Accounting Chapter 1

Which one of the following financial statements shows the end of the year cash balance for a business entity?

Balance sheet and statement of cash flows

Which financial statement would you refer to in order to determine how many resources (assets) the company owns?

Balance sheet

Which one of the following financial statements reports an entity's financial position at a specific date?

Balance sheet

You are a potential creditor and are concerned that a particular company you are ready to give a loan to might have too much debt. Which financial statement would provide you information needed in order to evaluate your concern?

Balance sheet

Which one of the following equations represents the statement of retained earnings activity?

Beginning retained earnings + net income dividends = ending retained earnings

Which one of the following is not one of the activities on the statement of cash flows?

Business Activities

If stockholders want to know how money flowed into and out of the company, what financial statement would they use?

Statement of cash flows

Both net income and dividends can be found on the financial statement called the ____________________.

Statement of retained earnings

Who among the following invest funds into a business and are considered owners?

Stockholders

Which of the following best describes the term "retained earnings" of a company?

The accumulated net income of a company that has not been distributed to owners in the form of dividends.

Ponzi Corporation reported the following information for the year ended December 31, 2012. Net income- $100,000 Dividends- 6,000 Retained earnings at december 31, 2012- 120,000 Refer to the information provided above for Ponzi Corporation. What was the economic effect of the payment of Ponzi's dividends?

The dividend reduced total retained earnings.

Monaco Lawn Service Company creates revenue each time:

a lawn is mowed.

The income statement shows:

a summary of the results of operations for a period of time.

Doughtry's Pet Shop reported a net loss of $1,500,000 and total expenses of $2,900,000. How much were the total sales?

$1,400,000 $2,900,000 (Total expenses) - 1,500,000 (Net loss) = $1,400,000 (Total sales)

Liabilities are reported on the:

Balance sheet

76)

Balance sheet

Which of the following is not an asset?

Equity

On January 1, 2012, Money Company's balance in retained earnings was $10,000,000. At the end of the year, December 31, 2012, the balance in retained earnings was $9,400,000. During 2012, the company earned net income of $440,000. How much were dividends?

1,040,000 $10,000,000 (Beginning retained earnings) + 440,000 (Net income) 9,400,000 (Ending retained earnings) = $1,040,000 (Dividends)

List the four financial statements. Explain the connection between these four statements.

1. Balance Sheet 2. Income Statement 3. Statement of Retained Earnings 4. Statement of Cash Flows Net income on the income statement increases retained earnings on the statement of retained earnings. The balance in the statement of retained earnings goes to the balance sheet. The ending balance for cash on the statement of cash flows is also shown on the balance sheet.

The assets and liabilities of the company are $175,000 and $40,000, respectively. Equity should equal:

135,000 $175,000 (Assets) - 40,000 (Liabilities) = $135,000 (Equity)

On January 1, 2012, Blackstone Company reported assets of $1,000,000 and liabilities of $600,000. During 2012 assets decreased by $200,000 and Equity decreased $250,000. What is the amount of Equity on December 31, 2012.

150,000 Assets Liabilities Equity Jan. 01, 2012. 1,000,000 = 600,000 +. 400,000 During 2012 200,000 = 50,000. + 250,000 Jan 31, 2012 800,000 = 650,000. +. 150,000

Bailout Corporation reported the following information for the year ended December 31, 2012. Revenues- 250,000,000 Expenses- 2,000,000 Retained earnings at december 31, 2011- 100,000 Retained earnings at december 31, 2012- 450,000 Refer to the selected information provided for Bailout Corporation. How much was paid out in dividends in 2012?

150,000 $100,000 (2011 Retained earnings) + 2,500,000 (Revenues) 2,000,000 (Expenses) X (Dividends) = $450,000 (2012 Retained earnings) X = $150,000

Ranger Company has assets of $5,000,000, liabilities of $3,000,000, and retained earnings of $1,200,000. How much is total equity?

