Accounting Chapter 2

Leon deposits $5,000 in a bank account in the name of Beta Inc., in return for shares of common stock in Beta. Which of the following is the effect of this transaction on the financial statements of Beta? a. An increase in cash from financing activities b. A decrease in cash from investing activities c. An increase in cash from investing activities d. A decrease in cash from financing activities

A. An increase in cash from financing activities

Consider the following transactions for Giggly Care. Payment of dividends → $1,250 Fees earned → $4,500 Payment of expenses → $2,750 Which of the following shows the effect of these transactions on the liquidity metric and the profitability metric of the company? a. An increase of $500 in the liquidity metric and an increase of $1,750 in the profitability metric b. An increase of $500 in the liquidity metric and a decrease of $1,750 in the profitability metric c. An increase of $1,750 in the liquidity metric and a decrease of $500 in the profitability metric d. A decrease of $500 in the liquidity metric and an increase of $1,750 in the profitability metric

A. An increase of $500 in the liquidity metric and an increase of $1,750 in the profitability metric liquidity → fees earned - paid expenses & dividends profitability → fees earned - paid expenses

Which of the following represents the accounting equation? a. Total assets equal total liabilities plus total stockholders' equity b. Total assets equal total retained earnings plus total stockholders' equity c. Total assets equal total liabilities minus total stockholders' equity d. Total assets equal total retained earnings minus total stockholders' equity

A. Total assets equal total liabilities plus total stockholders' equity

Which of the following statements is the cumulative total of an entity's assets, liabilities, and stockholders' equity since the company's inception? a. A balance sheet b. A statement of cash flows c. A statement of retained earnings d. An income statement

A. a balance sheet

Under the cash basis of accounting, cash flow from _____ reported on the statement of cash flows equals net income on the income statement. a. operating activities b. financial activities c. investing activities d. non-recurring activities

A. operating activities

When comparing operating performance across companies within the same industry, common-sized income statements are often prepared only through operating income rather than through net income because: a. other income is influenced by a variety of factors that are independent of operations. b. operating income takes into account the differences in the financing and tax strategies used by companies. c. other income does not take into account the non-recurring income and expenses of a company. d. operating income is influenced by a variety of factors and can vary significantly across companies.

A. other income is influenced by a variety of factors that are independent of operations.

Which of the following is the first of the financial statements to be prepared by a company for any given financial year? a. The income statement b. The statement of cash flows c. The statement of stockholders' equity d. The balance sheet

A. the income statement

The following transactions relate to Spring Inc. Issue of common stock → $10,000 Payment of dividends → $1,500 Cash sales → $5,000 Payment of expenses → $3,000 As a result of the above transactions, the profitability metric of the company increases by _____. a. $3,500 b. $2,000 c. $500 d. $5,000

B. $2,000 issue of common stock / sales

Identify the correct order in which land, accounts receivable, cash, and inventory are listed in the assets section of a balance sheet. a. Cash, inventory, accounts receivable, land b. Cash, accounts receivable, inventory, land c. Cash, land, accounts receivable, inventory d. Land, inventory, accounts receivable, cash

B. Cash, accounts receivable, inventory, land

Which of the following is true regarding common-sized financial statements? a. They measure the expenses from the income statement. b. They are prepared by expressing financial statement amounts as a percent of a base amount. c. They are prepared based on the assumption that the net income and equity are constant. d. They measure the operating, investing, and financial activities of a company.

