Question 1

For February, Jim's Jeans recognized $40,000 in revenue, with a selling commission to its marketing personnel of 5%. The manager of the department is the only employee in this department with a salary, and he makes $48,000 per year. Jim had advertising expenses of $5,000, along with miscellaneous selling expenses of $2,000. What was the total selling/marketing expense for February?
A)$27,000
B)$57,000
C)$13,000
D)$11,000
E)$48,000

Accepted Answer

The total selling expense for February was $13,000, which includes all associated expenses. Revenue is not factored in, except for the calculation of commission. The total selling expense includes all associated expenses with some numbers requiring calculations:
Commission: 40,000 x .05 = 2,000
Salary: 48,000 / 12 = 4,000
Advertising Expense: 5,000
Miscellaneous Expense: $2,000
Total: 13,000
Key Takeaway: Expenses within a category factor in salaries, specific expenses, and commissions. Often, those numbers will need to be calculated from the information given. Read the question carefully. For example, with salaries, if months are referenced, the salaries will often need to be divided to come up with the monthly expense.

Question 2

Which of the following is subtracted from net sales to determine gross profit?
A)Cost of goods sold
B)Expenses
C)Both cost of goods sold and expenses
D)Cost of goods sold, expenses, and taxes
E)Taxes

Accepted Answer

Cost of goods sold is subtracted from net sales to determine gross profit.
Key Takeaway: Gross profit is Net Sales ? COGS. Operating Income is determined by taking the Gross Profit and subtracting Operating Expenses. The net amount of non-operating revenues, gains, non-operating expenses, and losses is combined with Operating Income to arrive at the Net Income (or the Net Loss).
Some common formulas:
· Net Sales ? COGS = Gross Profit
· Gross Profit ? Operating Expenses = Operating Income
· Operating Income + (Non-operating Income + Revenue + Gains) ? (Non-operating Expenses + Non-operating Losses) = Net Income or Net Loss

Question 3

Jim's Jeans decided to shut down their Jimmy Jean Division. Where on the income statement would this closing be addressed?
A)Under extraordinary items at the bottom of the income statement.
B)As a note on the operating income section of the income statement.
C)Under discontinued operations at the bottom of the income statement.
D)As a deduction in the Net Profit section of the income statement.
E)An entry would be on the operating income section of the income statement.

Accepted Answer

The closing of the division would be listed under discontinued operations at the bottom of the Income Statement.
Key Takeaway: Both extraordinary items and discontinued operations are separated out in the income statement and added to a separate, last section of the statement. They are listed and kept separate, with discontinued operations first and extraordinary items coming second.

Question 4

After the closure of the Jimmy Jean Division of Jim's Jeans, the Granny Glam Division was so upset that they decided to go on strike. As a result, Jim's Jeans suffered a loss of $20,000. Where was this noted on the Income Statement?
A)Under extraordinary items, at the bottom of the income statement.
B)Under discontinued operations, at the bottom of the income statement.
C)A note would be added at the bottom of the income statement.
D)It would not be noted on the income statement.
E)A separate line item, in the main portion of the income statement.

Accepted Answer

The loss that resulted from the strike would be a separate line item, in the main portion of the income statement. It would not qualify as an extraordinary item.
Key Takeaway: Extraordinary items are events that are unusual in nature and infrequent in occurrence. If an item is unique and significant but it does not meet the criteria for being both "unusual and infrequent," the item must remain in the main section of the income statement. It can, however, be shown as a separate line item. For example, a strike in a labor force, while unique and significant, is not unusual and infrequent in the business world.

Question 5

Complete the following statement:
________ occur when money is earned; ________ occur when cash is received.
A)Receipts; revenues
B)Revenues; receipts
C)Accounts receivables; receipts
D)Both B & C are correct.
E)None is correct.

Accepted Answer

Revenues occur when money is earned, receipts occur when the cash is received for the revenue.
Key Takeaway: It's important not to confuse receipts and revenues. For the accrual basis, revenues are shown at the top of the income statement in the period they are earned, not when the cash is collected. Thus, revenues occur when money is earned, receipts when cash is received.

Question 6

Larry, who uses the accrual basis of accounting, hired an extra driver to help him make deliveries in December. The extra driver only works from December 1st through the 31st . Larry pays the driver on January 5th, but the expense is shown on the December income statement. Why?
A)Cost benefit analysis
B)Matching principle
C)Cost principle
D)Going concern principle
E)Gross profit margin analysis

Accepted Answer

The matching principle is the reason that the expense should be noted during the month it occurred, rather than when payment was made.
Key Takeaway: The recording of expenses with the related revenues is associated with another basic accounting principle known as the matching principle.

