Accounting Midterm Prep
True or False: Accounts receivables (net) reported in the current asset section of a company's balance sheet represents the total amount owed by customers within the next year.
Answer: False Rationale: A company makes two representations when reporting A/R in the balance sheet. The first being that it expects to collect the amount reported on the balance sheet. The second is that it expects to collect within the next year. The company may not expect to collect the total amount owed by customers, thus, the statement is incorrect.
True or False: When a firm uses an accelerated method of depreciation for tax reporting in order to minimize its tax burden, it will not really save any tax dollars in the end because depreciation method merely changes the timing of the depreciation expenses but not the total.
Answer: False Rationale: An accelerated method for taxes brings real savings. Paying lower taxes early on allows the company to reinvest the additional cash flows into additional operating assets. As well, the present value of a dollar of tax in the future is worth less than a dollar today.
True or False: The cash conversion cycle is defined as: Days sales outstanding - Days inventory outstanding + Days payable outstanding
Answer: False Rationale: Cash conversion cycle equals Days sales outstanding plus Days inventory outstanding less Days payable outstanding.
True or False: Bed Bath and Beyond has a return policy which states that the customer "may return a purchase for a refund, merchandise credit, or exchange to any of our stores nationwide or to our returns processing center". The company can report revenue on the full amount as soon as the merchandise is sold.
Answer: False Rationale: Revenue will be recognized as soon as the merchandise is sold but only for the portion that the company estimates will not be returned. The estimated returns are netted against sales and set up as a liability (reserve).
True or False: Assets must always equal liabilities plus equity.
Answer: True Rationale: The accounting equation is Assets = Liabilities + Equity. This relation must always hold.
Heller Company offers an unconditional return policy to its customers. During the current period, the company records total sales of $935,000, with a cost of merchandise to Heller of $374,000. Based on past experience, Heller Company expects 4% of sales to be returned. How much in net sales will Heller Company recognize for the current period? A) $897,600 B) $935,000 C) $359,040 D) $920,040 E) $561,000
Answer: A Rationale: $935,000 x 96% = $897,600
On December 31 Starstruck Corporation reported, on its Form 10-K, the following (in millions): Total assets $21,494.3 Total stockholders' equity 8,836.1 Total current liabilities 6,820.4 What did Starstruck report as total liabilities on December 31? A) $12,658.2 million B) $ 5,837.8 million C) $14,673.9 million D) $23,510.0 million E) None of these are correct.
Answer: A Rationale: Assets = Liabilities + Stockholders Equity. $21,494.3 = Liabilities + $8,836.1 Therefore, total liabilities = $12,658.2 on December 31.
If a company issues 2,500 shares of common stock at a market price of $48 per share, which of the following is the correct balance sheet effect? A) Increase cash by $120,000 and increase contributed capital by $120,000 B) Increase cash by $120,000 and increase earned capital by $120,000 C) Increase stock revenues by $120,000 D) Stock issuances are not reported on the balance sheet E) None of these are correct.
Answer: A Rationale: Cash increases by the number of shares issued times the market price; contributed capital also increases by the same amount. The latter is broken down into two segments: 1. common stock, which increases by the original par value of the shares sold, and 2. additional paid-in capital, which makes up the balance. Revenue is an Income Statement category and therefore irrelevant in this case.
During the year, Brown Company reported cost of goods sold of $1,213.9 million. Inventory at the start of the year was $437.4 million and at the end of the year was $468.6 million. Which of the following describes the closing entry that the company will make for these accounts? A) Credit Cost of goods sold $1,213.9 million B) Debit Inventory $31.2 million C) Credit Inventory $468.6 million D) Debit Cost of goods sold $745.3 million E) None of these are correct.
Answer: A Rationale: Cost of goods sold is a temporary account that must be closed. Inventory accounts are never closed—they are permanent accounts.
McKinnon Enterprises owns a professional ice hockey team, the Rockford Penguins. The company sells season tickets for its upcoming season and receives $816,000 cash. The season starts January 1, with five home games occurring monthly over the next six months. What is the balance in the company's deferred revenue account at the end of April? (Assume the deferred revenue account had a zero balance on January 1.) A) $272,000 B) $408,000 C) $544,000 D) $816,000 E) None of these are correct.
Answer: A Rationale: Deferred revenue recognized: ($816,000 / 6 months) x 4 months = $544,000; $816,000 - $544,000 = $272,000 remains in deferred revenue account.
Which one of the following would be considered a contingent liability? A) A company estimates that it will probably have to pay $75,000 to the EPA for a chemical spill. B) A company owes $35,000 on inventories purchased on credit. C) A company has access to a line of credit with a bank in the amount of $120,000. D) A company believes that it is reasonably possible it will lose a lawsuit and damages could be $100,000. E) None of these are correct.
