Accounting 207 Final

What is the order in which assets are generally listed on a classified balance sheet?

Current; long-term investments; property, plant and equipment, intangibles

All of the following are interrelationships that are important to understand when preparing financial statements except

all of the payments on the balance sheet should be equal to the cash payments for operating activities on the statement of cash flows

Which of the following is an asset? a. Mortgage payable b. Investments c. Common stock d. Retained earnings

b. Investments

In a service-type business, revenue is recognized:

when the service is performed.

The going concern assumption assumes that the business

will remain in operation for the foreseeable future.

Buying assets needed to operate a business is an example of a(n)

investing activity.

The retained earnings statement shows all of the following except

the time period following the one shown for the income statement

If an individual asset is increased, then

there could be an equal decrease in another asset.

Expenses are incurred

to generate revenues.

Which of the following is the most appropriate and modern definition of accounting?

The information system that identifies, records, and communicates the economic events of an organization to interested users.

Which of the following is not a common way that managers use the balance sheet?

To analyze the balances of assets, liabilities, and stockholders' equity throughout the accounting period

The accounting equation may be expressed as

Assets = Liabilities + Stockholders' Equity.

An adjusting entry:

affects a balance sheet account and an income statement account.

Debts and obligations of a business are referred to as

liabilities.

The periodic inventory system is used most commonly by companies that sell

low-priced, high-volume merchandise.

An asset-expense relationship exists with:

prepaid expense adjusting entries.

Debt securities sold to investors that must be repaid at a particular date some years in the future are called

Bonds payable

Working Capital Formula

(Cash + Accounts Receivable + Inventory+ Prepaid Insurance) - (Account Payable + Salary/Wages) or simply: Current Assets - Current Liabilities

Formula for total amount of property, plant, and equipment

(Land + Building + Equipment + Furniture - Accumulated Depreciation)

Current Assets

* Cash * Short Term investments * Accounts receivable * Notes receivable * Inventory * Supplies * Prepaid insurance

Which of the following is a primary user of accounting information with a direct financial interest in the business?

Creditor

An awareness of the normal balances of accounts would help you spot which of the following as an error in recording?

A credit balance in an expense account

Liabilities of a company are owed to

Creditors

Which of the following is not classified properly as a current asset?

A receivable from the sale of an asset to be collected in two years

The journal entry to record a credit sale is

Accounts Receivable X Sales X

The cost of assets consumed or services used is also known as

An expense

Which one of the following represents the expanded basic accounting equation?

Assets + Dividends + Expenses = Liabilities + Common Stock + Revenues

If a company issues common stock for $40,000 and uses $30,000 of the cash to purchase a truck,

Assets will be increased by $40,000.

If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month's financial statements?

Assets will be overstated and net income and stockholders' equity will be overstated.

Which accounts normally have debit balances?

Assets, expenses, and dividends.

Otto's Tune-Up Shop follows the revenue recognition principle. Otto services a car on Au- gust 31. The customer picks up the vehicle on September 1 and mails the payment to Otto on September 5. Otto receives the check in the mail on September 6. When should Otto show that the revenue was recognized?

August 31

Which of the following statements is true?

Credits decrease assets and increase liabilities.

Which of the following statements is true regarding the recording process?

Both IFRS (International Financial Reporting Standards) and U.S. GAAP use the same general rules of debits and credits and the steps in the recording process.

Which of the following is not a current liability?

Bonds Payable

Common stock is reported on the

Balance Sheet

Which of the following financial statements is concerned with the company at a point in time?

Balance Sheet

Which financial statement would best indicate whether the company relies on debt or stockholders' equity to finance its assets?

Balance sheet

Jack and Jill form a partnership. Jack runs the business in New York, while Jill vacations in Hawaii. During the time Jill is away from the business, Jack increases the debts of the business by $20,000. Which of the following statements is true regarding this debt?

Both Jack and Jill are personally liable for the business debt.

Which of the following are internal reports that accounting provides to internal users?

Both forecasts of cash needs and financial comparisons are internal reports.

Which of the following would not be classified as a long-term liability?

Current maturities of long-term debt

Which of the following is not a step for solving an ethical dilemma?

Certifying the ethical accuracy of the financial information.

Stockholder Equity Formula

Common Stock +(Assets- Liabilities) + (Revenues - Expenses) - Dividends

Which of the following accounts is classified as a contra revenue account?

Cost of Goods Sold

Which of the following accounts follows the rules of debit and credit in relation to increases and decreases in the opposite manner?

Dividends and Interest Revenue

If a company fails to adjust for accrued expenses, what effect will this have on that month's financial statements?

Expenses will be understated and net income and stockholders' equity will be over- stat- ed.

What organization issues U.S. accounting standards?

