ACCY 200 Exam I

The liability for product warranty claims is an example of a liability that:

1. Has been calculated using estimates 2. Has been recorded in the process of matching revenue and expense 3. Also resulted in a reduction of net income

Identify the information that the current generally accepted accounting principles and auditing standards require the financial statements of an entity to how for the reporting period:

1. financial poisiton at the end of the period 2. earnings for the period 3. cash flows during the period 4. investments by and distributions to owners

When a depreciable asset is sold:

A gain arises if the sales proceeds exceed the net book value

Which of the following is true regarding notes receivables?

A note is a more formal document than an account receivable

Which of the following statements best describes the process of accounting for depreciation:

A process for recognizing the cost of an asset that should be matched against revenue earned as a result using the asset

Which of the following concepts/principles relate to the entire model?

Accounting entity Accounting equation Going concern

Noncurrent, intangible assets such as leasehold improvements, patents, and copyrights are all subject to:

Amortization

The effects on the financial statements of accruing interest on short-term marketable debt securities include:

An increase in net income An increase in revenues An increase in assets

Transactions:

Are summarized in accounts, and accounts are further summarized in financial statements Can be seen as the bricks that build financial statements Are economic interchanges between entities Involve the selection of alternative methods of reflecting the effects of certain accounts

Under accrual accounting, year-end adjustments are made:

Because revenue receipts may occur before or after the event that causes revenue recognition To ensure that expenses are recognized in the year in which they are incurred To ensure that revenues are recognized in the year in which they are earned Because the cash disbursement for expenses may occur before or after the event that causes expense recognition

When a firm purchases supplies for use in its business, and the cost of the supplies purchased is recorded as an asset, the following adjustment to recognize the cost of supplies will probaby be required:

Dr. Supplies expense Cr. Supplies

The amount in the Cash account, which is reported as an asset on the balance sheet, includes all of the following except:

Expected litigation settlements

When costs are rising over time:

FIFO results in higher profits than LIFO

If ending inventory was overstated at the end of Year 1 but counted correctly at the end of Year 2 and this error was not discovered until sometime in Year 3, then:

Gross profit (and net income) was overstated in Year 1 and understated in Year 2 but the error would have self-corrected in total.

Identify the true statements regarding a bank reconciliation.

In a bank reconciliation, deposits in transit are added to the bank balance. In a bank reconciliation, outstanding checks are subtracted from the bank balance.

If there is a loss on the disposal of a depreciable asset:

In retrospect, the depreciation expense recognized over the asset's life was too low

Debit entries:

Increase asset accounts and decreases liability and stockholders' equity accounts

The entry to record depreciation expense:

Increases a contra asset and decreases net income

Which of the following groups of accounts would be closed in the year-end closing process?

Insurance Expense Service Revenue Loss on sale of equipment Sales

Leasehold is an example of which of the following types of assets?

Intangible asset

Which of the following groups of accounts would all be closed in the year-end closing process?

Interest Income, Cost of Goods Sold, Dividends, and Gain on Sale of Land

If a company issues a stock dividend, identify the true effects on the financial statements of the company.

Its retained earnings is decreased. Its total assets are not affected. Its total stockholders' equity is not affected.

Which of the following is true regarding the balance sheet components?

Liabilities are the obligations of the organization

Which of the following is not usually associated with bonds?

Maturity rate

The intangible asset goodwill:

May arise when one company purchases another company

Which of the following statements are true regarding owners' equity and ownership rights held in noncorporate entities?

Neither proprietorships or partnerships issue stock. Owners' equity for proprietorships and partnerships is usually referred to as capital. No distinction is made between invested capital and retained earnings for a proprietorship or a partnership.

Which of the following statements regarding net income (loss) and retained earnings are correct?

Net income for the period increases retained earnings. Retained earnings represent the cumulative earnings the corporation has retained for use in the business. Dividends declared during the period decrease retained earnings.

