PAGE 1 FINANCIAL ACCOUNTING AND REPORTING ACCOUNTING PROCESS 1. An optional step in the accounting cycle is the preparation of a. Adjusting entries b. Closing entries c. Financial statements d. A postclosing trial balance 2. Which of the following steps in the accounting cycle are listed in logical order? a. Post the reversing entries, prepare the financial statements and then take a trial balance. b. Prepare the closing entries, prepare the adjusting entries and then prepare the financial statements. c. Prepare an unadjusted trial balance, prepare the adjusting entries and then prepare the financial statements. d. Post the closing entries, take a post-closing trial balance and then prepare financial statements. \
3. The accounting equation must remain in balance a. Throughout each step in the accounting cycle b. Only when journal entries are recorded. c. Only at the time the trial balance is prepared. d. Only when formal financial statements are prepared. 4. The system of bookkeeping that recognizes the two-fold effect of an accountable event is known as? a. Double-entry c. Cash basis b. Single-entry d. Accrual 5. Which of the following is not an advantage of double entry bookkeeping? a. Provide that all clerical errors will be revealed and corrected. b. The complete effect of all transactions is recorded. c. Complete accounting permits fair presentation of financial statements. d. Provides more effective internal control. 6. It is the accounting device that is used to store the recorded monetary information from the entity’s transaction and events. a. Account c. Ledger b. Journal d. Source document 7. A general journal a. Chronologically lists transactions and other events expressed in terms of debits and credits. b. Contains one record for each of the asset, liability, equity, revenue and expense accounts. c. Lists all the increases and decreases in each account in one place. d. Contains only adjusting entries. 8. Accumulated depreciation is an example of a. Nominal and adjunct account b. Real and adjunct account c. Nominal and contra account d. Real and contra account 9. Which is an example of a nominal and contra account? a. Freight in b. Sales discount c. Purchases d. Allowance for doubtful accounts 10. Which of the following best describes a general journal? a. The general journal directly provides data for a trial balance. b. The general journal eliminates the need for control accounts in the ledger. c. The general journal provides a continuing balance of the amount to date in each of the accounts. d. The general journal provides a chronological listing of transactions in a debit-credit form. 11. A simple journal entry a. Consists of one debit and one credit b. Consists of two debits and one credit
c. Consists of one debit and two credits d. Is only a memorandum entry
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PAGE 2 12. In recording transactions a. The word “debit” means increase and the word “credit” means decrease. b. Assets, expenses and drawing accounts are credited for increases. c. Liabilities, revenue and capital accounts are credited for increases. d. Assets, expenses and drawing accounts are debited for decreases. 13. Which of the following is not a possible combination of a journal entry? a. Increase in asset and increase in liability. b. Decrease in equity and increase in liability. c. Decrease in liability and decrease in asset. d. Increase in asset and decrease in equity. 14. Which type of accounts measure economic flows over a period of time? a. Real accounts c. Mixed accounts b. Nominal accounts d. Contra accounts 15. Given the dual effects of accountable events, an increase in a liability cannot possibly be accompanied by a (an) a. Decrease in another liability c. Increase in an asset b. Increase in owner’s equity d. Decrease in revenue 16. Willis Company purchased a computer for P200,000. The company paid P50,000 cash as down payment and issued a P150,000 note payable without interest in 60 days. Which one of the following is not descriptive of the transaction? a. Total liabilities increased by P150,000. b. Total assets increased by P200,000. c. The transaction did not immediately affect the owner’s equity. d. From the viewpoint of a short time creditor the transaction made the business less solvent. 17. Which is false concerning the use of special journals? a. Only sales of merchandise on account are recorded in the sales journal and cash sales are recorded in the cash receipts journal. b. Purchases of any items on account are recorded in the purchases journal. c. Transactions that cannot be appropriately recorded in a special journal are recorded in the general journal. d. Only cash purchases are recorded in the cash disbursements journal. 18. What function do general ledgers serve in the accounting process? a. Reporting c. Classifying b. Summarizing d. Recording 19. Which of the following best describes the purpose of a general ledger? a. The general ledger contains only accounts which are supported by subsidiary accounts. b. The general ledger provides a record of transactions classified by account. c. The general ledger eliminates the need for control accounts. d. The general ledger provides a listing of the dates of transactions affecting each account, what amount and the ending balance of each account. 20. A subsidiary ledger is a. A listing of the components of account balances b. A back up system to protect against record destruction. c. A listing of all account balances just before closing entries are prepared. d. A listing of accounts of a subsidiary company. 21. A trial balance (choose the incorrect one) a. Is a test of the equality of the debits and credits in the general ledger b. Is a list of all open accounts in the ledger with their balances as of a given date c. Provides information that is helpful when making adjusting entries d. Proves that no errors of any kind have been made in the accounts during the accounting period. 22. A transplacement error is an a. Error of interchanging the figures b. Error of placing the decimal point c. Error of not recording the transaction d. Error, which if not detected, is automatically compensated or corrected in the next accounting period.
