1. A natural business year

a. is the calendar year
b. records activities for a period less than a year
c. refers to an interim accounting period
d. ends when most activities in an operating cycle have been substantially concluded

2. The intermingling of performance of one period with that of preceding or succeeding periods is characteristic of which basis of accounting?

a.

Cash basis	Accrual basis
Yes	Yes

b.

Cash basis	Accrual basis
Yes	no

c.

Cash basis	Accrual basis
No	Yes

d.

Cash basis	Accrual basis
No	No

3. The accrual basis of accounting recognizes expenses when:

a.

Related revenues are recognized	The expense is incurred	The service/product is received
Yes	Yes	No

b.

Related revenues are recognized	The expense is incurred	The service/product is received
Yes	No	No

c.

Related revenues are recognized	The expense is incurred	The service/product is received
No	Yes	Yes

d.

Related revenues are recognized	The expense is incurred	The service/product is received
No	No	Yes

4. Which equation is correct?

a. Assets = Liabilities + Contributed Capital ? Dividends
b. Stockholders' Equity = Assets - Liabilities + Contributed Capital + Net Income
c. Stockholders' Equity = Contributed Capital + Retained Earnings + Net Income - Dividends
d. Retained Earnings = Net Income + Dividends

5. (CMA adapted, Dec 96 #11) Revenues of an entity are generally measured by the exchange values of the assets or liabilities involved. Recognition of revenue does not occur until the

a. revenue is realized and collected
b. revenue is realized and earned
c. entity has signed a binding contract
d. revenue is earned and recorded

6. At the end of the third year of operation, GreenWash Corporation has total assets equal to $100,000, liabilities totaling $90,000, and contributed capital of $30,000. What is the balance in retained earnings?

a. $40,000 (Dr)
b. $40,000 (Cr)
c. $20,000 (Dr)
d. $10,000 (Cr)

7. What is the purpose of adjusting entries?

a. To record all cash flows during the period
b. To make debits equal credits on the adjusted trial balance
c. To close revenue and expense accounts
d. To correct for omissions or errors in the recording of transactions

8. Ames Corp. purchased new equipment during the year but neglected to record depreciation. What is the effect of this omission on each of the named accounts?

a.

Accumulated Depreciation	Retained Earnings	Depreciation Expense
Understated	Overstated	Understated

b.

Accumulated Depreciation	Retained Earnings	Depreciation Expense
Understated	No effect	Overstated

c.

Accumulated Depreciation	Retained Earnings	Depreciation Expense
Overstated	Understated	Understated

d.

Accumulated Depreciation	Retained Earnings	Depreciation Expense
Overstated	No effect	Overstated

9. On July 1, Year 1, University Bagels bought an insurance policy costing $600 that would insure the retail building for two years against fire loss. What asset account and what amount are recorded on the balance sheet at December 31, Year 1?

a. Prepaid Insurance, $450
b. Insurance Expense, $300
c. Prepaid Insurance, $300
d. Insurance Expense, $150

10. On October 1, Year 1, Word-of-Mouth Catering accepted a $10,000, 120?day note from a customer. The note earns 10% interest per year. What is the amount of interest receivable recorded at December 31, Year 1? (Assume no other entries to record interest have been made.)

a. $333
b. $250
c. $83
d. $0, because interest is not due until January 31 of Year 2

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