Financial Accounting Standards Board

Which of the following is a user of accounting information with an indirect financial interest in a business?

Financial Adviser

Which of the following activities involves collecting the necessary funds to support the business?

Financing

Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in

Inventory.

Which of the following organizations issues accounting standards for countries outside the United States?

IASB

To show how successfully your business performed during a period of time, you would report its revenues and expenses in the

Income Statement

Which financial statement is prepared first?

Income statement

Trademarks would appear in which balance sheet section?

Intangible assets

Which activities involve acquiring the resources to run the business?

Investing

Which of the following groups uses accounting information to determine whether the company's net income will result in a stock price increase?

Investors in common stock

Why are financial statement users interested in the statement of cash flows?

It provides information about an important company resource

A furniture factory's employees work overtime to finish an order that is sold on January 31. The office sends a statement to the customer in early February and payment is received by mid-February. The overtime wages should be expensed in:

January.

If a company fails to adjust an Unearned Rent Revenue account for rent that has been earned, what effect will this have on that month's financial statements?

Liabilities will be overstated and revenues will be understated.

Which of the following describes the classification and normal balance of the Unearned Revenue account?

Liability, credit

The group of users of accounting information charged with achieving the goals of the business is its

Managers

Which of the following is the best definition of an internal user of accounting information?

Managers who use accounting information to plan, organize, and run a business

Which of the following groups uses accounting information to determine whether a marketing proposal will be cost effective?

Marketing managers

Why should the income statement be prepared first?

Net income from the income statement flows into the retained earnings statement. The ending retained earnings balance then flows into the balance sheet.

A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be recognized?

November 30

Which activities involve putting the resources of the business into action to generate a profit?

Operating

Gross Profit Formula

Operating expenses - cost of goods sold

Which pair of accounts follows the rules of debit and credit in relation to increases and decreases in the same manner?

Prepaid Insurance and Advertising Expense

Which pair of the listed accounts follows the rules of debits and credits in relation to increases and decreases in the same manner?

Prepaid Rent and Advertising Expense

Which accounts normally have credit balances?

Revenues, liabilities, and retained earnings.

Which of the following groups uses accounting information primarily to insure the entity is operating within prescribed rules?

Regulatory agencies

Which of the following accounts will reflect the account's beginning balance on the adjusted trial balance?

Retained earnings

Which pair of the listed accounts follows the rules of debits and credits in relation to increases and decreases in the opposite manner?

Salaries and Wages Expense and Notes Payable

The agency of the United States Government that oversees the U.S. financial markets is the

Security Exchange Commission.

Which account will have a zero balance after closing entries have been journalized and posted?

Service revenue.

Marvin Services Corporation had the following accounts and balances: Accounts payable: $18,000 Equipment: $21,000 Accounts receivable: 3,000 Land : 21,000 Buildings: ? Unearned service revenue: 6,000 Cash: 9,000 Total stockholders' equity: ? If the balance of the Buildings account was $45,000 and the equipment was sold for $21,000, what would be the total of stockholders' equity? a. $39,000 b. $54,000 c. $69,000 d. $75,000

Solution: $3,000 + $51,000+ $9,000 + $21,000 + $21,000 = $105,000

Assets classified as investments are known as

Stock Investments

Claims of owners are called

Stockholder's Equity

Which of the following describes the classification and normal balance of the Retained Earnings account?

Stockholders' equity, credit

A local retail shop has been operating as a sole proprietorship. The business is growing and now the owner wants to incorporate. Which of the following is not a reason for this owner to incorporate?

The prestige of operating as a corporation

Under U.S. GAPP

The rules of debits and credits, and the steps in the recording process are the same as under IFRS (International Financial Reporting Standards).

Which statement is correct?

The use of the cash basis of accounting violates both the revenue recognition and ex- pense recognition principles.

Which statement about long-term investments is not true?

They do not include long-term notes receivable.

Which one of the following questions is most likely asked by an internal human resources director for the company?

What average pay raise is affordable for employees this year?

Generally accepted accounting principles

are accounting rules that are recognized as a general guide for financial reporting.

It is not true that current assets are resources that are expected to be

acquired within one year.

Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause:

an understatement of assets and an understatement of revenues.

Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause:

an understatement of expenses and an understatement of liabilities.

If total liabilities decreased by $4,000, then

assets must have decreased by $4,000, or stockholders' equity must have increased by $4,000.

If total liabilities increased by $5,000, then

assets must have increased by $5,000, or stockholders' equity must have decreased by $5,000.

Courtney Company purchased equipment for $1,800 cash. As a result of this event,

assets remained unchanged.

If a company fails to adjust for accrued revenues:

assets will be understated and revenues will be understated.

