Accounting Chapter 3

Expenses not related to the primary operations of a business are reported as: a. other expenses in the income statement. b. nonoperating expenses in the balance sheet. c. miscellaneous expenses in the income statement. d. miscellaneous expenses in the balance sheet.

A. other expenses in the income statement.

The quick ratio is computed as: a. quick assets divided by current liabilities. b. quick assets divided by current assets. c. current assets divided by noncurrent liabilities. d. quick assets divided by noncurrent liabilities.

A. quick assets divided by current liabilities.

Using accrual accounting, expenses are recorded and reported ______ a. when they are incurred, whether or not cash is paid. b. when they are incurred and paid at the same time. c. if they are paid before they are incurred. d. if they are paid after they are incurred.

A. when they are incurred, whether or not cash is paid.

Which of the following is an example of a long-term liability? a. A note payable due within a month b. A note payable due in 3 years c. A trade payable due within a month d. An account payable

b. A note payable due in 3 years

The updating of the accounting records prior to preparing financial statements as required by accrual accounting is called the: a. realization process. b. adjustment process. c. accounting cycle. d. analyzing process.

b. adjustment process.

Calculate the quick ratio using the following information. (Round to two decimal places.) Cash → $50,000 Accounts receivable → $130,000 Inventories → $210,000 Prepaid assets → $15,000 Current liabilities → $200,000 a. 0.98 b. 2.50 c. 0.90 d. 1.35

c. 0.90

Receivables are _____. a. assets b. liabilities c. revenues d. expenses

A. assets

Cash and other assets that are expected to be converted to cash or sold or used up within one year or less, through the normal operations of the business are called ______ a. current assets. b. intangible assets. c. fixed assets. d. notes receivable.

A. current assets.

The ability of a company to pay debts as they become due is best analyzed using: a. net cash flows from operating activities. b. the cash inflows from financing activities. c. accrual accounting. d. the cash basis of accounting.

A. net cash flows from operating activities.

The fixed asset account is not reduced directly for depreciation because: a. consistency needs to be maintained in the presentation of other nondepreciable assets. b. depreciation is a noncash expense. c. depreciation is based on the market value of a fixed asset. d. a record of the initial cost of a fixed asset needs to be maintained for tax and other purposes.

D. a record of the initial cost of a fixed asset needs to be maintained for tax and other purposes.

Shine invested $6,000 in a business in exchange for common stock. This transaction results in: a. an increase in stockholders' equity and no change in assets. b. an increase in stockholders' equity and a decrease in cash. c. an increase in stockholders' equity and a decrease in cash flows from investing activities. d. an increase in stockholders' equity and an increase in cash flows from financing activities.

D. an increase in stockholders' equity and an increase in cash flows from financing activities.

The accrual basis of accounting recognizes _______ a. revenues when cash is received and expenses when cash is paid. b. revenues when earned and expenses when cash is paid. c. revenues when cash is received and expenses when incurred. d. revenues when earned and expenses when incurred.

D. revenues when earned and expenses when incurred.

Under the accrual basis of accounting, net cash flows from operating activities on the statement of cash flows will normally be the same as net income.

false

Unearned revenue is a stockholders' equity account

false liabilites

Accrued expenses are expenses that have been incurred and paid.

false might not be paid

Which of the following financial statements groups together accounts of similar nature and reports them in a few major classifications? a. Classified-balance sheet b. Multi-step income statement c. Statement of stockholder's equity d. Statement of cash flows

A. Classified-balance sheet

____________ are created by recording a transaction in a way that delays recognition of an expense or revenue. a. Deferrals b. Accruals c. Adjustments d. Accounts

A. Deferrals

_____ are written claims against debtors who promise to pay the amount of the credit instrument plus interest. a. Notes receivable b. Interest payables c. Unearned revenues d. Accounts payable

A. Notes receivable

On October 1, Synergy Corp. received $2,000 from Excellent Company as rent for the use of its land as a temporary parking lot from October 20Y5 through March 20Y6. This transaction results in: A. an increase in cash flows from operating activities in the statement of cash flows and no entries in the income statement. B. an increase in cash flows from financing activities in the statement of cash flows and no entries in the income statement. C. an increase in cash flows from operating activities in the statement of cash flows and an increase in Retained Earnings in the income statement. D. an increase in cash flows from operating activities in the statement of cash flows and an increase in Fees earned in the income statement.

