# Accounting 1 Midterm Pre-examination

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| By Chian Tayupon
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Chian Tayupon
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Questions: 80 | Attempts: 557

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• 1.

### When using the perpetual inventory system, freight charges on goods purchased are debited to inventory.

• A.

True

• B.

False

A. True
Explanation
In the perpetual inventory system, all costs associated with acquiring inventory are recorded directly into the inventory account. This includes freight charges on goods purchased, which are considered part of the cost of acquiring the inventory. Therefore, freight charges on goods purchased are debited to the inventory account in the perpetual inventory system.

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• 2.

### 2. If both purchases and ending inventory are overstated by the same amount, net income is not affected.

• A.

True

• B.

False

A. True
Explanation
If both purchases and ending inventory are overstated by the same amount, it means that the reported value of inventory at the end of the accounting period is higher than it should be, and the reported cost of goods sold is also higher than it should be. However, since both purchases and ending inventory are overstated by the same amount, the difference between them (which is the cost of goods sold) remains the same. As a result, net income is not affected because the overstatement in purchases and ending inventory cancels each other out.

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• 3.

### 3. All freight charges are included in the computation of the cost of goods sold.

• A.

True

• B.

False

B. False
Explanation
The statement is false because not all freight charges are included in the computation of the cost of goods sold. While some freight charges may be included, others may be classified as separate expenses such as shipping or delivery costs. Therefore, it is incorrect to say that all freight charges are included in the computation of the cost of goods sold.

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• 4.

### 4. The amount of profit will appear on the credit side of the Income Statement column on a worksheet if total revenues exceed total expenses for the period.

• A.

True

• B.

False

B. False
Explanation
The amount of profit will appear on the credit side of the Income Statement column on a worksheet if total revenues exceed total expenses for the period. This statement is false. In accounting, profit is calculated by subtracting total expenses from total revenues. If total revenues exceed total expenses, there will be a net profit, which will appear on the debit side of the Income Statement column on a worksheet, not the credit side.

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• 5.

### 5. If the ending balance of the Supplies account is greater than its beginning balance, more supplies are purchased than used during the period.

• A.

True

• B.

False

A. True
Explanation
If the ending balance of the Supplies account is greater than its beginning balance, it means that more supplies were purchased than used during the period. This is because the ending balance includes the beginning balance plus any additional supplies purchased, minus any supplies used. Therefore, if the ending balance is greater, it indicates that more supplies were purchased than used.

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• 6.

### 6. When using the percentage of accounts receivable as computation for the doubtful accounts, the amount derived when multiplying the accounts receivable with the percentage is doubtful accounts expense.

• A.

True

• B.

False

B. False
Explanation
When using the percentage of accounts receivable as computation for the doubtful accounts, the amount derived when multiplying the accounts receivable with the percentage is not the doubtful accounts expense. The amount derived from this calculation represents the estimated amount of accounts receivable that is expected to be uncollectible, which is recorded as a contra-asset account called the allowance for doubtful accounts. The doubtful accounts expense is then determined separately by analyzing the actual bad debts incurred during the accounting period.

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• 7.

### 7. Supplies purchased that were subsequently returned without replacement will be recorded by the buyer as a credit to purchase returns and allowances.

• A.

True

• B.

False

B. False
Explanation
Supplies purchased that were subsequently returned without replacement will not be recorded as a credit to purchase returns and allowances by the buyer. Instead, it will be recorded as a credit to accounts payable or cash, depending on the method of payment used. The purchase returns and allowances account is used to record returns or allowances granted by the seller to the buyer.

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• 8.

### 8. The adjusting entry to recognize earned commission revenues not previously recorded or billed will cause total assets to increase.

• A.

True

• B.

False

A. True
Explanation
The adjusting entry to recognize earned commission revenues not previously recorded or billed will cause total assets to increase because revenue is a component of total assets. When the earned commission revenue is recognized and recorded, it increases the revenue account, which in turn increases the total assets of the company.

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• 9.

### 9. Reversing entries are made to correct errors in the accounts.

• A.

True

• B.

False

B. False
Explanation
Reversing entries are not made to correct errors in the accounts. They are made to cancel out the effects of certain adjusting entries that were recorded in the previous accounting period. These entries are typically made at the beginning of a new accounting period and are used to simplify the recording process and ensure that the correct balances are carried forward. Therefore, the statement that reversing entries are made to correct errors in the accounts is false.

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• 10.

