Multiple Choice: Chapter Four
1. The accountant's worksheet:
a. lays the groundwork for formal financial statement preparation.
b. is a fundamental financial statement.
c. provides details necessary for full disclosure and the preparation of footnotes.
d. is prepared at the end of each operating cycle.
Answera. Formal financial statements can be prepared from the worksheet, therefore the worksheet lays the groundwork for their preparation. The worksheet is not a financial statement and does not include details about needed footnotes. The worksheet would be prepared at the end of an "accounting cycle" -- not an "operating cycle."
2. In preparing a worksheet, a net loss would be computed and entered in the:
a. debit column of the income statement columns of the worksheet.
b. credit column of the income statement columns of the worksheet.
c. in the debit column of the adjusted trial balance.
d. in the credit column of the balance sheet columns of the worksheet.
Answerb. A net loss is represented in the worksheet by debits exceeding credits in the subtotal of the income statement columns. To complete (i.e., balance) the income statement columns necessitates a credit to the income statement columns and a debit to the balance sheet columns. Therefore, the amount of a net loss is computed and entered in the credit column of the income statement columns of the worksheet.
3. Which of the following accounts would not be closed at the end of an accounting period?
a. Income Summary
d. Capital Stock
4. After closing all revenue and expense accounts, Norris Company had a debit balance in its Income Summary account of $10,000. The proper entry to record the closing of the Income Summary account would be:
a. Revenue 10,000 Income Summary 10,000 b. Retained Earnings 10,000 Income Summary 10,000 c. Income Summary 10,000 Retained Earnings 10,000 d. Income Summary 10,000 Expenses 10,000
5. The following statements all pertain to the accounting cycle. Which of these statements is wrong?
a. A post-closing trial balance is prepared prior to closing temporary accounts.
b. Formal financial statements may be produced from the worksheet.
c. Adjusting entries are recorded in the journal and posted to the ledger.
d. The post-closing trial balance is prepared by examining ledger balances subsequent to the closing of accounts.
Answera. A post-closing trial balance is prepared after all closing entries are complete, not "prior to" closing entries. Formal financial statements are prepared from a worksheet, and adjusting entries are recorded in the journal and posted to the ledger.
6. Which of the following statements about reversing entries is true?
a. Identical account balances are achieved in the subsequent accounting period whether reversing entries are utilized or not.
b. Reversing entries may not be used with accrued revenues.
c. Reversals are generally applied to those adjusting items that do not involve future cash flow.
d. Reversing entries would not be prepared if a company also utilized closing entries.
Answera. Reversing entries are an optional tool to assist in the bookkeeping function. No matter whether they are used or not, identical account balances and financial statements should result. Reversing entries are often used for accrued revenues, and other similar items which will involve future cash flows. Reversing entries are prepared at the beginning of a new accounting period, and closing entries are prepared at the end of an accounting period. Closing entries must be prepared whether or not the company elects to use reversing entries.
7. Shipman Company had accrued salaries of $300 on December 31. The company recorded reversing entries on the following January 1. On the next payday, January 7, the appropriate entry to record the payment of $1,000 in salaries should include:
a. a debit to Salaries Expense of $1,000.
b. a debit to Salaries Expense of $700.
c. a debit to Salaries Expense of $1,300.
d. a debit to Salaries Payable for $300.
Answera. When reversing entries are used, the journal entry on the payment date will record the full amount paid as a debit to Salaries Expense. The net impact is that salaries expense will equal the correct $700 amount related to the new year (i.e., $1,000 paid less $300 related to the prior year). This results because the reversing entry would establish a $300 credit to Salaries Expense and the payroll journal entry enters a $1,000 debit to Salaries Expense.
8. Current assets are those assets which management intends to convert into cash or consume within:
a. The operating cycle
b. One year
c. The longer of (a) or (b)
d. The shorter of (a) or (b)
9. On a classified balance sheet, the appropriate ordering of specific classifications is:
a. Current assets; long-term investments; property, plant, and equipment; intangible assets; other assets.
b. Current assets; property, plant, and equipment; long-term investments; intangible assets; other assets.
c. Current assets; intangible assets; property, plant, and equipment; long-term investments; other assets.
d. Current assets; other assets; long-term investments; intangible assets; property, plant, and equipment.
10. If a company had a current ratio of 0.5, then which of the following statements regarding that company's working capital would be true?
a. The company's working capital would be positive.
b. The company's working capital would be zero.
c. The company's working capital would be negative.
d. The company's working capital would be 2:1.
Answerc. For the current ratio to be 0.5 signifies that the company has twice as many current liabilities as current assets. Therefore, working capital is a negative amount (i.e., current assets minus current liabilities is negative).