CHAPTER 4

COMPLETING THE ACCOUNTING CYCLE

Summary of Questions by Learning Objectives and Bloom’s Taxonomy

Item	LO	BT	Item	LO	BT	Item	LO	BT	Item	LO	BT	Item	LO	BT
True-False Statements
1.	1	K	9.	2	K	17.	4	K	25.	6	C	sg33.	2	K
2.	1	K	10.	2	K	18.	4	C	26.	6	K	sg34.	3	K
3.	1	C	11.	2	K	19.	5	C	27.	6	K	sg35.	6	C
4.	1	C	12.	2	K	20.	5	K	28.	6	K	sg36.	6	K
5.	1	K	13.	2	K	21.	5	C	29.	6	K	sg37.	6	K
6.	1	K	14.	2	K	22.	6	K	a30.	7	K
7.	1	C	15.	3	C	23.	6	C	sg31.	1	K
8.	2	K	16.	3	K	24.	6	C	sg32.	2	K
Multiple Choice Questions
38.	1	K	66.	2	K	94.	3	C	122.	6	AN	150.	6	AP
39.	1	K	67.	2	K	95.	3	C	123.	6	AN	151.	6	AP
40.	1	K	68.	2	C	96.	3	C	124.	6	K	a152.	7	K
41.	1	C	69.	2	K	97.	4	K	125.	6	K	a153.	7	K
42.	1	C	70.	2	K	98.	4	K	126.	6	C	sg154.	1	C
43.	1	K	71.	2	C	99.	4	K	127.	6	K	sg155.	2	K
44.	1	C	72.	2	K	100.	4	K	128.	6	K	sg156.	2	K
45.	1	K	73.	2	K	101.	4	K	129.	6	C	sg157.	3	K
46.	1	K	74.	2	C	102.	4	K	130.	6	C	st158.	4	K
47.	1	K	75.	2	C	103.	4	K	131.	6	K	sg159.	4	K
48.	1	K	76.	2	C	104.	4	K	132.	6	K	st160.	5	K
49.	1	K	77.	2	C	105.	4	K	133.	6	K	sg161.	5	AN
50.	1	K	78.	2	C	106.	5	K	134.	6	K	st162.	6	K
51.	1	C	79.	2	AN	107.	5	AN	135.	6	K	sg163.	6	K
52.	1	K	80.	2	C	108.	5	K	136.	6	K	st,a164.	7	K
53.	1	C	81.	2	C	109.	5	C	137.	6	K	165.	8	K
54.	1	AP	82.	2	C	110.	5	K	138.	6	C	166.	8	K
55.	1	C	83.	2	C	111.	5	AN	139.	1	AN	167.	8	K
56.	2	K	84.	2	AN	112.	5	AN	140.	6	AN	168.	8	K
57.	2	K	85.	2	C	113.	5	AN	141.	6	AN	169.	8	K
58.	2	K	86.	2	C	114.	5	AN	142.	6	AN	170.	8	K
59.	2	K	87.	3	K	115.	5	AN	143.	6	AN	171.	8	K
60.	2	K	88.	3	C	116.	6	AN	144.	6	AN	172.	8	K
61.	2	K	89.	3	K	117.	6	AN	145.	6	AN	173.	8	K
62.	2	K	90.	3	K	118.	6	AN	146.	6	K	174.	8	K
63.	2	K	91.	3	K	119.	6	AN	147.	6	K	175.	8	K
64.	2	K	92.	3	K	120.	6	AN	148.	6	K
65.	2	K	93.	3	K	121.	6	AN	149.	6	K

sg This question also appears in the Study Guide.

st This question also appears in a self-test at the student companion website.

a This question covers a topic in an appendix to the chapter.

Summary of Questions by Learning Objectives and Bloom’s Taxonomy

Brief Exercises
176.	2	AN	179.	2	K	182.	5	AN	185.	6	AP
177.	2	AN	180.	3	K	183.	6	AN	186.	6	K
178.	2	AN	181.	5	AN	184.	6	AP	a187.	7	AP
Exercises
188.	1	C	194.	1,6	AP	200.	2	AP	206.	5	AN	212.	6	AP
189.	1	C	194.	2	AN	201.	3	C	207.	5	AN	a213.	7	AN
190.	1	AN	196.	2	AP	202.	3	AN	208.	5	AN	a214.	7	AN
191.	1	AN	197.	2	AP	203.	4	C	209.	6	AP	a215.	7	AN
192.	1	AN	198.	2	AP	204.	5	AN	210.	6	AN
193.	1	AN	199.	2	AP	205.	5	AN	211.	6	AP
Completion Statements
216.	1	K	219..	2	K	222.	4	K	225.	6	K
217.	1	K	220.	2	K	223.	6	K	226.	6	K
218.	2	K	221.	3	K	224.	6	K	227.	6	K
Matching
228.	1-7	K
Short-Answer Essay
229.	1	K	231.	6	K	a233.	7	K	225.	5	K
230.	2	K	232.	6	K	234.	5	K

SUMMARY OF Learning OBJECTIVES BY QUESTION TYPE

Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type
Learning Objective 1
1.	TF	7.	TF	42.	MC	48.	MC	54.	MC	190.	Ex	217.	C
2.	TF	31.	TF	43.	MC	49.	MC	55.	MC	191.	Ex	228.	MA
3.	TF	38.	MC	44.	MC	50.	MC	139.	MC	192.	Ex	229.	SA
4.	TF	39.	MC	45.	MC	51.	MC	154.	MC	193.	Ex
5.	TF	40.	MC	46.	MC	52.	MC	188.	Ex	194.	Ex
6.	TF	41.	MC	47.	MC	53.	MC	189.	Ex	216.	C
Learning Objective 2
8.	TF	33.	TF	63.	MC	71.	MC	79.	MC	155.	MC	197.	Ex
9.	TF	56.	MC	64.	MC	72.	MC	80.	MC	156.	MC	198.	Ex
10.	TF	57.	MC	65.	MC	73.	MC	81.	MC	176.	BE	199.	Ex
11.	TF	58.	MC	66.	MC	74.	MC	82.	MC	177.	BE	200.	Ex
12.	TF	59.	MC	67.	MC	75.	MC	83.	MC	178.	BE	218.	C
13.	TF	60.	MC	68.	MC	76.	MC	84.	MC	179.	BE	219/220.	C
14.	TF	61.	MC	69.	MC	77.	MC	85.	MC	195.	Ex	228.	MA
32.	TF	62.	MC	70.	MC	78.	MC	86.	MC	196.	Ex	230.	SA
Learning Objective 3
15.	TF	87.	MC	90.	MC	93.	MC	96.	MC	201.	Ex	228.	MA
16.	TF	88.	MC	91.	MC	94.	MC	157.	MC	202.	Ex
34.	TF	89.	MC	92.	MC	95.	MC	180.	BE	221.	C

SUMMARY OF Learning OBJECTIVES BY QUESTION TYPE

Learning Objective 4
17.	TF	98.	MC	101.	MC	104.	MC	159.	MC	228.	MA
18.	TF	99.	MC	102.	MC	105.	MC	203.	Ex
97.	MC	100.	MC	103.	MC	158.	MC	222.	C
Learning Objective 5
19.	TF	107.	MC	111.	MC	115.	MC	182.	BE	207.	Ex	235.	SA
20.	TF	108.	MC	112.	MC	160.	MC	204.	Ex	208.	Ex
21.	TF	109.	MC	113.	MC	161.	MC	205.	Ex	228.	MA
106.	MC	110.	MC	114.	MC	181.	BE	206.	Ex	234.	SA
Learning Objective 6
22.	TF	37.	TF	125.	MC	135.	MC	145.	MC	184.	BE	225.	C
23.	TF	116.	MC	126.	MC	136.	MC	146.	MC	185.	BE	226.	C
24.	TF	117.	MC	127.	MC	137.	MC	147.	MC	186.	BE	227.	C
25.	TF	118.	MC	128.	MC	138.	MC	148.	MC	183.	Ex	228.	MA
26.	TF	119.	MC	129.	MC			149.	MC	209.	Ex	231.	SA
27.	TF	120.	MC	130.	MC	140.	MC	150.	MC	210.	Ex	232.	SA
28.	TF	121.	MC	131.	MC	141.	MC	151.	MC	211.	Ex
29.	TF	122.	MC	132.	MC	142.	MC	162.	MC	212.	Ex
35.	TF	123.	MC	133.	MC	143.	MC	163.	MC	223.	C
36.	TF	124.	MC	134.	MC	144.	MC	183.	BE	224.	C
Learning Objective a7
a30.	TF	a153.	MC	a167.	MC	a213.	Ex	a215.	Ex	228.	MA
a152.	MC	a164.	MC	a187.	BE	a214.	Ex	233.	SA
Learning Objective a8
a165.	MC	a167.	MC	a169.	MC	a171.	MC	a173.	MC	a175.	MC
a166.	MC	a168.	MC	a170.	MC	a172.	MC	a174.	MC

Note: TF = True-False BE = Brief Exercise C = Completion

MC = Multiple Choice Ex = Exercise MA = Matching

SA = Short-Answer Essay

CHAPTER Learning OBJECTIVES

1. Prepare a worksheet. The steps in preparing a worksheet follows. (a) Prepare a trial balance on the worksheet, (b) Enter the adjustments in the adjustments columns, (c) Enter adjusted balances in the adjusted trial balance columns, (d) Extend adjusted trial balance amounts to appropriate financial statement columns, and (e) Total the statement columns, compute net income (or net loss), and complete the worksheet.