### 10. When profit or loss is zero, one of the usual closing entries will be avoided.

• A.

True

• B.

False

A. True
Explanation
When profit or loss is zero, it means that the company's revenue is equal to its expenses, resulting in neither profit nor loss. In this scenario, there is no need to make any closing entries related to profit or loss because there is no amount to be transferred to the retained earnings account. Therefore, one of the usual closing entries will be avoided when profit or loss is zero.

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• 11.

### 11. An entry debiting inventory and crediting cost of goods sold when merchandise is returned and the perpetual inventory method is used.

• A.

True

• B.

False

A. True
Explanation
When merchandise is returned using the perpetual inventory method, the inventory account is debited to increase the inventory balance and the cost of goods sold account is credited to decrease the cost of goods sold. This is because the returned merchandise is added back to the inventory and the cost associated with it is deducted from the cost of goods sold. Therefore, the statement is true.

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• 12.

### 12. The cost of goods sold is equal to the cost of inventory at the end of the period plus net purchases minus the cost of inventory at the beginning of the period.

• A.

True

• B.

False

B. False
Explanation
The cost of goods sold is not equal to the cost of inventory at the end of the period plus net purchases minus the cost of inventory at the beginning of the period. The correct calculation for the cost of goods sold is the cost of inventory at the beginning of the period plus net purchases minus the cost of inventory at the end of the period.

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• 13.

### 13. If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier delivers the goods to the common carrier.

• A.

True

• B.

False

B. False
Explanation
When a supplier ships goods f.o.b. (free on board) destination, it means that the supplier is responsible for the goods until they reach the buyer's specified destination. Therefore, title to the goods does not pass to the buyer when the supplier delivers the goods to the common carrier. The correct answer is False.

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• 14.

### 14. One of the limitations of the income statement is that items cannot be measured reliably are not reported.

• A.

True

• B.

False

A. True
Explanation
The income statement is a financial statement that reports a company's revenues, expenses, and net income over a specific period of time. One limitation of the income statement is that it only includes items that can be measured reliably. This means that if an item cannot be accurately quantified or its value cannot be determined with certainty, it will not be reported on the income statement. Therefore, the statement "items cannot be measured reliably are not reported" is true.

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• 15.

### 15. The income statement reveals net earnings (net income) of a firm at a point in time.

• A.

True

• B.

False

B. False
Explanation
The income statement does not reveal net earnings (net income) of a firm at a point in time. Instead, it shows the financial performance of a company over a specific period, typically a year. Net income is calculated by subtracting expenses from revenues, and it represents the profit or loss of a company during that period. Therefore, the income statement provides information about the profitability of a company, but not specifically at a single point in time.

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• 16.

### 16. The use of a purchase discount account implies that the recorded cost of a purchased inventory item is its invoice price less the purchase discount allowable whether or not it is taken.

• A.

True

• B.

False

B. False
Explanation
The use of a purchase discount account does not imply that the recorded cost of a purchased inventory item is its invoice price less the purchase discount allowable whether or not it is taken. The purchase discount account is used to record any discounts taken by the buyer when paying for the inventory item. If the discount is not taken, the recorded cost of the inventory item would still be its invoice price.

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• 17.

### 17. Distribution costs or selling expenses may not be directly related to the entity’s efforts to generate sales.

• A.

True

• B.

False

B. False
Explanation
Distribution costs or selling expenses are directly related to the entity's efforts to generate sales. These costs include expenses such as advertising, sales commissions, transportation costs, and packaging costs, which are all incurred in order to promote and sell the entity's products or services. Therefore, these costs are directly linked to the entity's sales activities and are necessary to generate sales. Hence, the statement that distribution costs or selling expenses may not be directly related to the entity's efforts to generate sales is false.

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• 18.

### 18. When an entity uses the perpetual inventory system, no entry is required to transfer the beginning inventory balance to the income summary account.

• A.

True

• B.

False

A. True
Explanation
In the perpetual inventory system, inventory balances are continuously updated in real-time. This means that there is no need to transfer the beginning inventory balance to the income summary account at the start of a new accounting period. The perpetual inventory system automatically keeps track of inventory purchases, sales, and adjustments, allowing for accurate and up-to-date inventory records. Therefore, no entry is required to transfer the beginning inventory balance to the income summary account in this system.

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• 19.

### 19. In no case shall deferrals be allowed to be reversed.

• A.

True

• B.

