DSST Principles of Financial Accounting

DSST Principles of Financial Accounting Time 120 Minutes 76 Questions For each question below, choose the best answer from the choices given. 1. Which of the following are periodic reports created to convey a business s financial information? Accounting system Exposure drafts Discussion memoranda Financial statements 2. Because it communicates financial information, accounting is known as the language of business governmental standard businessperson s tool manager s best friend 3. One of the main tasks performed by a certified public accountant (CPA) is preparing and maintaining governmental financial records establishing a company s accounting policies preparing internal accounting reports for management auditing and providing management advice for companies 4. All of the following are provisions of the Sarbanes-Oxley Act of 2002 EXCEPT rules on consulting services securities regulation principle development auditor rotation 1

5. Which of the following contains an auditor s opinion that the presentation of the information contained in financial statements is accurate and complete? An exposure draft A stockholder s report A discussion memorandum An auditor s report 6. Which of the following is a association whose only members are accounting educators? Securities and Exchange Commission (SEC) American Accounting Association (AAA) American Institute of Certified Public Accountants (AICPA) International Accounting Standards Board (IASB) 7. The limited liability partnership (LLP) Act offers a member of a partnership protection from other partners malfeasance profits creditors responsibilities 8. Which of the following has responsibility and oversight for the accounting issues of publicly owned firms? U.S. Treasury Department Federal Bureau of Investigation (FBI) Securities and Exchanges Commission (SEC) Federal Trade Commission (FTC) 9. Which of the following accounts is an example of a business asset? Rent expense Accounts payable Prepaid insurance Revenue 2

10. In the fundamental accounting equation, the term owner s equity refers to the property of the business owner s financial interest in the business amounts customers owe the business amounts the business must pay at a future date 11. The sale of services for cash would affect the accounts of a business by increasing assets and increasing owner s equity increasing liabilities and increasing assets decreasing owner s equity and increasing assets decreasing assets and decreasing liabilities 12. Christensen Credit Repair has assets of $875,000 and liabilities of $67,300. The amount in the owner s equity account is $938,000 $875,000 $815,000 $807,700 13. A business has $5,600 in liabilities, $8,300 in revenue, $15,600 in cash, and $27,725 in capital. The amount of the other assets of the business totals $8,300 $13,900 $26,025 $27,000 14. Under the accrual method of accounting, the amounts that customers owe to a business at a future date is called revenue accounts receivable accounts payable accounts to be received 3

15. Dani Black opened Dani s designs and invested $65,000 in cash and $2,500 in tools (at fair market value) to start the business. Which of the following is the amount to credit to the capital account? $2,500 $62,500 $65,000 $67,500 16. A business issues a check for $4,500 for 6 months of advertising on the local radio station. The effect of this transaction will be an increase to prepaid advertising and decrease to cash increase to advertising expense and decrease to cash increase to advertising expense and increase to accounts payable increase to prepaid advertising and increase to accounts payable 17. The owner of Castelli Wines, a sole proprietorship, withdraws $5,000 for personal use. Which of the following accounts are affected by this transaction? Owner s expense and cash Capital and cash Drawing and cash Accounts payable and cash 18. A set of steps followed each period is called the accounting cycle. It is used to record financial data and generate reports generate financial reports and report to regulatory bodies provide a paper trail for auditors to follow classify, record, and summarize financial information 19. In an accounting system, merchandise inventory is classified as a(n) asset contra-asset liability expense 4

20. A 10-column accounting worksheet contains all of the following columns EXCEPT trial balance adjusted trial balance cost of goods manufactured income statement 21. Which of the following accounts appear on a post-closing trial balance? Liability, expense, and revenue Owner s capital, drawing, and revenue Expense, drawing, and revenue Asset, liability, and owner s capital 22. Upscale Consulting, a sole proprietorship, has a balance in the fees income account of $2,275,000 at the end of a period. Which of the following is the entry to close this account? Debit fees income, credit cash Debit fees income, credit owner s capital Debit cash, credit fees income Debit owner s capital, credit fees income 23. The purpose of adjusting entries at the end of each period is to update the balance of liability accounts update the balance of revenue accounts adjust the cash account update the balance in asset accounts 24. In performing the adjusting entry for depreciation, the accountant would record which of the following transactions? Dr. depreciation expense; Cr. accumulated depreciation Dr. asset; Cr. accumulated depreciation Dr. accumulated depreciation; Cr. depreciation expense Dr. accumulated depreciation; Cr. asset 5