Liability/Stockholders' equity accounts:

Normally have a credit balance Increase with credit entries Decrease with debit entries

Asset accounts:

Normally have a debit balance Decrease with credit entries Increase with debit entries

An Accounts Payable normally results from which of the following transactions?

Purchasing goods and services from suppliers on credit

Which of the following accounts would be closed during the year-end closing process?

Rent expense Cost of goods sold Service revenue Gain on sale of land Loss on sale of buildings Wages expense Dividends

Assets = Liabilities + Paid-in-capital +

Retained earnings (beginning of period) + Revenues (during the period) - expenses (during the period)

Depreciation, in accounting, is a process that results in:

Spreading the cost of an asset over its useful life to the entity

The balance sheet might also be called:

Statement of financial position

In the context of determining the ending balance of retained earnings within the statement of changes in retained earnings which of the following is true?

Stock splits have no effect on retained earnings Net income needs to be added (positive amount) to retained earnings Treasury stock purchases have no effect on retained earnings. Stock dividends need to be subtracted (negative amount) The beginning balance of Retained Earnings account needs to be added (positive amount) Cash dividends for common and preferred stock need to be subtracted (negative amount)

The net book value of a depreciable asset is:

The difference between the asset's cost and accumulated depreciation

Which of the following items are normally included as key components of a corporation's annual report?

The notes to the financial statements A five year (or longer) summary of key financial data The report of the external auditor's examination of the financial statements

Stockholders' equity refers to which of the following?

The ownership right of the stockholder(s) of the entity

The principal challenge to calculating depletion:

The quantity of material to be recovered

Which of the following concepts/principles relate to transactions?

Unit of measurement Cost principle Objectivity

Accumulated other comprehensive income (loss) is a stockholders' equity category that may include which of the following components?

Unrealized gains or losses on available-for-sale investments Changes in certain pension or other postretirement benefit items Cumulative foreign translation adjustments Gains or losses on certain derivative instruments

The declaration of a cash dividend by the directors results in:

a decrease in retained earnings and an increase in current liabilities

The financial leverage characteristic of long-term debt results in:

a magnification of ROE relative to what it would be without long-term debt

Many current liabilities are affected by accrual accounting entries. This happens because:

accrual accounting involves recognizing liabilities when expenses have been incurred but not yet paid

A transaction that is likely to cause an increase in a current liability is:

accrual of interest expense

Which of the following is not a stockholders' equity account?

accumulated depreciation

The accrual of interest on short-term marketable securities results in:

an increase in current assets and an increase in net income

The adjusting entry to accrue Interest Expense results in:

an increase in interest expense

The adjustsing entry to accrue Interest Expense results in:

an increase in interest expense

Deposits in transit:

are added to the bank's balance.

Although revenues and expenses are reported on the income statement, they also:

are reported in the assets section of the balance sheet

Outstanding checks:

are subtracted from the bank's balance.

NSF (not sufficient funds) checks:

are subtracted from the company's book balance.

Interest on a Note Payable is most appropriately accrued:

as of the end of each accounting period during which the note is a liability

Interest on a Note Payable is most appropriately accrued:

as of the end of each accounting period which the note is a liability

Prepaid expenses such as insurance premiums and lease (rental) payments that have been paid in advance by a company should be treated as:

assets until the benefits associated with the prepayment are received and thus the expense has been incurred.

If debits equal credits, then:

assets will equal the sum of liabilities and stockholders' equity.

Paid-in capital includes:

common stock preferred stock additional paid-in capital

The amount in the Cash account, which is reported as an asset on the balance sheet, includes all of the following except:

expected litigation settlements.

The cost of an inventory item is released to the income statement as an:

expense when the product is sold (or becomes worthless or is lost or stolen).