Question 7

If Larry's Lobsters hires an accountant who decides to change their book depreciation method from the double-declining balance method to the straight-line method, how would this change be noted?
A)As a discontinued operation on the income statement.
B)As an extraordinary item on the income statement.
C)As a note on the balance sheet.
D)As a change in accounting principle on the income statement.
E)As an e-mail to Larry's Lobsters employees.

Accepted Answer

The change in the depreciation method from double-declining to the straight-line method would be a change in accounting principle, noted on the income statement.
Key Takeaway: There are three types of accounting changes:
· Changes in accounting principle (ex. Straight-line to accelerated depreciation)
· Changes in accounting estimates (ex. Useful lives of PPE, bad debts %)
· Changes in reporting entity
Each of these is handled differently. For some changes in accounting principle, retroactive changes must be made to allow year-to-year comparisons. GAAP is the source to determine if retroactive changes must be made to the financial statements.

Question 8

GAAP refers to:
A)A store that sells casual clothing
B)General accounting assistance program
C)Generally accepted accounting principles
D)Generally acceptable account procedures
E)The theory that accounting and the general public look at financial statements differently

Accepted Answer

GAAP refers to generally accepted accounting principles and in the United States, GAAP is set by FASB-the Financial Accounting Standards Board.
Key Takeaway: Generally accepted accounting principles are the commonly-followed rules and standards that govern preparation, presentation, and reporting of financials in the accounting process. GAAP not only contains general commonly followed accounting rules, but industry-specific standards, as well.

Question 9

If a company carries a mortgage that has a variable interest rate, which of the following financial statements will be affected if the interest rate rises?
A)The balance sheet
B)The income statement
C)The statement of retained earnings
D)The statement of cash flows
E)All of the above

Accepted Answer

All of the financial statements-the balance sheet, the income statement, the statement of retained earnings, and the statement of cash flows-will be affected by the rising interest rate in a variable interest rate, as it will increase the interest expense.
Key Takeaway: When the interest rate rises, the company's interest expense will rise, so its net income on the income statement will fall. A decrease in net income leads to a decrease in retained earnings on the statement of retained earnings and on the balance sheet. The company pays off the added interest with cash, which is an asset, so assets on the balance sheet fall. Finally, the increase in cash interest payments is also reflected on the statement of cash flows, producing a decline in net cash provided by operating activities.

Question 10

A marketing expense and an overhead expense are both part of the:
A)Direct expenses
B)Operating expenses
C)Indirect expenses
D)Total expenses
E)General expenses

Accepted Answer

The marketing expense (a direct or selling expense) and an overhead expense (an indirect expense) are both part of the total expenses for the company.
Key Takeaway: Total expenses for a business include both direct and indirect expenses. Different verbiage can be used, such as selling expenses for direct expenses, and overhead costs for indirect expenses.

Question 11

Larry's Lobsters sells a truck that is no longer used in the business and the amount they receive for the truck is more than the amount carried in the accounting books. What is reported on the income statement?
A)An expense
B)Revenue
C)Profit
D)Loss
E)A gain

Accepted Answer

A gain will be reported on the income statement if the truck sells for a higher value than shown in the accounting books.
Key Takeaway: Since the sale of the truck is outside the main activity of the business and the amount received was more than what was shown on the books, it is reported as a gain, which is shown on the income statement.

Question 12

If Larry's Lobsters saw net sales of $100,000 and they had goods available for sale of $80,000, with an ending inventory of $40,000, what is the gross profit margin of Larry's Lobsters?
A)There is not enough information supplied.
B)40%
C)50%
D)60%
E)70%

Accepted Answer

The company would have a gross profit margin of 60%.
COGS = Goods Available for Sale ? Ending Inventory (COGS = 80,000 ? 40,000)
Gross Profits = Net Sales ? COGS (Gross Profit = 100,000 ? 40,000)
Gross Profit Margin = Gross Profit / Net Sales (Gross Profit Margin = 60,000 / 100,000) = 60%
Key Takeaway: Usually, word problems will take more than one calculation. Take the last piece of information that is requested, determine which formula or method to use, and work backwards using the information available.
Gross Profit Margin = Gross Profit / Net Sales (Gross Profit Margin = Gross Profit / 100,000)
= 60%
Gross Profits = Net Sales ? COGS (Gross Profit = 100,000 ? COGS)
COGS = Goods Available for Sale ? Ending Inventory (COGS = 80,000 ? 40,000)

Question 13

Expenses cannot be estimated on income statements.