25. On December 31, the accountant for a company made the following two errors: a) she failed to record $500 in accrued interest from a note payable, and b) she failed to record $750 in accrued interest on a note receivable. The effect on the owner s equity resulting from these errors is owner s equity is overstated by $250 owner s equity is understated by $250 owner s equity is understated by $750 owner s equity is overstated by $500 26. The purpose of an asset deferral account, like unearned subscription income for a publisher, is to inflate the assets of a company denote anticipated cash for services set aside money for bills to be paid in the future recognize when cash is received before it is earned 27. For a liability account on a worksheet, the effect of a debit adjustment is an increase in the account balance in the adjusted trial balance column no change in the account balance in the adjusted trial balance column a decrease in the account balance in the income statement column a decrease in the account balance in the adjusted trial balance section 28. Carly s Catering issued a $12,000, 6-month note at 8 percent on November 1. The adjusting entry on December 31 for the interest is Dr. interest expense $160; Cr. interest payable $160 Dr. interest expense $480; Cr. interest payable $480 Dr. interest receivable $160; Cr. interest income $160 Dr. interest receivable $480; Cr. interest income $480 29. On January 1, Cardenas Construction purchased $5,000 worth of office supplies. An inventory performed on December 31 revealed that $2,950 of supplies remained. The adjusting entry for the supplies would be which of the following? Dr. supplies $2,050; Cr. supplies expense $2,050 Dr. supplies $2,950; Cr. supplies expense $2,950 Dr. supplies expense $2,050; Cr. supplies $2,050 Dr. supplies expense $2,950; Cr. supplies $2,950 6

30. Using the following data for Sylvester s Pet Store, evaluate the ending inventory using the FIFO method. Beginning inventory, March 1: 98 units @ $340 Purchases: June: 110 units @ $350; September: 120 units @ $355; December: 95 units @ $347 Ending Inventory: February 28: 90 units $30,600 $31,230 $31,320 $31,500 31. The ending balance of the merchandise inventory account is determined to be $76,700. The adjusting transaction to record the ending merchandise inventory is Dr. income summary $76,700; Cr. merchandise inventory $76,700 Dr. income summary $76,700; Cr. purchases $76,700 Dr. merchandise inventory $76,700; Cr. income summary $76,700 Dr. merchandise inventory $76,700; Cr. purchases $76,700 32. The replacement cost or market price of an item refers to the amount that a firm must charge its customers for the items basis that must be used for merchandise valuation price that must appear in all trade publications price the firm would pay to buy an item through usual channels 33. The method of valuation for merchandise inventory that is not always accepted internationally or for IFRS standards is FIFO average cost LIFO specific identification 7

34. Kierstan Jorgenson, owner of Bar-L Ranch, uses a cash payments journal to monitor the cash expenditures of her business. She issued a check for $15,000 plus sales tax of $1,200 for the purchase of a new horse. The transaction would be which of the following? Dr. horses $15,000; Cr. sales tax payable $1,200; Cr. cash $16,200 Dr. horses $15,000; Dr. sales tax expense $1,200; Cr. cash $16,200 Dr. horses $15,000; Cr. cash $15,000 Dr. horses $16,200; Cr. cash $16,200 35. Controlling the payment of cash is important to ensure that appropriate payments are issued. Which of the following is an example of a good cash payment control? Making payments in cash whenever possible Allowing any employee to approve bills and invoices Having the person who approves the bill prepare the check to pay the invoice Dividing responsibilities for approving invoices, preparing checks, and mailing payments 36. Meaghan s Muffin Shop had cash sales of $925 plus sales tax of $74 with a cash shortage of $28. The transaction in the cash receipts journal is Dr. cash $925; Cr. cash short and over $28; Cr. sales $897 Dr. cash $971; Dr. cash short and over $28; Cr. sales $925; Cr. sales tax liability $74 Dr. cash $999; Cr. cash short and over $28; Cr. sales $925; Cr. sales tax liability $74 Dr. cash $925; Dr. sales tax expense $74; Cr. cash short and over $28; Cr. sales $971 37. Deb s Designs issued check 9321 to replenish its petty cash fund. Deb s analysis of her administration assistant s payments from the fund indicate the following totals: postage, $44; supplies, $58; miscellaneous expense, $23. Which of the following is the transaction to replenish the petty cash fund? Dr. miscellaneous expense $125; Cr. cash $125 Dr. cash $125; Cr. miscellaneous expense $125 Dr. shipping expense $44; Dr. supplies expense $58; Dr. miscellaneous expense $23; Cr. cash $125 Dr. cash $125; Cr. shipping expense $44; Cr. supplies expense $58; Cr. miscellaneous expense $23 8

38. The allowance for doubtful accounts is a contra-asset account that is linked with the accounts receivable on the balance sheet of a company. Since the allowance for doubtful accounts provides an estimate of the uncollectible accounts it is called a(n) estimation account valuation account deduction loss 39. The GAAP constraint that applies to the use of the allowance method for estimating uncollectible accounts is the realization transparency periodicity of income conservatism 40. Mary McGorray, a credit customer of Hukilau Travel, passes away owing the firm $3,500. Using the direct charge-off method, the transaction to record the write-off is Dr. uncollectible accounts expense $3,500; Cr. accounts receivable-m. McGorray $3,500 Dr. allowance for doubtful accounts $3,500; Cr. accounts receivable-m. McGorray $3,500 Dr. accounts receivable-m. McGorray $3,500; Cr. uncollectible accounts expense $3,500 Dr. uncollectible accounts expense-m. McGorray $3,500; Cr. cash, $3,500 9