Answer: A Rationale: For a liability to be a contingent liability, the amount must be estimable and probable.
On its year-end balance sheet, Wells Inc., reports treasury stock at cost of $4,687 million. The company has a total of 1,172,513,618 shares issued and 1,082,986,591 shares outstanding. What average price did Wells pay for treasury shares? A) $52.35 B) $4.00 C) $4.33 D) $2.08 E) None of these are correct.
Answer: A Rationale: Price per share is total treasury shares at cost divided by treasury shares. $4,687,000,000 / (1,172,513,618 - 1,082,986,591) = $52.35 per share.
The year-end financial statements of Rally Company for the current year, report total revenues of $19,829 million, accounts receivable of $1,399 million at the current year-end, and $1,318 million for the prior year-end. The company's accounts receivable turnover for the year is: A) 14.6 times B) 14.2 times C) 15.0 times D) 15,4 times E) None of these are correct.
Answer: A Rationale: Receivables turnover = Sales / Average AR = $19,829 / [($1,399 + $1,318) / 2] = 14.6 times per year.
ABC Corporation reports the following (in $ millions): net income of $445, retained earnings at the end of the year of $10,018, and retained earnings at the beginning of the year of $9,863. Assume that there were no other retained earnings transactions during the year. What dividends did the firm pay during the year? A) $290 million B) $600 million C) $155 million D) $-0- E) There is not enough information to calculate the amount.
Answer: A Rationale: Retained earnings, ending = Retained earnings, beginning + Net Income - Dividends Dividends = Retained earnings, Beginning + Net Income - Retained earnings, ending Dividends = $9,863 + $445 - $10,018 = $290 million
Which of the following are included in current assets? A) Prepaid rent B) Taxes payable C) Automobiles D) Common stock E) None of these are correct.
Answer: A Rationale: Taxes payable is a liability, automobiles is not a current asset but a long-term one, and common stock is an equity.
In its December 31, year-end financial statements, Davidson reported the following (in millions): Long-term Assets $4,829 Current Liabilities $ 2,290 Long-term Liabilities $4,086 Total Liabilities $6,376 Equity $1,536 At December 31, current assets amount to: A) $3,083 million B) $1,547 million C) $2,290 million D) $5,622 million E) None of these are correct.
Answer: A Rationale: Total assets = Total liabilities + Equity. Total assets - Long-term assets = Current assets. Current assets = $6,376 + $1,536 - $4,829 Current assets = $3,083 million
Kelty Company's year-end financial statements reported the following (in millions): Total assets $41,278 Total liabilities 29,465 Total shareholders' equity 11,813 Dividends 205 Net income 3,160 Retained earnings, Jan. 1 11,425 What did Kelty Company report for retained earnings at December 31? A) $14,380 million B) $14,768 million C) $14,790million D) $14,585 million E) There is not enough information to determine the answer.
Answer: A Rationale: (in millions) Retained earnings, Jan. 1 $11,425 Net income 3,160 Dividends (205) Retained earnings, Dec. 31 $14,380
As inventory and PPE assets on the balance sheet are consumed, they are reflected: A) As a revenue on the income statement B) As an expense on the income statement C) As a cash flow outflow on the Statement of Cash flows D) Both B and C E) Assets are never consumed.
Answer: B Rationale: As assets are consumed (used up), their cost is transferred into the income statement as an expense. The cash outflow occurred when the assets were originally purchased and not when they are used up.
As inventory and property plant and equipment on the balance sheet are consumed, they are reflected: A) As a revenue on the income statement B) As an expense on the income statement C) As a use of cash on the statement of cash flows D) On the balance sheet because assets are never consumed E) Both B and C because the financial statements articulate
Answer: B Rationale: As assets are consumed (used up), their cost is transferred to the income statement as expenses. Cash is not involved so C and E are incorrect.
Thomas Company receives information that requires the company to increase its expectations of uncollectible accounts receivable. Which of the following does not occur on the company's financial statements? A) Bad debt expense is increased B) Accounts receivables (gross) is reduced C) Net income is reduced D) The allowance account is increased E) None of these are correct.
Answer: B Rationale: Both bad debt and the allowance account are increased, resulting in lower NET accounts receivable and lower net income. The gross amount of receivables is unchanged.
In its year-end financial statements, Naperville, Inc. reported cash of $6,276 million. The statement of cash flows reports the following (in millions): Net cash from operating activities $6,192 Net cash from investing activities (2,068) Net cash from financing activities (5,552) What was the balance in Naperville's cash account at the start of the current year? A) $ 4,848 million B) $ 7,704 million C) $ 1,428 million D) $12,468 million E) None of these are correct.