Accepted Answer

False. Expenses can be estimated on income statements.
Key Takeaway: Expenses can be estimated-and often must be-and these estimates appear on income statements. The reason an expense would be estimated is the matching principle, in which an expense should occur in the same month as the revenue. So a utility bill can be estimated at month end as a utility payable if the bill has not yet been received.

Question 14

On January 1, Larry's Lobsters, which uses the accrual basis of accounting, borrowed $100,000 to purchase a new boat. The interest rate is 10%. Larry's Lobsters pays interest on a quarterly basis, with the first payment due on April 1. What will be the interest expense on the January income statement?
A)$833.33
B)$1,000
C)$10,000
D)$2,500
E)$4,000

Accepted Answer

The interest expense on the income statement for the month of January is $833.33.
100,000 x 10% = $10,000 annually in interest
$10,000 / 12 = $833.33 per month
Key Takeaway: In the accrual basis of accounting, expenses are reported during the month they are recognized. Each month the business will recognize 1/12 of the interest expense in this example. Other annual expenses will also be divided by 12 to reach a monthly cost.

Question 15

Jim's Jeans is located in Florida and hopes to tap into the spending of the state's retired population. Jim's Jeans pays a tax rate of 35% and their income before taxes and extraordinary items was $400,000. If Jim's Jeans suffered a tax-deductible extraordinary loss of $100,000, what is their net income?
A)$185,000
B)$105,000
C)$260,000
D)$300,000
E)$195,000

Accepted Answer

The Net Income would be $195,000, which is their operating income ? the loss x (1 ? tax rate %).
Key Takeaway: The tax deductible extraordinary loss reduced the taxable income, so the net income was found to be:
Operating Income 400,000
Tax-Deductible Loss 100,000
Taxable Income 300,000
300,000 x (1 ? .35) = $195,000

Question 16

Earnings per share is always shown on the income statement, except __________
A)when the company is publicly traded.
B)when the company issues stock.
C)when the shareholders vote to have it not shown.
D)when the accountant elects not to do so.
E)when the company is privately owned.

Accepted Answer

When a company is privately owned, there is no publicly traded stock, thus there will not be an earnings per share section on the income statement.
Key Takeaway: Earning per share is required on income statements for publicly traded corporations, as it is one of the best indicators of the company's profitability.

Question 17

Petey's Printing discards a copier that it purchased for $100,000. If the machine's accumulated depreciation is $99,000, what would the journal entry be to record the disposal?
A)Debit Accumulated Depreciation of Copier, $99,000; credit Copier, $100,000; credit Loss on Disposal of Copier, $1,000.
B)Debit Accumulated Depreciation of Copier, $99,000; credit Copier, $100,000; debit Loss on Disposal of Copier, $1,000.
C)Credit Accumulated Depreciation of Copier, $99,000; debit Copier, $100,000; debit Loss on Disposal of Copier, $1,000.
D)Debit Accumulated Depreciation of Copier, $99,000; debit Copier, $100,000; credit Loss on Disposal of Copier, $1,000.
E)Credit Accumulated Depreciation of Copier, $99,000; credit Copier, $100,000; debit Loss on Disposal of Copier, $1,000.

Accepted Answer

The following entries would be made to record the copier being destroyed:
Debit Accumulated Depreciation of Copier, $99,000
Credit Copier, $100,000;
Debit Loss on Disposal of Copier, $1,000.
Key Takeaway: When in doubt, use T-accounts to illustrate the transaction. This will eliminate answers that are not possible, due to the total of the debits not equaling the total of the credit entries.

Question 18

If Petey's Printing is providing printing services on account, how is his balance sheet affected?
A)Assets decrease; owner's equity decreases
B)Assets increase; owner's equity increases
C)Liabilities increase; owner's equity decreases
D)Assets increase; owner's equity decreases
E)Liabilities decrease; assets increase

Accepted Answer

Providing services on account will increase an asset (the A/R account) and increase the owner's equity account.
Key Takeaway: The basic accounting equation: Assets = Liabilities + Owner's Equity comes in handy for balance sheet questions regarding increases and decreases. Since the services rendered will increase revenue, which is an increase to owner's equity, there should be a corresponding increase to an asset. In this case, since the transaction was on account, it would be the accounts receivable.

