ACCT 1110- Ch.15

Which of the following shows how to calculate working capital? a.Current Assets - Current Liabilities b.Current Assets - Total Liabilities c.Total Assets - Current Liabilities d.Total Assets - Total Liabilities

A The difference between current assets and current liabilities represents the amount of capital the business has available for current operations. This is called working capital.

Which of the following accounts are closed to the owner's capital account? a.Income Summary and Drawing b.Income Summary and revenues c.Revenues and expenses d.Drawing and expenses

A The income summary and drawing accounts are closed to the owner's capital account.

Which of the following adjusting entries should be reversed? a.Adjusting entries that decrease an asset or liability account from a zero balance b.Adjusting entries that decrease an asset or liability account from a positive balance c.Adjusting entries that increase an asset or liability account from a zero balance d.Adjusting entries that increase an asset or liability account from a positive balance

C A company should reverse all adjusting entries that increase an asset or liability account from a zero balance.

A reversing entry is the opposite of a(n) a.adjusting entry. b.depreciation entry. c.closing entry. d.normal business transaction.

A A reversing entry is the reverse or opposite of an adjusting entry.

The owner's equity of Rosewood Company was $287,000 on January 1 and $363,000 on December 31. The accounts receivable balance on January 1 was $24,000 and $28,000 on December 31. The net income for the year was $125,000, and the net credit sales were $190,000. What was Rosewood's return on owner's equity for the period? a.38.5% b.58.5% c.34.4% d.48.0%

A Return on Owner's Equity = Net Income/Average Owner's Equity {$125,000/[($287,000 + $363,000)/2]}.

The employees of Luke Company are paid every Friday for a five-day work week, ending on that day. December 31, the end of the company's fiscal year, ended on a Wednesday. The employees earn in total $500 per day. On January 2, the employees are paid. Assuming that Luke Company does reversing entries, which of the following journal entries would be made on January 2 to record the payment of the employees' wages? a.Debit Wages Expense for $2,500 and credit Cash for $2,500 b.Debit Wages Expense for $2,500, credit Wages Payable for $1,500, and credit Cash for $1,000 c.Debit Wages Expense for $1,000, debit Wages Payable for $1,500, and credit Cash for $2,500 d.Debit Wages Payable for $2,500 and credit Cash for $2,500

A Reversing entries are done to simplify the recording of transactions in the new accounting period. As its name implies, a reversing entry is the reverse or opposite of the adjusting entry. At the end of December, the adjusting entry to record the accrued wages would have been a debit to Wages Expense and a credit to Wages Payable for $1,500. The reversing entry on January 1 would have been the exact opposite: debit Wages Payable and credit Wages Expense for $1,500. Therefore, on January 2 when the employees are paid, the bookkeeper simply debits Wages Expense and credits Cash for the full amount earned that week of $2,500.

The accounts receivable balance of Venice Company was $418,000 on January 1 and $482,000 on December 31. The inventory balance was $135,000 on January 1 and $120,000 on December 31. The net income for the year was $280,000, the net credit sales were $820,000, and the cost of goods sold was $185,000. What was Venice's accounts receivable turnover for the period? a..53 b.1.8 c.0.8 d.2.3

B Accounts Receivable Turnover = Net Credit Sales for the Period/Average Accounts Receivable {$820,000/[($418,000 + $482,000)/2] = 1.8}.

At the start of this fiscal year, Aimee purchased a building where she can run and operate her business for $850,000. When she purchased the building, she paid $125,000 in cash and signed a mortgage note payable for the remainder. The note was for 20 years, and she must pay $3,021 per month on the note. How would this note be classified on the balance sheet at the start of the fiscal year? a.$850,000 in long-term liabilities b.$36,252 in current liabilities and $688,748 in long-term liabilities c.$725,000 in long-term liabilities d.$725,000 in current liabilities and $36,252 in long-term liabilities

B The current portion of long-term debt, the amount due within one year, is reported as a current liability. The remainder, the amount not due for more than one year, is reported under long-term liabilities ($3,021 per month × 12 months = $36,252 must be paid in the current year; $725,000 - $36,252 = $688,748 due in more than one year).

Which of the following accounts should be shown on the post-closing trial balance? a.All accounts listed in the general ledger b.All asset, liability, and capital accounts c.All expense accounts d.All revenue and expense accounts

B The purpose of the post-closing trial balance is to prove that the general ledger is in balance at the beginning of a new accounting period, before any transactions for the new accounting period are entered. It should also confirm that all temporary accounts have zero balances.

Which of the following would be considered a general expense? a.Delivery Expense b.Sales Commission Expense c.Insurance Expense d.Depreciation Expense—Store Equipment and Fixtures

C All expenses associated with administrative, office, or general operating activities are classified as a general expense. All expenses that are directly associated with selling activities are classified as a selling expense.

