Flo and Jim are the owners of Turner Aviation. Please refer to the financialinformation below to answer the questions that follow:
Turner Aviation
Account
Cash
Accounts Receivable
Inventory
Prepaid Insurance
Fixed Assets
Accumulated Depreciation
Accounts Payable
Unearned Revenue
Accrued Liabilities
Note Payable
Member Capital
Retained Earnings
Revenues
Cost of Goods Sold
Utilities
Rent
Insurance
Depreciation
Interest
Taxes
Current
Period
Prior
Period
300
850
1,190
110
4,200
(1,560)
690
0
200
3,300
200
580
6,790
5,090
148
480
72
480
264
136
310
750
1,010
120
3,600
(1,080)
620
50
220
3,000
200
350
6,670
5,030
150
480
60
360
240
80
Page 3 of 13
1 Which of the following is true?
A
B
C
D
E
Flo and Jim can agree that Flo will pay the Prepaid Expenses
Turner Aviation follows the cash method of accounting
Asset balances are adjusted if they increase in value
A change in Accumulated Depreciation results in a chage in Liabilities
None of the above.
2 At the beginning of January of the current year, new equipment was purchased
for $600 and began being used in normal operations. It is expected to last for
five years and have no value at the end of this time. Which of the following is true?
A
B
C
D
E
The current year depreciation expense is 240 under the sum-of-years digits method.
The current year depreciation expense is 200 under the double-declining balance method.
The straight-line method results in the largest depreciation expense in the final year.
No contra account is involved in the journal entries for each of the five years.
None of the above.
3 Which of the following is true regarding the Owners Equity of Turner Aviation?
A
B
C
D
E
Retained Earnings at the end of the Current Period is 700.
The members have withdrawn the investment they originally made.
There weren’t any dividends paid during the Current Period.
Retained Earnings at the beginning of the Current Period is 350.
None of the above.
4 Which accounts show that Turner Aviation is on the accrual method of
accounting?
A
B
C
D
E
Accumulated Depreciation
Accrued Liabilities
Note Payable
Cost of Goods Sold
None of the above
5 A credit, or right side entry, to the Allowance for Doubtful Accounts account
results in which of the following?
A
B
C
D
E
a charge-off of an amount owed by a customer
a decrease in Accounts Receivable
an inaccurate estimate of Uncollectible Accounts Expense
a decrease in total assets
None of the above
Page
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6 What are the cash flows from operations for Turner Aviation for the Current
Period?
A
B
C
D
E
$290
$330
($270)
$120
None of the above
7 Which is true of the Fixed Assets during the Current Period?
A
B
C
D
E
They represent future value beyond the Current Period
Cause current asets to increase when they increase
Any additional fixed assets were purchased with cash
They increased by 480
None of the above
8 Turner Aviation does not have the technology to track the products that it
holds for resale to customers. Which of the following is true?
A
B
C
D
E
It is not required to follow the matching principle.
It should follow FIFO, since it generally sells older products first.
It should use the perpetual method.
It may choose among cost flow assumptions allowed by GAAP.
None of the above
9 When customers pay at a later time than the revenue for services
provided to them is recorded, which of the following is true of the
journal entry to record the payment?
A
B
C
D
E
It will involve a temporary account.
It will involve a left side entry to Revenue.
It will involve a reduction in Unearned Revenue.
Accounts Receivable will be debited.
None of the above
10 What is the present value of $10,000 paid in cash two years from now?
A
B
C
D
E
We won’t know until we know the inflation that occurs over the two years.
$0, because something that is not possessed cannot have value.
An amount that grows at the discount rate to reach $10,000 in two years.
$10,000, because cash does not change in value.
None of the above.
Page
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11 If products held for resale to customers with a cost of $100 each weare
on hand at the end of the prior period, products costing $101 each were
purchased during the current period, which of the following is true?
A
B
C
D
E
A FIFO cost flow assumption results in a lower Cost of Goods Sold.
A LIFO cost flow assumption results in a higher net income.
Use of the perpetual method results in a lower net income.
Use of average costing achieves the same result as specific identification.
None of the above
12 What happens to the profit that Turner Aviation made during the Current Period?
A
B
C
D
E
It must be retained as part of current assets to be available for future distributions.
It should not be used to pay creditors.
None of it was distributed to the owners.
It caused an increase in Retained Earnings.
None of the above.
13 The total Liabilities at the end of the Current Period is:
A
B
C
D
E
5,090
4,190
4,970
5,750
None of the above
14 Turner Aviation is in need of additional aircraft, but it does not want to incur
additonal liabilities on its balance sheet. Which of the following may it do?
A
B
C
D
E
Arrange with another company to use its aircraft in return for rental payments
Enter into a rent-to-own agreement by which it acquires title after seven years
Contract with a vendor to pay exactly the value of the aicraft in monthly rent
Form a wholly-owned subsidiary to borrow the funds and purchase the aircraft
None of the above
15 If someone who has never been involved with Turner Aviation before is interested
in determining the value, which of the following should they consider?