2. Explain the process of closing the books. Closing the books occurs at the end of an accounting period. The process is to journalize and post closing entries and then underline and balance all accounts. In closing the books, companies make separate entries to close revenues and expenses to Income Summary, Income Summary to Owner’s Capital, and Owner’s Drawings to Owner’s Capital. Only temporary accounts are closed.

3. Describe the content and purpose of a post-closing trial balance. A post-closing trial balance contains the balances in permanent accounts that are carried forward to the next accounting period. The purpose of this trial balance is to prove the equality of these balances.

4. State the required steps in the accounting cycle. The required steps in the accounting cycle are (1) analyze business transactions, (2) journalize the transactions, (3) post to ledger accounts, (4) prepare a trial balance, (5) journalize and post adjusting entries, (6) prepare an adjusted trial balance, (7) prepare financial statements, (8) journalize and post closing entries, and (9) prepare a post-closing trial balance.

5. Explain the approaches to preparing correcting entries. One way to determine the correcting entry is to compare the incorrect entry with the correct entry. After comparison, the company makes a correcting entry to correct the accounts. An alternative to a correcting entry is to reverse the incorrect entry and then prepare the correct entry.

6. Identify the sections of a classified balance sheet. A classified balance sheet categorizes assets as current assets; long-term investments; property, plant, and equipment; and intangibles. Liabilities are classified as either current or long-term. There is also an owner’s (owners’) equity section, which varies with the form of business organization.

a7. Prepare reversing entries. Reversing entries are the opposite of the adjusting entries made in the preceding period. Some companies choose to make reversing entries at the beginning of a new accounting period to simplify the recording of later transactions related to the adjusting entries. In most cases, only accrued adjusting entries are reversed.

TRUE-FALSE STATEMENTS

1. A worksheet is a mandatory form that must be prepared along with an income statement and balance sheet.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

2. If a worksheet is used, financial statements can be prepared before adjusting entries are journalized.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

3. If total credits in the income statement columns of a worksheet exceed total debits, the enterprise has net income.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

4. It is not necessary to prepare formal financial statements if a worksheet has been prepared because financial position and net income are shown on the worksheet.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5. The adjustments on a worksheet can be posted directly to the accounts in the ledger from the worksheet.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

6. The adjusted trial balance columns of a worksheet are obtained by subtracting the adjustment columns from the trial balance columns.

Ans: F, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem LOlving, IMA: FSA

7. The balance of the depreciation expense account will appear in the income statement debit column of a worksheet.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

8. Closing entries are unnecessary if the business plans to continue operating in the future and issue financial statements each year.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

9. The owner’s drawings account is closed to the Income Summary account in order to properly determine net income (or loss) for the period.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

10. After closing entries have been journalized and posted, all temporary accounts in the ledger should have zero balances.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

11. Closing revenue and expense accounts to the Income Summary account is an optional bookkeeping procedure.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

12. Closing the drawings account to Owner’s Capital is not necessary if net income is greater than owner’s drawings during the period.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

13. The owner’s drawings account is a permanent account whose balance is carried forward to the next accounting period.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

14. Closing entries are journalized after adjusting entries have been journalized.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

15. The amounts appearing on an income statement should agree with the amounts appearing on the post-closing trial balance.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

16. The post-closing trial balance is entered in the first two columns of a worksheet.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

17. A business entity has only one accounting cycle over its economic existence.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

18. The accounting cycle begins at the start of a new accounting period.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

19. Both correcting entries and adjusting entries always affect at least one balance sheet account and one income statement account.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

20. Correcting entries are made any time an error is discovered even though it may not be at the end of an accounting period.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

21. An incorrect debit to Accounts Receivable instead of the correct account Notes Receivable does not require a correcting entry because total assets will not be misstated.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

22. In a corporation, Retained Earnings is a part of owners’ equity.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

23. A company’s operating cycle and fiscal year are usually the same length of time.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

24. Cash and supplies are both classified as current assets.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

25. Long-term investments would appear in the property, plant, and equipment section of the balance sheet.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

26. A liability is classified as a current liability if the company is to pay it within the forthcoming year.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

27. A company’s liquidity is concerned with the relationship between long-term investments and long-term debt.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics

28. Current assets are customarily the first items listed on a classified balance sheet.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

29. The operating cycle of a company is determined by the number of years the company has been operating.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

a30. Reversing entries are an optional bookkeeping procedure.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

31. After a worksheet has been completed, the statement columns contain all data that are required for the preparation of financial statements.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

32. To close net income to owner’s capital, Income Summary is debited and Owner’s Capital is credited.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

33. In one closing entry, Owner’s Drawings is credited and Income Summary is debited.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

34. The post-closing trial balance will contain only owner’s equity statement accounts and balance sheet accounts.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

35. The operating cycle of a company is the average time required to collect the receivables resulting from producing revenues.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

36. Current assets are listed in the order of liquidity.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

37. Current liabilities are obligations that the company is to pay within the coming year.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Answers to True-False Statements

Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.
1.	F	7.	T	13.	F	19.	F	25.	F	31.	T	37.	T
2.	T	8.	F	14.	T	20.	T	26.	T	32.	T
3.	T	9.	F	15.	F	21.	F	27.	F	33.	F
4.	F	10.	T	16.	F	22.	T	28.	T	34.	F
5.	F	11.	F	17.	F	23.	F	29.	F	35.	F
6.	F	12.	F	18.	T	24.	T	a30.	T	36.	T

MULTIPLE CHOICE QUESTIONS

38. Preparing a worksheet involves

a. two steps.

b. three steps.

c. four steps.

d. five steps.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

39. The adjustments entered in the adjustments columns of a worksheet are

a. not journalized.

b. posted to the ledger but not journalized.

c. not journalized until after the financial statements are prepared.

d. journalized before the worksheet is completed.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

40. The information for preparing a trial balance on a worksheet is obtained from

a. financial statements.

b. general ledger accounts.

c. general journal entries.

d. business documents.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

41. After the adjusting entries are journalized and posted to the accounts in the general ledger, the balance of each account should agree with the balance shown on the

a. adjusted trial balance.

b. post-closing trial balance.

c. the general journal.

d. adjustments columns of the worksheet.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

42. If the total debit column exceeds the total credit column of the income statement columns on a worksheet, then the company has

a. earned net income for the period.

b. an error because debits do not equal credits.

c. suffered a net loss for the period.

d. to make an adjusting entry.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

43. A worksheet is a multiple column form that facilitates the

a. identification of events.

b. measurement process.

c. preparation of financial statements.

d. analysis process.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

44. Which of the following companies would be least likely to use a worksheet to facilitate the adjustment process?

a. Large company with numerous accounts

b. Small company with numerous accounts

c. All companies, since worksheets are required under generally accepted accounting principles

d. Small company with few accounts

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

45. A worksheet can be thought of as a(n)

a. permanent accounting record.

b. optional device used by accountants.

c. part of the general ledger.

d. part of the journal.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

46. The account, Supplies, will appear in the following debit columns of the worksheet.

a. Trial balance

b. Adjusted trial balance

c. Balance sheet

d. All of these answer choices are correct

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

47. When constructing a worksheet, accounts are often needed that are not listed in the trial balance already entered on the worksheet from the ledger. Where should these additional accounts be shown on the worksheet?