2,000,000 $5,000,000 (Assets) - 3,000,000 (Liabilities) = $2,000,000 (Equity)

IPOD Corporations end-of-year balance sheet consisted of the following accounts Cash- 180,000 Property, plant & equipment- 950,000 Capital stock- 1,000,000 Retained earnings- ? Accounts receivable- 700,000 Long-term debt- 600,000 Accounts payable- 350,000 Inventory- 540,000 Refer to the information provided above for IPOD Corporation.What amount should IPOD report on its balance sheet for total assets?

2,370,000 $180,000 (Cash) + 700,000 (Accounts receivable) + 950,000 (Property, plant & equipment) + 540,000 (Inventory) = $2,370,000

Tarp Corporation Beginning retained earnings- 550,000 Ending Retained Earnings- 700,000 Dividends paid- 100,000 Revenue- 525,000 Refer to the selected information provided for Tarp Corporation. What is the net income for Tarp Corporation?

250,000 $550,000 (Beginning retained earnings ) + X (Net income) 100,000 (Dividends) = $700,000 (Ending retained earnings) X = $250,000

Jetson Corporation reported the following information for the year ended December 31, 2012. Revenue- 14,000,000 Expenses- 11,500,000 Dividends- 1,000,000 Retained earnings at december 31, 2012- 1,750,000 Refer to the selected information provided for Jetson Corporation. What was the retained earnings balance on December 31, 2011?

250,000 X (2011 Retained earnings) + 14,000,000 (Revenues) 11,500,000 (Expenses) $1,000,000 (Dividends) = $1,750,000 (2012 Retained earnings) X = $250,000

Ponzi Corporation reported the following information for the year ended December 31, 2012. Net income- $100,000 Dividends- 6,000 Retained earnings at december 31, 2012- 120,000 Refer to the information provided above for Ponzi Corporation. What was the balance of retained earnings at January 1, 2012?

26,000 $120,000 (Retained earnings) + 6,000 (Dividends) 100,000 (Net income) = $26,000

Tarp Corporation Beginning retained earnings- 550,000 Ending Retained Earnings- 700,000 Dividends paid- 100,000 Revenue- 525,000 Refer to the selected information provided for Tarp Corporation. The company's expenses are:

275,000 $550,000 (Beginning retained earnings ) + X (Net Income) 100,000 (Dividends) = $700,000 (Ending retained earnings) X = $250,000 or Net Income $525,000 (Revenue) 250,000 (Net income) = $275,000 (Expenses)

Davis Construction began operation on January 1, 2012, with an initial investment of $100,000 from each of its three stockholders. During the year ending 2012 Davis Construction had net income of $125,000 and paid dividends of $50,000. Refer to Davis Construction. If Davis Construction's revenues were $500,000 for the year ended December 31, 2012, how much were total expenses?

375,000 $500,000 (Revenues) - 125,000 (Net Income) = $375,000 (Expenses)

IPOD Corporations end-of-year balance sheet consisted of the following accounts Cash- 180,000 Property, plant & equipment- 950,000 Capital stock- 1,000,000 Retained earnings- ? Accounts receivable- 700,000 Long-term debt- 600,000 Accounts payable- 350,000 Inventory- 540,000 Refer to the information provided above for IPOD Corporation. What is IPOD's retained earnings balance at the end of the current year?

420,000 Assets = $180,000 (Cash) + 950,000 (Property, plant & equipment) + 700,000 (Accounts receivable) + 540,000 (Inventory) = $2,370,000 Liabilities = $600,000 (Long-term debt) + 350,000 (Accounts payable) = $950,000 Equity = $2,370,000 (Total assets) 950,000 (Total liabilities) = $1,420,000 Retained Earnings = $1,420,000 (Stockholders' equity) 1,000,000 (Capital stock) = $420,000

The Peck Company reported the following items on its financial statements for the year ending December 31, 2012. Sales- 1,560,000 Selling, general and administrative expense- 40,000 Dividends- 10,000 Cost of sales- 1,400,000 Other expense- 30,000 Income tax expense- 25,000 Refer to Peck Company. How much will be reported as retained earnings on its balance sheet at December 31, 2012, if this is the first year of operations?