False

B. False
Explanation
Deferrals cannot be reversed in any case. This means that once a deferral is made, it cannot be undone or changed. Therefore, the statement "In no case shall deferrals be allowed to be reversed" is true.

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• 20.

### 20. Adjusting entries are mainly anchored with the matching principle.

• A.

True

• B.

False

B. False
Explanation
Adjusting entries are not mainly anchored with the matching principle. Adjusting entries are made to ensure that revenues and expenses are properly recognized in the accounting period in which they occur, regardless of when cash is received or paid. The matching principle states that expenses should be matched with the revenues they help generate in the same accounting period. While adjusting entries do help in achieving the matching principle, they serve a broader purpose of accurately reflecting the financial position and performance of a company.

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• 21.

### 21. After journalizing and posting the closing entries, the balance of the owner’s capital account represents the cumulative net result of income, expense, and withdrawal transactions.

• A.

True

• B.

False

A. True
Explanation
After journalizing and posting the closing entries, the balance of the owner's capital account represents the cumulative net result of income, expense, and withdrawal transactions. This means that the balance in the capital account reflects the total amount of income earned, expenses incurred, and withdrawals made by the owner throughout the accounting period. Therefore, the statement is true.

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• 22.

### 22. If there is a loss, the closing entries would involve a credit to income summary.

• A.

True

• B.

False

A. True
Explanation
When there is a loss, the closing entries are made to transfer the balances of temporary accounts (such as revenue and expense accounts) to the income summary account. The income summary account acts as a temporary holding account to summarize the net income or loss for the period. Since a loss decreases the net income, a credit entry is made to the income summary account to reflect the decrease in net income due to the loss. Therefore, the statement is true.

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• 23.

### 23. In an income statement that uses the method of natural presentation of expense, costs are grouped according to their functions.

• A.

True

• B.

False

B. False
Explanation
In an income statement that uses the method of natural presentation of expense, costs are not grouped according to their functions. Instead, they are grouped based on their nature or type. This means that expenses such as salaries, rent, and utilities will be grouped together under a specific category, regardless of the function they serve within the company.

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• 24.

### 24. There is sufficient information on a post-closing trial balance to prepare a balance sheet.

• A.

True

• B.

False

A. True
Explanation
A post-closing trial balance is prepared after all the closing entries have been made and the temporary accounts have been closed. It includes only the permanent accounts, such as assets, liabilities, and equity accounts. Since a balance sheet shows the financial position of a company at a specific point in time, it includes information from permanent accounts. Therefore, a post-closing trial balance provides sufficient information to prepare a balance sheet.

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• 25.

### 25. Trade discounts of 10%, 20% signifies that the invoice price is 72% of its list price.

• A.

True

• B.

False

A. True
Explanation
A trade discount of 10% means that the buyer will receive a 10% reduction in the price of the item. Similarly, a trade discount of 20% means a 20% reduction in the price. To find the final price after both discounts, we can calculate 100% - 10% = 90% of the original price, and then 90% - 20% = 72% of the original price. Therefore, the invoice price is 72% of its list price.

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• 26.

### 26. The terms FOB destination and FOB shipping point indicate who paid the transaction cost.

• A.

True

• B.

False

B. False
Explanation
The terms FOB destination and FOB shipping point do not indicate who paid the transaction cost. Instead, they refer to the point at which the ownership and responsibility for the goods transfer from the seller to the buyer. FOB destination means that the seller is responsible for the goods until they reach the buyer's specified destination, while FOB shipping point means that the buyer assumes responsibility once the goods are shipped from the seller's location.

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• 27.

### 27. A deduction allowed to wholesalers and retailers from the price of the merchandise listed in catalogues is called cash discounts.

• A.

True

• B.

False

B. False
Explanation
Cash discounts are not deductions allowed to wholesalers and retailers from the price of merchandise listed in catalogues. Cash discounts are reductions in price given to customers who pay their bills within a specified time period. The correct term for deductions allowed to wholesalers and retailers from the price of merchandise listed in catalogues is trade discounts.

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• 28.

### 28. The effect of a sales return and allowance is a reduction in sales revenue and a decrease in cash or accounts receivable.

• A.

True

• B.

False

A. True
Explanation
Sales return and allowance refers to the situation where a customer returns a product or receives a partial refund due to dissatisfaction or other reasons. This results in a reduction in sales revenue because the original sale is reversed. Additionally, there is a decrease in cash or accounts receivable because the company refunds the customer either in cash or by reducing the amount owed by the customer. Therefore, the statement that the effect of a sales return and allowance is a reduction in sales revenue and a decrease in cash or accounts receivable is true.

