Question 1

The primary accounting standard-setting body in the United States is the:&#10;A) Securities and Exchange Commission.&#10;B) Internal Revenue Service.&#10;C) Financial Accounting Standards Board.&#10;D) corporate board of directors.

Accepted Answer

The Financial Accounting Standards Board (FASB) is the primary accounting standard-setting body in the United States. The Securities and Exchange Commission (SEC) also has an important role in accounting standard-setting and oversight, but it delegates much of this responsibility to the FASB. The Internal Revenue Service (IRS) is responsible for administering the tax code, but it does not set accounting standards. The corporate board of directors is responsible for overseeing management and strategic direction of a company, but it does not set accounting standards.

Question 2

Tawdry Company debited Prepaid Insurance for $900 on May 1, 2012, for a one-year fire insurance policy. If the company prepares monthly financial statements, failure to make an adjusting entry on May 31, for the amount of insurance that has expired would cause:

A) assets to be overstated by $900 and expenses to be understated by $900.
B) expenses to be overstated by $75 and assets to be understated by $75.
C) assets to be overstated by $75 and expenses to be understated by $75.
D) expenses to be overstated by $900 and assets to be understated by $900.

C

Accepted Answer

The insurance policy costs $900 for a year, so the monthly expense is $900/12 = $75. Without adjusting for the expired portion of the insurance, the Prepaid Insurance asset account remains overstated by $75, and the Insurance Expense account is understated by $75 for the month of May.

Question 3

An increase in a revenue:&#10;A) decreases net income.&#10;B) decreases assets.&#10;C) increases liabilities.&#10;D) increases stockholders' equity.

Accepted Answer

An increase in revenue increases the company's earnings, which increases the company's retained earnings, which in turn increases stockholders' equity.

Question 4

The revenue recognition principle dictates that revenue should be recognized in the accounting period in which it is&#10;A) collected.&#10;B) earned.&#10;C) earned and collected.&#10;D) most likely to be collected.

Accepted Answer

The revenue recognition principle states that revenue should be recognized when it is earned, regardless of whether it has been collected or not. Therefore, option B is correct. Option A and D are incorrect because revenue can be recognized before it is collected, and option C is incorrect because revenue should be recognized when it is earned, not just when it is both earned and collected.

Question 5

Which one of the following accounts is not closed at the end of an accounting period?&#10;A) Retained Earnings account&#10;B) Dividends account&#10;C) Service Revenue account&#10;D) Insurance Expense account

Accepted Answer

The Retained Earnings account is not closed at the end of an accounting period. It keeps a running total of all the profits and losses from all accounting periods, and the balance is carried forward to the next accounting period. The other accounts listed (Dividends, Service Revenue, and Insurance Expense) are all temporary accounts that are closed at the end of each accounting period.

Question 6

The purpose of recording depreciation on a productive assets is to:&#10;A) reflect the decline in the fair value of the assets each period.&#10;B) reduce income when the company has an exceptionally profitable year.&#10;C) be in conformity with the revenue recognition principle.&#10;D) allocate the original cost of a productive asset to expense over its useful life.

Accepted Answer

The purpose of recording depreciation on a productive asset is to allocate the original cost of the asset to expense over its useful life. This allows for a more accurate reflection of the asset's decreasing value over time and helps to match expenses with revenues in accordance with accrual accounting principles. Option A is not correct because depreciation does not reflect fair value. Option B is incorrect because depreciation is not used to reduce income during profitable years. Option C is incorrect because the purpose of depreciation is not related to the revenue recognition principle.

Question 7

Posting is the process of:&#10;A) preparing a chart of accounts.&#10;B) adding a column of figures.&#10;C) transferring journal entries to ledger accounts.&#10;D) recording entries in a journal.

Accepted Answer

Posting is the process of transferring journal entries to ledger accounts. This is an essential step in the accounting cycle as it allows for the accurate recording of transactions and the preparation of financial statements.

Question 8

A corporation with total stockholders' equity of $75,000 paid a $12,000 business debt. As a result of this transaction, total stockholders' equity:&#10;A) did not change.&#10;B) increased by $12,000.&#10;C) decreased by $12,000.&#10;D) decreased to $63,000.

Accepted Answer

Paying off a business debt affects the assets and liabilities on the balance sheet but does not directly impact the stockholders' equity. The reduction in liabilities (debt) is offset by an equal reduction in assets (cash), leaving stockholders' equity unchanged.

Question 9

The left side of an account is always:&#10;A) the debit side.&#10;B) the credit side.&#10;C) the balance of that account.&#10;D) carried forward to the next accounting period.

Accepted Answer

The left side of an account is always the debit side, while the right side is the credit side. This is a fundamental concept in accounting known as the double-entry system, where for every debit entry there must be a corresponding credit entry.

Question 10

Gross profit is calculated by&#10;A) subtracting total expenses from total revenues.&#10;B) subtracting cost of goods sold from net sales.&#10;C) subtracting the ending inventory from cost of goods sold.&#10;D) adding cost of goods sold to net sales.

Accepted Answer

Gross profit is the difference between net sales and the cost of goods sold. Therefore, option B is the correct answer as it subtracts the cost of goods sold from the net sales.

Deck 7: Fraud, Internal Control, and Cash