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PAGE 3 23. What is the normal order of accounts in the unadjusted trial balance? a. Asset, equity, income, expense and liability b. All accounts with debit balances and then all accounts with credit balances c. Asset, liability and equity d. Asset, liability, equity, income and expense 24. The sum of either trial balance column represents a. Total assets b. Total liability
c. Total liabilities and equity d. No meaningful amount
25. Which statement is correct concerning journal and ledger? a. A ledger is included in basic financial statements but a journal is not. b. Entries are posted from the ledger to the journal. c. All debit and credit parts of all journal entries must eventually be posted to the ledger accounts. d. A ledger is the place most transactions are originally recorded. 26. Which of the following is not a principal purpose of the trial balance? a. It proves that debits and credits of equal amounts are in the ledger. b. It is the basis for any adjustments to the account balances. c. It supplies a listing of open accounts and their balances. d. It proves that debits and credits were properly entered in the ledger accounts. 27. Why are adjusting entries necessary? a. Transactions take place over more than one accounting period. b. They help properly measure net income or net loss. c. To bring assets and liabilities to correct balances. d. All of these. 28. Adjusting entries are needed a. Whenever revenue is not received in cash b. Whenever expenses are paid in cash c. Primarily to correct errors in the initial recording of business transactions d. Whenever transactions affect the revenue or expenses of more than one accounting period. 29. Adjusting entries affect a. One nominal account and one real account b. Two nominal accounts c. Two real accounts d. No particular combination of nominal and real accounts 30. Which of the following would not be a correct form for an adjusting entry? a. A debit to revenue and a credit to liability b. A debit to an expense and a credit to a liability c. A debit to a liability and a credit to a revenue d. A debit to an asset and a credit to a liability 31. Which of the following best defines a prepayment and a deferral? a. Adjusting entries where cash flow precedes revenue or expense recognition. b. Adjusting entries where revenue or expense recognition precedes cash flow. c. Adjusting entries where cash flow and revenue or expense recognition are simultaneous. d. Adjusting entries where revenues or expenses are recognized in the absence of cash flow. 32. The purpose of the adjusting entries is to a. Prepare revenue and expense accounts for recording the transaction of the next period. b. Apply the realization principle and the matching principle to transactions affecting two or more accounting periods. c. Adjust daily the balances in asset, liability, revenue and expense accounts for the effects of business transactions. d. Adjust the capital account for the revenue, expense and withdrawal transactions which occurred during the year. 33. Which of the following properly describes a deferral? a. Cash is received after revenue is earned. b. Cash is received before revenue is earned. c. Cash is paid after expense is incurred. d. Cash is paid at the same time period that an expense is incurred.