Question 19

If Larry was using a perpetual inventory system, how would he record the purchase of $20,000 of inventory on account?
A)A credit to sales
B)A debit to sales
C)A debit to merchandise inventory
D)A credit to merchandise inventory
E)A credit to purchases on account

Accepted Answer

The purchase of inventory on account would be recorded as a debit to merchandise inventory.
Key Takeaway: With a perpetual inventory system, the inventory account is updated after every purchase or sale and quantities are updated continuously. A purchase would be an addition to the merchandise inventory and this account is increased with a debit entry.

Question 20

Which of the following is considered a contra account?
A)Ken Tyler, Capital
B)Cash
C)Wages payable
D)Wage expense
E)Accumulated depreciation

Accepted Answer

Accumulated depreciation is the only example provided that can be considered a contra account.
Key Takeaway: A contra account is an account that is used to offset another account, in this case, an asset that is being depreciated. It carries a credit balance.

Quiz 1: Accounting

Which of the following is subtracted from net sales to determine gross profit?

Jim's Jeans decided to shut down their Jimmy Jean Division. Where on the income statement would this closing be addressed?

After the closure of the Jimmy Jean Division of Jim's Jeans, the Granny Glam Division was so upset that they decided to go on strike. As a result, Jim's Jeans suffered a loss of $20,000. Where was this noted on the Income Statement?

Complete the following statement: occur when money is earned; occur when cash is received.

Larry, who uses the accrual basis of accounting, hired an extra driver to help him make deliveries in December. The extra driver only works from December 1st through the 31st . Larry pays the driver on January 5th, but the expense is shown on the December income statement. Why?

If Larry's Lobsters hires an accountant who decides to change their book depreciation method from the double-declining balance method to the straight-line method, how would this change be noted?

GAAP refers to:

If a company carries a mortgage that has a variable interest rate, which of the following financial statements will be affected if the interest rate rises?

A marketing expense and an overhead expense are both part of the:

Larry's Lobsters sells a truck that is no longer used in the business and the amount they receive for the truck is more than the amount carried in the accounting books. What is reported on the income statement?

If Larry's Lobsters saw net sales of $100,000 and they had goods available for sale of $80,000, with an ending inventory of $40,000, what is the gross profit margin of Larry's Lobsters?

Expenses cannot be estimated on income statements.

Earnings per share is always shown on the income statement, except __________

Petey's Printing discards a copier that it purchased for $100,000. If the machine's accumulated depreciation is $99,000, what would the journal entry be to record the disposal?

If Petey's Printing is providing printing services on account, how is his balance sheet affected?

If Larry was using a perpetual inventory system, how would he record the purchase of $20,000 of inventory on account?

Which of the following is considered a contra account?

Quiz 1: Accounting

Which of the following is subtracted from net sales to determine gross profit?

Jim's Jeans decided to shut down their Jimmy Jean Division. Where on the income statement would this closing be addressed?

After the closure of the Jimmy Jean Division of Jim's Jeans, the Granny Glam Division was so upset that they decided to go on strike. As a result, Jim's Jeans suffered a loss of $20,000. Where was this noted on the Income Statement?

Complete the following statement: ________ occur when money is earned; ________ occur when cash is received.

Larry, who uses the accrual basis of accounting, hired an extra driver to help him make deliveries in December. The extra driver only works from December 1st through the 31st . Larry pays the driver on January 5th, but the expense is shown on the December income statement. Why?

If Larry's Lobsters hires an accountant who decides to change their book depreciation method from the double-declining balance method to the straight-line method, how would this change be noted?

GAAP refers to:

If a company carries a mortgage that has a variable interest rate, which of the following financial statements will be affected if the interest rate rises?

A marketing expense and an overhead expense are both part of the:

Larry's Lobsters sells a truck that is no longer used in the business and the amount they receive for the truck is more than the amount carried in the accounting books. What is reported on the income statement?

If Larry's Lobsters saw net sales of $100,000 and they had goods available for sale of $80,000, with an ending inventory of $40,000, what is the gross profit margin of Larry's Lobsters?

Expenses cannot be estimated on income statements.

Earnings per share is always shown on the income statement, except __________

Petey's Printing discards a copier that it purchased for $100,000. If the machine's accumulated depreciation is $99,000, what would the journal entry be to record the disposal?

If Petey's Printing is providing printing services on account, how is his balance sheet affected?

If Larry was using a perpetual inventory system, how would he record the purchase of $20,000 of inventory on account?

Which of the following is considered a contra account?

Complete the following statement: occur when money is earned; occur when cash is received.