Answer: B Rationale: Cash at end of year = Cash at beginning of year + Change in cash during the year $6,276 = Cash at beginning of year + $6,192 - $2,068 - $5,552 Cash at beginning of year = $7,704 million
Costco Wholesale Corporation collects annual non-refundable membership fees from customers. When should Costco recognize revenue for these membership fees? A) Immediately when cash is received because the fees are nonrefundable B) Evenly over the membership year C) Evenly over the current fiscal year D) At the end of the membership year when Costco has discharged its obligation to the customer E) Pro rata over the customer's actual purchasing pattern
Answer: B Rationale: Costco should record membership fees evenly over the year even if the fee is nonrefundable because Sam's has an obligation to stay open for business for a year to honor the customer's membership.
McKinnon Enterprises owns a professional ice hockey team, the Rockford Penguins. The company sells season tickets for its upcoming season and receives $1,056,000 cash. The season starts January 1, with five home games occurring monthly over the next six months. How much revenue will McKinnon Enterprises recognize from its season ticket sales through the end of April? A) $ 528,000 B) $ 704,000 C) $1,056,000 D) $ 352,000 E) None of these are correct.
Answer: B Rationale: Deferred revenue recognized: ($1,056,000/ 6 months) x 4 months = $704,000
A company records an adjusting journal entry to record $10,000 depreciation expense. Which of the following describes the entry? A) Debit Property Plant and Equipment and Credit Depreciation expense B) Debit Depreciation expense and Credit Property Plant and Equipment C) Debit Property Plant and Equipment and Credit Cash D) Debit Depreciation expense and Credit Cash E) Debit Net Income and Credit Property Plant and Equipment
Answer: B Rationale: Depreciation is an expense which decreases retained earnings—it is a debit. Property plant and equipment is being used up and thus its balance is decreasing on the balance sheet—it requires a credit.
Car Facts Inc. reports sales of $15,081,362 thousand and cost of sales of $13,691,824 thousand for the fiscal year ended February 28. The gross profit for the year is: A) $1,391,144 thousand B) $1,389,538 thousand C) 9.20% D) 90.8%
Answer: B Rationale: Gross profit = Sales - COGS = $15,081,362 thousand - $13,691,824 thousand = $1,389,538 thousand.
At year end, Kay Corporation had net working capital of $4,546 million and current liabilities of $5,948 million. The firm's current assets are: A) $1.402 million B) $10,494 million C) $16,442 million D) $5,948 million E) None of these are correct.
Answer: B Rationale: Net working capital = Current assets - Current liabilities. $4,546 = Current assets - $5,948 Current assets = $10,494
Which of the following is included as a component of stockholders' equity? A) Buildings B) Retained earnings C) Prepaid property taxes D) Accounts payable E) Dividends
Answer: B Rationale: Retained earnings is a component of stockholders' equity. Dividends affect retained earnings but they are not reported as a separate component.
Which one of the following items is not a component of contributed capital? A) Preferred stock B) Retained earnings C) Common stock D) Additional paid-in capital E) All of the above
Answer: B Rationale: Retained earnings is a separate component of stockholders' equity section. It is typically referred to as "earned" capital.
During the year, Sparkle Inc. had Sales of $2,850.6 million, Gross profit of $1,307.7 million and Selling, general, and administrative expenses of $1,022.4 million. What was Sparkle's Cost of sales for the year? A) $1,828.2 million B) $1,542.9 million C) $2,330.1 million D) $ 285.3 million E) There is not enough information to calculate the amount.
Answer: B Rationale: Sales - Cost of sales = Gross profit $2,850.6 - Cost of sales = $1,307.7 Cost of sales = $1,542.9 million
On January 1, Fey Properties paid $10,080 for a three-year insurance premium, with coverage beginning immediately. Fey Company prepares monthly financial statements. Which of the following describes the required adjusting entry on January 31? A) Debit Cash for $3,360 and Credit Prepaid insurance for $3,360 B) Debit Insurance expense for $280 and Credit Prepaid insurance for $280 C) Debit Prepaid insurance for $280 and Credit Insurance expense for $280 D) Debit Cash for $6,720 and Credit Prepaid insurance for $6,720 E) Debit Insurance expense for $3,360 and Credit Prepaid insurance for $3,360
Answer: B Rationale: The adjusting entry required consists of a debit to insurance expense and a credit to prepaid insurance for $280 ($10,080 / 36 months).