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PAGE 4 34. An adjusting entry in which revenue is recognized before the related cash receipt occurs is a. Deferral b. Nominal c. Accrual d. Special item 35. An accrued expense can best be described as an amount a. Paid and currently matched with earnings b. Paid and not currently matched with earnings c. Not paid and not currently matched with earnings d. Not paid and currently matched with earnings 36. A prepaid expense can best be described as an amount a. Paid and currently matched with earnings b. Paid and not currently matched with earnings c. Not paid and currently matched with earnings d. Not paid and not currently matched with earnings. 37. An accrued income can best be described as an amount a. Collected and currently matched with expenses b. Collected and not currently matched with expenses c. Not collected and currently matched with expenses d. Not collected and not currently matched with expenses 38. An unearned income can best be described as an amount a. Collected and currently matched with expenses b. Collected and not currently matched with expenses c. Not collected and currently matched with expenses d. Not collected and not currently matched with expenses 39. The payment of insurance premium is initially debited to a prepaid expense account. This approach is known as a. Asset method c. Income method b. Expense method d. Liability method 40. Owner’s equity was understated and liabilities were overstated. Which of the following errors could have been the cause? a. Making the adjustment entry twice. b. Failure to record interest on accrued note payable. c. Failure to make an adjusting entry to record revenue which has been earned but not yet billed to customers. d. Failure to record the earned portion of rent received in advance. 41. The trial balance debit or credit amount of each account is combined with the amount of any debit or credit adjustment to that account to determine the new balance of the account. This process is known as a. Footing c. Balancing b. Cross footing d. Totaling 42. The adjusting entry for income collected in advance which was credited originally to income will a. Decrease liability c. Decrease an income account b. Increase asset d. Increase equity 43. The adjusting entry for income earned but not yet collected or recorded will a. Increase liability c. Decrease asset b. Increase asset d. Decrease liability 44. After the accounts have been closed a. All the accounts have zero balances b. The asset, liability and equity accounts have zero balances c. The revenue, expense, income summary and retained earnings accounts have zero balances. d. The revenue, expense and income summary accounts have zero balances. 45. A post closing trial balance a. Is a listing of general ledger accounts and their balances after closing entries have been made. b. Consist entirely of real accounts c. Helps to ensure that the closing process has been performed correctly. d. All of the above
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PAGE 5 46. In preparing a worksheet, the company is profitable in the current period, the total of the balance sheet credit column will be. a. Larger than the balance sheet debit column b. Smaller than the balance sheet debit column c. Larger than the income statement debit column d. Smaller than the income statement credit column 47. A debit balance in the income summary account represents a. Net income c. A drawing account b. Net loss d. None of the above. 48. If income is greater than expenses of a corporation, the income summary account will be closed by a. Debiting retained earnings and crediting income summary b. Debiting cash and crediting income summary c. Debiting income summary and crediting retained earnings d. Debiting income summary and crediting cash 49. Which statement is true? a. Financial statements cannot be prepared properly until adjusting entries are posted to ledger. b. A post-closing trial balance has balances in the temporary accounts. c. The statement of financial position and comprehensive income reflect external transactions only and the notes refer only to internal transactions. d. Income summary is a clearing or suspense account that is often used to hold the balances of income and expense accounts and its balance is closed to retained earnings for a corporate type of business. 50. Reversing entries should not be made for I. Adjusting entries related to depreciation, doubtful accounts and ending inventory. II. Adjusting entries related to prepayment of costs initially recorded as assets or receipts in advance initially recorded as liabilities. a. I only c. Both I and II b. II only d. Neither I nor II 51. An adjusted trial balance a. Is prepared after the financial statements are completed. b. Proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made. c. Is a required financial statement under international financial reporting standards. d. Cannot be used to prepare financial statements. 52. An entity is preparing the annual financial statements based on the adjusted trial balance. Which financial statement shall be prepared first? a. Statement of financial position b. Income statement c. Retained earnings statement d. There is no particular order because any financial statement may be prepared first once the adjusted trial balance is prepared 53. Which of the following statements best describes the purpose of closing entries? a. To faciliate posting and taking a trial balance. b. To determine the amount of net income or net loss for the period. c. To reduce the balances of temporary accounts to zero so that they may be used to accumulate the revenue, expenses and dividends of the next period. d. To complete the record of various transactions that were started in a prior period. 54. Which type of account is always debited during the closing process? a. Dividends b. Expense c. Revenue d. Retained earnings
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PAGE 6 55. The dividends declared account is a nominal account and a. Carried forward to the next accounting period b. Closed directly to retained earnings c. Closed directly to income summary d. Closed directly to share capital 56. The postclosing trial balance a. Consists of statement of financial position accounts only. b. Will balance if a transaction is not journalized and posted, or if a transaction is journalized and posted twice. c. Shows that the accounting equation is in balance at the end of the accounting period. d. All of the choices are correct regarding the postclosing trial balance. 57. The postclosing trial balance a. Provides a convenient listing of account balances that can be used to prepare the financial statements. b. Does not include nominal accounts. c. Is identical to the statement of financial position. d. Proves that all accounts have been closed properly. 58. Reversing entries a. Are normally prepared for accrued, prepaid and estimated items. b. Are necessary to achieve a proper matching of revenue and expense. c. Are desirable to exercise consistency and establish standardized procedures. d. Must be made at year-end. 59. Adjusting entries that should be reversed include a. All accrued revenue b. All accrued expenses c. Those that debit an asset or credit a liability d. All of these 60. A reversing entry should never be made for an adjusting entry that a. Accrues unrecorded revenue. b. Adjusts expired costs from an asset account to an expense account. c. Accrues unrecorded expenses. d. Adjusts unexpired costs from an expense account to an asset account.
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