A. an increase in cash flows from operating activities in the statement of cash flows and no entries in the income statement.

__ is an example of an accrued liability. a. Prepaid rent b. A utility expense c. An attorney's annual retainer fee d. Accrued interest on notes receivable

B. A utility expense

What is unique about reporting current assets? A. Current assets are reported after they are converted into cash B. Current assets are reported in the order of their liquidity D. Current assets are reported net of depreciation D. Current assets are reported from highest to lowest

B. Current assets are reported in the order of their liquidity

Which of the following is true of operating income? a. Operating income is determined by deducting the operating expenses from the gross margin. b. Operating income is determined by deducting the operating expenses from the revenues earned. c. Operating income is determined by adding the operating expenses to the gross margin. d. Operating income is determined by deducting the nonoperating expenses from the revenues earned.

B. Operating income is determined by deducting the operating expenses from the revenues earned. (revenues earned - operating expenses)

Which of the following is true of the quick ratio of a company? a. The quick ratio is computed as current assets divided by quick assets. b. The quick ratio is a better metric than quick assets for comparing among companies. c. The quick ratio is computed as current assets divided by noncurrent liabilities. d. The quick ratio is used to assess the company's ability to generate earnings.

B. The quick ratio is a better metric than quick assets for comparing among companies.

On December 1, Atlas Inc. paid a premium of $3,600 for a two-year general business insurance policy that covers risks from fire and theft. Which of the following is the effect of this transaction on Atlas's financial statements? a. There is an increase in cash flows from operating activities in the statement of cash flows. b. There is a change in the mix of assets in the balance sheet. c. There is an increase in deferred expenses in the income statement. d. There is a decrease in cash flows from financing activities in the statement of cash flows.

B. There is a change in the mix of assets in the balance sheet.

Under the revenue recognition principle, revenue is recorded when: a. cash is received. b. a product has been delivered to a customer. c. cash is paid at the time the services are received. d. services have been purchased and the cash is yet to be paid.

B. a product has been delivered to a customer.

The main sources of generating equity are: A. Retained earnings and Cash flows B. Retained earnings and Contributed capital C. Cash flows and Contributed capital D. Cash flows and Income statement

B.Retained earnings and Contributed capital

Compute the quick ratio using the following information. (Round to two decimal places.) Cash → $50,000 Accounts receivable → $130,000 Inventories → $210,000 Prepaid assets → $15,000 Total current assets → $405,000 Current liabilities → $160,000 a. 2.50 b. 3.25 c. 1.13 d. 2.62

C. 1.13

Which of the following is an example of a deferred expense? a. An interest payable b. A utility expense c. Prepaid interest d. An unpaid wage

C. Prepaid interest

Which of the following concepts requires expenses to be recorded in the same period as the related revenues that they generate? a. The economic entity concept b. The full disclosure concept c. The matching concept d. The monetary unit concept

C. The matching concept

A service provider records an account payable when: a. cash is received at the time the services are rendered. b. services have been rendered and the cash is yet to be received. c. services have been purchased and the cash is yet to be paid. d. cash is paid at the time the services are received.

C. services have been purchased and the cash is yet to be paid.

On November 1, Atlas Inc. paid a premium of $3,600 for a 3-year general business insurance policy that covers risks from fire and theft. What amount of insurance will expire each month? a. $300 b. $360 c. $150 d. $100

D. $100

Although quick ratios vary by industry, a quick ratio of at least _____ is normal. a. 2.0 b. 0.5 c. 0.8 d. 1.0

D. 1.0

Atlas Inc. purchased supplies for $300 on account. What is the effect of this transaction on Atlas's income statement and balance sheet? a. The asset Supplies decreases by $300 in the balance sheet. b. Accounts Receivable increases by $300 in the income statement. c. There are no entries in the balance sheet. d. Accounts Payable increases by $300 in the balance sheet.

