Accounting Chapter 2

At the beginning of the fiscal year, the balance sheet showed assets of $2,728 and stockholders' equity of $1,672. During the year, assets increased $148 and liabilities decreased $76.

$1,896.

At the beginning of the year, paid-in capital was $164 and retained earnings was $94. During the year, the stockholders invested $48 and dividends of $12 were declared and paid. Retained earnings at the end of the year were $104.

$22

Which of the following statements are true about liabilities of a firm?

-Accounts payable is an example of liabilities. -Liabilities are probable future sacrifices of economic benefits.

Which of the following statements are true about the assets of a firm?

-Assets result from past transactions or events of the firm. -Assets represent the amount of resources controlled by the firm. -The economic benefits associated with assets must be obtained or controlled by the firm. -Assets are probable future economic benefits to the firm.

Which of the following calculations are made on the income statement?

-Gross profit minus selling, general, and administrative expenses equals income from operations. -Net sales minus the cost of goods sold equals gross profit. -Income from operations minus interest expense equals income before taxes. -Income before income taxes minus income taxes equals net income.

Which of the following statements are true regarding the balance sheet equation?

-It is another term for the accounting equation. -It can be expressed as A = L + SE. -It must remain in balance after each transaction is recorded.

Which statements are true regarding stockholders' equity?

-It is equal to assets minus liabilities. -It is sometimes referred to as net worth. -It is sometimes referred to as net assets.

Which statements are true regarding a firm's fiscal year?

-It is often the same as the calendar year. -It is the annual period used for reporting purposes. -It can be any 12-month period.

Which of the following statements are true regarding stockholders' equity?

-It is the equity in the assets that remain after subtracting the liabilities. -it is sometimes referred to as owners' equity. -It is sometimes referred to as net worth. -It is sometimes referred to as net assets.

Which of the following statements are true regarding the balance sheet equation?

-It must remain in balance after each transaction is recorded. -It can be expressed as A = L + SE. -It is another term for the accounting equation.

Which of the following statements are true about liabilities of a firm?

-Liabilities are amounts owed to other entities. -Liabilities are claims against the firm by its creditors. -Liabilities are present obligations to transfer assets or provide services to other organizations.

Which of the following items are considered key elements of ethical behavior for a professional accountant?

-Maintaining objectivity: being impartial and free from conflicts of interest. -Accepting an obligation to serve in the best interests of the employer, the client, and the public. -Maintaining integrity: being honest and forthright in one's dealings and communication with others. -Maintaining independence, both in appearance and in fact. -Having competence by acquiring and maintaining the professional knowledge and skill to adequately perform the work assigned.

Which of the following statements are true regarding net assets?

-Net assets is another term for net worth. -Net assets are equal to stockholders' equity. -Net assets are equal to assets minus liabilities.

Which of the following are included in liabilities?

-Other accrued liabilities -Accounts payable -Long-term debt

Which of the following are other names for the income statement?

-Statement of operations -Statement of earnings -Profit and loss statement

On January 31, a company's balance sheet showed net assets of $2,600 and liabilities of $700. Stockholders' equity on January 31 was:

2,600

Which statement that is true about a balance sheet?

A balance sheet is generally prepared as of the end of a fiscal reporting period.

Which of the following statements is not true regarding accounts receivable?

Accounts receivable is recorded for the company's gross profit on credit sales.

Which of the following accounting methods accomplishes much of the matching of revenues and expenses?

Accrual accounting

Matching revenues and expenses refers to:

Accurately reflecting the results of operations for a fiscal period.

Which of the following are considered selling, general, and administrative expenses?

Advertising expense Depreciation expense Wages expense

Which of the following is a current asset?

Cash

Which of the following statements is true regarding the statement of cash flows?

Cash received from the sale of long-term debt is a financing activity, and the activity is a source of cash. Cash received from the sale of buildings or equipment is an investing activity, and the activity is a source of cash. Depreciation expense is added back to net income in the operating activities section. The increase in accounts payable for the year is a source of cash and is shown as an operating activity.

Which of the following are reported in the statement of changes in stockholders' equity?

Common stock issued during the year Net income for the year Dividends for the year Total stockholders' equity at the end of the year. Year-end balance of retained earnings

Which concept/principle supports the fact that assets such as land, buildings, and equipment are not reported at their fair values?

Cost principle

Which of the following are included in assets?

Equipment Cash Accounts receivable Merchandise inventory

Major classifications of accounting activity would not include:

Financial accounting, national accounting, cost accounting

Which of the following is true regarding the income statement?

