Exam 1 Review
Supplemental Instruction
Iowa State University / Leader:
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1.  Which of the following best describes the objective of financial accounting?

  1. To capture information about the activities of a company so that it can be reported to decision makers inside the business.
  2. To capture information about the activities of a company so that it can be reported to decision makers outside the business.
  3. To capture information about employee activities of a company so that it can be reported to managers.
  4. To capture information about investors, so a company can decide who to sell stock to.

2.  Which of the following statements regarding the income statement is not correct?

  1. The equation for the income statement is Revenues + Expenses = Net Income
  2. The income statement is usually the first financial statement that is prepared.
  3. When listing the accounts on the income statement, revenues are on top, usually with the largest, most relevant revenue listed first.
  4. It is quite common for a business to provide goods and services in one month and collect cash in a later month.

3.  What are the three types of business activities that can be found on the Statement of Cash Flows?

  1. Buying, selling, and investing
  2. Investing, operating, and spending
  3. Financing, operating, and investing
  4. None of the above

4.  At the end of the year, Carnations Inc. reported net income of $15,250 and paid dividends of $4,300. If they ended the year with Retained Earnings of $20,650, what was their Beginning Retained Earnings?

  1. $10,000
  2. $31,600
  3. $29,000
  4. $9,700

5.  How does the balance sheet connect to the Statement of Cash Flows?

  1. The Cash on the balance sheet is equal to the ending Cash reported on the statement of cash flows.
  2. The Cash on the balance sheet is equal to beginning Cash reported on the statement of cash flows.
  3. The balance sheet and the statement of cash flows are not connected
  4. Both a and b

6.  Which of the following is false regarding GAAP?

  1. GAAP stands for Generally Accepted Accounting Principles
  2. GAAP is a set of rules of accounting created by the Financial Accounting Standards Board for use in the United States
  3. The main goal of GAAP is to ensure companies produce financial information that is useful in decision making
  4. All are true of GAAP

7.  Sarbanes-Oxley requires all of the following except:

  1. Top managers of public companies must sign a report certifying their responsibilities for the financial statements
  2. Companies must maintain an audited system of internal controls to ensure accuracy in the accounting reports
  3. Companies must report financial statements every month
  4. Companies must maintain an independent committee to oversee top management and ensure that they cooperate with auditors

8.  Which of the following is a disadvantage of incorporation?

  1. Ability to raise capital
  2. Double taxation of earnings
  3. Ease of ownership transfer
  4. Limited liability of stockholder

9.  Receiving contributions from stockholders’ is a ______activity that can be found on the statement of cash flow?

  1. Investing
  2. Operating
  3. Financing
  4. None of the above

10.  All of the following are asset accounts except:

  1. Cash
  2. Inventory
  3. Supplies
  4. Accounts Payable

11.  Which of the following best describes current liabilities?

  1. Liabilities that will become noncurrent liabilities
  2. Debts or obligations that will be paid, settled, or fulfilled within 12 months of the balance sheet date
  3. Liquid liabilities
  4. Assets that are turned into liabilities in the current period

12.  According to the Revenue Recognition Principle, when would revenue be recognized if cash was received in a period after goods or services are provided?

  1. In the current period
  2. In the next period
  3. At the end of the year
  4. They must pay when the goods or services are provided

13.  Total current assets, total current liabilities, and total stockholders’ equity can all be found on:

  1. Classified Balance Sheet
  2. Balance Sheet
  3. Income Statement
  4. Classified Income Statement

14.  Target Co. sold 25 purses at $32 each, which customers paid in cash. What is one of the effects of the transaction on the accounting equation?

  1. Cash -$800
  2. Accounts Receivable +800
  3. Sales Revenue +800
  4. Sales Expense -800

15.  Lulu Lemon recorded a transaction that decreased accounts receivables by $23,100 and increased cash by $23,100. Which of the following best describes that transaction?

  1. Lulu Lemon paid insurance costs of $23,100 for the next six months
  2. Lulu Lemon had customers pay $23,100 off on their account balance
  3. Lulu Lemon paid employees wages of $23,100
  4. Lulu Lemon sold $23,100 of stock to investors

16.  What are the effects on the accounting equation if Patchwork received a bill of $578 for utilities in January that they will pay in February?

  1. Prepaid utilities +578; Cash -578
  2. Cash +578; Utilities Expense +578
  3. Prepaid utilities +578; Accounts Payable +578
  4. Utilities Expense +578; Accounts Payable +578

17.  Which of the following has a normal debit balance?

  1. Notes Payable
  2. Expenses
  3. Accounts Payable
  4. Revenues

18.  Thermos Co. had a net profit margin of 12%. What does this tell us about the company’s performance?

  1. For every dollar of revenues, Thermos Co earned 12 cents of income.
  2. For every dollar of net income, Thermos Co earned 12 cents of revenue.
  3. Their net income was 12% higher than last year.
  4. Their revenue was 12% higher than last year.

19.  Which of the following is not a limitation of the income statement?

  1. Does not indicate the amount of cash the company is generating
  2. Does not directly measure the change in the value of a company
  3. Uses estimates to measure income
  4. All of the above are limitations of the income statement

20.  ABC.com paid for advertising for the year on January 1, 2012. Under the accrual method, when would they record the expense?

  1. When cash is paid
  2. When the expense is incurred
  3. When customers see the advertising
  4. When customers that saw the advertising use their website

21.  StoreCo receives $40,000 for newspaper subscriptions. They have delivered 25% of the newspapers to subscribers. What revenue can StoreCo report?

  1. 0
  2. 30,000
  3. 25,000
  4. 10,000

22.  Which of the following accounts would NOT increase with a debit?

  1. Cash
  2. Cost of Goods Sold
  3. Dividends
  4. Sales Revenue

23.  Which of the following situations would result in a $200 credit to cash?

  1. Purchasing machinery for $200
  2. Taking out a loan for $200
  3. Selling machinery for $200
  4. Having net income equal to $200

24.  Which of the following is an advantage of a sole proprietor?

  1. Ease of ownership transfer
  2. Income is only taxed once
  3. Legal protection
  4. Double Taxation

25.  The balance sheet is the company’s financial position at a ______?

  1. Period of time
  2. Annual Report
  3. Point of Time
  4. Financial Year

26.  The current ratio would include all of the following accounts except…

  1. Inventory
  2. Cash
  3. Current Liabilities
  4. Retained Earnings

27.  Which of the following best represents the matching principle?

  1. Prepaying rent for a year
  2. Target expenses electricity costs for next year
  3. Target expenses electricity costs for the current month
  4. Recording revenue for receiving cash before performing a service

28.  Which event would not constitute a transaction?

  1. Dylan orders a T.V.
  2. Jeff’s Pizza delivers the pizza that you ordered and you pay cash
  3. Best Buy pays off a loan from Wells Fargo
  4. Dylan’s T.V. arrives that he orders.