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1. Which of the following is a satisfactory statement of the balance sheet equation?
a. Assets + owner’s equity = liabilities
b. Assets = liabilities + owners’ equity
c. Assets + liabilities = owners’ equity

2. A revenue
a. increases assets and liabilities.
b. increases assets and owners’ equity.
c. increases assets and decreases owners’ equity.

3. In accounting, depreciation refers to the
a. decline in value of an asset.
b. obsolescence of an asset.
c. allocation of asset cost.

4. Gross margin is equal to the difference in
a. net sales and operating expenses.
b. net sales and cost of goods sold.
c. net sales and operating income.

5. Which of the following does NOT include net income in its computation?
a. Profit margin
b. Return on assets
c. Debt to equity ratio

6. What do current assets and current liabilities have in common?
a. Current assets are claims against current liabilities.
b. If current assets increase, there will be a corresponding increase in current liabilities.
c. Current liabilities and current assets are those items that will be satisfied and converted into cash, respectively, in one year or operating cycle, whichever is longer.

7. What does the retained earnings account measure?
a. Cash held by the company since its inception.
b. Financial resources currently available to satisfy obligtions.
c. All undistributed earnings.

8. An overstatement of beginning inventory results in
a. no effect on the period’s net income.
b. an overstatement of net income.
c. an understatement of net income.

9. Which inventory method generally results in the most realistic ending inventory figure?
c. Average-cost

10. All else remaining equal, when a LIFO liquidation occurs during a period of rising prices, which of the following statements about the effects on a firm’s financial statements is generally true?
a. Cost of goods sold increases
b. Taxes decrease
c. Gross profit margin increases

11. A machine was purchased for AED17,000, has accumulated depreciation of AED9,000, and has a depreciable cost of AED10,000. Its estimated residual value is
a. AED2,000.
b. AED7,000.
c. AED8,000.

12. A truck was purchased for AED35,000. It had a five-year life and a AED5,000 residual value. Under the double-declining-balance method, what is the accumulated depreciation after two years?
a. AED19,200
b. AED21,200
c. AED22,400

13. The amortization of a bond discount will result in reporting an amount of interest expense for an interest period that
a. is less than the amount of cash to be paid for interest for the period.
b. exceeds the amount of cash to be paid for interest for the period.
c. equals the amount of cash to be paid for interest for the period.

14. A AED100,000 bond issue with a carrying value of AED97,000 is called at 101 and retired. Which of the following statements is true?
a. No gain or loss is recorded.
b. A loss of AED4,000 is recorded.
c. A loss of AED1,000 is recorded.

15. Under a finance lease, the lessee does NOT record which of the following?
a. Rent expense
b. Lease obligations
c. Depreciation on the leased asset

16. Under a defined benefit pension plan,
a. the employer guarantees the employees certain benefits upon retirement.
b. retirement payments are based on the amount accumulated in the pension fund.
c. accounting for annual pension expense is simple.

17. Deferred income taxes are justified by what basic concept?
a. Revenue recognition
b. Matching
c. Conservatism

Use the following to answer the next 3 questions:
Net income AED5,000
Depreciation expense 2,500
Increase in deferred tax liabilities 500
Decrease in accounts receivable 2,000
Increase in inventories 9,000
Decrease in accounts payable 5,000
Increase in accrued liabilities 1,000
Increase in property and equipment 14,000
Increase in short-term notes payable 19,000
Decrease in long-term bonds payable 4,000
18. What is net cash flow from operating activities?
a. (AED3,000)
b. (AED1,000)
c. AED5,000

19. What is net cash flow from investing activities?
a. AED14,000
b. (AED14,000)
c. AED21,000

20. What is net cash flow from financing activities?
a. AED15,000
b. (AED15,000)
c. AED17,000

1-b, 2-b, 3-c, 4-b, 5-c, 6-c, 7-c, 8-c, 9-b, 10-c, 11-b, 12-c, 13-b, 14-b, 15-a, 16-a, 17-b, 18-a, 19-b, 20-a.

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