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• 29.

### 29. When the seller offers a sales discount, it is disadvantageous for the buyer to borrow cash in order to settle its obligation within the discount period.

• A.

True

• B.

False

B. False
Explanation
When the seller offers a sales discount, it is advantageous for the buyer to borrow cash in order to settle its obligation within the discount period. This is because the discount reduces the amount owed by the buyer, so borrowing cash to take advantage of the discount can result in cost savings for the buyer. Therefore, the statement is false.

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• 30.

### 30. A revenue account, with a credit normal balance, shall be closed with a credit to revenue, and debit to income summary.

• A.

True

• B.

False

B. False
Explanation
A revenue account, with a credit normal balance, shall be closed with a debit to revenue and a credit to income summary. This is because revenue accounts have a credit balance, and to close them, we need to decrease the balance by debiting the revenue account and transferring the amount to the income summary account, which has a credit balance.

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• 31.

### Which of the following is not an objective of financial reporting?

• A.

To provide information about economic resources, the claims to those resources, and the changes in them.

• B.

​​​​​​​To provide information that are useful to investors, creditors, and other users in assessing the amounts, timing, and uncertainty of future cash flows.

• C.

To provide information about an entity’s financial position, performance, and cash flows, in order to meet the specific needs of external users.

• D.

To provide information about the entity that is useful in assessing the management’s stewardship of the entity’s economic resources.

C. To provide information about an entity’s financial position, performance, and cash flows, in order to meet the specific needs of external users.
Explanation
The objective of financial reporting is to provide information that is useful to investors, creditors, and other users in assessing the amounts, timing, and uncertainty of future cash flows. This option states that the objective is to provide information about an entity's financial position, performance, and cash flows, in order to meet the specific needs of external users. However, the correct answer is that this is not an objective of financial reporting.

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• 32.

### 2. Which of the following is incorrect?

• A.

​​​​​​In January 1, 2019, Sadness & Co. purchased an equipment with a cost of P50,000, a salvage value of P10,000, and an estimated useful life of 10 years. In December 31, 2027, the company should reclassify the equipment to current, because its remaining useful life left is 1 year.

• B.

​​​​​​Current liabilities are present obligations of an entity that it expects to settle within its normal operating cycle. A long-term note, payable in 5 years, can be a current liability.

• C.

The normal balance of the revenue account is credit. Thus, a credit balance in the income summary account indicates income

• D.

The post-closing trial balance, which verifies that all debits equal the total credits, does not include the withdrawal account.

A. ​​​​​​In January 1, 2019, Sadness & Co. purchased an equipment with a cost of P50,000, a salvage value of P10,000, and an estimated useful life of 10 years. In December 31, 2027, the company should reclassify the equipment to current, because its remaining useful life left is 1 year.
Explanation
The given statement is incorrect because the equipment should not be reclassified to current on December 31, 2027, based on the remaining useful life. Reclassification of assets to current is based on their expected conversion to cash within the normal operating cycle, and not solely on the remaining useful life. The equipment in question has a useful life of 10 years, and it would not be considered a current asset just because it has 1 year of useful life remaining.

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• 33.

### 3. A reversing entry cannot be made for all of the following, except

• A.

Deferred revenue initially recorded as a liability

• B.

​​​​​​Unearned revenue initially recorded as income

• C.

Prepaid expense initially recorded as an asset

• D.

None of these

B. ​​​​​​Unearned revenue initially recorded as income
Explanation
A reversing entry is made to reverse the effect of an adjusting entry that was made in the previous accounting period. It is typically used for accruals and deferrals. In this case, deferred revenue initially recorded as a liability and prepaid expense initially recorded as an asset are both examples of deferrals, where cash has been received or paid in advance for goods or services that will be provided in the future. These deferrals require reversing entries to adjust the accounts back to their original state. On the other hand, unearned revenue initially recorded as income is not a deferral but rather an error in recording. Therefore, a reversing entry cannot be made for unearned revenue initially recorded as income.

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• 34.

### 4. Monsters Inc. omitted the entry to convert unearned revenues to earned revenues. How would this omission affect the entity’s liabilities and revenues?

• A.

​​​​​​Liabilities would be overstated, Revenues would be overstated

• B.

