Financial accounting 9th edition by harrison horngren test

1. Revenues were $170,000, expenses were $90,000, and cash dividends were $30,000. Indicate the net income and the change in retained earnings for the period.

A.Net income was $50,000; change in retained earnings was $50,000

B. Net income was $80,000; change in retained earnings was $50,000

C. Net income was $80,000; change in retained earnings was $80,000

D. Net income was $250,000; change in retained earnings was $250,000


2. Financial Statements are

a. reports issued by outside consultants who are hired to analyze key operations of the business.

b. reports created by management that states it is responsible for the acts of the corporation.

c. standard documents that tell us how well a business is performing and where it stands in financial terms.

d. standard documents issued by outside consultants who are hired to analyze key operations of the business in financial terms.


3. If the income statement includes revenues earned even if the cash has not been collected from customers yet, it means that the

a. Closing entries have not been completed yet.

b. Journal has errors in it.

 c. Accrual basis of accounting is being used.

d. Adjusting entries have not been done yet.


4. At the beginning of the period, assets were $490,000 and stockholders’ equity was $240,000. During the year, assets increased by $60,000, liabilities increased by $40,000, and stockholders’ equity increased by $20,000. Beginning liabilities must have been:

A. $230,000.

B. $250,000.

C. $280,000.

D. $300,000.


5. The acronym GAAP stands for

 a. government audited accounting pronouncements.

b. generally accepted accounting principles.

c. government authorized accountant principles.

d. generally acceptable authorized pronouncements.


6. Why do adjustments need to be made at the end of each accounting period?

a. To make sure the revenues are overstated

b. To ensure that the company will report profit.

c. To make sure all revenues earned and expenses incurred for the period are reported.

d. To ensure that the trial balance balances.


7. All of the following expenditures were made by UM Co. related to machinery the company purchased and used during the year 2003. Identify which of the following expenditures should NOT be capitalized:

a. An expenditure made to install the machinery at the factory.

b. The costs of electricity to operate the machine for the first year of use.

c. The costs of freight while the machine was in transit from the seller’s warehouse.

d. The costs of testing the machine in preparation for use.


8. To be capitalized expenditure must:

a. Extend the useful life of a long-term asset.

b. Enhance the operating efficiency of a long-term asset.

c. Be reasonable and necessary to put a long-term asset into a working condition.

d. All of the above.


9. If the proper adjustment for depreciation is NOT made at the end of the accounting period, what is the effect on net income?

a. Net income will be overstated.

b. Net income will be understated.

c. There will be no effect on net income.

d. Net income will not be affected in the current period, but will be overstated in the next period


10. A potential investor interested in evaluating a company’s financial performance for the current period would probably examine which of the following financial statements?

A. Balance sheet only

B. Income statement only

C. Statement of cash flows and income statement

D. Statement of retained earnings and balance sheet


11. Fargo Engines Incorporated sells part number 45G to toy manufacturers. Information about part number 45G is contained in the table below. Fargo uses a perpetual inventory system.



Number of Units

Unit Cost

Total Cost

Beginning Inventory


















Determine the cost of goods sold and ending inventory cost of part 45G assuming that the 8,000 units are sold at a per unit selling price of $12.50 and that the company uses the LIFO cost flow method.

a. Cost of goods sold is $67,750 and ending inventory is $24,250.

b. Cost of goods sold is $66,600 and ending inventory is $25,400.

c. Cost of goods sold is $66,200 and ending inventory is $25,800.

d, None of the above.


12. From question #11 above, indicate the gross profit margin on the sale,

a. $100,000

b. $75,750

c. $32,250

d. $33,800

Gross profit= (8000*12.50)-66,200= 33,800


13. Which of the following would be an example of a weakness in controls over inventory?

a. Having an employee identify reliable vendors from whom to buy merchandise.

b. Paying for inventory only after it has been checked that an item was received.

c. Having the employee who keeps inventory records also make payments for the goods.

d. Limiting access to inventory by using locked warehouses and storage rooms.


14. An Oklahoma City business paid $15,000 cash for equipment used in the business. At the time of purchase, the equipment had a list price of $20,000. When the balance sheet was prepared, the value of the equipment later rose to $22,000. What is the relevant measure of the value of the equipment?

