Accounting Test 1 (Chapters 1-4)

Monster Music Company provided music lessons to customers and earned $10,000 receiving $6000 in cash and earning the rest on account. What is Monster Music Company's revenue under the accrual basis of accounting?

$10,000

ABC, Inc.'s income statement shows service revenue of $40,000, Wages Expense of $25,000 and Net Income of $1,000. The other expenses on ABC's income statement must equal?

$14,000

The annual depreciation taken on a vehicle totals $3,000. The vehicle has been in service for 3 full years and the adjusting entries have been completed for the year. At the end of the 3rd year, the annual financial statements will report Depreciation Expense equal to $ _____ and Accumulated Depreciation equal to $ _____.

$3,000; $9,000

ACE Electronics bought equipment for $4,000. Normally the equipment would have cost $4,500, but the supplier gave Ace a special discount. ACE's balance sheet should report equipment of?

$4,000

Monster Music Company provided music lessons for customers and earned $10,000 receiving $6,000 in cash and earning the rest on account. What is Monster Music Company's revenue if it used the cash basis of accounting instead of accrual basis accounting?

$6,000

Bank 'n' Roll, Inc. pays its employees once a month and records the expense at the time of payment. On May 31, Bank 'n' Roll, paid its employees $10,000 for work performed in May. The entry to record the payment includes a ____ for $10,000.

- Credit to cash - Debit to Wages Expense

External users of the company's financial statements?

- Creditors - Securities and Exchange Commission (SEC) - Stockholders

Noodlecake pays $300 cash to create the company's logo. The journal entry to record this transaction would include a _____ for $300.

- Debit to Logo/Trademarks - Credit to cash

In May, Pizza Aroma ordered $1,200 of supplies and promised to pay the supplier next month. As soon as it receives the supplies in May, Pizza Aroma should record a ____ of $1,200.

- Debit to Supplies - Credit to Accounts Payable

Identify the entries needed for the closing process?

-Debit each revenue, credit each expense, and record the difference in Retained Earnings. - Credit dividends and debit retained earnings

Revenue is recognized when?

-Services are provided even if cash has not yet been collected, if using accrual basis accounting. - Cash is collected from customers, if using cash basis accounting.

Place, the steps of the adjustment process in order.

1. Analyze the accounts to determine the amount of the adjustment 2. Record the adjusting entry in the journal 3. Summarize the adjusting entries in the accounts

Accounting cycle steps in chronological order

1. Record a journal entry 2. Summarize in the ledger (T-accounts) 3. Prepare an unadjusted trial balance 4. Adjust the accounts 5. Prepare financial statements 6. Close the books

Prepare a statement of retained earnings for the month of September from top to bottom.

1. Retained Earnings, September 1 2. Net Income 3. Dividends 4. Retained Earnings, September 30

At the end of the accounting period, adjusting entries are required. Place the steps in the adjustment process in the correct order.

1. Use the unadjusted trial balance to determine the accounts requiring adjustment. 2. Record and post adjusting entries 3. Prepare an adjusted trial balance to check the quality of the debits and credits 4. Prepare financial statements 5. Record closing journal entries and post to the accounts 6. Prepare a post-closing trial balance

_____ are used to accumulate and report the effects of each different business activity separately rather than combining the various types of activities together.

Accounts

Noodlecake purchased $2,000 of equipment and promised to pay for it next month. Noodlecake will report a $2,000?

Accounts Payable

A seller records an increase to the assets account called ___ ____ when it sells to a customer on credit.

Accounts Receivable

Which report is constructed immediately prior to preparing the financial statements with the purpose of demonstrating that the accounts balance?

Adjusted trial balance

What two accounts are used to record the adjusting entry for the amortization of long-term assets that lack physical substance.

Amortization Expense, Accumulated Amortization

Revenue on the income statement for the year ended December 31, 2018 equals the?

Amount earned by selling goods or services to customers during 2018.

After the adjustments have been recorded, the adjusted balance in the Prepaid Rent account represents the?

Amount of the prepayment that remains toward future rental periods.

The balance sheet balances when?

Assets equal liabilities plus stockholders' equity

A classified balance sheet shows subtotals for current ____ and current ___.

Assets, Liabilities

Cash is reported on which of the following financial statements?