41. Using the aging method of estimating accounts receivable losses, Kristina s Party Planners has the following data: Invoice Age Current 31 60 days 61 90 days Over 90 days Amount $9,075 $8,575 $5,425 $2,320 Kristina has estimated that the losses from the accounts receivable will be as follows: current, 1%; 31 60 days, 3%, 61 90 days, 12%, Over 90 days, 35%. The total amount of her accounts that would be estimated as uncollectible is $1,811 $3,047.40 $3,237.86 $4,882.50 42. Cherry s Fruit Stand experienced a loss of its inventory due to a fire on July 15. The July 1 inventory had a cost of $80,000 and a retail value of $115,000. During July, merchandise was purchased for $65,000 and was marked to sell for $100,000. Sales through July 14 were $150,000. Using the retail method, the value of the inventory as of July 14 is $65,000 $54,232.15 $43,837.21 $15,000 10

43. Bella s Berries had a fire on August 20 and used the gross profit method of inventory valuation. The net sales until the fire were $99,800 and cost of goods sold was $62,300. The value of the inventory on August 1 was $75,000 with purchases of $38,200 during August. Which of the following is the inventory cost? $113,200 $99,800 $62,300 $50,900 44. To record a stockholder s subscription to purchase common stock, the common stock subscribed account is used. What type of account is common stock subscribed? Asset Liability Owner s capital Revenue 45. When Danny Mallamace pays his common stock subscription for L&A Industries in full, the transaction will be recorded by L&A Industries as Dr. cash; Cr. subscriptions receivable-common; Dr. common stock subscribed; Cr. common stock Dr. cash; Cr. common stock Dr. cash; Cr. common stock subscribed; Dr. subscriptions receivable-common; Cr. common stock Dr. common stock subscribed; Cr. subscriptions receivable-common 46. The stockholders ledger of a corporation contains all of the following information EXCEPT stockholder name and address stockholder Social Security number dates of stock transactions number of shares for each transaction 47. To write off a customer s account using the allowance method, the transaction is Dr. uncollectible accounts expense; Cr. accounts receivable Dr. allowance for doubtful accounts; Cr. uncollectible account expense Dr. allowance for doubtful accounts; Cr. accounts receivable Dr. accounts receivable; Cr. allowance for doubtful accounts 11

48. The method of writing off uncollectible accounts that is accepted by the Internal Revenue Service (IRS) for tax reporting is the allowance method direct charge-off method aging of accounts receivable method uncollectible accounts method 49. One problem with the direct charge-off method for accounts receivable is that it may understate accounts receivable overstate accounts payable understate accounts payable overstate accounts receivable 50. Using the direct charge-off method, for an account receivable that is written off and then received in the same period as the write-off, the first transaction to record the receipt of the payment is Dr. cash; Cr. accounts receivable Dr. cash; Cr. uncollectible accounts expense Dr. accounts receivable; Cr. uncollectible accounts expense Dr. uncollectible accounts expense; Cr. accounts receivable 51. Barry Wilson, accountant for Voodoo Trucking, uses the units-of-output method to compute the depreciation for the company president s vehicle. The vehicle was purchased for $76,000 and has a salvage value of $10,000. The president expects to keep his vehicle for 100,000 miles. Last year s mileage for the president s vehicle was 18,000 miles. The amount of the annual depreciation for last year for the president s vehicle was $11,880 $13,500 $13,680 $15,480 52. The accounting principle that applies to a company s choice of depreciation method is the transparency principle materiality principle matching principle realization principle 12

53. A patent is an intangible asset that is defined as the exclusive right to produce and/or publish artistic work exclusive right to sell an invention for a period of time right to an exclusive selling agreement with the government use of symbol or name to build customer confidence 54. Marie Smith, owner of Lejeune Printing, purchases a new machine for $150,000. The cash discount for her prompt payment for the machine was $3,000. Transportation costs were $3,200. Installation costs were $850. The capitalized cost of the packing machine is $150,000 $151,050 $154,050 $157,050 55. When an asset is sold for cash for less than the book value, the transaction to record the sale is Dr. cash; Dr. loss on sale of asset; Cr. accumulated depreciation; Cr. asset Dr. cash; Dr. accumulated depreciation; Cr. loss on sale of asset; Cr. asset Dr. asset; Dr. loss on sale of asset; Dr. accumulated depreciation; Cr. cash Dr. cash; Dr. loss on sale of asset; Dr. accumulated depreciation; Cr. asset 56. The transaction to record the payment of a discounted note payable on the maturity date is Dr. notes payable; Cr. cash Dr. cash; Cr. notes payable Dr. notes payable; Cr. interest expense; Cr. cash Dr. notes payable; Dr. interest expense; Cr. cash 57. The maturity value of a $4,200, 6.87 percent, 3-month note payable is (using banker s rule) $4,127.86 $4,128.85 $4,271.15 $4,272.14 13

58. The accounts payable ledger provides information about the individual accounts that a business holds with its creditors and is called a schedule of accounts payable schedule of accounts receivable special journal subsidiary ledger 59. A purchases journal is used to record the purchase of merchandise on account. A transaction involving the return of defective merchandise to the supplier for credit is recorded in the purchases journal cash receipts journal general journal sales journal 60. On July 31, the general ledger of Renaissance Plus, a clothing store, showed a balance of $15,985 in the purchases account, a balance of $879 in the freight-in account, and a balance of $2,260 in the purchase returns and allowances account. The net delivered cost of purchases for July is $16,864 $14,604 $13,725 $12,846 61. The interest on a 9-month, $5,775 note at 8.75% is $381.15 $373.79 $378.98 $376.81 62. A 265-day note payable issued on September 30 is due on (assume a non-leap year) June 21 June 22 June 23 June 24 14