Gross profit, income from operations, and income before taxes are all subtotals on the income statement.

Which statement is true regarding the income statement?

It is a link between the balance sheets at the beginning and end of the year.

Which of the following statements are true regarding income from operations?

It is frequently called operating income. It is frequently called earnings from operations. It is a subtotal on the income statement that is not affected by the firm's tax rate or by the amount of interest expense incurred.

Which of the following statements are true regarding retained earnings?

It is increased each year by the entity's net income. It is referred to as an accumulated deficit if cumulative losses and dividends exceed cumulative net income. It is reduced by any dividends paid to stockholders. It is the cumulative net income of the entity that has been retained for use in the business.

Which of the following is true of financial accounting? (Check all that apply).

It is measured in dollars. It is not the sole source of information about an entity. It is a form of historical scorekeeping. It may provide information that is helpful in assessing an entity's future prospects.

Which of the following statements are true regarding parent-subsidiary relationships?

It is not necessary for the parent to own 100 percent of the stock of the subsidiary Subsidiaries may themselves be parents of subsidiaries One parent may have several subsidiaries.

Which statements are true regarding the par value per share of common stock?

It is often a nominal amount, such as $1 per share. It is an arbitrary value assigned when the corporation is organized. It is a relic from the past, that for all practical purposes, has lost its significance.

Which statement is true regarding a firm's fiscal year?

It is the annual period used for reporting to owners, the government, and others.

Which statements are true regarding gross profit?

It represents the seller's maximum "cushion" available to cover all other operating expenses before it is possible to have net income. It is sometimes referred to as gross margin.

Which statements are true regarding the cost of goods sold?

It represents the total cost of merchandise sold to customers. It is normally shown as a separate expense because of its significance. It is frequently called cost of sales or cost of products sold.

Which of the following items is not considered a key element of ethical behavior for a professional accountant?

Maintaining profitability: to the greatest extent possible, ensure that the client's accounting records show a profit.

Which of the following statements are true regarding the statement of cash flows?

Net income from the income statement is the starting point for determining cash provided or used by operating activities. Cash paid for the purchase of buildings or equipment is an investing activity, and the activity is a use of cash. Cash received from the sale of common stock is a financing activity, and the activity is a source of cash.

Which of the following statements are not true about net sales?

Net sales include only credit sales, not cash sales Net sales represent the difference between gross profit and cost of goods sold.

Which of the following statements is not correct regarding retained earnings?

Retained earnings is increased each year by the entity's net income and dividends.

Financial accounting information as presented in financial statements may help users to assess which of the following?

The firm's working capital and cash management practices The firm's future earnings potential based on an analysis of past results Relative strengths and weaknesses of the firm's financial position

Which of the following statements about partnerships is true?

The income earned from partnerships is taxed at the partner level.

Which of the following statements are true regarding the statement of cash flows?

The net increase in cash for the year is equal to the sum of the net cash provided or used by operating, investing, and financing activities. Payment of cash dividends on common stock is a financing activity, and the activity is a use of cash. If a current liability account increases for the year, this will show up as a source of cash in the operating activities section.

Which of the following are alternative names for the statement of changes in stockholders' equity?

The statement of changes in retained earnings The statement of changes in capital stock The statement of changes in owners' equity

Inventory, $42,000; Long-term Debt 62,500; Common Stock $30,000; Accounts Payable $22,000; Cash $66,000; Buildings and Equipment $195,000; Short-term Debt $24,000; Accounts Receivable $54,500; Retained Earnings $102,000; Notes Payable (nine month) $27,000; Accumulated Depreciation $90,000.

Total current assets on the balance sheet are: $162,500.

Which concept/principle supports the notion that for companies reporting their financial statements in United States dollars, no adjustments are made for the effects of inflation?