The inventory cost flow assumption describes the flow of product cost:

from the asset (inventory) account and to the expense (cost of goods sold) account

Current maturities of long-term debt are reported _____.

in the current liability section but separately from short-term debt

When using the horizontal model for a transaction that affects both the balance sheet and the income statement, the balance sheet will balance when the:

income statement effect on stockholders' equity is considered

One of the principal reasons for selecting the LIFO cost flow assumption instead of the FIFO cost flow assumption in an inflationary economic environment is that:

income taxes will be lower

A credit entry will:

increase a liability account

The effect of an adjustment on the financial statements is usually to:

increase the accuracy of both the balance sheet and income

A debit entry will:

increases the balance of an expense account

When bonds are issued at a premium:

interest expense on the bonds will be less than the interest paid

A fiscal year:

is frequently based on the firm's operating cycle

Additional paid-in capital:

is one of the items included in the paid-in capital (or contributed capital) category of stockholders' equity. is sometimes referred to as capital surplus.

The petty cash fund:

is used to make small payments of cash.

Inventory is reported on the balance sheet at:

lower of cost or market value.

When using the horizontal model, the arrow from net income to stockholders' equity indicates that:

net income affects retained earnings, which is a component of stockholders' equity.

The current liability for Wages Payable (or Accued Payroll) represents the:

net pay earned by employees for which they have not yet been paid

A working capital loan will generally:

not affect working capital

The payment of a current liability will:

not affect working capital

Short-term marketable debt securities that fall in the held-to-maturity category are reported on the balance sheet at the entity's cost, which is usually about the same as market value, because _____.

of their high quality and the short time until maturity

Current maturities of long-term debt:

permit a more accurate determination of working capital

An organization's system of internal control is designeed primarily to:

provide an operating framework for all employees as they work to achieve the organization's goals

Accrual accounting results in:

recognizing revenue at the point of sale and recognizing expenses are they are incurred

The amortization of bond discount:

results in bond interest expense being greater than the interest paid to bondholders

Net income from the income statement is added to the beginning balance of:

retained earnings in the statement of changes in retained earnings

When a manufacturer invests in short-term marketable securities:

risk avoidance is of great importance

The amount in the Cash account, which is reported as an asset on the balance sheet, includes:

savings account balances checking account balances money on hand in petty cash funds undeposited receipts including checks

The balance sheet of an entity:

shows amounts that are not adjusted for changes in the purchasing power of the dollar

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

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

When a company issues a bond at a discount:

the company's interest expense will be more than the interest paid each year

Short-term marketable debt securities that are in the held-to-maturity category are reported on the balance sheet at:

the entity's cost of the securities.

Regardless of the inventory cost flow assumption used, inventories on the balance sheet are stated at:

the lower of cost or market

The "market" in the lower of cost of market valuation is generally:

the replacement cost of the inventory.

With respect to the write-off of an uncollectibble account receivable against the Allowance for Bad Debts account, a sound system of internal control would require:

the write-off be approved by 2 employees

The effect of an adjustment is:

to increase the accuracy of the financial statements

When an uncollectible account receivable is written off against the Allowance for Bad Debts account:

total current assets are not affected

When a firm purchases its own shares as treasury stock:

total stockholders' equity is decreased

The distinction between a current asset and other assets is based on:

when the asset is expected to be converted to cash, or used to benefit the entity

Which of the following concepts/principles relate to financial statements?

Consistency Full disclosure Materiality Conservatism

If ending inventory was understated at the end of Year 1 but counted correctly at the end of Year 2 and this error was not discovered until sometime in Year 3, then:

Cost of goods sold was overstated in Year 1 and understated in Year 2 but the error would have self-corrected in total.

Which of the following statements are true regarding the matching concept?

Does not mean that revenues and expenses for a period are equal Revenue is not earned without effort and expenses are the measure of the economic efforts exerted to generate revenues All expenses incurred in generating that period's revenues be deducted from the revenues earned

The entry to accrue interest on short-term marketable debt securities is:

Dr. Interest Receivable xx Cr. Interest Income xx