Balance sheet and statement of cash flows

The adjusted trial balance should be prepared _____ the financial statements are prepared to prove the _____ of the debits and credits.

Before; equality

A company typically receives ____ an asset, when it issues stock to its owners.

Cash

When a company receives cash from a customer in advance of performing the services, the company will debit __ and credit ____ ____.

Cash, Unearned Revenue

Mauricio invested $30,000 in Pizza Aroma in exchange for its stock. Pizza Aroma now has a balance in its _____ account.

Common Stock

The ____ principle requires that assets be recorded at the amount exchanged for them at the time of purchase.

Cost

A company paid $500 cash for a new printer. The entry to record this transaction would include a ____ to cash.

Credit

During the closing process, the closing entries to individual expense accounts will be recorded with a _____ to reduce the account balance to zero.

Credit

Liabilities have a normal ____ balance?

Credit

The adjusting entry for supplies used during the period requires a _____ to supplies and a ____ to supplies expense.

Credit, Debit

Who has first claim to a business's assets should the company go out of business?

Creditors

The totals on a trial balance reveal whether the total ___ equal the total ____.

Credits, Debits

Assets that will be used up or converted to cash within 12 months are ____ assets.

Current

Current assets divided by current liabilities is the ____ ration.

Current

Balance sheet accounts, such as Supplies or Prepaid rent, ____ as a result of deferral adjustment.

Decrease

A net loss will?

Decrease retained earnings

The adjusting entry to record the supplies used during the period will result in a?

Decrease to Supplies and an increase to Supplies Expense

_____ is the process of allocating the cost of buildings, vehicles, and equipment to expense over time as they are used?

Depreciation

Profits earned by a company that are paid to stockholders are called?

Dividends

Which financial statement reports the dividends during the current accounting period?

Dividends are reported on the Statement of Retained Earnings.

Temporary accounts include _____, ______, and ______. These accounts only track the current period's results.

Dividends, Revenues, Expenses

Adjustments help to ensure that all revenues are recorded in the period in which they are _____.

Earned

Adjusting entries are made at the _____ of the accounting period, while daily transactions are made throughout the accounting period.

End

The management of Acme, Inc., prepared a statement for Acme's external users that listed the company's assets, liabilities, and stockholder's equity as of the last day of the year. This statement must be a ?

Financial Statements

Cash flows provided by ____ activities on the statement of cash flows reports the cash activity with stockholders and creditors such as banks.

Financing

Unearned Revenue should be reduced and Revenue increased for the amount of revenue _____ during the period.

Gained

If a company determines that is has $1,400 of supplies on hand at the end of the period, which of the following statements is correct? The Company?

Has $1,400 in supplies remaining at the end of the period

Safa So Good, Inc., signs a contract with a programmer for the development of software that will be developed, delivered and paid for in the next year. The signing of the contract?

Has no effect on the accounting equation

The balance sheet reports the company's assets, liabilities, and stockholder's equity at a specific point in time. The ____ statement describes the revenue and expense items that affected net income over an interval of time.

Income

Corporations?

Income is taxed twice

In its 1st year of operation, Jetway Airlines paid Salaries Expense of $40 million. On December 31, it recorded an entry for additional Salaries Expense of $2 million that will be paid at the beginning of the 2nd year. What should Jetway report in the income statement and balance sheet for its first year ended December 31st.

Income statement: 42 million; balance sheet: Salaries Payable $2 million.

A company paid $5,000 cash to purchase equipment. The company recorded a debit to Equipment of $5,000 and a credit to cash of only $500. This company's accounting records are?

Incorrect because debits do not equal credits

Net income, as opposed to a net loss, causes retained earnings to?

Increase

During the year, a company had $100,000 in revenues, $40,000 in expenses, and paid $3,000 in dividends. The net of these items caused total stockholder's equity to?

Increase by $57,000

What statement is correct regarding the adjustment to record interest accrued on a note payable?

Interest on the note payable is classified as an expense since it is a cost of borrowing

Events that do not involve exchange between the company and someone else but affects assets, liabilities and/or stockholder's equity are called ____ events.

Internal

Cash flows from (used in) _____ activities on the statement of cash flows reports the cash activity from the buying and selling of productive resources such as land, buildings, and equipment.

