ACCTCY 2010 Bruce Runyan Exam 1 Review (Practice Exam 1)

Owen Company's unadjusted book balance at June 30 is $13,260. The company's bank statement reveals bank service charges of $105. Two credit memos are included in the bank statement: one for $1,370, which represents a collection that the bank made for Owen, and one for $170, which represents the amount of interest that Owen had earned on its interest-bearing account in June. Based on this information, Owen's true cash balance is:

$14,695 explanation: $13,260 unadjusted book balance − $105 service charge + $1,370 collection + $170 interest = $14,695 true cash balance

Nelson Company experienced the following transactions during Year 1, its first year in operation. Issued $7,400 of common stock to stockholders Provided $3,700 of services on account Paid $1,950 cash for operating expenses Collected $2,600 of cash from accounts receivable Paid a $170 cash dividend to stockholders What is the of net cash flow from operating activities shown on the Year 1 statement of cash flows?

$650 explanation: Net cash flow from operating activities = $2,600 cash collected from customers − $1,950 cash paid for expenses = $650 The issue of stock for cash and the payment of dividends are classified as a financing activities.

Jason Company paid $2,700 for one year's rent in advance beginning on October 1, Year 1. Jason's Year 1 income statement would report rent expense, and its statement of cash flows would report cash outflow for rent, respectively, of

$675; $2,700 explanation: $2,700 × 3/12 = $675 rent expense; $2,700 payment on 10/1/Year 1 is a cash outflow for rent

Which of the following is considered a period cost?

Advertising expense for the current month

Following the February bank reconciliation for Kincaid Company, the accountant made an entry that increased accounts receivable and decreased cash by $150. This entry may have been used to record:

An NSF check received by Kincaid from a customer

Assume the perpetual inventory method is used. The company purchased $12,800 of merchandise on account under terms 2/10, n/30. The company returned $2,300 of merchandise to the supplier before payment was made. The liability was paid within the discount period. All of the merchandise purchased was sold for $19,600 cash. What effect will the return of merchandise to the supplier have on the accounting equation?

Assets and liabilities are decreased by $2,300 explanation: The purchase return will decrease assets (merchandise inventory) and decrease liabilities (accounts payable) by $2,300, the full invoiced amount of the merchandise returned.

Ashton Company uses the perpetual method. The company's inventory account had a $6,600 balance as of December 31, Year 1. A physical count of inventory shows only $5,900 of merchandise in stock at December 31, Year 1. How does the related adjusting entry affect the financial statements?

Assets increase, expenses increase, and cash flow from operating activities decreases

In preparing the April bank reconciliation for Oscar Company, it was discovered that on April 10 a check was written to pay delivery expense of $45 but the check was erroneously recorded as $54 in the company's books. The correction the error of this error would increase:

Cash and decrease delivery expense by $9 explanation: In order to correct the error, which caused delivery expense to be overstated and cash to be understated, the company must increase cash and decrease delivery expense by $9, which is the difference between the actual amount of the check of $45 and the amount recorded of $54.

Which of the following items is an example of revenue?

Cash received from customers at the time services were provided

Duluth Company collected a $6,000 cash advance from a customer on November 1, Year 1 for work to be performed over a six-month period beginning on that date. If the year-end adjustment is properly recorded, what will be the effect of the adjusting entry on Duluth's Year 1 financial statements?

Decrease liabilities and increase revenues

In a bank reconciliation, a customer's NSF check included with the bank statement is:

Deducted from the company's cash balance to get the true cash balance

What types of accounts are "matched" when the matching concept is used in a discussion of accrual accounting?

Expenses and revenues

Which of the following is not an asset use transaction?

Paying cash to purchase land (asset exchange transaction)

Which of the following events would not require an end-of-year adjusting entry?

Providing services for cash

Which of the following is not one of the elements that are typically present when fraud occurs?

The assistance of others

Mayberry Company paid $30,000 cash to purchase land. As a result of this business event:

Total assets and total stockholders' equity were not affected, and net cash flow from investing activities decreased

Which of the following statements about liabilities is true?

a. They represent obligations to repay debts b. They may increase when assets increase c. They are found on the claims side of the accounting equations d. All of the answers are characteristics of liabilities answer: d

Which of the following show how purchasing supplies for cash will affect a company's financial statements?

assets: +/- liabilities: n/a equity: n/a revenue: n/a expense: n/a net income: n/a statement of cash flows: -OA explanation: Purchasing supplies for cash decreases the asset account (cash) and increases the asset account (supplies). Expenses in the current period are not affected because the expense will not be recognized until the supplies are used. There is a cash outflow that is classified as an operating activity.