EZ Wheels Corporation manufactures kick scooters. The company offers a one-year warranty on all scooters. During the year, the company recorded net sales of $1,520 million. Historically, about 4% of all sales are returned under warranty and the cost of repairing and or replacing goods under warranty is about 30% of retail value. Assume that at the start of the year EZ Wheels' balance sheet included an accrued warranty liability of $13.0 million and at the end of the year the accrued warranty liability balance was $9.9 million. How much did EZ Wheels pay during the year to repair and/or replace scooters under warranty? A) $ 9.9 million B) $21.3 million C) $18.2 million D) $60.8 million E) None of these are correct.
Answer: B Rationale: Total cash paid out is $13.0 million + $18.2 million* - $9.9 million = $21.3 million.
A company's net cash flow will equal its net income ... A) Almost always B) Rarely C) Occasionally D) Only when the company has no investing cash flow for the period E) Only when the company has no investing or financing cash flow for the period
Answer: B Rationale: Net income reflects the company's revenue minus expenses for the given period. Net cash flow represents the amount of money received (spent) on operating, investing and financing activities for the given period. These values are rarely the same.
Weimar World, a tax-preparation service, had a cash balance of $245,000 as of March 1. During the month of March, Weimar World had the following transactions. • Billed $992,000 in revenues on credit • Received $328,000 from customers' accounts receivable • Incurred expenses of $388,000 but only paid $175,400 cash for these expenses • Prepaid $64,400 for computer services to be used next month What was the company's cash balance on March 31? A) $604,000 B) $849,000 C) $333,200 D) $397,600 E) None of these are correct.
Answer: C
Page's June 30, year-end financial statements reported the following (in millions): Cash, beginning of year $17,090 Cash, end of year $17,755 Cash from operating activities $38,588 Cash from investing activities $(13,938) What did Page report for cash from financing activities for the year ended June 30? A) $ 23,985 million B) $25,315 million C) $(23,985) million D) $25,315 million E) $24,650 million
Answer: C Rationale: Cash, beginning of year + Cash from operating activities + Cash from investing activities + Cash from financing activities = Cash at end of year $17,090 + $38.588 - $13,938 + Cash from financing = $17,755 Cash from financing = $(23,985)
EZ Wheels Corporation manufactures kick scooters. The company offers a one-year warranty on all scooters. During the year, the company recorded net sales of $1,520 million. Historically, about 4% of all sales are returned under warranty and the cost of repairing and or replacing goods under warranty is about 30% of retail value. Assume that at the start of the year EZ Wheels' balance sheet included an accrued warranty liability of $13.0 million and at the end of the year the accrued warranty liability balance was $9.9 million. What was EZ Wheels Corporation's warranty expense for the year? A) $21.3 million B) $60.8 million C) $18.2 million D) $ 9.9 million E) None of these are correct.
Answer: C Rationale: $1,520 million x 4% x 30% = $18.2 million
An accrual of wages expense would have what effect on the balance sheet? A) Decrease liabilities and increase equity B) Increase assets and increase liabilities C) Increase liabilities and decrease equity D) Decrease assets and decrease liabilities E) None of these are correct.
Answer: C Rationale: An accrual of wages expense increase wages payable (a liability) and decreases retained earnings, resulting from the decrease in net income.
United Company's year-end balance sheet reported the following (in millions) Total Assets $100,228 Total Liabilities 78,713 Contributed Capital 8,933 What was United Company's total liabilities and stockholders' equity at December 31? A) $ 87,646 million B) $ 91,295 million C) $100,228 million D) $ 21,515 million
Answer: C Rationale: Assets = Liabilities + Stockholders Equity. Assets = $100,228 so this is the total of liabilities and equity combined.
The financial statements of Calico Corporation, for the May 31, year-end, included the following information relating to their allowance for doubtful accounts: Balance in allowance at the beginning of the year $360 million, accounts written off during the year of $151 million, balance in allowance at the end of the year $351 million. What did Calico Corporation report as bad debt expense for the year? A) $200 million B) $209 million C) $142 million D) $160 million E) None of these are correct.
Answer: C Rationale: Balance in allowance at the beginning of the year + Bad debt expense - Accounts written off during the year = Balance in allowance at the end of the year. Bad debt expense = $351 million - $360 million + $151 million = $142 million.
Which of the following would not require the company to record an accrual on the balance sheet? A) The company owes $43,000 in wages to its employees for the previous two weeks. B) Interest will be paid when a note payable matures in the following accounting period. C) Management believes a lawsuit against the company is meritless because they have never had a single complaint about dangerous side effects of their drug in two years. D) The company knows that they will be fined for pollution as a result of their manufacturing process and can estimate the amount of the obligation. E) None of these are correct.
Answer: C Rationale: Based on management's belief, the lawsuit at hand can be deemed less than reasonably possible and therefore does not need to be disclosed in the financial statements.