a. They should be inserted in alphabetical order into the trial balance accounts already given.

b. They should be inserted in chart of account order into the trial balance already given.

c. They should be inserted on the lines immediately below the trial balance totals.

d. They should not be inserted on the trial balance until the next accounting period.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

48. When using a worksheet, adjusting entries are journalized

a. after the worksheet is completed and before financial statements are prepared.

b. before the adjustments are entered on to the worksheet.

c. after the worksheet is completed and after financial statements have been prepared.

d. before the adjusted trial balance is extended to the proper financial statement columns.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

49. Assuming that there is a net loss for the period, debits equal credits in all but which section of the worksheet?

a. Income statement columns

b. Adjustments columns

c. Trial balance columns

d. Adjusted trial balance columns

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

50. Adjusting entries are prepared from

a. source documents.

b. the adjustments columns of the worksheet.

c. the general ledger.

d. last year’s worksheet.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

51. The net income (or loss) for the period

a. is found by computing the difference between the income statement credit column and the balance sheet credit column on the worksheet.

b. cannot be found on the worksheet.

c. is found by computing the difference between the income statement columns of the worksheet.

d. is found by computing the difference between the trial balance totals and the adjusted trial balance totals.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

52. The worksheet does not show

a. net income or loss for the period.

b. revenue and expense account balances.

c. the ending balance in the owner’s capital account.

d. the trial balance before adjustments.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

53. If the total debits exceed total credits in the balance sheet columns of the worksheet, owner’s equity

a. will increase because net income has occurred.

b. will decrease because a net loss has occurred.

c. is in error because a mistake has occurred.

d. will not be affected.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

54. The income statement and balance sheet columns of Iron and Wine Company’s worksheet reflect the following totals:

Income Statement Balance Sheet

Dr. Cr. Dr. Cr.

Totals $72,000 $44,000 $60,000 $88,000

The net income (or loss) for the period is

a. $44,000 income.

b. $28,000 income.

c. $28,000 loss.

d. not determinable.

Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

55. The income statement and balance sheet columns of Iron and Wine Company’s worksheet reflect the following totals:

Income Statement Balance Sheet

Dr. Cr. Dr. Cr.

Totals $72,000 $48,000 $60,000 $84,000

To enter the net income (or loss) for the period into the above worksheet requires an entry to the

a. income statement debit column and the balance sheet credit column.

b. income statement credit column and the balance sheet debit column.

c. income statement debit column and the income statement credit column.

d. balance sheet debit column and the balance sheet credit column.

Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

56. Closing entries are necessary for

a. permanent accounts only.

b. temporary accounts only.

c. both permanent and temporary accounts.

d. permanent or real accounts only.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

57. Each of the following accounts is closed to Income Summary except

a. Expenses.

b. Owner’s Drawings.

c. Revenues.

d. All of these are closed to Income Summary.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

58. Closing entries are made

a. in order to terminate the business as an operating entity.

b. so that all assets, liabilities, and owner’s capital accounts will have zero balances when the next accounting period starts.

c. in order to transfer net income (or loss) and owner’s drawings to the owner’s capital account.

d. so that financial statements can be prepared.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

59. Closing entries are

a. an optional step in the accounting cycle.

b. posted to the ledger accounts from the worksheet.

c. made to close permanent or real accounts.

d. journalized in the general journal.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

60. The income summary account

a. is a permanent account.

b. appears on the balance sheet.

c. appears on the income statement.

d. is a temporary account.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

61. If Income Summary has a credit balance after revenues and expenses have been closed into it, the closing entry for Income Summary will include a

a. debit to the owner’s capital account.

b. debit to the owner’s drawings account.

c. credit to the owner’s capital account.

d. credit to the owner’s drawings account.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

62. Closing entries are journalized and posted

a. before the financial statements are prepared.

b. after the financial statements are prepared.

c. at management’s discretion.

d. at the end of each interim accounting period.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

63. Closing entries

a. are prepared before the financial statements.

b. reduce the number of permanent accounts.

c. cause the revenue and expense accounts to have zero balances.

d. summarize the activity in every account.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

64. Which of the following is a true statement about closing the books of a proprietorship?

a. Expenses are closed to the Expense Summary account.

b. Only revenues are closed to the Income Summary account.

c. Revenues and expenses are closed to the Income Summary account.

d. Revenues, expenses, and the owner’s drawings account are closed to the Income Summary account.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

65. Closing entries may be prepared from all of the following except

a. Adjusted balances in the ledger

b. Income statement and balance sheet columns of the worksheet

c. Balance sheet

d. Income and owner’s equity statements

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

66. In order to close the owner’s drawings account, the

a. income summary account should be debited.

b. income summary account should be credited.

c. owner’s capital account should be credited.

d. owner’s capital account should be debited.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

67. In preparing closing entries

a. each revenue account will be credited.

b. each expense account will be credited.

c. the owner’s capital account will be debited if there is net income for the period.

d. the owner’s drawings account will be debited.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

68. The most efficient way to accomplish closing entries is to

a. credit the income summary account for each revenue account balance.

b. debit the income summary account for each expense account balance.

c. credit the owner’s drawings balance directly to the income summary account.

d. credit the income summary account for total revenues and debit the income summary account for total expenses.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

69. The closing entry process consists of closing

a. all asset and liability accounts.

b. out the owner’s capital account.

c. all permanent accounts.

d. all temporary accounts.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

70. The final closing entry to be journalized is typically the entry that closes the

a. revenue accounts.

b. owner’s drawings account.

c. owner’s capital account.

d. expense accounts.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

71. An error has occurred in the closing entry process if

a. revenue and expense accounts have zero balances.

b. the owner’s capital account is credited for the amount of net income.

c. the owner’s drawings account is closed to the owner’s capital account.

d. the balance sheet accounts have zero balances.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

72. The Income Summary account is an important account that is used

a. during interim periods.

b. in preparing adjusting entries.

c. annually in preparing closing entries.

d. annually in preparing correcting entries.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

73. The balance in the income summary account before it is closed will be equal to

a. the net income or loss on the income statement.

b. the beginning balance in the owner’s capital account.

c. the ending balance in the owner’s capital account.

d. zero.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

74. After closing entries are posted, the balance in the owner’s capital account in the ledger will be equal to

a. the beginning owner’s capital reported on the owner’s equity statement.

b. the amount of the owner’s capital reported on the balance sheet.

c. zero.

d. the net income for the period.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

75. The income statement for the month of June, 2014 of Camera Obscura Enterprises contains the following information:

Revenues $7,000

Expenses:

Salaries and Wages Expense $3,000

Rent Expense 1,500

Advertising Expense 800

Supplies Expense 300

Insurance Expense 100

Total expenses 5,700

Net income $1,300

The entry to close the revenue account includes a

a. debit to Income Summary for $1,300.

b. credit to Income Summary for $1,300.

c. debit to Income Summary for $7,000.

d. credit to Income Summary for $7,000.

Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

76. The income statement for the month of June, 2014 of Camera Obscura Enterprises contains the following information:

Revenues $7,000

Expenses:

Salaries and Wages Expense $3,000

Rent Expense 1,500

Advertising Expense 800

Supplies Expense 300

Insurance Expense 100

Total expenses 5,700

Net income $1,300

The entry to close the expense accounts includes a

a. debit to Income Summary for $1,300.

b. credit to Rent Expense for $1,500.

c. credit to Income Summary for $5,700.

d. debit to Salaries and Wages Expense for $3,000.

Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

77. The income statement for the month of June, 2014 of Camera Obscura Enterprises contains the following information:

Revenues $7,000

Expenses:

Salaries and Wages Expense $3,000

Rent Expense 1,500

Advertising Expense 800

Supplies Expense 300

Insurance Expense 100

Total expenses 5,700

Net income $1,300

After the revenue and expense accounts have been closed, the balance in Income Summary will be

a. $0.

b. a debit balance of $1,300.

c. a credit balance of $1,300.

d. a credit balance of $7,000.

Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $7,000 ( $5,700 ( $1,300

78. The income statement for the month of June, 2014 of Camera Obscura Enterprises contains the following information:

Revenues $7,000

Expenses:

Salaries and Wages Expense $3,000

Rent Expense 1,500

Advertising Expense 800

Supplies Expense 300

Insurance Expense 100

Total expenses 5,700

Net income $1,300

The entry to close Income Summary to Owner’s, Capital includes

a. a debit to Revenues for $7,000.

b. credits to Expenses totalling $5,700.

c. a credit to Income Summary for $1,300

d. a credit to Owner’s Capital for $1,300.

Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

79. The income statement for the month of June, 2014 of Camera Obscura Enterprises contains the following information:

Revenues $7,000

Expenses:

Salries and Wages Expense $3,000

Rent Expense 1,500

Advertising Expense 800

Supplies Expense 300

Insurance Expense 100

Total expenses 5,700

Net income $1,300

At June 1, 2014, Camera Obscura reported owner’s equity of $35,000. The company had no owner drawings during June. At June 30, 2014, the company will report owner’s equity of

a. $29,300.

b. $35,000.

c. $36,300.

d. $42,000.

Ans: C, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $35,000 + $1,300 = $36,300

80. The income statement for the year 2014 of Fugazi Co. contains the following information:

Revenues $70,000

Expenses:

Salaries and Wages Expense $45,000

Rent Expense 12,000

Advertising Expense 10,000

Supplies Expense 6,000

Utilities Expense 2,500

Insurance Expense 2,000

Total expenses 77,500

Net income (loss) $ (7,500)

The entry to close the revenue account includes a

a. debit to Income Summary for $7,500.

b. credit to Income Summary for $7,500.

c. debit to Revenues for $70,000.

d. credit to Revenues for $70,000.

Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

81. The income statement for the year 2014 of Fugazi Co. contains the following information:

Revenues $70,000

Expenses:

Salaries and Wages Expense $45,000

Rent Expense 12,000

Advertising Expense 10,000

Supplies Expense 6,000

Utilities Expense 2,500

Insurance Expense 2,000

Total expenses 77,500

Net income (loss) $ (7,500)

The entry to close the expense accounts includes a

a. debit to Income Summary for $7,500.

b. credit to Income Summary for $7,500.

c. debit to Income Summary for $77,500.

d. debit to Utilities Expense for $2,500.

Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

82. The income statement for the year 2014 of Fugazi Co. contains the following information:

Revenues $70,000

Expenses:

Salaries and Wages Expense $45,000

Rent Expense 12,000

Advertising Expense 10,000

Supplies Expense 6,000

Utilities Expense 2,500

Insurance Expense 2,000

Total expenses 77,500

Net income (loss) $ (7,500)

After the revenue and expense accounts have been closed, the balance in Income Summary will be

a. $0.

b. a debit balance of $7,500.

c. a credit balance of $7,500.

d. a credit balance of $70,000.

Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

83. The income statement for the year 2014 of Fugazi Co. contains the following information:

Revenues $70,000

Expenses:

Salaries and Wages Expense $45,000

Rent Expense 12,000

Advertising Expense 10,000

Supplies Expense 6,000

Utilities Expense 2,500

Insurance Expense 2,000

Total expenses 77,500

Net income (loss) $ (7,500)

The entry to close Income Summary to Owner’s Capital includes

a. a debit to Revenue for $70,000.

b. credits to Expenses totalling $77,500.

c. a credit to Income Summary for $7,500.

d. a credit to Owner’s Capital for $7,500.

Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

84. The income statement for the year 2014 of Fugazi Co. contains the following information:

Revenues $70,000

Expenses:

Salaries and Wages Expense $45,000

Rent Expense 12,000

Advertising Expense 10,000

Supplies Expense 6,000

Utilities Expense 2,500

Insurance Expense 2,000

Total expenses 77,500

Net income (loss) $ (7,500)

At January 1, 2014, Fugazi reported owner’s equity of $50,000. Owner drawings for the year totalled $10,000. At December 31, 2014, the company will report owner’s equity of

a. $17,500.

b. $32,500.

c. $40,000.

d. $42,500.

Ans: B, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $50,000 ( $10,000 ( $7,500 ( $32,500

85. The income statement for the year 2014 of Fugazi Co. contains the following information:

Revenues $70,000

Expenses:

Salaries and Wages Expense $45,000

Rent Expense 12,000

Advertising Expense 10,000

Supplies Expense 6,000

Utilities Expense 2,500

Insurance Expense 2,000

Total expenses 77,500

Net income (loss) $ (7,500)

After all closing entries have been posted, the Income Summary account will have a balance of

a. $0.

b. $7,500 debit.

c. $7,500 credit.

d. $77,500 credit.

Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

86. The income statement for the year 2014 of Fugazi Co. contains the following information:

Revenues $70,000

Expenses:

Salaries and Wages Expense $45,000

Rent Expense 12,000

Advertising Expense 10,000

Supplies Expense 6,000

Utilities Expense 2,500

Insurance Expense 2,000

Total expenses 77,500

Net income (loss) $ (7,500)

After all closing entries have been posted, the revenue account will have a balance of

a. $0.

b. $70,000 credit.

c. $70,000 debit.

d. $7,500 credit.

Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

87. A post-closing trial balance is prepared

a. after closing entries have been journalized and posted.

b. before closing entries have been journalized and posted.

c. after closing entries have been journalized but before the entries are posted.

d. before closing entries have been journalized but after the entries are posted.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

88. All of the following statements about the post-closing trial balance are correct except it

a. shows that the accounting equation is in balance.

b. provides evidence that the journalizing and posting of closing entries have been properly completed.

c. contains only permanent accounts.

d. proves that all transactions have been recorded.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

89. A post-closing trial balance will show

a. only permanent account balances.

b. only temporary account balances.

c. zero balances for all accounts.

d. the amount of net income (or loss) for the period.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

90. A post-closing trial balance should be prepared

a. before closing entries are posted to the ledger accounts.

b. after closing entries are posted to the ledger accounts.

c. before adjusting entries are posted to the ledger accounts.

d. only if an error in the accounts is detected.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

91. A post-closing trial balance will show

a. zero balances for all accounts.

b. zero balances for balance sheet accounts.

c. only balance sheet accounts.

d. only income statement accounts.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

92. The purpose of the post-closing trial balance is to

a. prove that no mistakes were made.

b. prove the equality of the balance sheet account balances that are carried forward into the next accounting period.

c. prove the equality of the income statement account balances that are carried forward into the next accounting period.

d. list all the balance sheet accounts in alphabetical order for easy reference.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

93. The balances that appear on the post-closing trial balance will match the

a. income statement account balances after adjustments.

b. balance sheet account balances after closing entries.

c. income statement account balances after closing entries.

d. balance sheet account balances after adjustments.

Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

94. Which account listed below would be double ruled in the ledger as part of the closing process?

a. Cash

b. Owner’s Capital

c. Owner’s Drawings

d. Accumulated Depreciation—Equipment

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

95. A double rule applied to accounts in the ledger during the closing process implies that

a. the account is a temporary account.

b. the account is a balance sheet account.

c. the account balance is not zero.

d. a mistake has been made, since double ruling is prescribed.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

96. The heading for a post-closing trial balance has a date line that is similar to the one found on

a. a balance sheet.

b. an income statement.

c. an owner’s equity statement.

d. the worksheet.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

97. Which one of the following is usually prepared only at the end of a company’s annual accounting period?

a. Preparing financial statements

b. Journalizing and posting adjusting entries

c. Journalizing and posting closing entries

d. Preparing an adjusted trial balance

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

98. The step in the accounting cycle that is performed on a periodic basis (i.e., monthly, quarterly) is

a. analyzing transactions.

b. journalizing and posting adjusting entries.

c. preparing a post-closing trial balance.

d. posting to ledger accounts.