A. Historical cost, $15,000

B. Fair market cost, $20,000

C. Current market cost, $22,000

D. $15,000 on the day of purchase, $22,000 on balance sheet date


15. Cost of goods sold appears on the:

A. statement of retained earnings as an addition to beginning retained earnings.

B. income statement as a deduction from sales

C. balance sheet as a deduction from sales

D. income statement as a deduction from gross profit


16. Kate Johnson, president of BQ Industries, executed a note payable on behalf of the company on October 1, 2012 in the amount of $125,000 with an interest rate of 8% for 15 months.

       Calculate the following items:

• The total interest to be paid over the term of the note


• The interest that should be accrued at December 31, 2012 (the Fiscal Year End)


• The maturity value of the note when the note is due


• The date that the note is due



17. Doris Day Company had beginning Retained Earnings of $80,000. The Company sold 1,000 shares of common stock for $45 during the period. During the year the company had profit of $225,000 and paid dividends of $15,000. What is the ending balance in Retained Earnings? SHOW YOUR CALCULATIONS!


18. Virginia Whittaker is reviewing her financial statements for May. Her dry cleaning business had a $10,000 profit for May, but his business checking account shows a decrease of $2,500. Explain to Virginia why the net income for the business and the ending balance in cash are not the same amounts.


19. Martin Motors purchased a machine that will help diagnose problems with engines. The machine cost $210,000 on January 10, 2012 and a residual value of $20,000 was anticipated, with a useful life of 5 years.


a. Prepare a depreciation schedule for the straight-line and double declining methods of depreciation.


b. In 2012, Martin Motors has a gross profit of $400,000 and operating expenses of $180,000. Show your calculations to prove which depreciation method Martin Motors would select to receive a cash flow advantage for tax purposes? In your calculations indicate how much tax savings will the company realize in the first year over other methods?


c. After depreciating the machine for two years using the straight-line method, Martin Motors realized that the machine would last 8 more years and the residual would stay as originally projected. Prepare the appropriate journal entry to record the depreciation expense for December 31, 2014.


21. Listed below are several account titles. List the type of account listed by the account title. The first item is listed as an example.


Account Title

Account Type

Normal Balance




Notes Payable



Merchandise Inventory



Prepaid Insurance



Common Stock






Accounts Receivable



Bonds Payable



Retained Earnings



Cost of Goods Sold






Short-term Investments



Accumulated Depreciation




22. John Smith started a consulting business and completed the following transactions:

A. Incorporated the business and issued 10,000 shares of $1 Par value common stock for $5 per share

B. Paid $2,000 monthly rent for office space

C. Purchased $3,000 of office equipment, paying $1,000 cash and signing a note for the remainder

D. Recorded $1,000 of revenue, receiving cash

E. Recorded $1,500 of revenue on account and mailed invoices to the customers

a. Prepare the journal entries, using the general journal given below.


b. After analyzing these transactions, what is the ending cash balance? 


23. Prepare a bank reconciliation using Bobby Barnacles’ Restaurant Supply Inc’s information for August 31, 2012.

• A NSF check from Johnny Jones for $3,164.

• Two deposits made on August 31 were not on the bank statement, totaling $2,897.

• The bank collected an EFT payment for Rent for $2,600.

• August 31 balance in Cash was $1,905.

 • The owner had written check # 1598 for $500 and recorded this check as $5,000.

 • The balance on the bank statement as of August 31 was $5,216.

• Bank service charge of $28 was shown on the bank statement.

• Checks #1572, 1606, 1116, and 1242 for $419, $126, $650, and $1,105, respectively, were not shown on the bank statement, even though the company had sent the checks.


Extra Credit:

 1. Revenue is-recorded when it is 


2. What is the Accounting Equation?


24. Anchor House Realtors, Inc. prepared the following random list of assets, liabilities, revenues, and expenses from its December 31, 2012, accounting records. The beginning retained earnings as of January 1, 2012, were $86,000 and the owner, John Anchor, received dividends of $17,000 during the year. Prepare the Income Statement, Statement of Retained Earnings and the CLASSIFIED Balance Sheet for Anchor House Realtors, Inc., as of December 31, 2012. Each of your statements should have the a-line heading, and your Balance Sheet should be a classified Balance Sheet.


Accounts receivable            $93,000                           Sales                     $313,000

Interest expense                    16,000                           Cash                          22,000

Interest Receivable                 3,000                            Note receivable      11,000

Accounts payable                  91,000                       Cost of Goods Sold    150,000

Income Tax expense             30,000                        Long-term Debt         160,000

Plant Assets, net Depreciation 453,000                 Wage expense            56,000

Salary payable                          5,000                           Inventory                 135,000

Common stock                     359,000                        Prepaid Rent                  8,000

Other Operating Expenses    20,000

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