Trio, Inc. reported retained earnings of $540,048 on December 31, 2017. During the year, Trio recorded net income of $148,583 and paid dividends of $63,538. The company had no other transactions that affected retained earnings. What must retained earnings have been on December 31, 2016? A) $ 63,538 B) $603,586 C) $455,003 D) $625,093 E) None of these are correct.
Answer: C Rationale: Beginning retained earnings can be backed into from ending retained earnings and the flows to retained earnings. Adding back the dividends and subtracting out the income will give us the retained earnings Thermopolis, began the year with: $540,048 + $63,538 - $148,583 = $455,003.
How would cash collected on accounts receivable affect the balance sheet? A) Increase liabilities and decrease equity B) Decrease liabilities and increase equity C) Increase assets and decrease assets D) Increase assets and increase equity
Answer: C Rationale: Cash collected on accounts receivable produces an increase in cash and a decrease in accounts receivable, both asset accounts. There is no impact on liabilities or on equity.
Hasten Corporation has the following metrics for the year. Amount in days Days sales outstanding 34.7 Days payables outstanding 23.6 Days inventory outstanding 56.1 The cash conversion cycle for the year is: A) 2.2 days B) 58.3 days C) 67.2 days D) 45.0 days E) None of these are correct.
Answer: C Rationale: Cash conversion cycle = Days sales outstanding + Days inventory outstanding - Days payable outstanding
During the fiscal year, Shoe Productions recorded inventory purchases on credit of $270.2 million. Inventory at the start of the year was $30.6 million and at the end of the year was $42.4 million. Which of the following describes how these transactions would be entered on the financial statement effects template? A) Increase expenses (Cost of goods sold) by $258.4 million B) Increase liabilities (Accounts payable) by $258.4 million C) Increase expenses (Cost of goods sold) by $270.2 million D) Increase noncash assets (Inventory) by $11.8 million E) None of these are correct.
Answer: C Rationale: Cost of goods sold is purchases less the increase in inventory $270.2 - ($42.4 - $30.6) = $258.4
In its 2016 annual report, Kehl's Corporation reported the following (in millions): Total assets $20,362 Total shareholders' equity $ 7,766 Total liabilities $12,596 What proportion of Kehl's Corporation is financed by nonowners? A) 44.8% B) 38.1% C) 61.9% D) 61.7% E) None of these are correct.
Answer: C Rationale: Nonowner financing for Kehl's assets is provided from liabilities (the shareholders are the owners). $12,596 / $20,362 = 61.9%
TeleLink reports retained earnings at the end of the current year of $32,598 million and retained earnings at the end of the previous year of $30,091 million. The company reported dividends of $3,940 million and other transactions with shareholders that reduced retained earnings during the current year by $1,806 million. How much net income did the firm report in the current year? A) $2,507 million net income B) $8,253 million net loss C) $8,253 million net income D) $2,507 million net loss E) None of these are correct.
Answer: C Rationale: Retained earnings, ending = Retained earnings, beginning + Net Income - Dividends +/- Other transactions $32,598 = $30,091 + Net income - $3,940 - $1,806 Net income = $8,253 million net income.
Ticketmaster contracts with the producer of Blue Man Group to sell tickets online. Ticketmaster charges each customer a fee of $18 per ticket and receives $44 per ticket from the producer. Ticketmaster does not take control of the ticket inventory. Average ticket price for the event is $210. How much revenue should Ticketmaster recognize for each Blue Man Group ticket sold? A) $18 because the $44 from the producer is similar to a negative cost of goods sold B) $210 because the $166 is cost of goods sold paid to the Blue Man Group producer C) $62 because both the fee from the customer and the Blue Man Group producer are earned D) $228 because the $166 is cost of goods sold paid to the Blue Man Group producer E) None of these are correct.
Answer: C Rationale: Ticketmaster should record $62 revenue each time it sells a ticket. Of that, $19 will be received in cash and $44 will be recorded as receivable from the Blue Man Group producers.
Aiello, Inc. had the following inventory in fiscal year. The company uses the FIFO method of accounting for inventory. Beginning Inventory, January 1: 104 units @ $15.00 Purchase 160 units @ $18.00 Purchase 40 units @ $13.50 Purchase 88 units @ $15.75 Ending Inventory, December 31: 96 units The company's cost of goods sold for fiscal year is: A) $4,926.00 B) $4,854.00 C) $4,244.60 D) $4,872.00 E) None of these are correct.
Answer: D Rationale: Costs of goods available for sale* $6,366.00 Less Ending Inventory (88 units @ $15.75) 1,386.00 Less Ending Inventory (8 units @ $13.50) 108.00 Cost of goods sold $4,872.00
In its 2019 annual report, Snap-Tite Incorporated reported the following (in millions): Current assets $1,884.0 Total shareholders' equity $2,635.2 Total liabilities $2,088.0 What did Snap-Tite report as total assets at year-end? A) $6,607.2 million B) $2,839.2 million C) $3,972.0 million D) $4,723.2 million E) None of these are correct.
