Acct 284: Financial Accounting Name ________________________

Exam #1
100 points UserID ____________@iastate.edu

Circle your answer on the exam and also enter it on the answer sheet using a #2
pencil.

1. On November 1, 2008 a company paid $3,600 for a two-year insurance policy with
coverage beginning on that date. The adjusting entry on December 31, 2008, the end
of the company’s fiscal year, would:
a. increase Prepaid Insurance by $300 and decrease Cash by $300
b. increase Insurance Expense by $300 and decrease Prepaid Insurance by $300
c. decrease Prepaid Insurance by $3,300 and increase Insurance Expense by
$3,300
d. decrease Cash by $300 and increase Insurance Expense by $300

2. Assets are listed on the balance sheet:

a. in order of dollar amount, from lowest to highest
b. in alphabetical order
c. in the order they will be used up or turned into cash
d. in order of the date they were acquired, with the oldest assets listed first.

3. The individual(s) primarily responsible for the information shown in the financial
statements is:
a. The PCAOB
b. The SEC
c. the company’s external auditor.
d. The company’s management.

4. A company’s stock is listed on the NYSE (New York Stock Exchange). The company
is:
a. a privately held company
b. a public company
c. a sole proprietorship
d. probably not a good investment

5. The qualitative characteristic of accounting information that allows us to assess the

financial performance of two companies in the same line of business is:
a. consistency
b. comparability
c. corporate espionage
d. common sense

6. Adjusting entries are recorded in order to:

a. increase net income for the reporting period
b. change the financial statements from the accrual basis to the cash basis of
accounting
c. bring account balances up to date so the financial statements more accurately
reflect what happened that accounting period
d. give accountants work to keep them busy
7. After financial statements are prepared, temporary accounts are closed by setting the
account balances back to $0. Which one of the following accounts is NOT a
temporary account?
a. Income Tax Expense
b. Sales Revenue
c. Dividends
d. Notes Payable

8. On December 31, 2008, an office cleaning service cleaned three offices for its clients.
Invoices totaling $250 were sent to the clients on January 3, 2009 with payment due
by January 15. Payments of $200 were received on January 10 and the remaining
$50 was received on January 15. The cleaning service should record revenue of:
a. $250 on December 31, 2008
b. $250 on January 3, 2009
c. $200 on January 10, 2009, and $50 on January 15, 2009
d. $250 on January 31, 2009

9. A company paid $60,000 for a parcel of land to use in its business on July 31, 2000.
On July 31, 2009 the land was appraised by a realtor at $95,000 and a buy has offered
$75,000 to purchase the land. On its July 31, 2009 balance sheet the company
should include this land at which amount?
a. $60,000
b. $75,000
c. $95,000
d. Somewhere between $75,000 and $95,000

10. On a classified balance sheet, which one of the following items is NOT a current
asset?
a. Office Supplies
b. Inventory
c. Equipment
d. Short-Term Investments

11. The primary objective of financial reporting is to:

a. Provide useful information to the Internal Revenue Service (IRS) about a
company’s taxable income
b. provide useful information to individuals outside the company to help them
make decisions about a company and assess future cash flows
c. provide useful information to a company’s managers to run the company on a
day to day basis.
d. provide useful information to a company’s competitors so one company cannot
dominate a market
Use the following information to answer the next two questions:

Assets, 12-31-09 $1,200,000

Liabilities, 12-31-09 $400,000
Contributed Capital, 12-31-09 $300,000
Dividends for 2009 $50,000
Operating Expenses in 2009 $140,000

12. How much was ending Retained Earnings on December 31, 2009?
a. $800,000
b. $500,000
c. $450,000
d. $310,000

13. If beginning Retained Earnings on January 1, 2009 were $400,000, how much was
Sales Revenue for 2009?
a. $190,000
b. $240,000
c. $290,000
d. $310,000

14. Of the following four items, which one should NOT be shown in the operating section
of the statement of cash flows?
a. receipt of cash from sales to customers
b. cash paid to purchase inventory
c. cash paid to purchase new company delivery trucks
d. cash paid to employees for salaries and wages

15. On February 12 a company recorded a transaction with a debit to Accounts

Receivable and a credit to Sales Revenue. Which one of the following describes this
transaction?
a. The company sold goods to a customer and received cash in return.
b. The company sold goods to a customer on account.
c. The company received payment from a customer for a past sale.
d. The customer returned goods previously purchased from the company.

