Multiple Choice Questions
1. For the purpose of classifying liabilities as current or noncurrent, the term operating cycle refers to
a. The average time period between business recessions.
b. The time period between date of sale and the date the related revenue is collected.
c. The time period between purchase of merchandise and the conversion of this merchandise back to cash.
d. A period of one year.
2. Failure to accrue interest expense results in
a. An understatement of net income and an understatement of liabilities.
b. An understatement of net income and an overstatement of liabilities.
c. An overstatement of net income and an overstatement of liabilities.
d. An overstatement of net income and an understatement of liabilities.
3. FastscarsWarehouse operates in a state with a 5.5% sales tax. For convenience, Fastscars Warehouse credits Sales Revenue for the total amount (selling price plus sales tax) collected from each customer. If Fastscars Warehouse fails to make an adjustment for sales taxes,
a. Net income will be overstated and liabilities will be understated.
b. Net income will be understated and liabilities will be overstated.
c. Net income will be understated and liabilities will be understated.
d. Net income will be overstated and liabilities will be overstated.
4. What kind of account is Unearned Revenue?
a. Asset account
b. Liability account
c. Expense account
d. Revenue account
5. An end-of-period adjusting entry that debits Unearned Revenue most likely will credit
a. An asset.
b. A liability.
c. A revenue.
d. An expense.
6. Alexander, Inc., manufactures and sells computer monitors with a three-year warranty.
Warranty costs are expected to average 7% of sales during the warranty period. The following table shows the sales and actual warranty payments during the first two years of operations:

Based on these facts, what amount of warranty liability should Alexander, Inc., report on its balance sheet at December 31, 2011?
a. $33,150
b. $30,000
c. $84,000
d. $50,850
7. Yesterdays Fashions has a debt that has been properly reported as a long-term liability up to the present year (2010). Some of this debt comes due in 2010. If Yesterdays Fashions continues to report the current position as a long-term liability, the effect will be to
a. Overstate net income.
b. Understate total liabilities.
c. Overstate the current ratio.
d. Understate the debtratio.

Year 2010 2011 Sales $450,000 750,000 3,150 30,000