I. Multiple choice (36 points) Write your name on the answer sheet. Darken
the circle on the answer sheet corresponding to the best answer for each
1. The Financial Accounting Standards Board employs a “due process” system
a. is an efficient system for collecting dues from members.
b. enables interested parties to express their views on issues under
c. identifies the accounting issues that are the most important.
d. requires that all accountants must receive a copy of financial standards.
2. Of the following adjusting entries, which one would cause an increase in
assets at the end of the period?
a. The entry to record the earned portion of rent received in advance.
b. The entry to accrue unrecorded interest expense.
c. The entry to accrue unrecorded interest revenue.
d. The entry to record expiration of prepaid insurance.
3. What is the quality of information that is capable of making a difference in a
a. Faithful representation.
b. Materiality.
c. Timeliness.
d. Relevance.
4. The quality of information that means the numbers and descriptions match
what really existed or happened is
a. relevance.
b. faithful representation.
c. completeness.
d. neutrality.
5. Which accounting assumption or principle is being violated if a company
provides financial reports only when it introduces a new product?
a. Economic entity.
b. Periodicity.
c. Revenue recognition.
d. Full disclosure.
6. Which of the following basic accounting assumptions is threatened by the
existence of severe inflation in the economy?
a. Monetary unit assumption.
b. Periodicity assumption.
c. Going-concern assumption.
d. Economic entity assumption.
7. Preparation of consolidated financial statements when a parent-subsidiary
relationship exists is an example of the
a. economic entity assumption.
b. relevance characteristic.
c. comparability characteristic.
d. neutrality characteristic.
8. Proponents of historical cost ordinarily maintain that in comparison with all
other valuation alternatives for general purpose financial reporting,
statements prepared using historical costs are more
a. verifiable.
b. relevant.
c. indicative of the entity’s purchasing power.
d. conservative.
9. Watts Corporation made a very large arithmetical error in the preparation of
its year-end financial statements by improper placement of a decimal point
in the calculation of depreciation. The error caused the net income to be
reported at almost double the proper amount. Correction of the error when
discovered in the next year should be treated as
a. an increase in depreciation expense for the year in which the error is
b. a component of income for the year in which the error is discovered, but
separately listed on the income statement and fully explained in a note to
the financial statements.
c. a loss and a liability for expected securities-related lawsuits
d. a prior period adjustment.
10. A change in accounting principle requires that the cumulative effect of the
change for prior periods be shown as an adjustment to:
a. beginning retained earnings of the earliest period presented.
b. net income of the period in which the change occurred.
c. comprehensive income for the earliest period presented.
d. stockholders’ equity of the period in which the change occurred.
11. Why is it necessary to make adjusting entries?
a. The accountant has made errors in recording external transactions.
b. Certain facts about the affairs of the business are not included in the ledger
as built up from external transactions.
c. The accountant wants to show the largest possible net income for the period.
d. The accountant wants to show the net cash flow for the year.
12. Garcia Corporation received cash of $36,000 on August 1, 2016 for one year’s
rent in advance and recorded the transaction with a credit to Rent Revenue. The
December 31, 2016 adjusting entry is
a. Debit Rent Revenue and credit Unearned Rent Revenue, $15,000.
b. Debit Rent Revenue and credit Unearned Rent Revenue, $21,000.
c. Debit Unearned Rent Revenue and credit Rent Revenue, $15,000.
d. Debit Cash and credit Unearned Rent Revenue, $21,000