55,000 Net Income: $1,560,000 (Sales) 1,400,000 (Cost of sales) 40,000 (Selling, general and administrative expenses) $30,000 (Other expenses) 25,000 (Income tax expense) = $65,000 Retained Earnings: $65,000 (Net income) 10,000 (Dividends) = $55,000

The Peck Company reported the following items on its financial statements for the year ending December 31, 2012. Sales- 1,560,000 Selling, general and administrative expense- 40,000 Dividends- 10,000 Cost of sales- 1,400,000 Other expense- 30,000 Income tax expense- 25,000 Refer to the information provided above for Peck Company. The Income Statement of Peck will report net income for the current year in the amount of:

65,000 Net income = $1,560,000 (Sales) 1,400,000 (Cost of sales) 40,000 (Selling, general and administrative expenses) 30,000 (Other expenses) 25,000 (Income tax expense) = $65,000

Davis Construction began operation on January 1, 2012, with an initial investment of $100,000 from each of its three stockholders. During the year ending 2012 Davis Construction had net income of $125,000 and paid dividends of $50,000. Refer to the information provided for Davis Construction, Inc. and calculate its retained earnings balance at December 31, 2012.

75,000 $ 0 (Beginning balance) + 125,000 (Net income) - 50,000 (Dividends) = $75,000

If a company has $10,500,000 of revenues, declares and pays $550,000 in dividends, and has net income of $1,600,000, how much were expenses for the year?

8,900,000 $10,500,000 (Revenues) 1,600,000 (Net income) = $8,900,000 (Expenses)

Who among the following generally lends funds to a business entity and expects repayment of the funds?

A creditor

Which of the following best describes the term "expenses"?

A decrease in resources resulting from the sale of goods or provision of services.

The accountant for the Times Corporation prepared the following list from the company's accounting records for the year ended December 31, 2012. Retained earnings- ? Cash- 97,000 Accounts payable- 70,000 Sales revenue- 1,075,000 Cost of sales- 780,000 Land- 810,000 Notes payable- 520,000 Inventory- 280,000 Prepaid expenses- 70,000 Common Stock- 500,000 Accounts receivable- 260,000 Interest income- 70,000 Salary expense- 220,000 Income tax expense- 60,000 Selling expense- 75,000 Salaries payable- 55,000 Determine the following amounts for Times Corporation: A) Total revenues for 2012 B) Total expenses for 2012 C) Net income for 2012

A) $1,145,000 $1,075,000 (Sales revenue) + 70,000 (Interest income) = $1,145,000 B) $1,135,000 $780,000 (Cost of sales) + 220,000 (Salary expense) + 60,000 (Income tax expense) + 75,000 (Selling expense) = $1,135,000 C) $10,000 $1,145,000 (Total revenue) $1,135,000 (Total expenses) = $10,000

The beginning balance of retained earnings was $2,400,000, and the ending balance was $1,500,000. The company paid dividends of $150,000. A) Determine the amount of net income (loss) for the year. B) What information would one find on the income statement in addition to net income?

A) $1,500,000 (Ending retained earnings) 2,400,000 (Beginning retained earnings) = ($900,000) ($900,000) (Decrease in retained earnings) + 150,000 (Dividends paid) = $750,000 (Loss) B) The Income statement will show the sources of amounts earned (revenues) as well as the amount and type of costs incurred by the company (expenses) during the period.

Question Cardinal Corporation reported the following information at December 31, 2012: Accounts payable $400,000Dividends paid $100,000 Cash $100,000Expenses $600,000 Inventories $700,000Revenue $750,000 A) Calculate Cardinal Corporation's total assets. B) Calculate Cardinal Corporations' net income for 2012. C) Calculate Cardinal Corporation's total equity at the end of 2012.

