True False and Multiple Choice Questions

True False and Multiple Choice Questions

Part I: True/False Questions

1.The specific identification method is acceptable only when the actual cost of individual units of merchandise can be determined from the accounting records.


2.An advantage of the average-cost method of accounting for inventory is that the inventory is valued in the balance sheet at current replacement costs.


3.An advantage to the LIFO method of accounting for inventory is that it values the cost of goods sold at current replacement costs.


4.During periods of inflation, the LIFO cost flow assumption will yield a lower inventory value than FIFO.


5.Any business that sells numerous units of identical products may determine its cost of goods sold using a cost flow assumption, rather than the specific identification method.


6.Incidental costs incurred in the purchase of land that are charged to Land Improvements will affect net income at some future time.


7.The term plant assets refers to long-lived assets acquired for use in business operations, rather than for resale to customers.


8.If a piece of equipment is dropped and damaged during installation, the cost of repairing the damage should be added to the cost of the equipment.


9.Natural resources such as oil or minerals are categorized as intangible assets.


10.Sales tax on equipment is not part of the acquisition cost and should not be capitalized.


11.A liability that is known to exist but the precise dollar amount is not known is called a possible liability.


12.Working capital is equal to current assets less current liabilities.


13.Current liabilities are obligations that must be repaid within the shorter of one year or the operating cycle.


14.Accounts payable are often subdivided into the categories of trade accounts payable and notes payable.


15.When money is borrowed by issuing a note payable, the borrower records a liability equal to the maturity value of the note.


Part II: Multiple Choice Questions


A. Consists of all goods owned and held for sale to customers.

B. Is a non-financial asset.

C. Both consists of all goods owned and held for sale to customers and is a non-financial asset.

D. Both consists of all goods owned and held for sale to customers and is a financial asset.

2.Which of the following is not considered an acceptable inventory cost method according to GAAP?

A. First-in, first-out.

B. First-in, last-out.

C. Last-in, first-out.

D. Average cost.

3.When prices are increasing, which inventory method will produce the highest cost of goods sold?



C. Average cost.

D. Cost of goods sold will not change.

4.Kent Company has used the same inventory method for many years. This is an example of which principle?

A. Matching.

B. Realization.

C. Cost.

D. Consistency.

5.In which of these inventory approaches is it important to determine the actual cost of a particular inventory item being sold in order to determine cost of goods sold?



C. Specific identification.

D. Weighted average cost.

6.In a perpetual inventory system, two entries are normally made to record each sales transaction. The purpose of these entries is best described as follows:

A. One entry recognizes the sales revenue and the other recognizes the cost of goods sold.

B. One entry records the purchase of merchandise and the other records the sale.

C. One entry records the cost of goods sold and the other reduces the balance in the Inventory account.

D. One entry updates the subsidiary ledger and the other updates the general ledger.

7.Land is purchased for $256,000. Additional costs include a $15,300 fee to a broker, a survey fee of $2,400, $1,750 to construct a fence, and a legal fee of $8,500. What is the cost of the land?

A. $256,000.

B. $271,300.

C. $283,950.

D. $282,200.

8.Which of the following would not be considered as part of the cost of equipment recently purchased?

A. Sales tax.

B. Transportation charges.

C. Installation and setup charges.

D. The cost to repair damage incurred after dropping the equipment.

7.Armstrong Company recently acquired a new computer system. Which of the following costs associated with the computer should not be debited to the Equipment account?

A. Insurance coverage purchased by Armstrong to cover the computer during shipment from the manufacturer.

B. Wages paid to system programmers hired to prepare the new computer for use.

C. Replacement of several circuit boards damaged during installation.

D. Installation of new electrical power supplies required for the computer.

8.Tomassi Company paid $450,000 to acquire a piece of real estate consisting of land and an office building with a parking lot. In this situation:

A. The purchase price should be apportioned among the Land, Land Improvement, and Building accounts.

B. The entire purchase price should be debited to the Land account only.

C. Land, Land Improvement, and Building accounts should each be credited for the respective appraisal value of each item.

D. Allocation of the entire $450,000 to Land results in an understatement of net income in the current and future accounting periods.

9.Which of the following assets is not subject to depreciation and whose usefulness does not decline over time?

A. Patents.

B. Copyrights.

C. Land.

D. Coal mine.

10.Assets that have been pledged as security for a loan:

A. Are reported as liabilities on the balance sheet.

B. Must be sold when the loan matures.

C. Become the property of the lender until the loan is paid in full.

D. Are disclosed in the notes to the financial statements.

11.All of the following are examples of current liabilities except:

A. Accounts payable.

B. Pledged assets.

C. Unearned revenue.

D. Income taxes payable.

12.The two basic characteristics of estimated liabilities are:

A. Probable and reasonably estimated.

B. Known to exist and amount unable to be determined until a later date.

C. Probable and non-interest bearing.

D. Known to exist and interest bearing.

13.If a business ceases operations and liquidates, which of the following will be paid last?

A. Owners.

B. General creditors.

C. Employees.

D. Creditors who have collateral for their loans.

14.A measure of a company’s liquidity is:

A. Assets divided by liabilities.

B. The current ratio.

C. The dollar amount of liabilities that bear interest.

D. The dollar amount of assets used as collateral for a loan.

15.On October 1, 2015, Master’s Co. borrows $500,000 from its bank for five years at an annual interest rate of 10%. According to the terms of the loan, the
principal amount will not be due for five years. Interest is to be paid monthly on the first day of each month, beginning November 1, 2015. With respect to this borrowing, Master’s December 31, 2015, balance sheet included only a long-term note payable of $500,000. As a result:

A. The December 31, 2015, financial statements are accurate.

B. Liabilities are understated by $12,500 accrued interest payable.

C. Liabilities are understated by $4,167 accrued interest payable.

D. Liabilities are understated by the amount of interest for the five-year term of the note that has not yet been paid.

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