Wing Company paid $5,000 cash to purchase land. What is the equation that shows the impact of this transaction on Wing's accounting equation?

assets: +/- liabilities: n/a stockholders' equity: n/a explanation: Purchasing land for cash is an asset exchange transaction. The asset account Cash decreases and the asset account land increases. There is no impact on liabilities or stockholders' equity.

Which of the following answer choices accurately reflects how the recording of accrued salary expense at the end of the year affects the financial statements of a business?

assets: n/a liabilities: + equity: - revenue: n/a expense: + net income: - statement of cash flows: n/a explanation: Accruing salary expense increases liabilities (salaries payable) and increases expenses, which decreases net income and stockholders' equity (retained earnings). It does not affect cash flows.

Lexington Company engaged in the following transactions during Year 1, its first year of operations. (Assume all transactions are cash transactions.) 1) Acquired $3,500 cash from issuing common stock. 2) Borrowed $2,450 from a bank. 3) Earned $3,350 of revenues. 4) Incurred $2,450 in expenses. 5) Paid dividends of $450. Lexington Company engaged in the following transactions during Year 2: 1) Acquired an additional $750 cash from the issue of common stock. 2) Repaid $1,475 of its debt to the bank. 3) Earned revenues, $4,750. 4) Incurred expenses of $2,850. 5) Paid dividends of $940. What is the net cash flow from financing activities on Lexington's statement of cash flows for Year 2?

$1,665 outflow explanation: $750 cash inflow from issuing stock − $1,475 cash outflow for loan repayment − $940 cash outflow for dividends = $1,665 cash outflow for financing activities

Retained Earnings at the beginning and ending of the period were $1,000 and $2,100, respectively. If revenues were $3,900 and dividends paid to stockholders were $900, what was the amount of expenses for the period?

$1,900 explanation: Beginning retained earnings of $1,000 + Revenues of $3,900 − Expenses − Dividends of $900 = Ending retained earnings of $2,100Expenses = $1,900

Yowell Company began operations on January 1, Year 1. During Year 1, the company engaged in the following cash transactions: 1) issued stock for $48,000 2) borrowed $29,000 from its bank 3) provided consulting services for $47,000 cash 4) paid back $19,000 of the bank loan 5) paid rent expense for $11,000 6) purchased equipment for $16,000 cash 7) paid $3,400 dividends to stockholders 8) paid employees' salaries of $25,000 What is Yowell's notes payable balance at the end of Year 1?

$10,000 explanation: Beginning notes payable balance of $0 + Loan of $29,000 − Repayment of loan of $19,000 = Ending notes payable balance of $10,000.

High Ridge Merchandising Company purchased inventory that had a list price of $10,000. The purchase was made under terms 2/10, net 30 FOB shipping point. Freight costs amounted to $300. Assuming High Ridge paid cash for the inventory after the discount period, the cost of the inventory was:

$10,300 explanation: Cost of inventory = Purchase price of inventory $10,000 + Transportation-in $300 = $10,300. FOB shipping point indicates that the buyer is responsible for the freight cost.

At March 31, Cummins Company had a balance in its cash account of $10,800. At the end of March, the company determined that it had outstanding checks of $1,195, deposits in transit of $730, a bank service charge of $45, and an NSF check from a customer for $230. The true cash balance at March 31 is:

$10,525 explanation: $10,800 unadjusted book balance − $45 service charge − $230 NSF check = $10,525 true cash balance

ABC Company ended Year 1 with the following account balances: Cash $600, Common Stock $400, and Retained Earnings $200. The following transactions occurred during Year 2: Issued common stock for $19,000 cash. ABC borrowed an additional $11,000 from Chris Bank. ABC earned $9,000 of revenue on account. ABC incurred $4,000 of operating expenses on account. Cash collections of accounts receivables were $6,000. ABC provided additional services to customers for $1,000 cash. ABC purchased land for $14,000. ABC used $3,000 in cash to make a partial payment on its accounts payable. ABC declared and paid a $200 dividend to the stockholders On December 31 ABC had accrued salaries of $4,000. What is the amount of retained earnings that will be shown on the balance sheet prepared at the end of Year 2?