Answer: D Rationale: Assets = Liabilities + Stockholders Equity. Assets = $2,088.0 + $2,635.2 Therefore, Assets = $4,723.2
During the year, Decker Corporation reported Net income of $1,448.0 million and paid dividends of $496.4 million. Which of the following describes how these transactions would affect Decker's equity accounts? (in millions) A) Increase contributed capital by $1,448.0 and decrease earned capital by $496.4 B) Decrease contributed capital by $496.4 and increase earned capital by $1,448.0 C) Increase contributed capital by $951.6 D) Increase earned capital by $951.6 E) None of these are correct.
Answer: D Rationale: Net income increases earned capital and dividends decrease earned capital. The net effect is an increase to earned capital.
On January 1, Fey Properties collected $5,760 for six months' rent in advance from a tenant renting an apartment. Fey Company prepares monthly financial statements. Which of the following describes the required adjusting entry on January 31? A) Debit Unearned rent revenue for $4,800 and Credit Cash for $4,800 B) Debit Rent revenue for $960 and Credit Unearned rent revenue for $960 C) Debit Cash for $5,760 and Credit Rent revenue for $5,760 D) Debit Unearned rent revenue for $960 and Credit Rent revenue for $960 E) Debit Cash for $4,800 and Credit Unearned rent revenue for $4,800.
Answer: D Rationale: The adjusting entry required consists of a debit to unearned rent revenue and a credit to revenue for $960 ($5,760 / 6 months).
Which of the following does not affect the current liabilities section of the balance sheet? A) Purchase of inventory on credit B) Wages owing to employees but not yet paid C) Insurance bill to be paid next month D) Sale of goods on credit E) A probable legal obligation, due within 12 months
Answer: D Rationale: The sale of goods on credit impacts non-cash assets, specifically accounts receivable; all the other items are liabilities that the company must pay within the next year, hence current liabilities.
How would a sale of $320 of inventory on credit affect the balance sheet if the cost of the inventory sold was $128? A) It would increase noncash assets by $320 and increase equity by $320 B) It would decrease noncash assets by $128 and decrease equity by $128 C) It would increase cash by $320 and increase equity by $320 D) Both A and B, above happen simultaneously
Answer: D Rationale: The sale on credit is an account receivable, a noncash asset that increases revenue and therefore increases equity (answer A). The sale also involves reducing inventory by $128, a noncash asset, which is an expense and therefore a decrease to equity of $128 (answer B). Therefore both A and B are correct so the answer is D.
As of December 31, Drake Inc. reported the following (in millions): Current Assets $25,574 Long-term Assets $34,190 Current Liabilities $20,906 Total Liabilities $49,193 What amount did Drake Inc. report as equity on December 31? A) $38,858 million B) $59,764 million C) $13,966 million D) $10,571 million E) None of these are correct.
Answer: D Rationale: Total assets = Total liabilities + Equity $25,574 + $34,190 = $49,193 + Equity Equity = $10,571 million.
In times of falling prices, choosing LIFO over FIFO as an inventory cost method would affect the financial statements as follows: A) Cost of goods sold will be higher and ending inventory will be lower B) Cost of goods sold will be lower and ending inventory will be lower C) Cost of goods sold will be higher and ending inventory will be higher D) Cost of goods sold will be lower and ending inventory will be higher E) None of these are correct.
Answer: D Rationale: When prices are falling, the more recent, lower prices will be transferred to the income statement (last in are the lowest prices). Thus, COGS will be lower. Conversely, the earliest, highest-priced inventory will remain on the balance sheet.
Why might a company repurchase its own stock? A) It believes that the market undervalues its shares B) To offset dilutive effects of employee stock options granted C) To recognize an economic gain when the treasury shares are later sold for a profit D) To improve earnings per share by reducing the denominator E) All of the above
Answer: E Rationale: Companies may repurchase shares to keep the outstanding shares constant in order to reduce the dilutive effect on earnings per share that may occur when employees exercise stock options.
How would a purchase of inventory on credit affect the income statement? A) It would increase liabilities B) It would decrease retained earnings C) It would increase assets D) Both A and C, above E) None of these are correct.
Answer: E Rationale: The purchase on credit increases both accounts payable and inventory, which are balance sheet accounts. It would, therefore, have no effect on the income statement.