63. On the maturity date, Merrill s Landscaping paid $5,000 plus $350 interest on a note. The transaction to record the payment is Dr. cash $5,350; Cr. notes payable $5,350 Dr. cash $5,000; Dr. interest expense $350; Cr. notes payable $5,350 Dr. notes payable $5,350; Cr. cash $5,350 Dr. notes payable $5,000; Dr. interest expense $350; Cr. cash $5,350 64. Jaymac Industries issues common stock for cash to its officers as follows: Gail Jacobsen, 500 shares; Robert Mangum, 750 shares; Lance Jamieson, 450 shares. The par value of the stock is $10 per share. The transaction to record the issuance of the stock is Dr. common stock $17,000; Cr. cash $17,000 Dr. cash $17,000; Cr. common stock $17,000 Dr. common stock receivable $17,000; Cr. cash $17,000 Dr. cash $17,000; Cr. common stock distributable $17,000 65. BG International has outstanding 75,000 shares of 10%, $90 par value cumulative preferred stock. The board of directors authorizes payment of $750,000 in dividends for this year. The amount paid to preferred stockholders is $750,000 $700,000 $675,000 $650,000 66. The par value of a stock is not reflected on the stock certificate specified in the corporate charter changeable by the board of directors credited as entire proceeds upon sale to the capital stock account 67. The class of stock that gets paid last when dividends are declared is cumulative preferred stock participating preferred stock common stock noncumulative preferred stock 15

68. Merchandise inventory is reported on the balance sheet as a(n) current asset operating expense long-term asset other expense 69. Pastorino Construction had sales for the year totaling $597,550. The sales returns and allowances were $12,325. The cost of goods sold was $355,220. Pastorino Constructions gross profit on sales was $230,005 $242,330 $247,885 $254,665 70. Marzano Industries has common stock that trades at $36.53 per share. Last year, the company declared dividends for common stock of $3,000,000 and had 1,000,000 shares outstanding. The yield on the common stock was 10.2 percent 8.2 percent 7.4 percent 3.7 percent 71. Which of the following is NOT a phase in the analysis of financial statements? Computing differences Computing ratios and percentages Computing net income Interpreting results 72. In vertical analysis of the income statement, each item is expressed as a percentage of revenue net income from operations cost of goods sold net sales 16

73. Which of the following is a measure of a company s liquidity? Asset turnover Acid-test ratio Rate of return on net sales Price-earnings ratio 74. Hood and Dailey Guitars has the following financial data. Cash: $100,000 Accounts Receivable: $35,250 Furniture: $150,000 Merchandise Inventory: $45,765 Accounts Payable: $62,000 Notes Payable: $15,000 The current ratio for Hood and Dailey is 1.61 2.18 2.35 2.92 75. The types of ratios used by financial statement analysts to analyze a single company do NOT include financial strength ratios liquidity ratios industry ratios efficiency ratios 76. Lance s Leisure Outlet wants to measure how effectively it uses its assets in making sales. The ratio that examines asset effectiveness is rate of return on total assets asset turnover inventory turnover accounts receivable turnover 17

ANSWER KEY DSST Principles of Financial Accounting 1. The correct answer is D. Financial statements are periodic reports created to convey financial information about a firm. You can eliminate choice A because the reports are generated through the accounting system. You can eliminate choices B and C because exposure drafts and discussion memoranda are part of the GAAP review process. 2. The correct answer is A. Accounting is frequently called the language of business because it conveys financial information in a standard format that facilitates business communication. You can eliminate choice B because accounting has no specific governmental standard by which financial information is communicated. You can eliminate choices C and D because accounting is a method of communicating information but is not known as a businessperson's tool or a manager's best friend. 3. The correct answer is D. One of the main tasks of a CPA is auditing and providing management advice for companies. You can eliminate choice A because only governmental accountants prepare and maintain governmental financial records. You can eliminate choice B because while CPAs provide management advice, they do not establish company policies. You can eliminate choice C because CPAs do not prepare internal company reports. 4. The correct answer is C. The Sarbanes-Oxley Act of 2002 contains no provisions for the development of any type of principles, accounting or otherwise. You can eliminate choices A, B, and D because rules on consulting services, securities regulation, and auditor rotation are all provisions of the Sarbanes-Oxley Act. 5. The correct answer is D. The auditor's report is a part of a company's financial statement that confirms the accuracy of the representation of the company's financial information in accordance with GAAP. You can eliminate choices A and C because the exposure draft and discussion memorandum are parts of the GAAP development process and do not pertain to a company's financial reports. You can eliminate choice B because the stockholder's report does not contain external validation about the accuracy of a company's financial reporting. 6. The correct answer is B. The American Accounting Association (AAA) is a group with membership requirements excluding those who are not accounting educators. You can eliminate choice A because the Securities and Exchanges Commission (SEC) is a governmental agency. You can eliminate choice C, American Institute of Certified Public Accountants (AICPA), because while some accounting instructors may have CPA credentialing, not all accounting instructors are CPAs. You can eliminate choice D because the International Accounting Standards Board (IASB) is not exclusively composed of accounting educators. 7. The correct answer is A. A limited liability partnership offers partners protection against the malfeasance, or wrongdoing, of the other partners in the partnership. You can eliminate choice B because the limited liability partnership (LLP) offers no protection of any partner's profits since the division of profits are delineated in the partnership agreement. You can eliminate choice C because the partners in a LLP are responsible for all debts of the business. You can eliminate choice D because the LLP Act provides no protection against partner responsibilities. 8. The correct answer is C. The Securities and Exchanges Commission (SEC) oversees the accounting issues of publicly owned businesses because of the Securities and Exchanges Acts of 1933 and 1934. You can eliminate choices A, B, and D because none of these organizations have oversight of publicly held companies. ANSWER KEY - Page 18