A) $100,000 (Cash) + 700,000 (Inventories) = $800,000 B) $750,000 (Revenue) 600,000 (Expenses) = $150,000 C) $800,000 (Total assets) 400,000 (Accounts payable) = $400,000

The following information comes from the records of America Corporation: Assets Liabilities Equity January 1, 2012 $750,000 $270,000 $________ December 31, 2012 905,000 _______ 700,000 A) What is the amount of equity at January 1, 2012? B) What is the amount of liabilities at December 31, 2012? C) Assume that the company paid dividends of $310,000 during the year. How much net income did it earn during the year? D) Assume that the company paid no dividends during the year. Without looking at the income statement, how can you tell if the company is profitable or not?

A) $750,000 (Assets) 270,000 (Liabilities) = $480,000 B) $905,000 (Assets) 700,000 (Equity) = $205,000 (Liabilities) C) $480,000 (Beginning equity) + X (Net income) 310,000 (Dividend) = $700,000 (Ending equity) (X = $530,000) Page 12 of 15 D) Assuming that the increase in equity would come from net income, the company would have to be considered profitable. Net income will increase retained earnings which is a part of equity.

Several amounts from GM Company at December 31, 2012, are listed below. Answer the questions. Services revenue- 817,500 Dividends paid- 75,000 Buildings- 165,000 Accounts payable- 60,000 Capital stock- 90,000 Utilities Expense- 28,500 Income tax payable- 6,000 Salaries expense- 343,500 Rent expense- 129,000 Land- 150,000 Accounts recievable- 42,000 Retained earnings, Jan. 1, 2012- 600,000 Notes Payable- 45,000 Income tax expense- 165,000 A) Calculate net income for 2012. B) How much is GM Company's retained earnings at the end of 2012?

A) $817,500 (Service revenue) 343,500 (Salaries expense) 129,000 (Rent expense) 28,500 (Utilities expense) 165,000 (Income tax expense) = $151,500 B) $600,000 (Retained earnings, Jan 1, 2012) + 151,500 (Net income) 75,000 (Dividends paid) = $676,500

President Corporation started business at the beginning of the year, with assets of $2,000,000 and equity of $1,130,000. By the end of the year, assets increased by $200,000 and liabilities decreased by $300,000. Other than net income or loss, the only change in equity was dividends of $100,000. A) What was the amount of President Corporation's equity at the end of the year? B) What was the amount of President Corporation's net income or net loss for the year?

A) Assets. Liabilities Equity Beginning of year 2,000,000. 870,000. 1,130,000 Change during yr. +200,000. -300,000. +500,000 End of year 2,200,000. B) Change in equity $500,000 Add Dividends 100,000 Net income 600,000

Each of the situations in A through C below applies to one of the assumptions or principles included in the conceptual framework of accounting. Identify which assumption or principles applies and explain why that assumption or principle applies. A) Globall Inc. is a U.S. company that has divisions in several countries around the world. Each country has a currency different than the U.S. dollar. Globall must include the financial data of its worldwide divisions in its financial statements. B) Cheetum & Howell operate a security business as a partnership. The partners are considering a change to the corporate form of business organization. C) Yum Shops, Inc. is a locally owned and operated confectionary. The owners have decided to expand into nearby cities. Expansion will require more capital, but management does not expect it will stay in business for more than one year or so regardless of its expansion plans.

A) The monetary unit assumption. Financial statements must be reported in monetary terms, and the standard monetary unit should be denominated in one currency. B) Economic entity assumption. A business can take three forms. Regardless of the form, however, the unit itself is distinct from its owners. C) Continuity (going concern) assumption. A business is assumed to continue to operate long enough to carry out its obligations, to more accurately reflect the valuation of assets and appropriately allocate costs to accounting periods.