As prepaid expenses expire with the passage of time, the correct adjusting entry will be a:

b. debit to an expense account and a credit to an asset account.

The primary difference between prepaid and accrued expenses is that prepaid expenses have:

been recorded and accrued expenses have not.

The amount of cost of good available for sale during the year depends on the amounts of

beginning merchandise inventory and net costs of purchases.

A business organized as a separate legal entity is a

corporation.

The operating cycle of a company is the average time that is required to go from cash to

cash in producing revenues.

Accumulated Depreciation is a(n):

contra asset account.

The Sales Returns and Allowances account is classified as a(n)

contra revenue account.

An account will have a credit balance if the

credits exceed the debits.

In a classified balance sheet, assets are usually classified as

current assets; long-term investments; property, plant, and equipment; and intangible assets.

Under the perpetual inventory system, in addition to making the entry to record a sale, a company would

debit Cost of Goods sold and credit Merchandise Inventory.

Adjustments for unearned revenue:

decrease liabilities and increase revenues.

Dividends paid

decrease retained earnings.

A current asset is

expected to be converted to cash or used in the business within a relatively short period of time.

The payment of a liability

decreases assets and liabilities.

A paid dividend

decreases assets and stockholders' equity.

An expense

decreases stockholders' equity.

An intangible asset

derives its value from the rights and privileges it provides the owner.

It is assumed that the activities of Ford Motor company can be distinguished from those of General Motors because of the

economic entity assumption.

If a company fails to make an adjusting entry to record supplies expense, then:

expense will be understated.

The expense recognition principle matches:

expenses with revenues.

The principle that indicates that assets should be reported at the price received to sell an asset is the

fair value principle.

Borrowing money is an example of a(n)

financing activity.

Issuing shares of stock in exchange for cash is an example of a(n)

financing activity.

The common characteristic possessed by all assets is

future economic benefit.

The proprietorship form of business organization

generally receives favorable tax treatment relative to a corporation.

Sales Returns and Allowances is increased when

goods that were sold on credit are returned.

Valuing assets at their fair value rather than at their cost is inconsistent with the

historical cost principle.

The statement of cash flows would disclose the payment of a dividend

in the financing activities section.

Debits

increase assets and decrease liabilities

The purchase of an asset on credit

increases assets and liabilities.

A revenue generally

increases assets and stockholders' equity.

The primary purpose of the statement of cash flows is to report

information about cash receipts and cash payments of a company.

The partnership form of business organization

is a common form of organization for service-type businesses

A revenue account

is increased by credits.

The Dividends account

is increased with debits and decreased with credits.

A business organized as a corporation

is owned by its stockholders.

An advantage of the corporate form of business is that

its ownership is easily transferable via the sale of shares of stock.

The purchase of an asset for cash

leaves total assets unchanged.

When a corporation distributes a dividend the

most common form of distribution is a cash dividend.

If the retained earnings account increases from the beginning of the year to the end of the year, then

net income is greater than dividends.

If the retained earnings account decreases from the beginning of the year to the end of the year, then

net income is less than dividends.

A payment of a portion of Accounts Payable will

not affect stockholders' equity.

The primary difference between accrued revenues and unearned revenues is that accrued revenues have:

not been recorded and unearned revenues have.

The economic entity assumption states that economic events

of every entity can be separately identified and accounted for.

Buying and selling products are examples of

operating activities

Stockholders' equity can be described as claims of

owners on total assets.

Prepaid expenses are:

paid and recorded in an asset account before they are used or consumed.

A small neighborhood barber shop that is operated by its owner would likely be organized as a

proprietorship.

Most business enterprises in the United States are

proprietorships and partnerships.

Unearned revenues are:

received and recorded as liabilities before they are recognized.

The most important information needed to determine if companies can pay their current obligations is the

relationship between current assets and current liabilities.

The balance sheet

reports the assets, liabilities, and stockholders' equity at a specific date.

The best definition of assets is the

resources belonging to a company that have future benefit to the company.

Dividends are reported on the

retained earnings statement.

The company's policy toward dividends and growth could best be determined by examining the

retained earnings statement.

An architecture firm earned $2,000 for architecture services provided with the fee to be paid in the future. No entry was made at the time the service was provided. If the fee has not been paid by the end of the accounting period and no adjusting entry is made, this would cause:

revenues to be understated.

Stockholders' equity is increased by

revenues.

The classification and normal balance of the Dividends account is

stockholders' equity with a debit balance.

The periodicity assumption states

the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared.

All of the following are advantages for choosing a proprietorship for a business except

transfer of ownership is easily achieved through stock sales.

A liability-revenue relationship exists with:

unearned revenue adjusting entries.

Working capital is

used to evaluate a company's liquidity and short-term debt paying ability.