Investing

Equipment on a balance sheet is the result of an _____ activity?

Investing

Entries are first recorded in the _____ and then summarized in the ledger.

Journal

Partnership?

Legal liability is the responsibility of two or more owners.

If the purchase of supplies on account is not recorded then?

Liabilities will be understated

When a company borrows from a bank by signing a formal agreement, an asset titled cash is increased and a ____ titled ____ ____ is increased.

Liability, Note Payable

If revenues are greater than expenses, the company generated net income. If expenses are greater than revenues, the company generated a net?

Loss

Morris Lest, Inc. received and paid a $500 electric bill in June for electricity used in May. In which month should Morris Lest record the expense in accordance with Generally Accepted Accounting Principles?

May

Non-Current Liability

Mortgage payment due in 20 years

Found on both the income statement and statement of retained earnings?

Net Income

What is the effect on total stockholders' equity when a company purchases a cash register for a cash payment of $1,200?

No effect

ABC Company paid $6,000 cash for insurance in June that provides coverage for 6 months, from July through December. How much expense should be recognized in June to be in accordance with generally accepted accounting principles?

No expense should be recognized in June

____ to the financial statements help users understand how financial statement amounts were derived and includes other information that may affect the user's decisions.

Notes

On October 31st, Pizza Company sold pumpkin spice pizza for Halloween parties on account. The customers have 30 days to pay for pizzas. In which month should Pizza Company record the revenue under accrual accoutning?

October

After the adjustments have been completed, the adjusted balance in the Supplies account represents the cost of supplies?

On hand at the end of the accounting period

Permanent accounts are found on?

Only the balance sheet

The ____ activities section on the statement of cash flows reports the activities directly related to running the business to earn profit.

Operating

Adjustments ensure that liabilities are reported as all amounts ______ at the end of the accounting period.

Owed

After the adjustments have been computed, the adjusted balance in Income Tax Payable represents the amount ______ to the government at the end of the accounting period.

Owed

Partnerships and sole proprietorships?

Owners have unlimited liability

After the adjustments have been completed, the adjusted balance in the "Salaries and Wages Payable" account represents wages incurred, but not yet ______ by the company.

Paid

Accounts ____ is a liability account and represents amounts owed to suppliers.

Payable

When a company pays its supplier for amounts owed, its cash and accounts ____ accounts are decreased.

Payable

Accounts ____ is an asset on the balance sheet that reports the amounts owed by customers for sales or services provided on credit.

Receivable

Every transaction involves a?

Receiving and giving something of value

Statement of retained earnings?

Reports the accumulation of profits kept by the business during the current accounting period with that of prior periods.

Income Statement?

Reports the financial performance of the business during the current accounting period.

Balance Sheet

Reports the financial position of the business at a point in time.

Statement of cash flows

Reports the operating, investing and financing activities on cash.

A ledger is used to?

Show increases and decreases in individual accounts, as well as ending balance.

Net income appears on the?

Statement of retained earnings and income statement.

A _____ certificate is a legal document representing ownership in a corporation.

Stock

Balance Sheet? Income Statement? Statement of Cash Flows?

Supplies Supplies Expense Cash paid for supplies

Closing entries move the balance from the _____ accounts into the Retained Earnings account.

Temporary

Lox, Stock and Bagel, Inc., issued $100,000 of common stock. It recorded the transaction by increasing cash and decreasing common stock. As a result of this entry?

The accounting equation will be out of balance

The balance in Retained Earnings prior to the closing process equals?

The balance at the end of the previous accounting period

Expenses are?

The costs of doing business that are necessary to earn revenue

How does the adjustment for depreciation differ from other deferral adjustments?

The depreciation adjustment uses a contra-account rather than reducing the asset accounts directly.

Temporary accounts are found on?

The income statement

In a deferral adjustment for revenues collected in advance that are now earned?

The liability recorded when cash was received is decreased by the adjustment for the revenue being earned.

What are the effects on the accounting equation from the adjustment for depreciation?

Total assets will decrease and total stockholders' equity will decrease

Process of recording journal entries?

Transactions are recorded chronologically showing the accounts debited along with the corresponding accounts credited.

True or False: Operating activities are the primary sources of revenue and expenses involved in running a business.