The accountant for the Times Corporation prepared the following list from the company's accounting records for the year ended December 31, 2012. Retained earnings- ? Cash- 97,000 Accounts payable- 70,000 Sales revenue- 1,075,000 Cost of sales- 780,000 Land- 810,000 Notes payable- 520,000 Inventory- 280,000 Prepaid expenses- 70,000 Common Stock- 500,000 Accounts receivable- 260,000 Interest income- 70,000 Salary expense- 220,000 Income tax expense- 60,000 Selling expense- 75,000 Salaries payable- 55,000 Determine the following amounts for Times Corporation: A) Total assets at the end of 2012. B) Total liabilities at the end of 2012. C) Total equity at the end of 2012.

A)$97,000 (Cash) + 260,000 (Accounts receivable) + 280,000 (Inventories) + 70,000 (Prepaid expense) + 810,000 (Land) = $1,517,000 B) $70,000 (Accounts payable) + 520,000 (Notes payable) + 55,000 (Salaries payable) = $645,000 C) $1,517,000 (Total assets) 645,000 (Total liabilities) = $872,000

What is the purpose of an income statement?

An income statement reports the company's revenues and expenses for a period of time and shows the company's profitability (or lack of). The income statement's purpose is to demonstrate the financial success or failure of the company over a specific period of time.

Which one of the following events creates a liability for a business?

An obligation to pay for goods purchased on credit from a supplier

Which of the following is a correct fundamental accounting equation?

Assets = Liabilities + Equity

The fundamental accounting equation is ____________________ = ____________________ + ____________________.

Assets, liabilities, equity

80)

Balance sheet

Which one of the following is a correct basic structure of the cash flow statement?

Cash flows provided (used) by operating activities + / - cash flows provided (used) by investing activities + / - cash flows provided (used) by financing activities = net increase (decrease) in cash

What is the difference between comparability and consistency?

Comparability allows comparisons to be made between or among companies. Even though a certain amount of freedom exists in selecting accounting techniques, when this information is disclosed in the financial statements, users can still compare the information when they know what technique is used. Consistency refers to the application of the same accounting techniques over time. It involves the relationships between a set of numbers over several periods, but within one company only, unlike comparability that can be between or among companies.

An accountant is uncertain about the best estimate of an amount for a business transaction. If there are two possible amounts that could be recorded, the amount least likely to overstate assets and earnings is selected. Which of the following qualities is characterized by this action?

Conservatism

Which of the following terms best describes a distribution of the net income of a corporation to its owners?

Dividends

Which of the following concepts relates to separating the reporting of business and personal economic transactions?

Economic entity assumption

Which of the following is an assumption made in the preparation of the financial statements?

Financial statements are prepared for a specific entity that is distinct from the entity's owners.

The type of business activity that relates to obtaining funds from either issuing stock or borrowing money is called ____________________.

Financing

Cash investments made by stockholders in exchange for capital stock in a business are reported on the statement of cash flows in the:

Financing activities section

The statement of cash flows has which of the following economic activity categories?

Financing, investing, and operating

Paige Company claims that its financial information is useful. Mention any four qualities that must be present in order to have "useful" accounting information? Explain these four qualities.

Four qualitative characteristics of useful accounting information are relevance, reliability, comparability, and consistency. Relevant information has the capacity to make a difference in a decision. It helps users predict future events or provides feedback. Reliable information is dependable, verifiable, and free from bias. Comparability allows comparisons to be made between or among companies. Consistency refers to the application of the same accounting methods over time.

Four financial statements are usually prepared for a business. The statement of cash flows is usually prepared last. The retained earnings statement (RE), the balance sheet (B), and the income statement (I) are prepared in a certain order to obtain information needed for the next statement. In what order are these three statements prepared?

I, RE, and B

Which financial statement would you analyze to determine its operating performance for the past year?

Income Statement

Which of the following is the correct date format for the financial statement heading?

Income Statement for the Year Ending December 31, 2012

75)

Income statement

The financial statement in which you list revenues, starting with sales revenue (service revenue), is called the ____________________.

Income statement

Which statement demonstrates the financial success or failure of the company over that specific period of time?