Liabilities would be overstated, Revenues would be understated

• C.

Liabilities would be understated, Revenues would be overstated

• D.

Liabilities would be understated, Revenues would be understated

B.   Liabilities would be overstated, Revenues would be understated
Explanation
If Monsters Inc. omitted the entry to convert unearned revenues to earned revenues, it means that they did not recognize the portion of the unearned revenues that should have been recognized as earned revenues. This would result in liabilities being overstated because the unearned revenues that should have been recognized as earned would still be classified as liabilities. Additionally, revenues would be understated because the portion of the unearned revenues that should have been recognized as earned would not be included in the revenue figure.

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• 35.

### 5. Which of the following statements about the worksheet is correct?

• A.

​​​​​​In a worksheet, profit or loss may not always be the amount by which the debit and credit columns for income statement, and the debit and credit columns for balance sheet differ.

• B.

​​​​​​​After completion, total debits and total credits in the income statement and balance sheet columns may not always be equal.

• C.

​​​​​​​If there is a loss, the loss figure is shown in the debit columns of both the income statement and balance sheet columns in the worksheet.

• D.

​​​​​​​The profit figure is extended to the credit column of the balance sheet because profit increases owner’s equity.

D. ​​​​​​​The profit figure is extended to the credit column of the balance sheet because profit increases owner’s equity.
Explanation
The profit figure is extended to the credit column of the balance sheet because profit increases owner's equity. This statement is correct because in accounting, profit is considered a source of owner's equity. When a business earns profit, it increases the owner's stake in the business, which is reflected in the balance sheet by extending the profit figure to the credit column.

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• 36.

### 6. The year-end statement of financial position reports an entity’s assets, liabilities, and equity

• A.

For a specific period

• B.

For the next year

• C.

​​​​​​​For the month ended

• D.

​​​​​​​As of a specific date

D. ​​​​​​​As of a specific date
Explanation
The year-end statement of financial position reports an entity's assets, liabilities, and equity as of a specific date. This means that the statement reflects the financial position of the entity at a particular point in time, rather than for a specific period or for the next year. It provides a snapshot of the entity's financial health at the end of the year, allowing stakeholders to assess its financial position and make informed decisions.

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• 37.

### 7. Which of the following properly describes the notes to financial statements within the scope of the PFRS?

• A.

​​​​​​​The notes comprise a summary of significant accounting policies and other explanatory information

• B.

States the financial review by the management that describes and explains the main features of the entity’s financial performance, financial position, and the principal uncertainties it faces.

• C.

Includes the entity’s policies for investment to maintain and enhance financial performance, including its dividend policy

• D.

​​​​​​​Shows the main factors and influences determining financial performance, including changes in the environment in which the entity operates

A. ​​​​​​​The notes comprise a summary of significant accounting policies and other explanatory information
Explanation
The correct answer is "The notes comprise a summary of significant accounting policies and other explanatory information." This answer accurately describes the purpose and content of the notes to financial statements. The notes provide additional details and explanations about the accounting policies used, as well as any other important information that helps users of the financial statements understand the financial position and performance of the entity.

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• 38.

### 8. This refers to the entity’s ability to settle its long-term financial commitments as they fall due.

• A.

Liquidity

• B.

Solvency

• C.

​​​​​​Financial Flexibility

• D.

​​​​​​​Profitability

B. Solvency
Explanation
Solvency refers to the entity's ability to settle its long-term financial commitments as they fall due. It indicates whether the entity has enough assets to cover its liabilities in the long run. Liquidity, on the other hand, refers to the entity's ability to meet its short-term obligations. Financial flexibility refers to the entity's ability to adapt to changing financial circumstances. Profitability refers to the entity's ability to generate profits. Therefore, solvency is the most appropriate term to describe the entity's ability to settle its long-term financial commitments.

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• 39.

### 9. Which of the following is incorrect?

• A.

The statement of cash flows reports the net increase or decrease in cash during the period and ends with the cash balance reported in the balance sheet. This statement is prepared based on the information from the income statement and the balance sheet.

• B.

​​​​​​The statement of financial position reports the ending owner’s equity, taken directly from the statement of changes in equity.

• C.

The statement of changes in equity may not consider the profit or loss figure from the income statement as one of the determining factors that explains the change in owner’s equity.

• D.

The income statement reports all income and expenses during the period. The profit or loss is the final figure in this statement.