Four years ago, Karam Company purchased land for $550,000 and a building for $1,200,000. The building has accumulated depreciation of $80,000. What is the book value of the building? a.$1,670,000 b.$470,000 c.$1,120,000 d.$1,750,000

C Book Value = Initial Cost of Asset - Accumulated Depreciation ($1,200,000 - $80,000 = $1,120,000).

At which of the following points in the year should a company perform reversing entries? a.At the end of each month b.At the end of the current fiscal year c.In the middle of current fiscal year d.At the beginning of a new fiscal year

D Adjusting entries should be reversed at the beginning of the next accounting period.

Which of the following accounts would not be closed at the end of a fiscal year? a.Purchases Returns and Allowances b.Interest Expense c.Sales Discounts d.Unearned Revenue

D All revenues and expenses reported on the income statement must be closed to Income Summary. Then, the income summary and drawing accounts are closed to the owner's capital account. Keep in mind that a few new accounts were needed for a merchandising business. These include Sales Returns and Allowances, Sales Discounts, Purchases Returns and Allowances, and Purchases Discounts. Since these are temporary accounts reported on the income statement, they also must be closed.

In what order are current assets listed on the balance sheet? a.Least to greatest b.Least liquid to most liquid c.Greatest to least d.Most liquid to least liquid

D Current assets are listed on the balance sheet from the most liquid to least liquid.

At the end of the fiscal year, Ski Company had a $31,000 debit in the income summary account, $1,000 in the drawing account, and a beginning capital balance of $243,000. What is the balance in the capital account after all temporary accounts have been closed? a.$211,000 b.$212,000 c.$273,000 d.$274,000

A A debit in the income summary account indicates a net loss for the year since the revenues and expenses are closed to Income Summary. Income Summary is closed to the capital account, and a net loss would decrease the value of the owner's capital. The drawing account is also closed to the capital account, and withdrawals made by the owner decrease the value of the owner's capital. Therefore, the ending capital balance of the owner would be $211,000 ($243,000 - $31,000 - $1,000 = $211,000).

Which of the following sections of the classified balance sheet would include the account Accumulated Depreciation? a.Property, plant, and equipment b.Long-term liabilities c.Current liabilities d.Current assets

A Accumulated Depreciation is a contra-asset account, which reduces the value of an asset that has a life longer than one year; therefore, it is listed below the asset it is reducing in the property, plant, and equipment section of the classified balance sheet.

Cardillo Company had the following accounts: Cash $21,000, Supplies $1,300, Accumulated Depreciation—Building $52,000, Prepaid Insurance $2,200, Equipment $87,000, Land $105,000, Accounts Payable $8,800, Merchandise Inventory $18,000, Building $650,000, Estimated Returns Inventory $4,000, Accounts Receivable $14,000, and Unearned Revenue $3,600. What is Cardillo Company's total current assets? a.$60,500 b.$147,500 c.$63,100 d.$902,500

A Current assets include cash and all other assets expected to be converted into cash or consumed within one year or the normal operating cycle of the business, whichever is longer. In a merchandising business, the current assets usually include cash, receivables (such as accounts receivable and notes receivable), merchandise inventory, and estimated returns inventory ($21,000 + $1,300 + $2,200 + $18,000 + $4,000 + $14,000 = $60,500).

How is net sales calculated? a.Gross sales less sales returns and allowances and sales discounts b.Gross sales plus sales returns and allowances and sales discounts c.Gross sales plus sales discounts d.Gross sales less sales returns and allowances

A Gross sales less sales returns and allowances and sales discounts equals net sales.

Which of the following are included in the statement of owner's equity? a.Net income or loss, withdrawals by the owner, and additional investments by the owner b.Net income or loss, expenses, assets, and withdrawals by the owner c.Revenues, assets, withdrawals by the owner, and additional investments by the owner d.Net income or loss, revenues, liabilities, and additional investments by the owner

A It includes the net income or loss and any additional investments or withdrawals by the owner.

How is gross profit calculated? a.Net sales less cost of goods sold b.Gross sales less operating expenses c.Gross sales less cost of goods sold d.Net sales less operating expenses

A Net sales less cost of goods sold equals gross profit.

Smith Company had $20,000 in Cash, $17,000 in Accounts Receivable, $3,500 in Supplies, $4,800 in Prepaid Insurance, $8,000 in Accounts Payable, and $5,550 in Wages Payable. What is Smith Company's quick ratio? a.2.7 b.3.1 c.2.9 d.1.5

A Quick Ratio = Quick Assets/Current Liabilities [($20,000 + $17,000)/($8,000 + $5,550) = 2.7].

Which of the following would not be considered a selling expense? a.Advertising Expense b.Office Supplies Expense c.Delivery Expense d.Bank Credit Card Expense

B All expenses associated with administrative, office, or general operative activities are classified as a general expense. All expenses that are directly associated with selling activities are classified as a selling expense.

Which of the following would not be considered a current asset? a.Supplies b.Equipment c.Merchandise inventory d.Prepaid insurance

B Current assets include cash and all other assets expected to be converted into cash or consumed within one year or the normal operating cycle of the business, whichever is longer.