A
B
C
D
E
working capital, debt-to-equity ratio, and EBIT
present value of liabilies, Retained Earnings, and cash flows from investing
Net Income, risk, and cash flows from operations
word of mouth, salvage value of fixed assets, and current owners
None of the above
Page
of 13
16 What is the Net Income for the Prior Period?
A
B
C
D
E
270
620
1,640
120
None of the above
17 Which of the following could be true of the role of legal counsel in the
financial reporting of Turner Aviation?
A
B
C
D
E
They must be independent of Turner Aviation at all times.
They are not needed if the financial reports are not audited.
They write the auditor’s opinion letter.
They assist with estimating and evaluating liability exposure.
None of the above.
18 If a new computer were to be purchased for use in business operations, which
of the following is permitted by GAAP?
A
B
C
D
E
A decision to use a higher salvage value than anticipated to calculate depreciation
A decision to use an accelerated method to calculate depreciation
A decision to use a longer useful life than expected for depreciation
A decision to capitalize repair and maintenance costs
None of the above
19 At the end of the Current Period, which accounts are involved in adjusting entries?
A
B
C
D
E
Taxes, Interest, and Cost of Goods Sold
Cost of Goods Sold, Depreciation, and Rent
Depreciation, Insurance, and Interest
Rent, Utilities, and Insurance
None of the above
20 Which of the following is true of recording goods held for resale to customers at cost?
A
B
C
D
E
It results in an increase in liabilities.
It increases Cost of Goods Sold in an inflationary period.
It is an example of the perpetual method.
It is an application of the realization principle.
None of the above
Page
of 13
21 Which of the following is true of present value?
A
B
C
D
E
It increases as the number of years increases.
It decreases as the expected return decreases.
It decreases as the risk increases.
It increases as expected inflation increases.
None of the above.
22 What should an auditor investigate when performing an audit of the Turner
Aviation financial reports?
A
B
C
D
E
Policy for safeguarding sensitive information in employee records
Follow several transactions through the accounting records
Current value of the business using discounted cash flows
Individual investments and risk profile of all owners
None of the above
23 Which of the following is true based on the Turner Aviation financial reports?
A
B
C
D
E
Working Capital increased.
The Debt-to-Equity Ratio increased.
The Current Ratio decreased.
Current Liabilities increased.
None of the above.
24 Which of the following is true of Turner Aviation’s financial reports?
A
B
C
D
E
Users of these financial reports can assume that it not going out of business.
Reporting consistently with GAAP increases their usefulness to outsiders.
The journal entries may be made by a bookkeeper.
All of the above are true
None of the above
25 Which of the following is true?
A
B
C
D
E
Net Income reflects the cash generated by operations.
A larger Depreciation expense results in larger cash flows from operations.
Interest Expense is included in cash flows from investing.
An increase in current assets results in higher cash flows from operations.
None of the above.
Page
of 13
26 If Turner Aviation were to dispose of one of its aircraft, which of the following
would be true?
A
B
C
D
E
If it receives cash that is less than the salvage value, a gain is recorded.
There would be a right side entry to a contra account.
There can be no gain or loss if the double-declining balance method was used.
It must wait until the end of the useful life that is used to determine depreciation.
None of the above
27 Turner Aviation receives a bill for utilities during the Current Period.
The bill is for the Prior Period utilities. Which of the following is true?
A
B
C
D
E
Assets should increase.
An entry to the Utilties ledger account should be posted at this time.
An expense has been incurred.
The bill should be capitalized.
None of the above
28 Turner Aviation would like to hire a financial statement auditor. Which of the
following should it consider?
A
B
C
D
E
a firm with licensed Certified Public Accounts
a family member of an owner that is familiar with the business
a part-time employee who has assisted with accounting recently
a member of the audit committee
None of the above
29 As of the beginning of the Current Period, what is the cumulative amount of cash
that has been received from customers for revenue yet to be earned?
A
B
C
D
E
750
0
850
50
None of the above
30 Which of the following results in an increase to working capital?
A
B
C
D
E
Borrow from a lender to purchase equipment
Purchase items for sale to customers from a supplier on credit
Prepay for insurance coverage for the next six months
An investor contributes cash to form a new business
None of the above
Page
of 13
31 Did Turner Aviation raise capital during the Current Period?
A
B
C
D
E
No, because the members did not make any additional investments.
No, because Retained Earnings increased.
Yes, because there was an increase in Note Payable.
Yes, because there were additional capital expenditures.
None of the above.
32 The financial statements of Turner Aviation do which of the following?
A
B
C
D
E
Cover only events that occur before the end of the Current Period
Show the value of the business at the end of the Current Period
Include investments held by Jim and Flo individually
Show the total profits of the business since it was formed
None of the above
33 Which of the following would result in a change in the total assets of
Turner Aviation?
A
B
C
D
E
Entering into a nine month lease for office space
Recording Uncollectible Accounts Expense at the end of a period
Engaging an expert to determine the value of the existing workforce
Receipt of a dividend from an investment
None of the above
34 If Turner Aviation were to make a loan to another business, which of the
following should it consider in negotiating the terms of the loan agreement?