Which of the following items would not be found on a balance sheet? (Select all that apply) A) Stockholders' Equity B) Property, plant and equipment C) Nonowner financing D) Cash E) Dividends
Answer: E Rationale: The balance sheet reports assets (including cash and property, plant and equipment), liabilities (including nonowner financing) and equity. Dividends are reported on statement of stockholders' equity.
True or False: The book value of stockholders' equity (the amount reported on the balance sheet) is most typically equal to the market value of the equity of a company.
Answer: False Rationale: Book value and market value differ for many reasons, including reporting assets at historical costs instead of current market value, and differences between the accounting periods in which transactions are recognized in the financial statements and when the value implications of those transactions are recognized by the capital markets.
True or False: If accrued liabilities are overestimated in the current period, the reported income in a following period will be lower than it should be.
Answer: False Rationale: If the accrued liabilities in this period are overestimated, then the current income is lower than it should be. This error will be corrected in a following period, and will artificially inflate income.
True or False: LIFO inventory costing yields more accurate reporting of the inventory balance on the balance sheet.
Answer: False Rationale: LIFO assumes that the most recently purchased goods are sold, thus the cost of the oldest items remain in the inventory balance. Hence, the balance sheet reports inventories at less current costs.
True or False: A company is worse off by paying cash dividends because it must record a loss for this transaction in its income statement.
Answer: False Rationale: Payment of cash dividends reduces cash and retained earnings, and is not recorded as an expense in the income statement.
True or False: A re-issuance of treasury stock at a price lower than what it was repurchased for results in a loss on the income statement.
Answer: False Rationale: There is no gain or loss on the re-issuance of treasury stock in the income statement. Instead, the difference between the proceeds received and the original repurchase price of the treasury stock is reflected as an increase or decrease in additional paid-in capital component of stockholders' equity.
True or False: The financial statement effects for uncollectible accounts occur when the company writes off the account because that is when all the uncertainty is resolved.
Answer: False Rationale: Under GAAP, costs relating to anticipated bad debts expense are matched with sales in the period that the sales are recognized. Upon write-off, both the receivable and the allowance account are reduced, leaving net receivables unchanged.
True or False:A statement of cash flows reports on cash flows for operating, investing and financing activities at a point in time.
Answer: False Rationale: A statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time.
True or False: If a company reports retained earnings of $175.3 million on its balance sheet, it must also report $175.3 million in cash.
Answer: False Rationale: The accounting equation requires total assets to equal total liabilities plus stockholders' equity. That does not imply, however, that liability and equity accounts relate directly to specific assets.
True or False: The income statement reports net income which is defined as the company's profit after all expenses and dividends have been paid.
Answer: False Rationale: The statement contains two errors. First, net income does not include any dividends during the period; these are a distribution of profits and not part of its calculation. Second, the income statement is prepared on an accrual basis and thus includes expenses incurred (as opposed to paid).
True or False: A balance sheet shows a company's position over a period of time, whereas an income statement, statement of stockholders' equity, and statement of cash flows show its position at a point in time.
Answer: False Rationale: The statement is reversed: A balance sheet shows a company's position at a point in time, whereas an income statement, statement of equity, and statement of cash flows show its position over a period of time.
True or False: R&D expense is treated as an operating expense, not a capital expenditure, unless the R&D assets acquired have an alternative future use.
Answer: True Rationale: Although the R&D assets are similar to regular plant assets, under GAAP, R&D costs are expensed unless the R&D assets have alternative future uses.
True or False: According to GAAP revenue recognition criteria, in order for revenue to be recognized on the income statement, it must be earned and realized (realizable).
Answer: True Rationale: According to GAAP revenue recognition criteria, revenue must be both realized (realizable) and earned, to be recognized on the income statement. The issue of when the revenue is earned is subject to professional judgment.
True or False: When there is a purchase and sale of stock, or a payment of dividends, there is never any gain or loss recorded.
Answer: True Rationale: Any "gains" or "losses" incurred due to the purchase and sale of stock are reflected as increases (decreases) in the paid-in-capital component of stockholders' equity. Dividends are reflected as decreases in the retained earnings component of stockholders' equity.
True or False: Assets are listed on the balance sheet in order of liquidity and liabilities are listed in order of maturity.
Answer: True Rationale: Assets are reported in the order that they are generally expected to be converted into cash. Receivables are, thus, reported before inventories, and inventories before PPE. Liabilities are reported in order of maturity, with current liabilities expected to be paid within one year and long-term liabilities expected to be paid over a longer period of time.
True or False: In 2017, Macy's paid $459 million of cash dividends. These dividends reduced assets and reduced retained earnings.
Answer: True Rationale: Cash dividends result in a reduction in cash and retained earnings.
True or False: In addition to purchased assets like inventories and equipment, companies also may report on their balance sheets intangible assets such as the value of a brand name.