$2,000 explanation: Revenue is recognized when it is earned and expenses when they are incurred, regardless of when cash changes hands. The issuance of common stock, the borrowing, the purchase of land and the payment of dividends do not affect net income. Revenue = $9,000 earned revenue on account + $1,000 provided services for cash = $10,000 Expenses = $4,000 operating expenses + $4,000 accrued salaries = $8,000 Net income = Revenue of $10,000 − Expenses of $8,000 = $2,000 Ending Retained Earnings = $200 Beginning Retained Earnings − $200 Dividends + $2,000 Net Income = $2,000

Lexington Company engaged in the following transactions during Year 1, its first year of operations. (Assume all transactions are cash transactions.) 1) Acquired $3,400 cash from issuing common stock. 2) Borrowed $2,400 from a bank. 3) Earned $3,300 of revenues. 4) Incurred $2,440 in expenses. 5) Paid dividends of $440. Lexington Company engaged in the following transactions during Year 2: 1) Acquired an additional $700 cash from the issue of common stock. 2) Repaid $1,440 of its debt to the bank. 3) Earned revenues, $4,700. 4) Incurred expenses of $2,830. 5) Paid dividends of $880. Total liabilities on Lexington's balance sheet at the end of Year 1 equal:

$2,400 explanation: Borrowed $2,400 from a bank

Revenue on account amounted to $6,400. Cash collections of accounts receivable amounted to $4,100. Expenses for the period were $3,300. The company paid dividends of $1,050. What was the amount of net income for the period?

$3,100 explanation: Net income = Revenue of $6,400 − Expenses of $3,300 = $3,100Dividends do not affect the determination of net income.

Sanchez Company engaged in the following transactions during Year 1: Started the business by issuing $14,300 of common stock for cash. The company paid cash to purchase $8,500 of inventory. The company sold inventory that cost $5,900 for $12,400 cash. Operating expenses incurred and paid during the year, $5,400. Sanchez Company engaged in the following transactions during Year 2: The company paid cash to purchase $12,600 of inventory. The company sold inventory that cost $10,100 for $19,000 cash. Operating expenses incurred and paid during the year, $6,400. Note: Sanchez uses the perpetual inventory system. What is the amount of retained earnings as of December 31, Year 2?

$3,600 explanation: Year 1 Net Income: $12,400 − $5,900 − $5,400 = $1,100Year 2 Net Income: $19,000 − $10,100 − $6,400 = $2,500Beginning Retained Earnings $1,100 + $2,500 = $3,600 Ending Retained Earnings

Finn Company reported assets of $1,000 and stockholders' equity of $600. What amount will Finn report for liabilities?

$400 explanation: In the accounting equation, assets equal claims (liabilities + stockholders' equity). If assets are $1,000, total claims must also be $1,000. Therefore, liabilities must be $1,000 − $600, or $400.

Sullivan Company uses the periodic inventory method. The following balances were drawn from the accounts of Sullivan Company prior to the closing process: Sales revenue $ 13,500 Beginning inventory balance 3,500 Purchases 8,300 Transportation-in 550 Transportation-out 750 Purchase discounts 350 Ending inventory balance3,900 What is the gross margin that will be reported on the income statement?

$5,400 explanation: Cost of goods sold = Beginning inventory $3,500 + Purchases $8,300 + Transportation-in $550 − Purchase discounts $350 − Ending inventory $3,900 = $8,100;Gross margin = $13,500 Sales revenue − $8,100 Cost of goods sold = $5,400

Packard Company engaged in the following transactions during Year 1, its first year of operations. (Assume all transactions are cash transactions.) 1) Acquired $1,400 cash from the issue of common stock. 2) Borrowed $870 from a bank. 3) Earned $1,050 of revenues cash. 4) Paid expenses of $340. 5) Paid a $140 dividend. During Year 2, Packard engaged in the following transactions. (Assume all transactions are cash transactions.) 1) Issued an additional $775 of common stock. 2) Repaid $535 of its debt to the bank. 3) Earned revenues of $1,200 cash. 4) Incurred expenses of $540. 5) Paid dividends of $190. What is the net cash inflow from operating activities on Packard's statement of cash flows for Year 2?