A
B
C
D
E
The return on assets of Turner Aviation
The borrower’s expectation regarding economic growth
The borrower’s possible rate of return on its investments
The creditworthiness of Turner Aviation
None of the above
35 Which of the following is true of the Turner Aviation financial reports?
A
B
C
D
E
The income statement includes activity from more than one time period.
Closing entries have yet to be recorded for both periods shown.
The income statement provides a summary of cash flows from operations.
The income statement shows all changes to retained earnings.
None of the above
Page 1 of 13
36 Which of the following is true regarding return genarated by Turner Aviation
for the Current Period?
A
B
C
D
E
Return on Investment and Return on Equity are the same.
If a 10% Return on Assets is desired, investors will be pleased.
Return on Equity does not include Retained Earnings.
Return on Equity is over 70%.
None of the above.
37 Which of the following is true regarding an increase in an asset?
A
B
C
D
E
Cash should be paid.
An account on the right side of the balance sheet should increase.
A journal entry should be recorded at the end of the Current Period
Total assets may not change as a result of this event.
None of the above
38 Which of the following is on the right side of the balance sheet?
A
B
C
D
E
Allowance for Doubtful Accounts
Intangibles
Loan to another company
Contra Accounts
None of the above
39 Which of the following could be a way that Turner Aviation influenced its
financial results for the Current Period? (assume no fraud)
A
B
C
D
E
Choosing a useful life for fixed assets that is longer than actually expected
Including accrued utilities and accrued advertising in the same account
Follow guidance from its auditor on application of the realization principle
Maintain an equal amount of current assets and long-term liabilities
None of the above
40 Turner Aviation purchases tools and supplies for resale to customers. These
tools and supplies are used to maintain aircraft. Which of the following is true?
A
B
C
D
E
It uses the periodic method for accounting for the tools and supplies.
It sold more of the tools and supplies than it bought during the Current Period.
Items that are still on hand at the end of a period are part of Inventory.
Increases to the tools and supplies are recorded in Accounts Receivable.
None of the above
Page 11 of 13
41 If Jim and Flo exchange property that belongs to them in exchange for
ownership interest in Turner Aviation, which of the following is true?
A
B
C
D
E
The right side of the balance sheet should be debited.
The assets of Turner Aviation have increased.
No economic event requiring a journal entry has occurred.
Jim and Flo have decreased the value of their investments.
None of the above
42 Which of the following is true of the financial reports of Turner Aviation?
A
B
C
D
E
They reflect the current market value of the business.
They must be independent of the audit committee.
They are not required to be audited if they are free from material misstatement.
They are the responsibilty of the owners.
None of the above.
43 An investor is considering purchasing an equity interest in Turner Aviation. If
they desire a return of 12%, what is the present value of five years of
projected profits of $250?
A
B
C
D
E
$405
$1,250
$142
$900
None of the above
44 Which of the following is true of the Turner Aviation financial reports?
A
B
C
D
E
They contain 10 temporary accounts.
The Retained Earnings account has never been debited.
They contain 12 accounts with right side balances.
Nine accounts will be closed into Retained Earnings at the end of the period.
None of the above.
45 Which of the following is true for Turner Aviation for the Current Period?
A
B
C
D
E
Payments from customers were a source of cash.
Payments to suppliers were a use of cash.
Depreciation is a source of cash.
Cash flows from investing were positive.
None of the above.
Page 1 of 13
46 Which of the following is true based on the financial reports of Turner
Aviation, assuming that all sales are on credit?
A
B
C
D
E
The credit sales do not affect working capital.
Inventory is generally held slightly longer than 90 days.
Accounts Receivable on average are outstanding just under 45 days.
The credit sales increase the debt-to-equity ratio.
None of the above.
47 Which of the following is true of Revenues?
A
B
C
D
E
A credit entry is used to close them out at the end of each period.
They represent amounts owed to customers.
GAAP requires that cash be received before they are reported.
They are a permanent account.
None of the above.
48 Turner Aviation is considering distributing some of its net income to its
members. What should it consider before doing so?
A
B
C
D
E
The amount by which Retained Earnings exceeds Member Capital.
The ratio of Fixed Assets to Liabilities.
The cumulative prior year net income that has not been distributed.
Contractual provisions related to the Note Payable.
None of the above.
49 Which of the following is true for the Current Period?
A
B
C
D
E
Leverage increased, while EBIT decreased.
The Gross Profit percentage increased, while the Profit Margin decreased.
Current Assets increased, while Current Liabilities decreased.
Operating Income increased, while working capital decreased.
None of the above.
50 Which of the following is true of a purchase of new aircraft by Turner Aviation?
A
B
C
D
E
The expense should be allocated among the time periods in which it is in service.
The cost can be expensed.
It is initially recorded at historical cost and then decreased over time.
It should be appraised at the end of each time period to determine its value.
None of the above.
END OF EXAM
Page 13 of 13
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