True

True or False: Revenues appear above expenses on the income statement.

True

When a company collects cash in advance from customers it records a liability called ____ _____.

Unearned Revenue

Which of the following types of transactions could be an accrual adjustment?

an increase to an asset account and an increase to a revenue account

A business just acquired and paid something that provides benefits in future periods. The business will decrease cash and?

increase an asset such as supplies

The Mortgage Payable account is increased with an entry on the ____ side of the T-account.

right

ACE Electronics paid $4,000 of the $5,000 its employees had earned during the period. ACE Electronics should report Wages Expenses of $5,000 in the income statement and Wages Payable of ______ on the balance sheet prepared in accordance with generally accepted accounting principles.

$1,000

In May, Sea the World Cruises, Inc. collected $1,000 cash from a customer for services to be performed in June. What is true assuming accrual accounting?

$1,000 of revenue should be recorded in June

The beginning balance in Acme's Accounts Payable was $4,000. Acme then bought $100 of supplies on account and paid $700 of the amount that it owed for supplies purchased on account last month. The ending balance in Acme's Accounts Payable was a credit of?

$3,400

On July 1, 2018, a firm prepaid $200,000 for 2 years rent of an office building beginning on July 1. What amount will be shown for prepaid rent one and one-half year later on December 31, 2019 balance sheet?

$50,000

During the year, Pizza Company, Inc. had $100,000 in revenues, $40,000 in expenses, and paid $3,000 in dividends. Net income equals?

$60,000

Accruix Inc. uses accrual basis accounting. Its balance sheets reported Accounts Receivable of $5,000 at the end of its first year of business. Its income statement reported Sales Revenue of $100,000 for its first year. What would Accruix's revenues have been if it had used cash basis accounting?

$95,000

Possible effects on the accounting equation when recording a transaction that increases an asset by $100?

- A liability account increases by $100 - An asset decreases by $100 - A stockholders' equity account increases by $100

What accounts are found on the balance sheet?

- Accounts Payable - Prepaid Advertising - Accounts Receivable - Unearned Revenue

Retained Earnings represent?

- Amounts earned (revenues minus expenses) that have been kept by the company. - Net income generated by the company through profitable operations that has not been distributed to its stockholders

On February 28, AppGame Company paid for a one-year insurance policy that begins March 1st. AppGame's entry to record this transaction includes?

- Debit to prepaid Insurance - Credit to Cash

Businesses earn profits by?

- Having revenues greater than expenses - Selling goods or services at more than they cost

Revenues increase net income and retained earnings, so revenues are recorded with a _____, just like all increases in stockholders' equity.

Credit

A company received $5,000 cash when it issued stock certificates to shareholders. The increase in cash would be recorded with a _____ to the cash account.

Debit

During the closing process, the closing entry to reduce the sales revenue normal account balance to zero requires the revenue account to be?

Debit

What entry records the adjustment for revenue earned, but not yet collected?

Debit Accounts Receivable and credit sales revenue

A service company receives a check from a customer as a partial payment of his account balance. This transaction does not involve the sale of additional services. How should the entry be recorded?

Debit cash and credit accounts receivable

The beginning balance in Acme's Cash account was $2,400. During the month, Acme issued $25,000 of stock for cash and repaid a $15,000 note payable. The balance in Acme's cash account is now a?

Debit of $12,400

The order in which assets are reported on the balance sheet is based on when the asset is?

Expected to be used or turned into cash

Adjustments made to expense accounts at the end of the accounting period adhere to the ____ recognition (matching) principle.

Expense

The ____ recognition principle requires an adjustment for income tax expenses owed attributable to the net income earned during the current period.

Expense

The _____ recognition principle requires an adjustment for salaries and Wages expense incurred during the accounting period that will be paid in a future accounting period.

Expense

Under the accrual basis of accounting, the ____ recognition(matching) principle requires that expenses be recognized in the same period as the related revenues.

Expense

The adjusting entry to record interest owed on obligations at the end of the accounting period includes a debit to "Interest ______" and a credit to "Interest _____."

Expense, Payable

Accrual adjustments include either a debit to an ______ account and a credit to a liability account or a debit to an asset account and a credit to a _____ account. Deferral adjustments include a debit to a liability account and a credit to a _____ account or a debit to an _____ account and a credit to an asset account.

