MULTIPLE CHOICE QUESTIONS

2-1 Chapter 2 The Financial Statements

MULTIPLE CHOICE QUESTIONS

1. Current assets are:

• all assets except inventory.
• all assets that provide benefits extending beyond one year.
• cash, accounts receivable, and buildings.
• all assets that are expected to be converted to cash in the near future.

Ans: D KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

2. Intangible assets are:

• goodwill, patents, copyrights, and trademarks.
• property, plant, and equipment.
• all assets except current assets.
• those assets that an owner can purchase with cash only.

Ans: A KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

3. Long-term investments can include all of the following except:

• notes receivable maturing in nine months.
• equity securities of another company to be held for more than a year.
• ten-year debt securities of another company.
• land to be held beyond one year.

Ans: A KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Which one of the following is an asset?
• A patent of a company’s secret formula for reverse osmosis.
• Retained earnings.
• Notes payable.
• Accounts payable.

Ans: A KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Financial Accounting in an Economic Context 9th Edition Pratt Test Bank Visit TestBankDeal.com to get complete for all chapters

2-2 Test Bank – Chapter 2 – The Financial Statements

• Which one of the following groups of accounts contains only assets?
• Equipment, patents, accounts receivable.
• Accounts receivable, building, retained earnings.
• Accounts payable, notes payable, contributed capital.
• Retained earnings, goodwill, and accounts payable.

Ans: A KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Which one of the following groups of accounts contains only assets?
• Contributed capital, retained earnings, revenues.
• Cash, contributed capital, retained earnings.
• Prepaid expenses, land, accounts receivable.
• Building, equipment, depreciation expense.

Ans: C KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Which one of the following is a liability?
• Interest receivable.
• Contributed capital.
• Retained earnings.
• Wages payable.

Ans: D KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Which one of the following groups of accounts contains only current assets?
• Inventory, accounts receivable, equipment.
• Cash, equipment, copyrights.
• Cash, accounts receivable, merchandise inventory.
• Patents, copyrights, and trademarks.

Ans: C KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Which one of the following creates a decrease in retained earnings?
• Prepaid assets.
• Equipment.
• Dividends.
• Merchandise inventory not sold.

Ans: C KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Test Bank – Chapter 2 – The Financial Statements 2-3

• At the end of 2014, Campbell Company has total assets and liabilities at $42,000 and

$11,000, respectively. Campbell reported net income for 2015 in the amount of $12,000.How much is shareholders’ equity at the end of 2015?

• $30,000
• $22,000
• $31,000
• $43,000

Ans: D KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Solution: $452,000  $11,000 + $12,000 = $43,000

• Which account is associated with the sale of inventory?
• Cost of goods sold.
• Depreciation.
• Inventory expense.
• Equipment.

Ans: A KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Which account is associated with borrowing money?
• Interest expense.
• Goodwill.
• Cost of goods sold.
• Depreciation.

Ans: A KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Which expense is associated with long-term assets?
• Dividends.
• Depreciation.
• Cost of goods sold.
• Interest.

Ans: B KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Which expense is associated with the use of patents?
• Interest.
• Amortization.
• Cost of goods sold.
• Depreciation.

Ans: B KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

2-4 Test Bank – Chapter 2 – The Financial Statements

• The major accounting difference between interest expenses for creditors and dividends

declared and paid to shareholders is that interest expenses:

• decrease retained earnings and dividends increase retained earnings.
• impact cash flows, while dividends do not.
• are not on the income statement while dividends declared and paid are.
• are on the income statement and dividends declared and paid are not.

Ans: D KP 2 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Desert Company has retained earnings of $11,000, total assets totaling $41,000, and

total liabilities of $20,000. How much is total shareholders’ equity?

• $8,000
• $19,000
• $21,000
• $27,000

Ans: C KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Solution: $41,000  $20,000 = $21,000

• Valley Company has cash, current liabilities, and long-term liabilities of $120,000,

$30,000, and $31,000, respectively. Valley has no current assets other than cash. How much cash can Valley use to acquire equipment so that amount of current assets is double the amount of current liabilities?

• $30,000
• $60,000
• $15,000
• $90,000

Ans: B KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Solution: $120,000  [2 x $30,000] = $60,000

• Favre Company has current assets, shareholders’ equity, current liabilities, and long-

term liabilities of $10,000, $27,000, $4,000, and $8,000, respectively. How much are long-term assets?

• $12,000
• $29,000
• $32,000
• $46,000

Ans: B KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement