PART 1: Theories C.

Statement of Owners Equity

D. Income Statement
1. Another way of stating the accounting equation is
A. Assets + Liabilities = Owner’s Equity 9. An economic unit that engages in buying and selling of goods and services.
B. Assets – Liabilities = Owner’s Equity A. Merchandise C. Business Firm
C. Assets= Owner’s Equity - Liabilities B. Bank D. Government
D. Owner’s Equity +Assets= Liabilities
10. A form of business organized as a separate legal entity from the owners
2. The account appropriately assigned to the transportation cost of A. Partnership C. Sole proprietor
merchandise bought is B. Corporation D. A and B
A. Freight In C. Transportation Expense
B. Freight Out D. None of the Above 11. It provides the ending balance of capital for Statement of financial
position
3. An accounting principle that requires expenses incurred in producing A. Net income
revenues be deducted from revenues generated during the accounting B. Revenue
period. C. Statement of Owners Equity
A. Matching of Cost against Revenue C. Accounting Period D. Cash Balance
B. Cost principle D. Objectivity
12. The business will continue for foreseeable future
4. A contra account of accounts receivable A. Prudence C. Going Concern
A. Allowance for bad debts C. Sales Returns and Allowances B. Materiality D. Accruals
B. Accumulated Depreciation D. Purchase Returns and Allowances
13. The accounting information should have verified supporting documents
5. A withdrawal made by the owner in form of merchandise for personal use such as invoice, vouchers or official receipt.
will require a debit to the drawing account and a credit to A. Consistency C. Materiality
A. Sales C. Merchandise Inventory B. Objectivity D. Matching
B. Purchases D. Purchase Discount
14. ________principle states that no revenue can be earned w/o incurring
6. The system must fit the firm's unique features and culture corresponding expenses.
A. Relevance C. Compatibility A. Matching C. Relevance
B. Flexibility D. Cost- Benefit B. Disclosure D. Uniformity

7. Business that resolve around the idea of a company providing its customers 15. Is the routine activity of recording, classifying, and summarizing business
with intangible goods transactions in systematic manner.
A. Service C. Manufacturing A. Auditing
B. Merchandising D. None of the above B. Financial Accounting
C. Management Accounting
8. Is a progress report shows list of assets, Liabilities and Owner’s Equity. D. Basic Accounting
A. Statement of Cash Flow
B. Statement of Financial Position
16. Is a highly professional characteristic which requires you to be honest, 23. Is a process in which transactions are recorded in the books of original
sincere and trustworthy. entries.
A. Objectivity C. Independent A. Recording C. Summarizing
B. Integrity D. Sincere B. Classifying D. Communicating

17. Type of business operation converts basic inputs such as materials, labor 24. The recording of financial transactions and events manually or
and overhead into finished products which are sold to customers electronically is called which of the following?
A. Service C. Manufacturing A. Reporting C. Auditing
B. Merchandising D. None of the above B. Budgeting D. Bookkeeping