ANSWER KEY DSST Principles of Financial Accounting 9. The correct answer is C. Prepaid insurance is an example of a business asset because the business owns the insurance for the duration of the period for which it has been paid in advance. You can eliminate choice A because rent expense is an expense account and falls into the owner's equity category. You can eliminate choice B because accounts payable is a liability account. You can eliminate choice D because revenue is an owner's equity account. 10. The correct answer is B. In the fundamental accounting equation, owner's equity is the owner's financial interest in the business, which is also known as net worth. You can eliminate choice A because the property of the business is known as "assets." You can eliminate choice C because the amounts customers owe the business is known as accounts receivable. You can eliminate choice D because the amount the business must pay at a future date is known as accounts payable. 11. The correct answer is A. The sale of services for cash would involve a transaction in which the cash (an asset) and the revenue (an owner's equity account) would both increase. You can eliminate choice B because the sale of services will not increase the amount the money must pay later. You can eliminate choice C because the sale of services does not involve a decrease to the owner's financial interest in the business. You can eliminate choice D because the sale of services for cash would not decrease assets; furthermore, the sale of services for cash will not affect a liability account. 12. The correct answer is D. Using the fundamental accounting equation and the values given, the following equation must be solved: Assets = Liabilities + Owner's Equity $875,000 = $67,300 + Owner's Equity $807,700 = Owner's Equity You can eliminate choices A, B, and C because none of these choices maintains the equality of the fundamental accounting equation. 13. The correct answer is C. The fundamental accounting equation is used to determine the remainder of the business's assets. Using the equation, $15,600 + Assets = $5,600 + $8,300 + $27,725 The amount that completes the equation is $26,025: $15,600 + Assets = $5,600 + $8,300 + $27,725 = ($5, 600 + $8,300 + $27, 752) $15, 600 = $41, 652 $15, 600 = $26, 052 You can eliminate choices A, B, and D because using those values would not maintain the equality of the equation. 14. The correct answer is B. Accounts receivable is the accounting term for amounts that customers owe ANSWER KEY - Page 19

ANSWER KEY DSST Principles of Financial Accounting businesses at a later date. You can eliminate choice A because revenue is the money earned in the course of doing business, not money to be paid at a future date. You can eliminate choice C because accounts payable is the amounts that a business must pay to creditors in the future. You can eliminate choice D because this is not a financial accounting term. 15. The correct answer is D. Using the principle that property equals financial interest, the cash and the fair market value of any other tools that the owner contributes from personal property are equal to the owner's financial interest in the business. You can eliminate choice A, B, and C because Dani has more than these amounts in property invested in the business. 16. The correct answer is A. The purchase of advertising in advance is known in accounting as prepaid advertising. By issuing a check for the advertising, the amount in the cash account decreases. You can eliminate choice B because the advertising expense account would not be affected until the adjustments are made at the end of the period. You can eliminate choice C because the advertising expense account would not be affected until the adjustments are made at the end of the period and, since the amount was paid in a check, no liability would be incurred. You can eliminate choice D because the amount was paid in a check and no liability would be incurred. 17. The correct answer is C. In financial accounting, withdrawals of funds by a sole proprietor for personal use are termed drawing. Since the owner withdrew the funds, the cash account is also affected. You can eliminate choice A because owner's expense is not a term used in accounting for this purpose. You can eliminate choice B because the capital account is not directly affected by the owner's withdrawal of funds. You can eliminate choice D because the liability accounts are not affected by a withdrawal of funds by the owner. 18. The correct answer is D. The accounting cycle comprises nine steps that a business uses to classify, record, and summarize the financial data of a period in time. You can eliminate choice A because classification of data is an important part of the accounting cycle. You can eliminate choice B because the purpose of the accounting cycle is more than report generation. You can eliminate choice C because the purpose of the accounting cycle is not the provide a paper trail but to facilitate financial analysis for decision making. 19. The correct answer is A. Merchandise inventory is classified in an accounting system as an asset account. You can eliminate choice B because a contra-asset reduces the balance of a linked asset; merchandise inventory does not decrease the balance of any asset. You can eliminate choice C because merchandise inventory is not a liability account. You can eliminate choice D because merchandise inventory is not an expense account; the balance in the account is permanent, but an expense account balance is temporary. 20. The correct answer is C. The 10-column worksheet contains columns for the trial balance, adjusted trial balance, and income statement. The cost of goods manufactured columns are only included on a 12-column worksheet. You can eliminate choices A, B, and D because these columns are present on a 10-column worksheet. 21. The correct answer is D. The post-closing trial balance reports the balances in the permanent accounts. After the period close, the only accounts with balances remaining are asset, liability, and owner's capital ANSWER KEY - Page 20

