: Unearned Revenue x
Revenue x
Unearned Revenue is a liability and we are debiting it, so the answer is A.  
9. When a tenant makes an end-of-period adjusting entry credit to the "Prepaid rent" account:  A. (S)he usually debits cash.
B. (S)he usually debits an expense account.
C. (S)he debits a liability account.
D. (S)he does none of the above.
The original transaction when the prepaid insurance was purchased would have looked like this: Prepaid Rent x
Cash x
When the time comes to adjust Prepaid Rent for the amount that expired between the purchase date and the end of the year, the entry is: Rent Expense x
Prepaid Rent x
So, the answer is B.
 
10. The employees of Neat Clothes work Monday through Friday. Every other Friday the company issues payroll checks totaling $32,000. The current pay period ends on Friday, July 3. Neat Clothes is now preparing quarterly financial statements for the three months ended June 30. What is the adjusting entry to record accrued salaries at the end of June?    

A. Option A
B. Option B
C. Option C
D. Option D
Payroll occurs every 2 weeks, so that is 10 workdays. The normal amount paid for two weeks is $32,000. However, in this case, that amount isn’t going to be paid until July 3. Further, we have to take into account that we do not accrue the amount of payroll related to July. So the answer is calculated as follows: 7/10 x $32,000 = $22,400. Answer D includes the proper amount and proper accounts.  

11. Pat's Custom Tuxedo Shop maintains its records on the cash basis. During this past year Pat's collected $42,000 in tailoring fees, and paid $14,000 in expenses. Depreciation expense totaled $2,000. Accounts receivable increased $1,500,...
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