Broderick Company had $250,000 in gross sales, $900 in other revenues, $48,000 in cost of goods sold, $6,000 in sales discounts, $22,000 in general expenses, $1,500 in other expenses, $31,500 in selling expenses, and $1,325 in sales returns and allowances. What is Broderick Company's income from operations? a.$194,675 b.$141,175 c.$148,500 d.$140,575

B Net Sales - Cost of Goods Sold - Operating Expenses = Income from Operations [($250,000 - $6,000 - $1,325) - $48,000 - $22,000 - $31,500 = $141,175]. Other revenues and expenses are shown after income from operations.

Which of the following assets would not be included as a quick asset? a.Temporary investments b.Merchandise inventory c.Cash d.Accounts receivable

B Quick assets include cash and all other current assets that can be converted into cash quickly, such as accounts receivable and temporary investments.

Which of the following accounts would be classified as a current liability? a.Mortgage Payable b.Estimated Returns Inventory c.Unearned Subscription Revenue d.Accumulated Depreciation

C Current liabilities include those obligations that are due within one year or the normal operating cycle of the business, whichever is longer, and will require the use of current assets. Examples of current liability accounts include: Accounts Payable, Customer Refunds Payable, Wages Payable, Sales Tax Payable, and Unearned Subscriptions Revenue.

Which of the following ratios determines the number of times the inventory is sold during the accounting period? a.Average days to sell inventory b.Working capital c.Inventory turnover d.Quick ratio

C Inventory turnover is the number of times the merchandise inventory turned over, or was sold, during the accounting period.

The average collection period determines the number of a.days it takes to sell the inventory. b.times the accounts receivable are collected during the period. c.days credit customers take to pay for their purchases. d.times the merchandise inventory was sold during the period.

C The average collection period is calculated by dividing the number of days in the year (365) by the rate of turnover to determine the number of days credit customers take to pay for their purchases.

Safety Company had $45,000 in gross sales, $1,200 in sales discounts, $10,000 in cost of goods sold, $5,500 in selling expenses, $600 in sales returns and allowances, and $7,200 in general expenses. What is Safety Company net sales? a.$20,500 b.$35,000 c.$43,200 d.$33,200

C explanation Sales ($45,000) - Sales Discounts ($1,200) - Sales Returns and Allowances ($600) = Net Sales ($43,200).

Connally Company is owned and operated by Lisa Connally. At the start of the fiscal year, her capital balance was $48,000. During the year, her company earned a net income of $15,000, she invested assets of $8,000 into the company, and she withdrew $10,000. What was her increase or decrease in capital this year? a.$23,000 b.$13,000 c.$61,000 d.$5,000

D Increase/Decrease in Capital = Net Income/Loss - Withdrawals ($15,000 - $10,000 = $5,000).

Aloha Company is starting its new fiscal year on July 1. The company has owned a specialized piece of equipment for three years that it depreciates using the straight-line method. The equipment was estimated to have a useful life of seven years, and the company feels that this estimate is still reasonable. Which reversing entry should the company make on July 1 to reverse the adjusting entry recorded on June 30, the end of the fiscal year, for depreciation on the equipment? a.Debit Accumulated Depreciation—Equipment and credit Equipment b.Debit Accumulated Depreciation—Equipment and credit Depreciation Expense—Equipment c.Debit Depreciation Expense—Equipment and credit Accumulated Depreciation—Equipment d.No reversing entry should be recorded.

D Only adjusting entries that increase an asset or liability account from zero should be reversed at the start of the next fiscal year. Since the adjusting entry to record depreciation on the company's equipment would not be increasing an asset or a liability account from zero, no reversing entry should be recorded.

The owner's equity of Rosewood Company was $287,000 on January 1 and $363,000 on December 31. The accounts receivable balance on January 1 was $24,000 and $28,000 on December 31. The net income for the year was $125,000, and the net credit sales were $190,000. What was Rosewood's return on owner's equity for the period? a.34.4% b.48.0% c.58.5% d.38.5%

D Return on Owner's Equity = Net Income/Average Owner's Equity {$125,000/[($287,000 + $363,000)/2]}.

Which item is listed first on the statement of owner's equity? a.Additional investments by the owner b.Capital balance of the owner at the end of the period c.Net income or loss d.Capital balance of the owner at the beginning of the period

D The capital balance of the owner at the beginning of the period is listed first on the statement of owner's equity.

Which of the following shows how to calculate working capital? a.Current Assets - Total Liabilities b.Total Assets - Current Liabilities c.Total Assets - Total Liabilities d.Current Assets - Current Liabilities

D The difference between current assets and current liabilities represents the amount of capital the business has available for current operations. This is called working capital.

Which of the following is not included on the statement of owner's equity? a.Withdrawals by the owner b.Additional investments by the owner c.Net income or loss d.Revenues

D The statement of owner's equity includes the net income or loss and any additional investments or withdrawals by the owner. Revenues are only included on the income statement.