ANSWER KEY DSST Principles of Financial Accounting accounts. You can eliminate choice A because expense and revenue accounts are temporary accounts in which balances are closed each period. You can eliminate choice B because the drawing and revenue accounts are temporary accounts in which balances are closed each period. You can eliminate choice C because expense, drawing, and revenue are all temporary accounts in which balances are closed each period. 22. The correct answer is B. Fees income is a temporary account in which the balance is closed each period to owner's capital. The proper transaction would be a debit to fees income and credit to owner's capital. You can eliminate choice A because the use of the cash account could result is a double-recognition of income. You can eliminate choice C because this transaction would result is a double recognition of both fees and any cash received. You can eliminate choice D because it is exactly backward, resulting in a reduction of owner's capital and a doubling of the fees income account 23. The correct answer is D. The purpose of adjusting entries is to update the balance in asset accounts to recognize the usage of assets during the period. You can eliminate choice A because liability accounts are not adjusted during the month-end process. You can eliminate choice B because revenue accounts are not adjusted during the month-end process. You can eliminate choice C because the cash account is not adjusted during the adjustments phase. 24. The correct answer is A. The adjusting entry to recognize the depreciation for each period includes a debit to the depreciation expense and a credit to the accumulated depreciation accounts. You can eliminate choice B because the asset account is not affected as part of the depreciation adjustment. You can eliminate choice C because accumulated depreciation is increased by a credit and depreciation expense is increased by a debit. You can eliminate choice D because accumulated depreciation is not increased and the asset account is not affected by this adjustment. 25. The correct answer is B. The accrual of the interest on a note payable and receivable at the end of a reporting period affects the owner's financial interest in the business. By failing to record the interest on a note payable of $500 and the interest on a note receivable of $750, the owner's equity is understated by $250. You can eliminate choice A because the interest on the note receivable is larger than the interest on the note payable. You can eliminate choice C because the effect of the note payable interest is not recognized. You can eliminate choice D because the effect of the note receivable interest is not recognized. 26. The correct answer is D. The purpose of a deferral account like unearned subscriptions income is to recognize the income received before it is earned for the service performed. You can eliminate choice A because asset inflation is not the purpose of a deferral. You can eliminate choice B because deferrals recognize cash received, not anticipated. You can eliminate choice C because the money set aside for future bills is not a deferral. 27. The correct answer is D. When adjustments are applied to a liability account, the debit decreases the credit balance that is normal for a liability account. The decreased balance is reported on the adjusted trial balance column. You can eliminate choice A because a debit will not increase the credit balance of a liability account. You can eliminate choice B because a debit adjustment will reduce the credit balance of a liability account. You can eliminate choice C because a liability account is not reported in the income statement columns of a worksheet. ANSWER KEY - Page 21

ANSWER KEY DSST Principles of Financial Accounting 28. The correct answer is A. The first step in this transaction is to compute the amount of the interest. For this adjustment, the equation would be: I = PRT 2 = $12,000 0.08 12 = $160 For accrued interest, the interest expense is debited and the interest payable is credited for the amount accrued during the period, which is two months in this case. You can eliminate choice B because the full amount of the interest would not be credited because the full amount of the note is not due until May 1. You can eliminate choices C and D because the issuance of the not means that it is a note payable, not a note receivable. 29. The correct answer is C. The adjustment to the supplies account is made to change the asset account balance to reflect the accurate total of what portion of the asset remains on hand at the end of the year, which is $2,050. You can eliminate choices A and B because a debit to supplies would increase the balance; furthermore, choice B has the totals of the inventory on hand, not the amount used. You can eliminate choice D because it contains the totals of the inventory on hand, not the amount used. 30. The correct answer is B. Using the FIFO method of merchandise inventory valuation, the number of units in ending inventory is multiplied by the unit cost from the last purchase: 90 $347 = $31,230 You can eliminate choice A because it is equal to the average of the unit cost multiplied by the ending inventory. You can eliminate choice C because it is equal to the ending inventory multiplied by the March 1 unit cost. You can eliminate choice D because it is equal to the ending inventory multiplied by the June unit cost. 31. The correct answer is C. To record the ending value of merchandise inventory, the adjustment involves a debit to merchandise inventory and a credit to income summary for the amount of the ending inventory. You can eliminate choice A because the debit to income summary and the credit to merchandise inventory removes the beginning balance of the inventory account. You can eliminate choices B and D because the purchases account is not involved in adjusting transactions for merchandise inventory. 32. The correct answer is D. The replacement cost or market price is the price a firm would have to pay to purchase an item through customary channels. You can eliminate choice A because the market price does not pertain to retail pricing. You can eliminate choice B because the replacement cost or market price is not necessarily the basis for inventory valuation. You can eliminate choice C because while the market price may appear in trade publications, this is not mandatory. 33. The correct answer is C. LIFO is not always accepted by countries aside from the United States because it can lead to inaccuracies in reporting of net income and tax liability. You can eliminate choices A, B, and D because each of these four methods are accepted both in the United States and internationally. ANSWER KEY - Page 22