Expense, Revenue, Revenue, Expense

As of December 31(the end of the accounting period), ABC Company has a profit before tax of $12,000. The company's tax rate is 25%. The adjustment will include an ____ of $_____ to Income Tax Expense.

Increase, $3,000

In an accrual adjustment for expense incurred but not yet paid, a liability is?

Increased because cash will be paid in the future due to the expense incurred.

In accrual accounting, to defer means to _____ recording the other side of the cash transaction as a revenue or expense. Instead the other side of the cash entry is recorded as liability or prepaid.

Postpone

The unit-of-measure assumption states that?

Results of business activities should be reported in an appropriate monetary unit.

Under the expanded accounting equation, assets equal liabilities plus common stock and ___ earnings.

Retained

What line item on the adjusted trial balance reports its beginning balance but on the balance sheet reports its ending balance?

Retained Earnings

______ are earned by selling goods or services to customers and is the first line item reported on the income statement.

Revenues

When will Accounts Receivable be involved in an adjusting entry?

Revenues are earned but have not been collected or recorded at the end of the period.

Profit is equal to ___

Revenues minus expenses

Net income (or loss) is recorded in the retained earnings account when _____ and _____ accounts are closed and transferred into retained earnings.

Revenues, Expenses

Increases to stockholders' equity are recorded on the ____ side of the T-account.

Right

The Retained Earnings account is increased with an entry on the ____ side of the account.

Right

The common stock account is increased with an entry on the ___ side of the T-account.

Right

The separate entity assumption assumes?

The financial reports of a business include only the results of that business's activity.

A company's profits?

- Are called net income -Equal revenues minue expenses - Belong to the owners

Similarities between Notes Payable and Accounts Payable?

- Are liabilities - Are amounts owed to creditors

What would be reported in the financing activities section of the statement of cash flows?

- Cash borrowed from the bank - Cash paid to reduce the principle borrowed from banks - Cash dividends paid to stockholders

An owner gives $5,000 cash to his company in exchange for stock. This will increase the companys'?

- Common Stock - Cash - Total Stockholder's Equity

Two sources of equity financing which increase stockholders' equity are?

- Common Stock - Retained Earnings

Identify the ways in which a business may be organized.

- Corporation - Partnership - Sole proprietorship

On June 1, Pizza Company paid $100 for advertisements to be run on June 1. Pizza Company's entry to record this payment will include a $100 _____/

- Credit to Cash - Debit to Advertising Expense

The entry to record income tax accrued, but unpaid, at the end of the accounting period includes both a ____ and a ____.

- Credit to Income Tax Payable - Debit to Income Tax Expense

The entry to record the sales of services for cash includes a?

- Credit to Revenue Services - Debit to Cash

Pizza Company sold pizzas on account. The journal entry to record the sales will include a ____.

- Credit to Sales Revenue - Debit to Accounts Receivable

Acme Enterprises issued $20,000 of stock in exchange for cash. The journal entry to record this transaction will include a ____ of $20,000.

- Debit to cash - Credit to Common Stock

Which of the following types of transactions represent deferral adjustments that are recorded to adjust for amount expired or used during the period?

- Decrease to Supplies and increase to Supplies Expense - Decrease to prepaid insurance and increase to insurance expense

Which of the following statements is correct regarding Dividends?

- Dividends are closed into retained earnings by crediting dividends - Dividends are closed into trained earnings by debiting Retained Earnings - Dividends have a normal debit balance

After posting all entries to the ledger, the accounts payable t-accounts will show what?

- Ending balance on the bottom of the credit side - Beginning balance on top of the credit side - Purchases on account to the credit side - Payments made on the debits side

Squid Rose, Inc., purchased equipment that cost $20,000 by issuing a $15,000 promissory note and paying the remainder in cash. The effects on the accounting equation are?

- Equipment, an asset, is increased by $20,000 - Cash, an asset, is decreased by $5,000 - Note Payable, a liability is increased by $15,000

Why is an adjustment necessary for interest accrued on a note payable at the end of the period if the interest will not be paid until the note is due?

- Even though the interest will not be paid until a future period, the expense was actually incurred during the current accounting period. - The adjustment is needed to accurately portray the interest liability of the company, all amounts owed should be reported on the balance sheet.