18. Another component of reliability that accountant should be enhanced the 25. An accountant has the responsibility to coordinate the annual budget
financial statements for the user to have an informed judgment; taking the processes of the business corporation she works for. In which of the following
importance of each information. areas of accounting is she most likely to be employed?
A. Neutrality C. Consistency A. Public accounting
B. Prudence D. Completeness B. Managerial accounting
C. Financial accounting
19. Accountants must see to it that Revenue and Expenses should not D. Auditing
overstated nor understated.
A. Business entity C. Neutrality 26. Which of the following statements is true?
B. Prudence D. Good Governance A. Revenue accounts are increased by debit entries
B. An account shows increase and decreases, but does not show the balance
20. Recognize only revenue/ income if it is earned C. Journalizing precedes posting
A. Accrual Assumption D. Debit entries are entries involving the right-hand side on an account
B. Money Measurement
C. Reporting period 27. Which of the following is not an equity account?
D. Business Entity Concept A. Owner's Capital
B. Owner's Withdrawals
21. This concept states that in preparing the financial statements of an entity, C. Revenue
personal and business information are separated D. Unearned Revenue
A. Business Entity C. Cost Principle E. Expenses
B. Going Concern D. Objectivity
28. Purchasing equipment on account will have what effect on the
22. Which form of ownership burdens owners with the greatest risk of loss of components of the accounting equation?
their personal assets? A. Increase in equipment and a decrease in equity
A. Limited partnership (LP) B. Increase in equipment and an increase in equity
B. Sole proprietorship C. Increase in equipment and an increase in liabilities
C. Corporation D. Increase in equipment and a decrease in liabilities
D. Limited liability partnership (LLP)
29. Purchasing equipment for cash...
A. Does not affect total assets
B. Increase assets and decreases Liabilities 36. In a sale or disposition of fixed assets of the business a gain is to
C. Increase both assets and Liabilities recognized when
D. Decrease both assets and Liabilities A. Selling Price is equal to the book value
B. Selling Price is more than book value
30. Which of the following changes describes the receipt of P1,000 as C. Selling Price is less than book value
payment on a customer’s account? D. None of the above
A. Assets and owners' equity increase by P1,000
B. Assets and owners' equity decrease by P1,000 37. An adjusting entry cannot include a debit to a(an)
C. Assets and liabilities increase by P1,000 A. Expense and a credit to asset
D. Assets and liabilities decrease by P1,000 B. Asset and a credit to a revenue
C. Liability and credit to a revenue
31. A revenue account.... D. Asset and credit to a liability
A. Is increased with a credit
B. Ultimately increases retained earnings 38. An adjusting entry would not be included which of the following
C. Is closed at the end of the accounting period accounts?
D. Is an income statement account A. Interest Receivable C. Salaries Payable
E. All of the above are correct B. Unearned Revenue D. Cash

32. Debit means 39. An adjusting entry made to record accrued interest on a note payable due
A. Asset next year consists of a debit to
B. Right side A. Interest Expense and credit to Interest Payable
C. Left side B. Interest Receivable and credit to Interest Income
D. Can be either right or left side C. Interest Expense and credit to Notes Payable
D. Interest Receivable and credit to Accounts Receivable
33. A statement showing the results of operations of a business for a given
period 40. Reversing Entry reserves a(an)
A. Capital Statement C. Trial Balance A. Closing Entry C. Adjusting Entry
B. Balance Sheet D. Income Statement B. Transaction Entry D. Correcting Entry