16. Use the information in the following table to determine the balance in Retained
Earnings on December 31, 2008. (Hint: prepare an unadjusted trial balance).
Account Balances on December 31, 2008
Cash $430,000 Contributed Capital $100,000
Inventory $90,000 Retained Earnings ?
Prepaid Insurance $5,000 Service Revenue $900,000
Equipment $155,000 Salaries Expense $240,000
Accounts Payable $35,000 Income Tax Expense $235,000

a. $425,000
b. $235,000
c. $190,000
d. $120,000
17. Recording an adjusting entry for office supplies used up during the month is an
example of:
a. a deferred revenue
b. a deferred expense
c. an accrued revenue
d. an accrued expense

18. Accumulated Depreciation is best described as:

a. An expense account.
b. A current asset account
c. A contra-asset account
d. A stockholders’ equity account

19. When we are uncertain about the value of an asset or liability, conservatism tells us
that we should:
a. Never overstate an asset or understate a liability.
b. Never understate an asset or overstate a liability.
c. Use the value that will result in the highest net income.
d. Use the value that will result in the highest market price for the company’s
stock.

20. A debit entry will cause the balance in an account to increase, except for:
a. Retained Earnings
b. Cash
c. Rent Expense
d. Dividends

21. A company purchased new equipment for $75,000, paying $65,000 in cash and putting
the rest on account. How does this transaction affect the accounting equation?
a. Assets increase $75,000, liabilities increase $10,000, and stockholders’ equity
increases by $65,000.
b. Assets increase $10,000 and liabilities increase $10,000.
c. Assets decrease $65,000 and liabilities increase $10,000.
d. Liabilities increase $10,000 and stockholders’ equity decreases $10,000.

22. On January 1, 2009 the balance in Accounts Receivable was $80,000. During
January debits totaling $120,000 were recorded in the account. If the balance in
Accounts Receivable on January 31, 2009 was $102,000, how much were the total
credits for the month of January? (Hint: use a T account)
a. $98,000
b. $22,000
c. $78,000
d. $142,000
23. On February 12, 2009, Investor A sold his/her 1,000 shares of a company’s stock to
Investor B for $25 per share. On the company’s books this will:
a. increase Cash by $25,000 and increase Contributed Capital by $25,000
b. increase Cash by $25,000 and increase Retained Earnings by $25,000
c. decrease Cash by $25,000 and decrease Contributed Capital by $25,000
d. the company’s books will not be affected.

24. A company appropriately uses the accrual basis of accounting. For 2008 the company
reported $500,000 of net income. This means that:
a. The company’s cash increased by $500,000 during 2008.
b. The company’s revenue was $500,000 more than its expenses for 2008.
c. The company’s expenses were $500,000 more than its revenue in 2008.
d. The company paid $500,000 in dividends to its stockholders in 2008.

25. Recording expenses in the same accounting period as the related revenues are
recorded is required by which accounting principle?
a. internal controls
b. matching
c. monetary unit
d. time period

26. In September, 2008, a magazine publishing company received $24,000 cash from
subscribers to a new magazine. Each subscription is for 12 issues of the magazine to
be mailed to subscribers each month beginning in October, 2008. On December 31,
2008, what is the correct balance in the Unearned Revenue account?
a. $24,000
b. $18,000
c. $6,000
d. $0

27. The Securities and Exchange Commission (SEC) is a federal agency that:
a. currently writes the accounting rules in the U.S.
b. was created by the Sarbanes-Oxley Act of 2002.
c. Has the power to determine the accounting rules in the U.S.
d. Must approve the economic stimulus package before it is signed by President
Obama.

28. Which one of the following is NOT an advantage of organizing a business as a

corporation?
a. double taxation
b. limited liability of stockholders
c. the ability to raise large amounts of capital
d. ease of transferring ownership
 29. In 2008 a company reported $333,000 of net income and paid dividends of $25,000. If
the balance of Retained Earnings on December 31, 2008 was $510,000, how much
was Retained Earnings at the beginning of 2008?
a. $177,000
b. $152,000
c. $202,000
d. $485,000

30. If we forget to make an adjusting entry to record accrued salaries and wages payable,
a. assets will be overstated and stockholders’ equity will be overstated.
b. Liabilities will be understated and stockholders’ equity will be understated.
c. Expenses will be understated and liabilities will be understated.
d. Net income will be understated and assets will be understated

31. Which of the following statements is true about adjusting entries?

a. They are prepared at the end of the accounting period.
b. They should never involve the Cash account.
c. They will always affect both the balance sheet and the income statement.
d. All of the above are true.

32. On December 1, 2008 a company borrowed $100,000 from the bank at 5%. The
adjusting entry on December 31, 2008 will:
a. increase interest expense and interest payable.
b. Increase interest expense and decrease cash.
c. Decrease cash and increase interest payable.
d. Decrease interest payable and increase interest expense.

33. On February 12 a business sold a gift card to a customer shopping for a Valentine’s
Day gift. The business should record revenue:
a. On Feb. 12 when the gift card is sold and cash is received.
b. On March 3 when the gift card is used.
c. 50% in February and 50% in March.
d. None of the above.

THE END!!!

Be sure your have entered your name, student ID number, and an answer
for each question on the answer sheet before handing in your exam.