ANSWER KEY DSST Principles of Financial Accounting 34. The correct answer is A. For Kierstan's purchase of horses, the asset account must be debited for the amount of the purchase, the sales tax liability must be credited, and the cash account must be credited for the sale plus the sales tax. You can eliminate choice B because the sales tax expense account would not be used for this transaction. You can eliminate choices C and D because the tax liability is omitted. 35. The correct answer is D. Since cash control is of vital importance, the responsibility of approving invoices, preparing checks, and mailing payments should be divided among employees whenever possible. You can eliminate choice A because payments in cash should be avoided as much as possible. You can eliminate choice B because approval of bills and invoices should be restricted to reliable and experienced employees. You can eliminate choice C because dividing responsibilities such as approving bills and preparing checks for the same prevents cash control issues. 36. The correct answer is B. The cash short and over is debited for a cash shortage. Sales tax on cash sales is always reported as a liability and the sales account is credited for the full amount of the cash sales. You can eliminate choice A because the sales tax is omitted. You can eliminate choices C and D because the cash short and over is credit, which indicates a cash overage. 37. The correct answer is C. When Deb replenishes the petty cash fund, she will debit the expense accounts for each category of expenses from the petty cash analysis sheet; similarly, cash will be credited. You can eliminate choice A because the petty cash expenses would not be combined into a single account. You can eliminate choices B and D because the cash would not be debited during the replenishment of the petty cash fund. 38. The correct answer is B. A valuation account is one that provides an estimation. You can eliminate choices A, C, and D because these are not terms that pertain to estimation accounts. 39. The correct answer is D. The conservatism constraint suggests that if alternative methods are available, the one that yields the lowest net income should be used. You can eliminate choice A because the realization concept pertains to the reporting of revenue in monetary terms. You can eliminate choice B because transparency means that a company's financial information should be clear and accurate. You can eliminate choice C because the periodicity of income principle pertains to the segmentation of income into discrete time periods. 40. The correct answer is A. Using the direct charge-off method, the transaction to record the uncollectible account would involve a debit to the uncollectible accounts expense and a credit to Mary's accounts receivable. You can eliminate choice B because the allowance for doubtful accounts is not used with the direct charge-off method. You can eliminate choice C because the debits and credits are reversed. You can eliminate choice D because the cash account is not affected during this type of write-off. 41. The correct answer is A. To determine the amount of the loss using the aging method of accounts receivable, multiply the amount in each date range by the percent deemed uncollectible and add those totals. For Kristina, the sum is: ($9,075 0.01) + ($8,575 0.03) + ($5,425 0.12) + ($2,320 0.35) = $1,811.00 ANSWER KEY - Page 23

ANSWER KEY DSST Principles of Financial Accounting 42. The correct answer is C. Using the retail method of estimating ending inventory, the cost ratio is 67.44%; therefore, the ending inventory at cost is $65,000 0.6744 = $43,837.21 You can eliminate choices A and D because the purchases and the difference of the beginning inventory and purchases will not yield the correct estimation using the retail method. You can eliminate choice B because the answer is mathematically incorrect. 43. The correct answer is D. Using the gross profit method of estimating ending inventory, the ratio of cost of goods sold to net sales is 62.42%. The ending inventory is: $113,200 $62,300 = $50,900 You can eliminate choice A because $113,200 is the goods available for sale prior to the fire, You can eliminate choice B because $99,800 is the net sales, not the inventory value. You can eliminate choice C because $62,300 is the cost of goods sold, on the ending inventory. 44. The correct answer is C. The common stock subscribed account is an owner's capital account that appears in the stockholders' equity section of the balance sheet. You can eliminate choice A because the common stock subscribed account is part of the stockholders' financial interest in the business, not the property of the business. You can eliminate choice B because the common stock subscribed account does not pertain to amounts of money to be paid at a future date. You can eliminate choice D because the common stock subscribed account does not pertain to money earned in the course of the firm's business. 45. The correct answer is A. When Mallamace pays his subscription for common stock in full, the subscriptions receivable account is credited to reflect full payment; similarly, the common stock subscribed account is debited and the common stock is credited to reflect the issue. You can eliminate choice B because the subscription accounts are not reflected. You can eliminate choice C because the debits and credits for the subscription accounts are reversed. You can eliminate choice D because the cash and common stock accounts are omitted. 46. The correct answer is B. Contact and purchase information is maintained for stockholders. The stockholder's Social Security number is not required as part of the contact information maintained by the company. You can eliminate choices A, C, and D because they are required pieces of information in the stockholders' ledger. 47. The correct answer is C. Using the allowance method, the allowance for doubtful accounts is debited and the customer's account is credited. You can eliminate choices A and B because the uncollectible account expense is not used for account write-offs using the allowance method. You can eliminate choice D because the debits and credits are reversed. 48. The correct answer is B. The direct charge-off method, although not GAAP compliant, is the only method allowed for tax reporting purposes. You can eliminate choice A because the allowance method is not allowed for tax reporting. You can eliminate choice C because the aging of accounts receivable is a method ANSWER KEY - Page 24