34. In a cash flow statement, which of the following constitutes an investing 41. This is the temporary account used to clear the books of revenues and
activity? expenses, the balance of which represents the net income or net loss for the
A. Cash investment by the owner period
B. Cash payment of expense A. Income and Expense Summary C. Owner’s Drawing
C. Cash Purchase of equipment B. Owner’s Capital D. Accounting Equation
D. Cash payment of a bank loan
42. A tool used to summarize all information needed to make adjusting and
35. Which of these accounts are presented in the Post-closing Trial Balance? closing entries and facilitates the preparation of the financial statements
A. Nominal Accounts C. Temporary Accounts A. T-account C. Unadjusted Trial Balance
B. Real accounts D. Closed Accounts B. Post-Closing Trial Balance D. Worksheet
43. It is the excess of net sales over cost of sales D. Both the balance sheet and the owner's equity statement.
A. Gross Profit C. Total Goods Available for Sale
B. Net Income D. Net Loss 50. The purchase of supplies for cash will result in a/an
A. Increase in cash and a decrease in capital
44. Income Statement form showing the costs and expenses according to its B. Increase in cash and an increase in supplies
functions C. Increase in supplies and a decrease in cash
A. Single-Step Form C. Functional Form D. Increase in equipment and an increase in capital
B. Multi-Step Form D. Account Form
51. One of the local fast-food outlets hired a first-year accounting student to
45. A basic assumption of accounting that requires activities of an entity be oversee the cash-collection procedures
kept separate from the activities of its owner is referred to as the A. Increase an asset, increase a liability
A. Stand Alone Concept B. Increase an asset, increase owner's equity
B. Monetary Unit Assumption C. No effect on the accounting equation
C. Corporate Form of Ownership. D. Decrease an asset, decrease owner's equity
D. Business Entity Assumption
52. Internal users of accounting information include all of the following
46. If total liabilities increased by 15,000 and owner’s equity increased by except
5,000 during a period of time, then total assets must change by what amount A. Company officers
and direction during that same period? B. Investors.
A. 20,000 decrease C. Marketing managers
B. 20,000 increase D. Production supervisors
C. 25,000 increase
D. 30,000 increase 53. Morreale Beaver Company buys a 12,000 van on credit. The transaction
will affect the
47. Owner's equity is increased by A. Income statement only
A. Revenues B. Balance sheet only
B. Expenses C. Income statement and owner's equity statement only
C. Liabilities D. Income statement, owner's equity statement, and balance sheet.
D. Drawings
54. In a service-type business, revenue is considered earned
48. Net income results when A. At the end of the month
A. Assets > Liabilities. B. At the end of the year
B. Revenues = Expenses C. When the service is performed
C. Revenues > Expenses D. When cash is received
D. Revenues < Expenses
55. The matching principle matches
49. The ending owner's equity amount is shown on A. Expenses with revenues
A. The balance sheet only B. Assets with liabilities
B. The owner's equity statement only C. Customers with businesses
C. Both the income statement and the owner's equity statement D. Creditors with businesses
56. On Dec 1, Dexter Shoe Store paid 8,000 to Ace Realty for 4 month rent B. Gross receipts
beginning Dec 1. Prepaid Rent was debited for the full amount. If financial C. Gross profit
statements are prepared on Dec 31 31, the adjusting entry to be made by D. Net income
Dexter Shoe Store is
A. Debit Rent Expense, 8,000; Credit Prepaid Rent, 2,000 62. A perpetual inventory system would likely be used by a(n)
B. Debit Prepaid Rent, 2,000; Credit Rent Expense, 2,000 A. Automobile dealership
C. Debit Rent Expense, 8,000; Credit Prepaid Rent, 8,000 B. Hardware store
D. Debit Rent Expense, 2,000; Credit Prepaid Rent, 2,000 C. Convenience store
D. Drugstore
57. Younger Corporation purchased a one-year insurance policy in May 2018
for 48,000. The insurance policy is in effect from May 2018 through April 63. The journal entry to record a return of merchandise purchased on account
2019. If the company neglects to make the proper year-end adjustment for under a periodic inventory system would credit
the expired insurance A. Accounts Payable
A. Net income and assets will be understated by 32,000 B. Purchase Returns and Allowances
B. Net income and assets will be overstated by 16,000. C. Merchandise Inventory
C. Net income and assets will be overstated by 32,000 D. Sales
D. Net income and assets will be understated by 16,000
64. Bryan Company purchased merchandise from Cates Company with freight
58. Sue Smiley, CPA, has billed her clients for services performed. She terms of FOB shipping point. The freight costs should be paid by the
subsequently receives payments from her clients. What entry will Sue make A. Seller
upon receipt of the payments? B. Buyer
A. Debit Unearned Revenue and credit Service Revenue C. Transportation Company
B. Debit Cash and credit Accounts Receivable D. Buyer and the seller
C. Debit Accounts Receivable and credit Service Revenue
D. Debit Cash and credit Service Revenue 65. Flynn Company purchased merchandise inventory with an invoice price of
5,000 and credit terms of 2/10, n/30. What is the net cost of the purchases if
59. In a perpetual inventory system, cost of goods sold is recorded Flynn Company pays within the discount period?
A. On a daily basis A. 5,000
B. With each sale B. 4,900
C. On a monthly basis C. 4,500
D. On an annual basis D. 4,600

60. Which of the following expressions is incorrect?
A. Gross profit – operating expenses = net income
B. Sales – cost of goods sold – operating expenses = net income
C. Net income + operating expenses = gross profit
D. Operating expenses – cost of goods sold = gross profit
66. When goods are returned that relate to a prior cash sale
A. The sales Returns and Allowances account should not be used
B. The cash account will be credited
C. Sales Returns and Allowances will be credited
D. Accounts Receivable will be credited

61. Sales revenue less cost of goods sold is called 67. The respective normal account balances of Sales, Sales Returns and
A. Net profit. Allowances, and Sales Discounts are
A. credit, credit, credit B. Liquidity
B. debit, credit, debit C. Profitability
C. credit, debit, debit D. Solvency
D. credit, debit, credit
74. The difference between the balance of a fixed asset account and the
68. All of the following are contra revenue accounts except related accumulated depreciation account is termed
A. Sales A. Contra asset
B. Sales allowances B. Book value
C. Sales discounts C. Liability
D. Sales returns D. Market value