B. They are prepared by expressing financial statement amounts as a percent of a base amount.

_____ are defined as distributions of a company's earnings to its stockholders. a. Surpluses b. Dividends c. Retained earnings d. Earnings before interest and taxes

B. dividends

Which of the following is the last of the financial statements to be prepared by a company for any given financial year? a. The income statement b. The statement of cash flows c. The balance sheet d. The statement of stockholders' equity

B. the statement of cash flows

During November, Delta received fees of $8,200 in cash. Which of the following accurately shows the effects of the transaction? a. Increase accounts receivable $8,200 and decrease capital stock $8,200 b. Increase cash $8,200 and increase notes payable $8,200 c. Increase cash $8,200 and increase fees earned $8,200 d. Increase accounts receivable $8,200 and increase retained earnings $8,200

C. Increase cash $8,200 and increase fees earned $8,200

A balance sheet begins with the ending balances of the earlier period because: a. it is the cumulative total of an entity's expenses and incomes from the company's inception. b. it is not the cumulative total of an entity's assets, liabilities and stockholders' equity from the company's inception. c. it is the cumulative total of an entity's assets, liabilities and stockholders' equity from the company's inception. d. it is not the cumulative total of an entity's assets and expenses from the company's inception.

C. it is the cumulative total of an entity's assets, liabilities and stockholders' equity from the company's inception.

For the accounting equation to balance, the sum of all the assets should be equal to _____. a. the sum of common stock and liabilities b. the sum of liabilities and retained earnings c. the sum of liabilities, common stock, and retained earnings d. the sum of common stock and retained earnings

C. the sum of liabilities, common stock, and retained earnings

A common-sized balance sheet is prepared by expressing each asset as a percent of _____. a. stockholders' equity b. non-current assets c. total assets d. total liabilities

C. total assets

A(n)_____ is defined as an economic event that under generally accepted accounting principles (GAAP) affects the financial statements. a. arrangement b. performance c. transaction d. review

C. transaction

Astrik Inc. has the following assets and liabilities (in millions). Determine Astrik's stockholders' equity. Assets → $5,000 Liabilities → $3,750 a. $5,000 b. $8,750 c. $3,750 d. $1,250

D. $1,250

Using the given financial data of Abe Inc., calculate the ending balance of assets on December 31, 20Y7. Closing balance of cash on December 31, 20Y7 → $5,000 Closing balance of accounts rec. on December 31, 20Y7 → $7,000 Closing balance of common stock on December 31, 20Y7 → $8,000 Closing balance of ret. earnings on December 31, 20Y7 → $2,000 Closing balance of accounts pay on December 31, 20Y7 → $2,000 a. $18,000 b. $16,000 c. $14,000 d. $12,000

D. $12,000 assets = cash & accts. receivable

Calculate the net increase or decrease in the cash balance using the following information. Cash flows from operating activities during the year → $3,500 Cash flows used in investing activities during the year → $11,000 Cash flows from financing activities during the year → $14,250 Ending cash balance as per the balance sheet → $25,000 a. A decrease of $6,750 b. An increase of $18,250 c. A decrease of $18,250 d. An increase of $6,750

D. An increase of $6,750 "from" = positive "for" = negative

The total assets of Gunther Inc. increased by $4,650 during the year. However, there was no change in its liabilities. Which of the following statements is true in the current scenario? a. Gunther's total stockholders' equity must have decreased by $4,650. b. Gunther's cash flow from investing activities must have decreased by $4,650. c. Gunther's cash flow from investing activities must have increased by $4,650. d. Gunther's total stockholders' equity must have increased by $4,650.

D. Gunther's total stockholders' equity must have increased by $4,650.

_____ report a company's performance for each period, independent of other periods. a. The statement of cash flows and the balance sheet b. The income statement and the balance sheet c. The balance sheet and the statement of retained earnings d. The statement of cash flows and the income statement

D. The statement of cash flows and the income statement

On an income statement, operating expenses are normally listed: a. after the non-recurring expenses. b. in order of size, beginning with the smallest expense. c. after the non-cash expenses. d. in order of size, beginning with the largest expense.