D. Accounts Payable increases by $300 in the balance sheet.

Which of the following statements best describes the accrual basis of accounting? a. Revenue is recorded only when cash is received. b. The matching concept is not used. c. Expenses are recorded only when cash is paid. d. Adjusting entries are required to properly match revenues and expenses.

D. Adjusting entries are required to properly match revenues and expenses.

What is not true of adjustments? A. Adjustments are necessary when there are accrual transactions. B. The adjustment process is the updating of accounts that help match revenues and expenses. C. The two types of accounts that need adjustment are accruals and deferrals. D. The adjustment process takes place after the preparation of financial statements.

D. The adjustment process takes place after the preparation of financial statements.

Elite Inc. purchased $6,500 of office equipment. It paid $1,250 cash as a down payment, with the remaining $5,250 ($6,500 - $1,250) due in five monthly installments of $1,050 ($5,250 ÷ 5) beginning January 1, 20Y6. Which of the following is the effect of this transaction on the financial statements? a. There is an increase in cash flows from investing activities by $1,250 in the statement of cash flows. b. There is an increase in cash flows from operating activities by $1,250 in the statement of cash flows. c. There are no entries in the balance sheet. d. There are no entries in the income statement.

D. There are no entries in the income statement.

The cost of a fixed asset less the balance of its accumulated depreciation is called the asset's: a. book value. b. economic value. c. intrinsic value. d. fair market value.

a. book value book value = fixed asset - accumulated depreciation

The quick ratios of Excellent Corp. and Synergy Inc. are 1.5 and 0.9, respectively. Which of the following inferences can be made from the information available? a. The quick assets of Excellent Corp. are more than the quick assets of Synergy Inc. b. The quick assets of Synergy Inc. are more than the quick assets of Excellent Corp. c. Excellent Corp. is in a stronger liquidity position than Synergy Inc. d. Synergy Inc. is in a stronger liquidity position than Excellent Corp.

c. Excellent Corp. is in a stronger liquidity position than Synergy Inc. higher quick ratio = stronger liquidity

Examples of quick assets are: a. cash, accounts payable, and inventories. b. cash, notes payable, and prepaid expenses. c. cash, marketable securities, and accounts receivable. d. cash, accounts payable, and notes payable.

c. cash, marketable securities, and accounts receivable

Forward Corp. purchased Planet Inc. for $12,000. The normal market value of the assets of Planet Inc. was $10,500. This difference of $1500 ($12,000 - $10,500) is recorded on Forward Corp's balance sheet as: a. a copyright. b. a patent. c. goodwill. d. a trademark.

c. goodwill

A service provider records an account receivable when: a. cash is received at the time the services are rendered. b. services have been purchased and the cash is yet to be paid. c. services have been rendered and the cash is yet to be received. d. cash is paid at the time the services are received.

c. services have been rendered and the cash is yet to be received.

Which of the following best describes an accrual adjustment? a. Recording a transaction in a way that delays or defers the recognition of an expense or revenue. b. The transaction is initially recorded as an asset but becomes an expense over time or through normal operations of the business. c. It is initially recorded as a liability but becomes a revenue over time or through normal operations of the business. d. It is created when a revenue or expense has been earned or incurred but has not been recorded.

d. It is created when a revenue or expense has been earned or incurred but has not been recorded.

Which of the following is true of net cash flows from operating activities? a. Net cash flows from operating activities are generally a better predictor of the profitability of a company than is accrual accounting. b. GAAP does not require the reporting of net cash flows from operating activities. c. Net cash flows from operating activities make no difference as long as the company reports net income. d. The ability of a company to pay debts as they become due is best analyzed using net cash flows from operating activities.

d. The ability of a company to pay debts as they become due is best analyzed using net cash flows from operating activities.

According to the matching principle, expenses must be recorded in the period of their occurrence, regardless of the payment period.

true

Liabilities that will not be due for more than one year are called long-term liabilities.

true

The accrual basis of accounting requires revenue to be recorded when the service is performed.

true

Under the revenue recognition principle, revenue is recorded when services have been provided or when a product has been delivered to a customer.

true

the quick ratio is a better metric than quick assets to compare companies.

true