Income statement

Monaco Lawn Service Company used $250 of fuel to mow customer lawns in June. The fuel was purchased on account and due in July. Fuel Expense should be recorded in:

June

PTG Enterprises purchases many small pieces of office furniture, such as trash cans, that cost less than $100 each. PTG accounts for these items as expenses when acquired rather than reporting them as property, plant, and equipment on its balance sheet. The company's accountant states that no accounting principle has been violated. Justification for PTG's policy of expensing these furniture items is based on cost vs. benefit considerations as well as qualitative characteristic of accounting information of:

Materiality

Which of the following qualitative characteristic of useful accounting information implies that only items that meet or exceed certain thresholds will affect decisions?

Materiality

Which one of the following is not one of the three business activities as shown in statement of cash flows?

Measuring

Which of the following underlying assumptions for the conceptual framework is the reason the dollar is used in the preparation of financial statements?

Monetary unit

Which of the following best describes a company's operating activities?

Operating activities are cash flows directly related to earning income

The statement of cash flows classifies cash flow into ____________________, ____________________ and ____________________ activities.

Operating, investing, financing

One of the qualitative characteristics of accounting information include:

Reliability

Question Net income from the income statement increases ____________________.

Retained earnings

Which one of the following item appears on a balance sheet

Retained earnings

How is the balance sheet linked to the other financial statements?

Retained earnings from the statement of retained earnings is reported on the balance sheet.

What does the phrase, "Revenue is recognized when earned" mean?

Revenue is recorded in the accounting records and reported on the income statement when goods are sold and delivered to a customer.

Scott Brothers, Inc. follows the qualitative characteristic of consistency. This means that:

Scott applies the same accounting methods each period

Davis Construction began operation on January 1, 2012, with an initial investment of $100,000 from each of its three stockholders. During the year ending 2012 Davis Construction had net income of $125,000 and paid dividends of $50,000. Refer to the information provided for Davis Construction, Inc. The dividends for the year:

are reported on the statement of retained earnings.

"Economic resources" are known as:

assets.

In order for accounting information to be useful in making informed decisions, it must be:

both relevant and reliable.

If an investor can use accounting information for two different companies to evaluate the types and amounts of expenses, the information is said to have the quality of:

comparability

The resources used to generate revenues during a period are called:

expenses.

The time period assumption is necessary because:

external users of financial statements want accurately-reported net income for a specific period of time.

Expenses can be matched against revenues:

in the same period as the revenue that it helped to generate.

The names of the four basic financial statements are the ____________________, the ____________________, the ____________________, and the ____________________

income statement, balance sheet, statement of retained earnings, statement of cash flows

The three financial statements in which net income can be found are the ____________________, the ____________________ and the ____________________.

income statement, statement of retained earnings, statement of cash flows using the indirect method

"Revenues" are best described as:

increases in resources resulting from the sale of goods or the provision of services.

Cash used to purchase a truck to transport lawn mowers and other tools to customer locations is reported on the statement of cash flows in the:

investing activities section.

Information that is material means that an error in recording the dollar amount of a transaction would:

likely affect the judgment of someone relying on the financial statements.

Cash received from customers for mowing their lawns is reported on the statement of cash flows in the:

operating activities section.

Mullins, Inc. manufactures furniture. Mullins has given you its most recent annual report in an effort to obtain a sizeable loan. The company is very profitable and appears to have a strong financial position. However, based on a news report you saw on television last night, you are aware that Mullins is a defendant in a class action lawsuit related to defective products. Serious injuries were allegedly caused by Mullins' infant high chairs overturning. The television news report is an example of financial information that is:

relevant

The principle of conservatism is concerned with:

the avoidance of overstating assets or income in the preparation of financial statements.

The going concern assumption is concerned with

the company's ability to continue operations long enough to carry out its existing obligations.

"Matching principle" is best described as:

the principle that expenses should be recorded in the period resources are used to generate revenues