69. In preparing closing entries for a merchandising company, the Income 75. Which of the following is not an activity listed in the statement of cash
Summary account will be credited for the balance of flows?
A. Sales A. Investing Activities
B. Merchandise inventory B. Funding Activities
C. Sales discounts C. Operating Activities
D. Freight-out D. Financing Activities

70. A post-closing trial balance will show 76. The one characteristic that all entries recorded in a cash receipts journal
A. Zero balances for all accounts have in common is
B. Zero balances for balance sheet accounts A. A credit to the Cash account.
C. Only balance sheet accounts B. That they all represent collections from customers
D. Only income statement accounts C. That they originate from the sales of merchandise
D. A debit to the Cash account
71. Which of the following items is not recorded in a cash disbursements
journal? 78. If merchandise from a cash sale is returned by a customer for a refund,
A. Payments for services purchased on account the sales return is recorded in the
B. Loans received from a bank A. General journal
C. Payments for purchases of goods on account B. Cash receipts journal
D. Cash purchases C. Cash payments journal
D. Sales journal
72. What special journal is used for the transaction "sold merchandise on
account" 79. Debit postings to the individual accounts in an accounts receivable
A. General journal subsidiary ledger generally come from the
B. Sales journal A. Sales journal
C. Cash disbursement journal B. Cash receipts journal
D. Cash receipts journal C. Purchases journal
D. Cash payments journal
73. Working capital is a measure of
A. Consistency 80. If a customer takes a cash discount, an entry is made in the
A. General journal d. expenses.
B. Cash payments journal
C. Sales journal 87. The debit and credit analysis of a transaction normally takes place
D. Cash receipts journal a. before an entry is recorded in a journal.
b. when the entry is posted to the ledger.
81. Which of the following accounts will normally appear in the ledger of a c. when the trial balance is prepared.
merchandising company that uses a perpetual inventory system? d. at some other point in the accounting cycle.
A. Purchases
B. Freight In 88. The accounting equation must remain in balance
C. Cost of Goods Sold a. throughout each step in the accounting cycle.
D. Purchase Discount b. only when journal entries are recorded.
c. only at the time the trial balance is prepared.
82. Gross profit will result if: d. only when formal financial statements are prepared.
A. Operating expenses are less than net income
B. Sales revenues are greater than operating expenses 89. A journal entry to record the sale of inventory on account will include a
C. Sales revenues are greater than cost of goods sold a. debit to inventory.
D. Operating expenses are greater than cost of goods sold b. debit to accounts receivable.
c. debit to sales.
83. Office Equipment is classified in the balance sheet as d. credit to cost of goods sold
A. A current asset
B. Property, plant, and equipment 90. A journal entry to record a payment on account will include a
C. An intangible asset a. debit to accounts receivable.
D. Current liabilities b. credit to accounts receivable.
c. debit to accounts payable.
84. Nominal accounts are also called d. credit to accounts payable.
a. temporary accounts.
b. permanent accounts. 91. A journal entry to record a receipt of rent revenue in advance will include
c. real accounts. a
d. none of these. a. debit to rent revenue.
b. credit to rent revenue.
85. The double-entry accounting system means c. credit to cash.
a. Each transaction is recorded with two journal entries. d. credit to unearned rent.
b. Each item is recorded in a journal entry, then in a general ledger account.
c. The dual effect of each transaction is recorded with a debit and a credit. 92. An adjusting entry should never include
d. More than one of the above. a. a debit to an expense account and a credit to a liability account.
b. a debit to an expense account and a credit to a revenue account.
86. Stockholders' equity is not affected by all c. a debit to a liability account and a credit to revenue account.
a. cash receipts. d. a debit to a revenue account and a credit to a liability account
b. dividends.
c. revenues. 93. Which of the following is an example of an accrued expense?
a. Office supplies purchased at the beginning of the year and debited to an 99. Recording the adjusting entry for depreciation has the same effect as
expense account. recording the adjusting entry for
b. Property taxes incurred during the year, to be paid in the first quarter of a. an unearned revenue.
the subsequent year. b. a prepaid expense.
c. Depreciation expense c. an accrued revenue.
d. Rent earned during the period, to be received at the end of the year d. an accrued expense.