What accounts are found on an income statement?

- Interest Expense - Rent Expense - Sales Revenue

Which of the following account balances will typically be increased as a result of adjusting entries?

- Interest Payable - Supplies Expense

Accounts Payable

- Is a liability - Represents amounts owed

Financing Activities?

- Issuing a note payable - Issuing stock

Characteristics of a corporation?

- It pays federal income taxes on its income. - It can raise large amounts of capital more easily than sole proprietorships and partnerships.

Found on a balance sheet?

- Liabilities - Assets - Stockholder's Equity

Line items that appear on a balance sheet?

- Liabilities - Assets - Stockholders' Equity

Non-Current assets found on the balance sheet.

- Machinery - Land - Equipment - Buildings

Financial Statements?

- May have a fiscal year end other than December 31 - May be prepared more than once a year

Characteristics of Notes Payable and not Accounts Payable?

- Notes payable are amounts borrowed from a bank; accounts payable are not - Only notes Payable have interest changes - Notes payable are documented with formal documents called notes

Identify the key activities necessary to start a business

- Obtaining financing - Purchase assets

The statement of retained earnings reports the amount?

- Of earning kept by the company - Of earning distributed to the company's owners during the accounting period

Financial statements can be prepared?

- On a month basis - On a fiscal year basis - On a quarterly basis

Possible effects on the accounting equation when recording a transaction that affects two accounts?

- One asset account increased and one asset account decreases - One asset account increases and one stockholders' equity account increases

Key characteristics of a partnership?

- Owners are personally responsible for the debts of the business, even if the debts are more than the amount owners have invested in the business. - Partnerships have more than one owner

What activities are part of the operating cycle?

- Paying cash to suppliers - Buying goods and services - Collecting cash from customers

Cash basis accounting may distort net income when a company?

- Pays for expenses in a later accounting period than when the resources are used - Collects cash in advance of providing services to customers - Pays for expense in advance of when the resources are used - Make credit sales

What items appear on the income statements?

- Revenues - Supplies Expense

Why is it necessary to make adjustments to revenue accounts at the end of the accounting period?

- Revenues earned at the end of the period, but not yet billed to Accounts Receivable, should be recorded as a revenue. - Payments received in advance, and originally recorded as a liability, should be reduced for any portion earned during the current period

The ending retained earnings balance appears on the?

- Statement of retained earnings - Balance Sheet

What accounts found on an unadjusted balance typically require adjusting entries?

- Supplies - Prepaid Rent - Interest Payable

Which account balances will typically be reduced as a result of adjusting entries?

- Supplies - Prepaid Rent - Unearned Revenue

Which of the following accounts found on an unadjusted balance typically require adjusting entries?

- Supplies - Prepaid Rent - Interest Payable

Taggert Company paid $1,800 for a 6-month insurance premium on September 1. Which of the following statements are correct regarding the accounting for this insurance over the 6 month period?

- Taggert will debit Insurance Expense for $300 on September 30 - Taggert will credit Prepaid Insurance for $300 on September 30 - Taggert will debit Prepaid Insurance for $1,800 on September 1

The heading of an income statement should include?

- The name of the business - The accounting period covered by the statement - The title "Income Statement"

A company purchased a $100,00 building in exchange for a 20-year note payable. The company recorded a $100,000 increase in the building account and a $100,000 decrease in cash. As a result of this error?

- Total liabilities are too low - Total assets are too low

As of December 31st, the unadjusted balance in Unearned Revenue contains $5,600 for unredeemed gift cards. An analysis of the monthly sales indicates that $3,200 gift cards were redeemed during the month but not yet recorded. How will these transactions affects the adjustments at the end of the period?

- Unearned Revenue needs to be decreased by the amount of gift cards redeemed during the month. - Sales Revenue needs to be increased by the amount of gift cards redeemed during the month.

Assets, on the balance sheet, provide future benefits for a company, while ____, on the income statement, are used-up benefits.

Expenses

Liabilities are?

Measurable amounts that the company owes to creditors

Which of the following statements is correct regarding a long-lived asset such as equipment?

The original cost in the equipment account will not change during the adjustment process.

If a company has no Wages Payable on its balance sheet, then one may conclude?

The wages expensed in the period were paid