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

99. Which one of the following is an optional step in the accounting cycle of a business enterprise?

a. Analyze business transactions

b. Prepare a worksheet

c. Prepare a trial balance

d. Post to the ledger accounts

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

100. The final step in the accounting cycle is to prepare

a. closing entries.

b. financial statements.

c. a post-closing trial balance.

d. adjusting entries.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

101. Which of the following steps in the accounting cycle would not generally be performed daily?

a. Journalize transactions

b. Post to ledger accounts

c. Prepare adjusting entries

d. Analyze business transactions

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

102. Which of the following steps in the accounting cycle may be performed most frequently?

a. Prepare a post-closing trial balance

b. Journalize closing entries

c. Post closing entries

d. Prepare a trial balance

Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

103. Which of the following depicts the proper sequence of steps in the accounting cycle?

a. Journalize the transactions, analyze business transactions, prepare a trial balance

b. Prepare a trial balance, prepare financial statements, prepare adjusting entries

c. Prepare a trial balance, prepare adjusting entries, prepare financial statements

d. Prepare a trial balance, post to ledger accounts, post adjusting entries

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

104. The two optional steps in the accounting cycle are preparing

a. a post-closing trial balance and reversing entries.

b. a worksheet and post-closing trial balances.

c. reversing entries and a worksheet.

d. an adjusted trial balance and a post-closing trial balance.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

105. The first required step in the accounting cycle is

a. reversing entries.

b. journalizing transactions in the book of original entry.

c. analyzing transactions.

d. posting transactions.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

106. Correcting entries

a. always affect at least one balance sheet account and one income statement account.

b. affect income statement accounts only.

c. affect balance sheet accounts only.

d. may involve any combination of accounts in need of correction.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

107. Merriweather Post Pavillion received a $820 check from a customer for the balance due. The transaction was erroneously recorded as a debit to Cash $280 and a credit to Service Revenue $280. The correcting entry is

a. debit Cash, $820; credit Accounts Receivable, $820.

b. debit Cash, $540 and Accounts Receivable, $280; credit Service Revenue, $820.

c. debit Cash, $540 and Service Revenue, $280; credit Accounts Receivable, $820.

d. debit Accounts Receivable, $820; credit Cash, $560 and Service Revenue, $280.

Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $820 ( $280 ( $540

108. If errors occur in the recording process, they

a. should be corrected as adjustments at the end of the period.

b. should be corrected as soon as they are discovered.

c. should be corrected when preparing closing entries.

d. cannot be corrected until the next accounting period.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

109. A correcting entry

a. must involve one balance sheet account and one income statement account.

b. is another name for a closing entry.

c. may involve any combination of accounts.

d. is a required step in the accounting cycle.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

110. An unacceptable way to make a correcting entry is to

a. reverse the incorrect entry.

b. erase the incorrect entry.

c. compare the incorrect entry with the correct entry and make a correcting entry to correct the accounts.

d. correct it immediately upon discovery.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

111. Zen Arcade paid the weekly payroll on January 2 by debiting Salaries and Wages Expense for $47,000. The accountant preparing the payroll entry overlooked the fact that Salaries and Wages Expense of $27,000 had been accrued at year end on December 31. The correcting entry is

a. Salaries and Wages Payable 27,000

Cash 27,000

b. Cash 20,000

Salaries and Wages Expense 20,000

c. Salaries and Wages Payable 27,000

Salaries and Wages Expense 27,000

d. Cash 27,000

Salaries and Wages Expense 27,000

Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

112. Jawbreaker Company paid $940 on account to a creditor. The transaction was erroneously recorded as a debit to Cash of $490 and a credit to Accounts Receivable, $490. The correcting entry is

a. Accounts Payable 940

Cash 940

b. Accounts Receivable 490

Cash 490

c. Accounts Receivable 490

Accounts Payable 490

d. Accounts Receivable 490

Accounts Payable 940

Cash 1,430

Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $940 + $490 ( $1,430

113. A lawyer collected $710 of legal fees in advance. He erroneously debited Cash for $170 and credited Accounts Receivable for $170. The correcting entry is

a. Cash 170

Accounts Receivable 540

Unearned Service Revenue 710

b. Cash 710

Service Revenue 710

c. Cash 540

Accounts Receivable 170

Unearned Service Revenue 710

d. Cash 540

Accounts Receivable 540

Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $710 ( $170 = $540

114. On May 25, Yellow House Company received a $650 check from Grizzly Bean for services to be performed in the future. The bookkeeper for Yellow House Company incorrectly debited Cash for $650 and credited Accounts Receivable for $650. The amounts have been posted to the ledger. To correct this entry, the bookkeeper should:

a. debit Cash $650 and credit Unearned Service Revenue $650.

b. debit Accounts Receivable $650 and credit Service Revenue $650.

c. debit Accounts Receivable $650 and credit Cash $650.

d. debit Accounts Receivable $650 and credit Unearned Service Revenue $650.

Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

115. On March 8, Black Candy Company bought supplies on account from the Arcade Fire Company for $550. Black Candy Company incorrectly debited Equipment for $500 and credited Accounts Payable for $500. The entries have been posted to the ledger. the correcting entry should be:

a. Supplies 550

Accounts Payable 550

b. Supplies 550

Accounts Payable 500

Equipment 50

c. Supplies 550

Equipment 550

d. Supplies 550

Equipment 500

Accounts Payable 50

Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $550 ( $500 ( $50

116. The following information is for Sunny Day Real Estate:

Sunny Day Real Estate

Balance Sheet

December 31, 2014

Cash $ 25,000 Accounts Payable $ 60,000

Prepaid Insurance 30,000 Salaries and Wages Payable 15,000

Accounts Receivable 50,000 Mortgage Payable 85,000

Inventory 70,000 Total Liabilities 160,000

Land Held for Investment 85,000

Land 120,000

Building $100,000

Less Accumulated Owner’s Capital 370,000

Depreciation (20,000) 80,000

Trademark 70,000 Total Liabilities and

Total Assets $530,000 Owner’s Equity $530,000

The total dollar amount of assets to be classified as current assets is

a. $105,000.

b. $175,000.

c. $190,000.

d. $260,000.

Ans: B, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $25,000 ( $30,000 ( $50,000 ( $70,000 ( $175,000

117. The following information is for Sunny Day Real Estate:

Sunny Day Real Estate

Balance Sheet

December 31, 2014

Cash $ 25,000 Accounts Payable $ 60,000

Prepaid Insurance 30,000 Salaries and Wages Payable 15,000

Accounts Receivable 50,000 Mortgage Payable 85,000

Inventory 70,000 Total Liabilities 160,000

Land Held for Investment 85,000

Land 120,000

Building $100,000

Less Accumulated Owner’s Capital 370,000

Depreciation (20,000) 80,000

Trademark 70,000 Total Liabilities and

Total Assets $530,000 Owner’s Equity $530,000

The total dollar amount of assets to be classified as property, plant, and equipment is

a. $200,000.

b. $220,000.

c. $285,000.

d. $305,000.

Ans: A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $120,000 ( $80,000 ( $200,000

118. The following information is for Sunny Day Real Estate:

Sunny Day Real Estate

Balance Sheet

December 31, 2014

Cash $ 25,000 Accounts Payable $ 60,000

Prepaid Insurance 30,000 Salaries and Wages Payable 15,000

Accounts Receivable 50,000 Mortgage Payable 85,000

Inventory 70,000 Total Liabilities 160,000

Land Held for Investment 85,000

Land 120,000

Building $100,000

Less Accumulated Owner’s Capital 370,000

Depreciation (20,000) 80,000

Trademark 70,000 Total Liabilities and

Total Assets $530,000 Owner’s Equity $530,000

The total dollar amount of assets to be classified as investments is

a. $0.

b. $70,000.

c. $85,000.

d. $155,000.

Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

119. The following information is for Sunny Day Real Estate:

Sunny Day Real Estate

Balance Sheet

December 31, 2014

Cash $ 25,000 Accounts Payable $ 60,000

Prepaid Insurance 30,000 Salaries and Wages Payable 15,000

Accounts Receivable 50,000 Mortgage Payable 85,000

Inventory 70,000 Total Liabilities 160,000

Land Held for Investment 85,000

Land 120,000

Building $100,000

Less Accumulated Owner’s Capital 370,000

Depreciation (20,000) 80,000

Trademark 70,000 Total Liabilities and

Total Assets $530,000 Owner’s Equity $530,000

The total dollar amount of liabilities to be classified as current liabilities is

a. $15,000.

b. $60,000.

c. $75,000.

d. $160,000.

Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $60,000 ( $15,000 ( $75,000

120. The following information is for Bright Eyes Auto Supplies:

Bright Eyes Auto Supplies

Balance Sheet

December 31, 2014

Cash $ 40,000 Accounts Payable $ 130,000

Prepaid Insurance 80,000 Salaries and Wages Payable 50,000

Accounts Receivable 100,000 Mortgage Payable 150,000

Inventory 140,000 Total Liabilities 330,000

Land Held for Investment 180,000

Land 250,000

Building $200,000

Less Accumulated Owner’s Capital 740,000

Depreciation (60,000) 140,000

Trademark 140,000 Total Liabilities and

Total Assets $1,070,000 Owner’s Equity $1,070,000

The total dollar amount of assets to be classified as current assets is

a. $140,000.

b. $220,000.

c. $360,000.

d. $500,000.

Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $40,000 ( $80,000 ( $100,000 ( $140,000 ( $360,000

121. The following information is for Bright Eyes Auto Supplies:

Bright Eyes Auto Supplies

Balance Sheet

December 31, 2014

Cash $ 40,000 Accounts Payable $ 130,000

Prepaid Insurance 80,000 Salaries and Wages Payable 50,000

Accounts Receivable 100,000 Mortgage Payable 150,000

Inventory 140,000 Total Liabilities 330,000

Land Held for Investment 180,000

Land 250,000

Building $200,000

Less Accumulated Owner’s Capital 740,000

Depreciation (60,000) 140,000

Trademark 140,000 Total Liabilities and

Total Assets $1,070,000 Owner’s Equity $1,070,000

The total dollar amount of assets to be classified as property, plant, and equipment is

a. $390,000.

b. $450,000.

c. $570,000.

d. $630,000.

Ans: A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $250,000 ( $140,000 ( $390,000

122. The following information is for Bright Eyes Auto Supplies:

Bright Eyes Auto Supplies

Balance Sheet

December 31, 2014

Cash $ 40,000 Accounts Payable $ 130,000

Prepaid Insurance 80,000 Salaries and Wages Payable 50,000

Accounts Receivable 100,000 Mortgage Payable 150,000

Inventory 140,000 Total Liabilities 330,000

Land Held for Investment 180,000

Land 250,000

Building $200,000

Less Accumulated Owner’s Capital 740,000

Depreciation (60,000) 140,000

Trademark 140,000 Total Liabilities and

Total Assets $1,070,000 Owner’s Equity $1,070,000

The total dollar amount of assets to be classified as investments is

a. $0.

b. $140,000.

c. $180,000.

d. $250,000.

Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

123. The following information is for Bright Eyes Auto Supplies:

Bright Eyes Auto Supplies

Balance Sheet

December 31, 2014

Cash $ 40,000 Accounts Payable $ 130,000

Prepaid Insurance 80,000 Salaries and Wages Payable 50,000

Accounts Receivable 100,000 Mortgage Payable 150,000

Inventory 140,000 Total Liabilities 330,000

Land Held for Investment 180,000

Land 250,000

Building $200,000

Less Accumulated Owner’s Capital 740,000

Depreciation (60,000) 140,000

Trademark 140,000 Total Liabilities and

Total Assets $1,070,000 Owner’s Equity $1,070,000

The total dollar amount of liabilities to be classified as current liabilities is

a. $50,000.

b. $130,000.

c. $180,000.

d. $330,000.

Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $130,000 ( $50,000 ( $180,000

124. All of the following are property, plant, and equipment except

a. supplies.

b. machinery.

c. land.

d. buildings.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

125. The first item listed under current liabilities is usually

a. accounts payable.

b. notes payable.

c. salaries and wages payable.

d. taxes payable.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

126. Equipment is classified in the balance sheet as

a. a current asset.

b. property, plant, and equipment.

c. an intangible asset.

d. a long-term investment.

Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

127. A current asset is

a. the last asset purchased by a business.

b. an asset which is currently being used to produce a product or service.

c. usually found as a separate classification in the income statement.

d. an asset that a company expects to convert to cash or use up within one year.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

128. An intangible asset

a. does not have physical substance, yet often is very valuable.

b. is worthless because it has no physical substance.

c. is converted into a tangible asset during the operating cycle.

d. cannot be classified on the balance sheet because it lacks physical substance.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

129. Liabilities are generally classified on a balance sheet as

a. small liabilities and large liabilities.

b. present liabilities and future liabilities.

c. tangible liabilities and intangible liabilities.

d. current liabilities and long-term liabilities.

Ans: D, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

130. Which of the following would not be classified a long-term liability?

a. Current maturities of long-term debt

b. Bonds payable

c. Mortgage payable

d. Lease liabilities

Ans: A, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

131. Which of the following liabilities are not related to the operating cycle?

a. Salaries and wages payable

b. Accounts payable

c. Utilities payable

d. Bonds payable

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

132. Intangible assets include each of the following except

a. copyrights.

b. goodwill.

c. land improvements.

d. patents.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

133. It is not true that current assets are assets that a company expects to

a. realize in cash within one year.

b. sell within one year.

c. use up within one year.

d. acquire within one year.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

134. The operating cycle of a company is the average time that is required to go from cash to

a. sales in producing revenues.

b. cash in producing revenues.

c. inventory in producing revenues.

d. accounts receivable in producing revenues.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

135. On a classified balance sheet, current assets are customarily listed

a. in alphabetical order.

b. with the largest dollar amounts first.

c. in the order of liquidity.

d. in the order of acquisition.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

136. Intangible assets are

a. listed under current assets on the balance sheet.

b. not listed on the balance sheet because they do not have physical substance.

c. long-lived assets that are often very valuable.

d. listed as a long-term investment on the balance sheet.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

137. The relationship between current assets and current liabilities is important in evaluating a company’s

a. profitability.

b. liquidity.

c. market value.

d. accounting cycle.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics

138. The most important information needed to determine if companies can pay their current obligations is the

a. net income for this year.

b. projected net income for next year.

c. relationship between current assets and current liabilities.

d. relationship between short-term and long-term liabilities.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics

139. The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2014:

Accounts payable $ 18,000

Accounts receivable 11,000

Accumulated depreciation – equipment 28,000

Advertising expense 21,000

Cash 15,000

Owner’s capital (1/1/14) 102,000

Owner’s drawings 14,000

Depreciation expense 12,000

Insurance expense 3,000

Note payable, due 6/30/15 70,000

Prepaid insurance (12-month policy) 6,000

Rent expense 17,000

Salaries and wages expense 32,000

Service revenue 133,000

Supplies 4,000

Supplies expense 6,000

Equipment 210,000

What is the company’s net income for the year ending December 31, 2014?

a. $12,000

b. $28,000

c. $42,000

d. $133,000

Ans: C, LO: 1, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $133,000 ( $21,000 ( $12,000 ( $3,000 ( $17,000 ( $32,000 ( $6,000 ( $42,000

140. The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2014:

Accounts payable $ 18,000

Accounts receivable 11,000

Accumulated depreciation – equipment 28,000

Advertising expense 21,000

Cash 15,000

Owner’s capital (1/1/14) 102,000

Owner’s drawings 14,000

Depreciation expense 12,000

Insurance expense 3,000

Note payable, due 6/30/15 70,000

Prepaid insurance (12-month policy) 6,000

Multiple Choice 140. (Cont.)

Rent expense 17,000

Salaries and wages expense 32,000

Service revenue 133,000

Supplies 4,000

Supplies expense 6,000

Equipment 210,000

What is the balance that would be reported for owner’s equity at December 31, 2014?

a. $158,000

b. $144,000

c. $130,000

d. $102,000

Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $133,000 ( $21,000 ( $12,000 ( $3,000 ( $17,000 ( $32,000 ( $6,000 ( $42,000( $102,000 ( $42,000 ( $14,000 ( $130,000

141. The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2014:

Accounts payable $ 18,000

Accounts receivable 11,000

Accumulated depreciation – equipment 28,000

Advertising expense 21,000

Cash 15,000

Owner’s capital (1/1/14) 102,000

Owner’s drawings 14,000

Depreciation expense 12,000

Insurance expense 3,000

Note payable, due 6/30/15 70,000

Prepaid insurance (12-month policy) 6,000

Rent expense 17,000

Salaries and wages expense 32,000

Service revenue 133,000

Supplies 4,000

Supplies expense 6,000

Equipment 210,000

What are total current assets at December 31, 2014?

a. $26,000

b. $32,000

c. $36,000

d. $42,000

Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $11,000 ( $15,000 ( $6,000 ( $4,000 ( $36,000

142. The following items are taken from the financial statements of the Postal Service for the year ending December 31, 2014:

Accounts payable $ 18,000

Accounts receivable 11,000

Accumulated depreciation – equipment 28,000

Advertising expense 21,000

Cash 15,000

Owner’s capital (1/1/14) 102,000

Owner’s drawings 14,000

Depreciation expense 12,000

Equipment 210,000

Insurance expense 3,000

Note payable, due 6/30/15 70,000

Prepaid insurance (12-month policy) 6,000

Rent expense 17,000

Salaries and wages expense 32,000

Service revenue 133,000

Supplies 4,000

Supplies expense 6,000

What is the book value of the equipment at December 31, 2014?

a. $170,000

b. $182,000

c. $210,000

d. $238,000

Ans: B, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $210,000 ( $28,000 ( $182,000

 

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Case Study

Abercrombie & Fitch: Is it Unethical to be Exclusive?