D. in order of size, beginning with the largest expense.

Consider the following information for Stunner Inc., and calculate its net income for the year 20Y7. Fees earned → $5,000 Miscellaneous expense → $540 Rent expense → $750 Wages expense → $1,200 Its net income for the previous year was $3,500. a. $2,510 b. $6,550 c. $6,010 d. $2,800

a. $2,510 net income = revenues - expenses

The statement of cash flows is integrated with the balance sheet because ______ a. the cash at the beginning of the period plus or minus the cash flows from operating, investing, and financing activities equals the end of period cash reported on the balance sheet. b. the cash at the beginning of the period plus or minus the net income equals the end of period cash reported on the balance sheet. c. the cash at the beginning of the period plus or minus assets and liabilities equals the end of period cash reported on the balance sheet. d. the cash at the beginning of the period plus or minus the cash flows from operating activities equals the end of period cash reported on the balance sheet.

a. the cash at the beginning of the period plus or minus the cash flows from operating, investing, and financing activities equals the end of period cash reported on the balance sheet.

_____ refers to the ability to convert an asset to cash. a. Dissolvability b. Liquidity c. Insurability d. Profitability

b. Liquidity

Which of the following indicates a change in the retained earnings for a given period? a. Net income minus depreciation b. Net income minus dividends c. Net income minus non-cash expenses d. Gross income minus dividends

b. Net income minus dividends

Which of the following is a built-in control of the integrated financial statement approach? a. The net income must equal ending cash balance from investing activities on the statement of cash flows. b. Total assets must equal total liabilities plus total stockholders' equity. c. All assets must be recorded at their realizable value. d. The net income must equal the ending balance of current assets on the balance sheet.

b. Total assets must equal total liabilities plus total stockholders' equity.

A balance sheet begins with the ending balances of the earlier period because: a. it is not the cumulative total of an entity's assets and expenses from the company's inception. b. it is the cumulative total of an entity's assets, liabilities and stockholders' equity from the company's inception. c. it is the cumulative total of an entity's expenses and incomes from the company's inception. d. it is not the cumulative total of an entity's assets, liabilities and stockholders' equity from the company's inception.

b. it is the cumulative total of an entity's assets, liabilities and stockholders' equity from the company's inception.

Companies prepare common-sized income statements by expressing income statement amounts as a percent of _____. a. gross profit b. sales c. cost of goods sold d. ending inventory

b. sales

Consider the following information related to Honor Inc.: Common stock at the beginning of the year → $8,000 Common stock issued during the year → $2,000 Net income for the year → $5,200 Dividends paid during the year → $3,800 Which of the following is the accurate way of reporting the common stock and retained earnings on the statement of stockholders' equity at the end of the year? a. $8,000 is shown as common stock, and $5,200 is shown as retained earnings. b. $10,000 is shown as common stock, and $5,200 is shown as retained earnings. c. $10,000 is shown as common stock, and $1,400 is shown as retained earnings. d. $11,400 is shown as common stock, and $0 is shown as retained earnings.

c. $10,000 is shown as common stock, and $1,400 is shown as retained earnings. retained earnings = net income - dividends

_____ are prepared by expressing financial statement amounts as a percent of a base amount and are useful in assessing a company's financial condition and performance over time. a. Stand-alone financial statements b. Audited financial statements c. Consolidated financial statements d. Common-sized financial statements

d. Common-sized financial statements

Which of the following is added to beginning retained earnings in order to calculate ending retained earnings? a. Operating income b. Cash flow from financing activities c. Gross income d. Net income

d. Net income

The payment of a liability increases both assets and liabilities.

false

A business sold merchandise for cash of $10,000 and recorded this as an increase in accounts receivable incorrectly. The accounting equation will remain in balance.

true

A common-sized income statement is prepared by expressing income statement amounts as a percent of sales.

true

Cash receipts from cash sales affect financial statement elements such as assets and stockholders' equity.

true

Paying expenses affects financial statement elements such as assets and liabilities.

true

The basic elements of a financial accounting system include a framework for preparing financial statements.

true

The integrated financial statement approach is used for analyzing, recording, and summarizing transactions.

true