Unit of measurement

Merchandise inventory is:

a current asset account

Davy Ltd. borrows money from a bank that has to be repaid within 3 months. For this transaction, Davy Ltd. debited the cash account and credited the short-term debt account in its book of accounts. Therefore, the short-term debt account is an example of Blank______.

a current liability

The time frame associated with an income statement is:

a past period of time

The time frame associated with a balance sheet is:

a point in time in the past

The three concepts/principles that relate to the entire model are:

accounting equation, accounting entity, and going concern

The four concepts/principles that relate to bookkeeping procedures and the accounting process are:

accounting period, matching, revenue recognition, and accrual

The two main components of paid-in capital are common stock and:

additional paid-in capital

Current liabilities:

are those liabilities that are likely to be paid with cash within one year of the balance sheet date

The income statement reports all of the following account types except:

assets

The balance sheet is a listing of the organization's:

assets, liabilities, and stockholders' equity

Stockholders' equity is:

decreased by dividends paid during the year

Selling, general, and administrative expenses include:

depreciation expense

The concept that refers to the presumption that the entity will continue to operate in the future is known as the:

going concern concept

The statement of operations, statement of earnings, and the profit and loss statement are alternative names for the statement.

income

The link between last year's balance sheet and this year's balance sheet is this year's:

income statement

The objectives of financial reporting for nonbusiness organizations focus on providing:

information about obligations, net resources, economic resources, and organizational performance.

Income from operations:

is a subtotal on the income statement that is not affected by the firm's tax rate or by amount of interest expense incurred

The balance sheet:

is like a snapshot of the organization's financial position, frozen at a specific point in time.

The three activity categories in the statement of cash flows are:

operating, investing, and financing

The two main components reported on the statement of changes in stockholders' equity are:

paid-in capital and retained earnings

The stated value per share of no-par-value stock operates in the same way as the value per share.

par

A partnership is essentially a group of who have banded together.

proprietors

Financial reporting is designed to meet the needs of users by providing information that is:

relevant to making rational investment and credit decisions and other informed judgments.

Net sales:

represent the amount of sales of merchandise to customers, less any sales returns

Cost of goods sold:

represents the total cost of merchandise sold to customers

Gross profit:

results from subtracting cost of goods sold from net sales

The owners of a corporation are called .

shareholders or stockholders

Shareholders of a corporation receive of stock as evidence of their ownership interest in the corporation.

shares

No-par-value stock can sometimes be assigned a(n) value per share.

stated

Alternative names for the statement of changes in stockholders' equity include all of the following except the:

statement of cash flows

Alternative names used to describe the income statement include all of the following except the:

statement of financial position

Current assets include cash and other assets:

that are likely to be converted into cash or used to benefit the entity within one year

In the horizontal model representation of the financial statements, Blank______.

the arrow pointing from net income to stockholders' equity indicates that net income affects retained earnings

One of the primary disadvantages of the corporation as a form of business is that:

the cost of forming a corporation is usually higher than that of starting a proprietorship or partnership

For a parent-subsidiary relationship to exist, Blank______.

the parent must normally own more than 50 percent of the stock of another corporation

A firm prepares comparative financial statement so that _blank​_.

the users of the data can easily spot changes in the firm's financial position and in its results of operations

Revenue is recognized at the time of sale, which is when:

title passes to the buyer or when the services are performed

If total liabilities are equal to $8,000 and total stockholders' equity is equal to $4,000, then:

total assets are equal to $12,000

If total assets are equal to $10,000 and total stockholders' equity is equal to $3,000, then:

total liabilities are equal to $7,000

If total assets are equal to $15,000 and total liabilities are equal to $9,000, then:

total stockholders' equity is equal to $6,000.

Proprietorships and partnerships have the liability characteristic in common.

unlimited

Revenues, expenses, gains, and losses are reported on the .

Blank 1: income Blank 2: statement

When a subsidiary is not wholly owned, the other stockholders of the subsidiary are referred to as

Blank 1: minority Blank 2: noncontrolling

Assets are future economic benefits obtained or controlled by a particular entity as a result of transactions or events.

Blank 1: probable Blank 2: past

In the horizontal model representation of the financial statements, the arrow going from net income to stockholders' equity means that net income affects the

Blank 1: retained Blank 2: earnings

The statement of changes in owners' equity, the statement of changes in retained earnings, and the statement of changes in capital stock are alternative names for the more commonly reported statement of changes in .

Blank 1: stockholders' Blank 2: equity

Financial statements that show a column for the current year and the prior year are known as

comparative

The four concepts/principles that relate to the financial statements are:

consistency, full disclosure, materiality, and conservatism

Retained earnings represents the net income of the entity that has been retained for use in the business.

cumulative

A = L + SE is called the

Blank 1: accounting or balance sheet Blank 2: equation

Stockholders' equity is the ownership right of the stockholders in the that remain after subtracting the of the corporation.

Blank 1: assets Blank 2: liabilities

It is important to recognize that financial accounting information is developed at a (cost/benefit) and that the (cost/benefit) to the user of the information should exceed the cost of providing it.

Blank 1: cost Blank 2: benefit