Answer: True Rationale: Companies may report intangible assets if they acquired them in an arms' length transaction. But if the intangible was not purchased, if it was internally generated it may not be included on the balance sheet because its future economic benefits cannot be reliably measured. So, all internally generated intangible assets are excluded from the balance sheet under GAAP.
True or False: Companies that engage in long-term sales contracts such as construction projects often use the cost-to-cost method to recognize revenue. This means that revenue is recognized in proportion to the project's completion.
Answer: True Rationale: Cost-to-cost method recognizes revenue by determining the costs incurred under the contract relative to its total expected costs and not evenly over time.
True or False: Contingent liabilities that are 'probable' and can be reasonably estimated are recorded on the balance sheet as a liability and as an expense in the income statement.
Answer: True Rationale: Only 'probable' contingent liabilities are estimated and recorded on the balance sheet or the income statement. Anything less than 'probable' liabilities (such as 'reasonably possible') are referenced in footnotes.
True or False: Next year, Chemical Corporation plans to build a laboratory dedicated to a special project. The company will not use the laboratory after the project is finished. Under GAAP, this laboratory should be expensed.
Answer: True Rationale: R&D costs must be expensed under GAAP unless they have alternative future uses. If these assets do, indeed, have alternative future uses, they will be capitalized and depreciated.
True or False: An increase in common stock would be reflected in the statement of stockholders' equity.
Answer: True Rationale: The statement of stockholders' equity reports on changes in the accounts that make up stockholders' equity. This includes contributed capital, retained earnings, and other equity.
A list of assets, liabilities and equity can be found on which of the following? A) Balance Sheet B) Income Statement C) Statement of Assets and Liabilities D) Statement of Cash Flows E) Statement of Stockholders' Equity
A) Balance Sheet
On December 31 of the current year, State Construction Inc. signs a contract with the state of West Virginia Department of Transportation to manufacture a bridge over the New River. State Construction anticipates the construction will take three years. The company's accountants provide the following contract details relating to the project: Contract price $624 million Estimated construction costs $480 million Estimated total profit $144 million During the three-year construction period, State Construction incurred costs as follows: Year 1 $ 48 million Year 2 $288 million Year 3 $144 million State Construction uses the cost-to-cost method to recognize revenue. Which of the following represent the revenue recognized in Year 1, Year 2, and Year 3? A) $62 million, $374 million, $187 million B) $62 million, $312 million, $250 million C) $0 million, $0 million, $624 million D) $60 million, $376 million, $188 million E) None of these are correct.
Answer: A
During the month of Marc, Weimar World, a tax-preparation service, had the following transactions. • Billed $396,800 in revenues on credit • Received $131,200 from customers' accounts receivable • Incurred expenses of $155,200 but only paid $70,160 cash for these expenses • Prepaid $25,776 for computer services to be used next month What was the company's accrual basis net income for the month? A) $241,600 B) $215,824 C) $ 44,384 D) $326,640 E) None of these are correct.
Answer: A Explanation: $396800-155200
Aiello Inc. had the following inventory in fiscal year. The company uses the LIFO method of accounting for inventory. Beginning Inventory, January 1: 104 units @ $15.00 Purchase 160 units @ $18.00 Purchase 40 units @ $13.50 Purchase 88 units @ $15.75 Ending Inventory, December 31: 96 units The company's cost of goods sold for fiscal year is: A) $4,926.00 B) $4,872.00 C) $1,440.00 D) $4,244.60 E) None of these are correct.
Answer: A Rationale: Costs of goods available for sale* $6,366.00 Less Ending Inventory (96 units @ $15) 1,440.00 Cost of goods sold $4,926.00
The year-end financial statements of Pratt Inc. include the following information in a footnote. (in millions) Allowance for doubtful accounts $5.8 (year 2) $7.4(year 1) Total accounts and other receivables, net $389.3 (year 2) $416.2 (year 1) What are the company's current gross accounts and other receivables at the end of Year 2? A) $395.1 million B) $389.3 million C) $383.5 million D) $390.9 million E) None of these are correct.
Answer: A Rationale: $389.3 million + $5.8 million = $395.1 million
True or False: Stockholders' equity is not accounted for at current fair value.
True
True or False: The three components of manufacturing costs are direct materials, direct labor, and manufacturing overhead.
True
True or False: Unearned revenue, an operating liability, arises when a company receives cash before any goods are delivered or services are rendered.
True
True or False: When Kimberly-Clark recently repurchased its stock, this action "downsized" the company. This has the opposite financial statement effects as stock issuance.
True
True or False: Accrued liabilities are obligations for which there is no external transaction.
True Rationale: Companies must estimate accrued liabilities such as rent payable because there has been no bill received or no transaction.