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The case will focus on issues related to market segmentation targeting and/or positioning.  You will be asked to answer questions following the case.  Your analysis and recommendations must be strongly communicated to demonstrate your knowledge and understanding of the concepts learned in the course. Be creative in your work and ensure that all your recommendations are fully substantiated.

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1. Students will purchase the case directly from the publisher.

2. Students will be required to address the questions that follow the case using course materials to inform and support their answers.  Additional research is likely to be needed to satisfactorily address the questions.

3. Remember, this is a Marketing class. The Product (the content, the presentation, etc.), Place (the manner in which it is presented to the instructor), Price (the amount of effort required to read and consider the points – this is a place where clarity, conciseness and attention to grammar, and spelling and punctuation counts), and Promotion (how well are your ideas supported and whether you “sell” your position) work together as the professor evaluates your work.

4. The written submission should be substantive, both in length 1500 words and content, directly and thoughtfully addressing the question or issue.

5. Responses should draw on materials from the assigned readings and discussion materials to develop a thoughtful and reasoned answer.  Students should not hesitate to draw on past experience, knowledge and external sources to support their position.

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The case assignment is an opportunity for students to assess a business challenge and apply their learning to assessing the issues and developing recommendations for their solution.

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  9B14A009 ABERCROMBIE & FITCH: IS IT UNETHICAL TO BE EXCLUSIVE?1 Danae Blanchard wrote this case under the supervision of Professors Seung Hwan (Mark) Lee and June Cotte solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2014, Richard Ivey School of Business Foundation Version: 2014-04-09

  In every school, there are the cool and popular kids and then there are the not-so-cool kids. Candidly, we go after the cool kids.

  — Michael Jeffries, Abercrombie & Fitch CEO2 BACKGROUND Abercrombie Co. was founded in 1898 by David T. Abercrombie in Manhattan, originally targeting hunters and fishermen for outdoor gear.3 When Abercrombie crossed paths with Ezra Fitch, a partnership was formed that resulted in the birth of Abercrombie & Fitch (A&F). While struggling throughout the 1970s, it wasn’t until 1988 when A&F was bought by The Limited Inc. (now known as L Brands) that the company became solely apparel-base. 4 Currently, A&F has three subsidiary stores worldwide: Abercrombie targets middle school students (ages 12 to 14), Hollister Co. targets high school students (roughly 15 to 18 years old) and A&F targets college students (about 19 to 22 years old). In 1992, A&F lost $25 million despite operating 36 stores. Leslee O’Neil, the executive vice-president of planning, stated, “ . . . it was a mess, a total disaster.”5 Michael Jeffries, hired as the new chief executive officer (CEO), had a clear vision to reinvent the brand and a strategic plan to establish a segmented target market. Jeffries believed A&F could become a “young, hip and spirited” company that would benefit from having a clearly defined target market.6 His vision included targeting cool, sexy and younger consumers and using sex appeal to revitalize the brand. After 14 years under his leadership, A&F had become the envy of the fashion world. Jeffries had built an iconic empire with more than 1,000 stores globally and US$4.5 billion dollars in annual sales. 7 The company saw earnings increase for 52 straight quarters, which is described as “the most amazing record that exists in U.S. retailing.”8 By the mid 2000s, the company had amassed a majority market share in the teen apparel market, and DNR magazine proclaimed, “the Abercrombie Effect — not since Ralph Lauren’s ascent in the 1980s has a single brand perfected a lifestyle based on look so often alluded to and imitated.”9 However, despite this success, Jeffries was criticized for his market segmentation strategy, which developed a negative reputation for the A&F brand among some consumers.

   

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  Page 2 9B14A009 SEGMENTATION CONTROVERSY Having a clearly defined target market is one goal of any apparel company. When interviewed by Salon Magazine, Jeffries clearly stated that “we want to market to cool, good-looking people. We don’t market to anyone other than that.”10 Margaret Doerrer, the national sales manager for Union Bay, another youth- oriented company, commented that Jeffries never lost sight of his target market. She stated that Jeffries “. . . created a quality brand that caters to cool clique and has a sense of exclusivity, yet it still has a mass appeal, because people want to be a part of it. It’s genius.”11 However, such an exclusionary segmentation strategy has its drawbacks. While it is strategic to have an exclusive sought-after brand, it is not tactical to alienate and offend consumers who are not within the target market. This begs the question: was Jeffries estranging potential sales by relying on this exclusive strategy? One of the controversial aspects of the firm’s strategy was that A&F did not offer extra large (XL) or double extra large (XXL) sizes for women, although those sizes were available for men. In fact, the largest women’s pants size was only size 10.12 The average U.S. woman’s pants size is 12 to 1413. It appeared that average- to large-sized female consumers did not fit the A&F definition of “cool and good-looking.” Consumers were enraged and criticized Jeffries, who defended his exclusionary strategy by stating, “A lot of people don’t belong [in our clothes] and they can’t belong.” 14 It was apparent that Jeffries was comfortable with his vision to focus on slimmer youth in efforts to make A&F a more exclusive brand desired by many. However, given recent pressure from the media and consumers, the question arose whether the company would continue with the current segmenting strategy or would widen A&F’s clothing selection to appeal to a greater number of possible consumers. ONE OPTION: ADD A FULLER RANGE OF SIZES Celebrities such as Ellen DeGeneres and Kirstie Alley spoke out against the company. 15 DeGeneres mocked the company over their sizing issue, and Alley talked negatively about the company on Entertainment Tonight, saying she would “never buy anything from Abercrombie.”16 Such opinions had negative repercussions on the A&F brand and contributed to the loss in sales. Consumers created negative memes of Jeffries and openly criticized him on social media. For example, in spring 2013, there were “118,834 mentions of Abercrombie on networks including Twitter, Facebook, blogs, and news websites throughout the quarter, and a whopping 79 per cent of those were negative.”17 Due to the general increase of negative sentiment towards the brand, in summer 2013, sales were down 10 per cent and women’s apparel sales were down 30 per cent.18 To make matters worse, there was a move to boycott the A&F brand. Given the growing controversy over the company’s target marketing practices, the company could make the decision to offer more variety in size and cater to all markets. Offering these sizes would make the company seem more inclusionary and accepting of all consumers and, more importantly, change consumer perception of the company as discriminatory. However, the expectations of being cool were not just placed on consumers, but also on employees. For instance, even in their workplace, it was mandatory for A&F employees to maintain the standards that they expected from their consumers, including stringent regulations on employees’ hair colour, cut and style, as well as make-up.19 The company stated that it wanted its employees to look natural and good-looking, just like their target market. 20 Such practices sparked a lawsuit in June 2013 when a Muslim female employee was fired from a Hollister store for wearing a hijab after being told not to.21 Overall, these controversies contributed to negative perceptions of the company, and becoming more inclusive (i.e., offering variety of sizes for women as well as men) was one of the first steps the company could take to create a more positive perception of the brand.