C. The statement of changes in equity may not consider the profit or loss figure from the income statement as one of the determining factors that explains the change in owner’s equity.
Explanation
The statement of changes in equity may not consider the profit or loss figure from the income statement as one of the determining factors that explains the change in owner's equity. This means that the statement of changes in equity may not directly include the profit or loss figure when calculating the change in owner's equity. Instead, it may consider other factors such as contributions from shareholders or distributions to shareholders.

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• 40.

### 10. If total credits exceed total debits in the balance sheet columns of a worksheet,

• A.

• B.

There is profit

• C.

​​​​​​​There is a loss

• D.

Assets exceed liabilities

C. ​​​​​​​There is a loss
Explanation
If the total credits exceed the total debits in the balance sheet columns of a worksheet, it indicates that there is a loss. This is because credits represent income or gains, while debits represent expenses or losses. When the total credits are higher than the total debits, it means that the company has incurred more expenses or losses than it has gained in income or profits. Therefore, there is a loss.

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• 41.

### 11. Which of the following is correct?

• A.

​​​​​​In the computation of gross profit, operating expenses are excluded.

• B.

Operating profit differs from earnings before interest and taxes.

• C.

Other gains and losses are included in the computation of revenues.

• D.

Profit from continuing operations is computed by deducting the income tax expense from the gross profit.

A. ​​​​​​In the computation of gross profit, operating expenses are excluded.
Explanation
The correct answer is that in the computation of gross profit, operating expenses are excluded. Gross profit is calculated by subtracting the cost of goods sold from the total revenue. Operating expenses, such as salaries, rent, and utilities, are not included in this calculation. Operating profit, on the other hand, is calculated by subtracting all operating expenses, including depreciation and amortization, from the gross profit. Other gains and losses, such as gains or losses from the sale of assets, are not included in the computation of revenues. Profit from continuing operations is calculated by further deducting non-operating expenses, such as interest and taxes, from the operating profit.

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• 42.

### 12. Which of the following most accurately reflects the concept of depreciation as used in accounting?

• A.

The process of charging the decline in value of an economic resource to income in the period in which the benefit occurred.

• B.

​​​​​​The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

• C.

A method of allocating asset cost to an expense account in a manner which closely matches the physical deterioration of the tangible asset involved.

• D.

An accounting concept that allocates the portion of an asset used up during the year to the contra asset account for the purpose of properly recording the fair market value of tangible assets.

B. ​​​​​​The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
Explanation
Depreciation is the process of allocating the cost of tangible assets to expense over the periods in which they are expected to provide benefits. This means that the cost of the asset is spread out over its useful life, rather than being expensed all at once. By doing so, the financial statements accurately reflect the decrease in value of the asset over time and match the expense with the periods in which the asset is used and generates revenue. This method allows for a more accurate representation of the asset's true value and helps in determining the profitability of the business.

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• 43.

### 13. The term "depreciable base," or "depreciation base," as it is used in accounting, refers to

• A.

The total amount to be charged (debited) to expense over an asset's useful life.

• B.

The cost of the asset less the related depreciation recorded to date.

• C.

​​​​​​the estimated market value of the asset at the end of its useful life.

• D.

The acquisition cost of the asset.

A. The total amount to be charged (debited) to expense over an asset's useful life.
Explanation
The term "depreciable base" or "depreciation base" in accounting refers to the total amount that will be charged to expense over the useful life of an asset. This means that it represents the portion of the asset's cost that will be allocated as an expense each accounting period. It does not include the related depreciation recorded to date or the estimated market value of the asset at the end of its useful life. It simply represents the acquisition cost of the asset that will be depreciated over time.

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• 44.

### 14. Which of the following inventories carried by a manufacturer is similar to the merchandise inventory of a retailer?

• A.

Raw materials

• B.

Work-in-process

• C.

Finished goods

• D.

​​​​​​Supplies

C. Finished goods
Explanation
Finished goods inventory is similar to the merchandise inventory of a retailer because it consists of completed products that are ready to be sold to customers. Both types of inventory represent the final stage of production or acquisition before the goods are sold to end consumers. Raw materials inventory refers to the materials that are used to produce goods, while work-in-process inventory includes partially completed products that are still being worked on. Supplies inventory includes items that are used in the manufacturing process but are not directly related to the final product.

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• 45.

### 15. Where should raw materials be classified on the balance sheet?

• A.

Prepaid expenses.

• B.

Inventory.

• C.

Equipment.

• D.