94. Which of the following statements is associated with the accrual basis of
accounting?
a. The timing of cash receipts and disbursements is emphasized.
b. A minimum amount of record keeping is required.
c. This method is used less frequently by businesses than the cash method of
accounting.
d. Revenues are recognized in the period they are earned, regardless of the
time period the cash is received
95. An adjusting entry to record an accrued expense involves a debit to a(an):
a. expense account and a credit to a prepaid account.
b. expense account and a credit to Cash.
c. expense account and a credit to a liability account.
d. liability account and a credit to an expense account.
96. The failure to properly record an adjusting entry to accrue an expense will
result in an:
a. understatement of expenses and an understatement of liabilities.
b. understatement of expenses and an overstatement of liabilities.
c. understatement of expenses and an overstatement of assets.
d. overstatement of expenses and an understatement of assets.
97. Which of the following properly describes a deferral?
a. Cash is received after revenue is earned.
b. Cash is received before revenue is earned.
c. Cash is paid after expense is incurred.
d. Cash is paid in the same time period that an expense is incurred
100. Unearned revenue on the books of one company is likely to be
a. a prepaid expense on the books of the company that made the advance
payment.
b. an unearned revenue on the books of the company that made the advance
payment.
c. an accrued expense on the books of the company that made the advance
payment.
d. an accrued revenue on the books of the company that made the advance
payment.
101. Adjusting entries are necessary to
1. obtain a proper matching of revenue and expense.
2. achieve an accurate statement of assets and equities.
3. adjust assets and liabilities to their fair market value.
a. 1
b. 2
c. 3
d. 1 and 2
102. Why are certain costs of doing business capitalized when incurred and
then depreciated or amortized over subsequent accounting cycles?
a. To reduce the federal income tax liability
b. To aid management in cash-flow analysis
c. To match the costs of production with revenues as earned
d. To adhere to the accounting constraint of conservatism

98. Adjustments are often prepared 103. When an item of expense is paid and recorded in advance, it is normally
a. after the balance sheet date, but dated as of the balance sheet date. called a(n)
b. after the balance sheet date, and dated after the balance sheet date. a. prepaid expense.
c. before the balance sheet date, but dated as of the balance sheet date. b. accrued expense.
d. before the balance sheet date, and dated after the balance sheet date. c. estimated expense.
d. cash expense
104. When an item of revenue is collected and recorded in advance, it is
normally called a(n) ___________ revenue.
a. accrued
b. prepaid
c. unearned
d. cash
105. An accrued expense can best be described as an amount
a. paid and currently matched with earnings.
b. paid and not currently matched with earnings.
c. not paid and not currently matched with earnings.
d. not paid and currently matched with earnings.
106. If, during an accounting period, an expense item has been incurred and
consumed but not yet paid for or recorded, then the end-of-period adjusting
entry would involve
a. a liability account and an asset account.
b. an asset or contra asset account and an expense account.
c. a liability account and an expense account.
d. a receivable account and a revenue account.
107. A prepaid expense can best be described as an amount
a. paid and currently matched with revenues.
b. paid and not currently matched with revenues.
c. not paid and currently matched with revenues.
d. not paid and not currently matched with revenues.
108. An accrued revenue can best be described as an amount
a. collected and currently matched with expenses.
b. collected and not currently matched with expenses.
c. not collected and currently matched with expenses.
d. not collected and not currently matched with expenses.
109. An unearned revenue can best be described as an amount
a. collected and currently matched with expenses.
b. collected and not currently matched with expenses.
c. not collected and currently matched with expenses.
d. not collected and not currently matched with expenses
110. An adjusted trial balance
a. is prepared after the financial statements are completed.
b. proves the equality of the total debit balances and total credit balances of
ledger accounts after all adjustments have been made.
c. is a required financial statement under generally accepted accounting
principles.
d. cannot be used to prepare financial statements
111. Which type of account is always debited during the closing process?
a. Dividends.
b. Expense.
c. Revenue.
d. Retained earnings.
112. Which of the following statements best describes the purpose of closing
entries?
a. To facilitate posting and taking a trial balance.
b. To determine the amount of net income or net loss for the period.
c. To reduce the balances of revenue and expense accounts to zero so that
they may be used to accumulate the revenues and expenses of the next
period.
d. To complete the record of various transactions that were started in a prior
period
113. Under the cash basis of accounting, revenues are recorded
a. when they are earned and realized.
b. when they are earned and realizable.
c. when they are earned.
d. when they are realized.