   

   

   

   

  Page 3 9B14A009 Jeffries himself was also criticized for the way A&F negatively contributed to the issues of body image and gender stereotypes. It was no secret that A&F had a large impact on how teens viewed beauty.22 In its advertising and product offerings, the company reaffirmed the stereotype that the ideal woman is tall, svelte and beautiful, while the ideal man is handsome and masculine.23 Ads featured large men as cool, beefy football players and wrestlers,24 but no large women. The negative gender stereotyping was further fueled by A&F’s exclusionary target marketing practices. While Jeffries contended that the brand represented an image that teenagers should strive for, these standards of beauty were often unrealistic and promoted unhealthy expectations.25 As pressures mounted regarding this issue, it seemed appropriate for Jeffries to consider widening A&F’s selection to welcome more consumers and contribute to their well- being. From a logistics perspective, adding a fuller range of sizes might increase the company’s market share in a target segment that it had ignored. Some of A&F’s main competitors (e.g., American Eagle and Aeropostale) offered women’s sizes XL and XXL and pant sizes up to 1826 without diluting the popularity of their brands. Ignoring this sector meant foregoing potential revenues, while entering it might gain market share. Hence, Jeffries might be wise to rethink the boundaries of A&F’s target market. A STATUS QUO OPTION: MAINTAIN THE SAME LINE Marketers of luxury brands want them to be highly desired, sought after and not easily attained by the average person. Brands such as Louis Vuitton, Chanel and Versace all practice exclusionary marketing tactics (via pricing) to make their brands not easily attainable, and they become highly desired by consumers. Many marketers support the idea that exclusivity in brands is a powerful thing.27 So, there were solid reasons for Jeffries to maintain A&F’s current marketing practices. Targeting a broader customer base might dilute the prestige of the A&F brand; with greater accessibility, it could become known as average, mainstream and no longer highly desirable. Jeffries stated, “Those companies that are in trouble are trying to target everybody: young, old, fat, and skinny. But then you become totally vanilla. You don’t alienate anybody, but you don’t excite anybody either.”28 When a company becomes “vanilla” and no longer exciting, it could lose the loyal customers it has worked hard to retain. Marketers in many industries know it is often easier and more cost effective to retain loyal customers than to target new ones.29 Moreover, successful businesses have clearly defined target markets and do not cater to anyone outside of the target market. “I really don’t care what anyone other than our target customer thinks,”30 explained Jeffries. So, despite the growing controversy, focusing on the current target market by making the A&F brand cool and exciting, and never “vanilla,” might make most sense. In this context, it is instructive to note the criticisms that H&M, one of A&F’s competitors, received over catering to a plus-size market 31 by featuring, for instance, a plus-sized model as the face for its new beachwear collection. 32 In March 2013, H&M replaced the typical slender mannequins in its lingerie department with large-sized mannequins, 33 showing its willingness to be inclusive and cater to larger women to avoid the kind of negative repercussions experienced by A&F. However, despite its best intentions, H&M was then criticized for promoting obesity.34 Therefore, if A&F were to go down this same route, it might receive the same type of criticism, bringing more controversy to the company. From a logistics perspective, increasing clothing sizes would increase production costs and reduce margins as more fabric would have to be used to produce larger sizes.35 If a company has a set sizing system, it cannot easily make the sizes bigger. Moreover, the body proportions of average to larger women vary from the proportions of smaller women, and thus new clothing patterns have to be customized, which puts

   

   

   

   

  Page 4 9B14A009 additional strain on production.36 Thus, an argument against offering a variety of sizes is that more fabric may lead to complex production systems and reduced margins. Hence, Jeffries might also need to consider the manufacturing implications of offering clothing sizes to average- and plus-sized women. THE DECISION To observers, it seemed that Jeffries had a difficult decision to make. While the current target marketing practices had generated high levels of success over the years, the brand that he had spent most of his career nurturing and developing seemed to be in trouble. Should the company stick to its current exclusionary tactics, focusing and catering solely to “cool, sexy” consumers? Or should it become more inclusive by offering plus sizes to tap into an underserved market? With the popularity of the brand continuing to fade, the decision about the future of A&F product offerings had become an important one.

   

   

   

   

  Page 5 9B14A009 NOTES

  1 This case has been written on the basis of published secondary sources. Consequently, the interpretation and perspectives presented in the case are not necessarily those of Abercrombie & Fitch or any of its employees. 2 Benoit Denizet-Lewis, “The Man Behind Abercrombie & Fitch,” Salon.com, 2006, www.salon.com/2006/01/24/jeffries/, accessed September 1, 2013. 3 Meredith Lepore, “ABERCROMBIE: How A Hunting And Fishing Store Became A Sex-Infused Teenybop Legend,” Business Insider, 2011, www.businessinsider.com/abercrombie-fitch-history-2011-4?op=1, accessed October 15, 2013. 4 Lepore, ”ABERCROMBIE.” 5 Denizet-Lewis, “The Man Behind Abercrombie & Fitch.” 6 Ibid. 7 Michael Thrasher, “The CEO Of Abercrombie & Fitch Is at a Major Crossroads,” Business Insider, 2013, www.businessinsider.com/abercrombie-ceo-at-a-crossroads-2013-8, accessed October 15, 2013. 8 Denizet-Lewis, “The Man Behind Abercrombie & Fitch.” 9 Ibid. 10 Thrasher, “The CEO of Abercrombie & Fitch Is at a Major Crossroads.” 11 Denizet-Lewis, “The Man Behind Abercrombie & Fitch.” 12 Ashley Lutz, “Abercrombie & Fitch Refuses to Make Clothes for Large Women,” Business Insider, 2013, www.businessinsider.com/abercrombie-wants-thin-customers-2013-5, accessed October 15, 2013. 13 Cynthia Nellis, “All About Fit,” Women’s Fashion-About.com, 2013, http://fashion.about.com/cs/tipsadvice/a/allaboutfit.htm, accessed December 15, 2013. 14 Denizet-Lewis, “The Man Behind Abercrombie & Fitch.” 15 Sapna Maheshwari, “Did Abercrombie’s Anti-Fat Controversy Contribute To Plunging Sales?,” BuzzFeed, 2013, www.buzzfeed.com/sapna/did-abercrombies-anti-fat-perception-contribute-to-plunging, accessed October 1, 2013. 16 Emma Jones, “Celebrities Sound Off Against Abercrombie & Fitch,” CelebrityStyle.About.com, 2013, http://celebritystyle.about.com/b/2013/06/16/cebrities-sound-off-against-abercrombie-fitch.htm, accessed October 13, 2013. 17 Maheshwari, “Did Abercrombie’s Anti-Fat Controversy Contribute To Plunging Sales?” 18 Sapna Maheshwari, “Exclusive: Girls Abandoning Abercrombie & Fitch, Driving Decline,” BuzzFeed, 2013, www.buzzfeed.com/sapna/exclusive-girls-that-wear-abercrombie-fitch-fall-to-wayside, accessed October 15, 2013. 19 Kevin Allen, “Abercrombie & Fitch Takes Flak over ‘Look Policy,’” PR Daily News, 2013, www.prdaily.com/Main/Articles/Abercrombie_Fitch_takes_flak_over_Look_Policy_15186.aspx?fb_action_ids=10200775936 788617, accessed October 20, 2013. 20 Thrasher, “The CEO of Abercrombie & Fitch Is at a Major Crossroads.” 21 Allen, “Abercrombie & Fitch Takes Flak.” 22 Denizet-Lewis, “The Man Behind Abercrombie & Fitch.” 23 “Women against the Media’s Woman,” Sociology of Women, 2008, http://sociologyofwomen.webs.com/stereotypes.htm, accessed October 31, 2013. 24 Lutz, “Abercrombie & Fitch Refuses to Make Clothes for Large Women.” 25 “Women against the Media’s Woman.” 26 Ashley Lutz, “Abercrombie & Fitch Refuses to Make Clothes for Large Women”; “Aero Girls Size Chart,” Aeropostale.com, 2013, www.aeropostale.com/category/index.jsp?categoryId=11893475&cp=3534618.3534619.3534623.3541051, accessed October 15, 2013. 27 Tim Backes, “A Lesson from Abercrombie about Exclusivity in Marketing,” ProPRCopy.com, 2013, www.proprcopy.com/copywriters-blog/exclusivity-in-marketing-a-lesson-from-abercrombie/, accessed October 15, 2013. 28 Denizet-Lewis, “The Man Behind Abercrombie & Fitch.” 29 Michael D. Hutt and Thomas W. Speh, Business Marketing Management B2B, 11th ed. Cengage Learning, United Kingdom, 2013. 30 Denizet-Lewis, “The Man Behind Abercrombie & Fitch.” 31 Lutz, “Abercrombie & Fitch Refuses to Make Clothes for Large Women.” 32 Laura Stampler, “H&M Subtly Used A Plus-Sized Model For Its Swimsuit Collection,” Business Insider, 2013, www.businessinsider.com/jennie-runk-plus-sized-model-for-hm-swimwear-2013-4, accessed October 1, 2013. 33 Ibid. 34 Ibid. 35 Ginia Bellafante, “Plus-Size Wars,” New York Times, 2010, www.nytimes.com/2010/08/01/magazine/01plussize- t.html?pagewanted=1&_r=2&hp&, accessed October 31, 2013. 36 Ibid.

 

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