​​​​​​​Furniture and Fixtures

B. Inventory.
Explanation
Raw materials should be classified as inventory on the balance sheet because they are the materials that a company has purchased but has not yet used in the production process. Inventory represents assets that a company intends to sell or use in the production of goods or services. Therefore, raw materials, which are essential for the production process, should be categorized as inventory on the balance sheet.

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• 46.

### 16. Why are inventories included in the computation of net income?

• A.

To determine cost of goods sold.

• B.

​​​​​​To determine sales revenue.

• C.

Inventories are not included in the computation of net income.

• D.

​​​​​​​To determine merchandise returns.

A. To determine cost of goods sold.
Explanation
Inventories are included in the computation of net income because they represent the cost of goods that have been sold during a specific period. By subtracting the cost of goods sold from the sales revenue, the company can determine its gross profit. This is an important component in calculating the net income, as it represents the overall profitability of the business after accounting for the cost of producing and selling its products. Therefore, including inventories in the computation of net income allows for a more accurate reflection of the company's financial performance.

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• 47.

### 17. Which of the following is a characteristic of a perpetual inventory system?

• A.

Inventory purchases are debited to a Purchases account.

• B.

Inventory records are not kept for every item.

• C.

Cost of goods sold is recorded with each sale.

• D.

​​​​​​​Cost of goods sold is determined as the amount of purchases less the change in inventory.

C. Cost of goods sold is recorded with each sale.
Explanation
A perpetual inventory system is a method of tracking inventory in real-time, where inventory records are constantly updated with each purchase and sale. In this system, the cost of goods sold is recorded with each sale, meaning that the cost of the items sold is immediately deducted from the inventory account. This allows for accurate and up-to-date tracking of inventory levels and cost of goods sold.

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• 48.

### 18. If a company uses the periodic inventory system, what is the impact on net income of including goods in transit f.o.b. shipping point in purchases, but not in ending inventory?

• A.

​​​​​​​Overstate net income.

• B.

Understate net income

• C.

No effect on net income

• D.

​​​​​​​Not sufficient information to determine effect on net income

B. Understate net income
Explanation
When a company uses the periodic inventory system, the purchases are recorded when goods are received, and the ending inventory is determined by a physical count at the end of the accounting period. If goods in transit f.o.b. shipping point are included in purchases but not in ending inventory, it means that these goods have not yet been received by the company. As a result, the company's ending inventory will be understated because it does not include these goods. Since ending inventory is deducted from purchases to calculate cost of goods sold, understating ending inventory will lead to an understatement of cost of goods sold and ultimately understate net income.

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• 49.

### 19. If the beginning inventory for 2019 is overstated, the effects of this error on cost of goods sold for 2019, net income for 2019, and assets at December 31, 2020, respectively, are

• A.

Overstatement, understatement, overstatement

• B.

​​​​​​overstatement, understatement, no effect

• C.

Understatement, overstatement, overstatement

• D.

​​​​​​​understatement, overstatement, no effect

B. ​​​​​​overstatement, understatement, no effect
Explanation
If the beginning inventory for 2019 is overstated, it means that the value of the inventory is recorded higher than it actually is. This would result in an overstatement of the cost of goods sold for 2019, as the inflated inventory value would be used to calculate the cost of goods sold. This overstatement would then lead to an understatement of net income for 2019, as the cost of goods sold is subtracted from revenue to calculate net income. However, the error in the beginning inventory for 2019 would have no effect on the assets at December 31, 2020, as the error occurred in the previous year and would not impact the current year's assets.

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• 50.

### 20. The failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results in

• A.

​​​​​​​an overstatement of assets and net income.

• B.

An understatement of assets and net income.

• C.

​​​​​​​an understatement of cost of goods sold and liabilities and an overstatement of assets.

• D.

​​​​​​​an understatement of liabilities and an overstatement of owners' equity.

D. ​​​​​​​an understatement of liabilities and an overstatement of owners' equity.
Explanation
When a purchase of merchandise on account is not recorded, it means that the company has not recognized the liability to pay for the goods received. As a result, both liabilities and owners' equity are understated because the amount owed to the supplier is not reflected in the financial statements. Additionally, since the goods are included in the physical inventory but not recorded as a purchase, assets are overstated. This leads to an understatement of liabilities and an overstatement of owners' equity.

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• Current Version
• Mar 22, 2023
Quiz Edited by
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• Aug 14, 2019
Quiz Created by
Chian Tayupon

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