ANSWER KEY DSST Principles of Financial Accounting of estimating uncollectible accounts for the allowance method. You can eliminate Choice D because it is not a method by which accountants report bad debts. 49. The correct answer is D. Using the direct charge-off method, accounts deemed uncollectible are not written off until the company recognizes the loss, potentially inflating the accounts receivable. You can eliminate choice A because the direct charge-off method will not underestimate the accounts receivable. You can eliminate choices B and C because accounts payable is not affected by the direct charge-off method. 50. The correct answer is C. The customer's account must be reinstated prior to recording the receipt of the cash. As such, the customer's accounts receivable must be debited and the uncollectible account expense must be reduced by a credit. You can eliminate choices A and B because the cash account is not affected in this first transaction. You can eliminate choice D because the debit and credit are reversed. 51. The correct answer is A. Using the units-of-output method, depreciation is calculated by dividing the cost less salvage value by the expected units for the life of the asset and multiplying that total by the annual units. In this case, the depreciation is $76,000 $10,000 18,000 = $11,880 100, 000 You can eliminate choice B because the depreciable base uses $1,000 as the salvage value. You can eliminate choice C because salvage value is omitted. You can eliminate choice D because the salvage value is added to the purchase price. 52. The correct answer is C. The matching principle states that revenues and expenses should be matched in the same accounting period. The depreciation method used should most closely reflect the usage of the asset during an accounting period. You can eliminate choice A because the transparency principle applies to the clarity of information and notes contained in financial statements. You can eliminate choice B because the materiality constraint applies to the size of a transaction that is recorded. You should eliminate choice D because the realization principle pertains to the exchange of cash for the sale of goods or services. 53. The correct answer is B. A patent, granted by the U.S. Patent Office, grants a person or company the exclusive right to sell an invention for a period of time. You can eliminate choice A because a copyright refers to the rights pertaining to artistic work. You can eliminate choice C because an exclusive selling agreement is a franchise. You can eliminate choice D because such use of a symbol is known as a trademark. 54. The correct answer is B. The capitalized costs of an asset are all costs to acquire, store, and install the asset less any discounts. In Marie's case, the capitalized costs of the asset is $150,000 $3,000 + $3,200 + $850 = $151,050 You can eliminate choice A because the only cost considered is the unit itself. You can eliminate choice C because the cash discount is omitted. You can eliminate choice D because the cash discount is added, not subtracted, from the total. ANSWER KEY - Page 25

ANSWER KEY DSST Principles of Financial Accounting 55. The correct answer is D. When an asset is sold for less than its book value, the asset is credited and accumulated depreciation is debited to close both accounts. The account loss on sale of asset is debited to reflect the sale for lower than the book value. You can eliminate choice A because the accumulated depreciation account would not be credited to close out the account with the sale of the asset. You can eliminate choice B because the loss on sale of asset account would not be credited in this transaction. You can eliminate choice C because the asset would not be debited, and neither would the cash be credited for the asset's sale. 56. The correct answer is A. A discounted note payable is one that the bank or maker withholds the interest in advance from the principal. The entry to reflect payment of the note at maturity involves a debit to notes payable and a credit to cash. You can eliminate choice B because the debits and credits are reversed. You can eliminate choices C and D because the interest is not paid at maturity on a discounted note payable. 57. The correct answer is D. The maturity value equals the sum of the principal and the interest. In this case, the maturity value equals $4,200 + $72.14 = $4,272.14 You can eliminate choices A and B because subtraction was used. You can eliminate choice C because the interest is computed using exact time. 58. The correct answer is D. The accounts payable ledger is called a subsidiary ledger because it is subordinate to the accounts payable account in the general ledger. You can eliminate choice A because the schedule of accounts payable is a report that is generated from the accounts payable ledger. You can eliminate choice B because accounts receivable and accounts payable are different accounts. You can eliminate choice C because a subsidiary ledger is separate from a special journal. 59. The correct answer is C. The purchases journal is only used to record the purchase of goods for resale. Any purchase return or allowance is recorded in the general journal. You can eliminate choice A because the purchases journal is not used to record returns. You can eliminate choice B because the transaction did not involve the receipt of cash. You can eliminate choice D because the sales journal is only used to record sales to customers on credit. 60. The correct answer is B. The net delivered cost of purchases includes the balance in the purchase account plus freight charges less any purchase returns or allowances for the month. In this case, the net delivered cost of purchases is $15,985 + $879 $2,260 = $14,604 You can eliminate choice A because the freight-in is subtracted and the purchase returns and allowances amount is added to the purchases balance. You can eliminate choice C because the freight-in is omitted from the calculation. You can eliminate choice D because the freight-in is subtracted. 61. The correct answer is C. Interest calculations use the equation I = PRT. The time period is calculated for a portion of a year. In this case, the calculation is: ANSWER KEY - Page 26