$660 explanation: Net cash inflow from operating activities = Inflow from revenue of $1,200 − Outflow for expenses of $540 = Net inflow of $660

Nelson Company experienced the following transactions during Year 1, its first year in operation. Issued $7,000 of common stock to stockholders Provided $3,300 of services on account Paid $1,850 cash for operating expenses Collected $2,400 of cash from accounts receivable Paid a $150 cash dividend to stockholders What is the total amount of assets shown on the balance sheet prepared as of December 31, Year 1?

$8,300 explanation: Total assets = Cash ($7,000 + $2,400 − $1,850 − $150) + Accounts Receivable ($3,300 − $2,400) = $8,300

Assume the perpetual inventory method is used. 1) The company purchased $12,300 of merchandise on account under terms 4/10, n/30. 2) The company returned $1,800 of merchandise to the supplier before payment was made. 3) The liability was paid within the discount period. 4) All of the merchandise purchased was sold for $18,600 cash. The amount of gross margin from the four transactions is:

$8,520 explanation: Cost of goods sold = ($12,300 − $1,800) × 0.96 = $10,080Sales revenue $18,600 − Cost of goods sold $10,080 = $8,520

Use the following account numbers and corresponding account titles to answer the following question. (1) cash (2) merchandise inventory (3) cost of goods sold (4) transportation-out (5) dividends (6) common stock (7) selling expense (8) loss on the sale of land (9) sales revenue Which accounts would affect operating income?

Account numbers 3, 4, 7, and 9 explanation: Operating income is the amount of income that is generated from the normal recurring operations of a business. Operating income is affected by sales revenue, cost of goods sold, selling and administrative expense, and transportation-out. Since it is not expected to recur on a regular basis, the loss on the sale of the land is subtracted from the operating income (as a non-operating item) to determine the amount of net income. Cash, merchandise inventory, common stock, and dividends are not reported on the income statement.

Consider the information: Company A: Sales 80,000 Cost of goods sold 48,000 Gross margin 32,000 Operating expenses 9,600 Net income 22,400 Company B: Sales 180,000 Cost of goods sold 135,600 Gross margin 45,000 Operating expenses 12,600 Net income 32,400 Company C: Sales 120,000 Cost of goods sold 72,000 Gross margin 48,000 Operating expenses 10,80 Net income 37,200 Company D: Sales 100,000 Cost of goods sold 60,000 Gross margin 40,000 Operating expenses 10,000 Net income 20,000 Based on common-sized income statements, which of the companies spent, relative to sales, the least on operating expenses?

Company B explanation: Operating expenses as a percentage of sales: Company A: $9,600 ÷ $80,000 = 12.0% Company B: $12,600 ÷ $180,000 = 7.0% Company C: $10,800 ÷ $120,000 = 9.0% Company D: $10,000 ÷ $100,000 = 10.0%

Financial accounting standards are known collectively as GAAP. What does that acronym stand for?

Generally Accepted Accounting Principles

Which of the following statements accurately describes a fidelity bond?

Insurance that the company buys to protect itself from loss due to employee dishonesty

If total assets decrease...

Liabilities, common stock, or retained earnings must decrease

Which of the following would be considered as primarily a merchandising business?

Martin's Supermarket

Which of the following cash transactions results in an increase to one asset account and a decrease to another asset account?

Purchasing land for cash (asset exchange transaction)

Which term best describes assets generated through operations that have been reinvested into the business?

Retained earnings

Santa Fe Company was started on January 1, Year 1, when it acquired $8,900 cash by issuing common stock. During Year 1, the company earned cash revenues of $4,850, paid cash expenses of $3,200, and paid a cash dividend of $750. Based on this information, which of the following statements is true?

The Year 1 statement of cash flows would show a net cash flow from financing activities of $8,150 explanation: $8,900 cash inflow from issuing stock − $750 cash outflow for dividends = $8,150 net cash inflow from financing activities

Rushmore Company provided services for $39,000 cash during Year 1. Rushmore incurred $28,000 expenses on account during Year 1, and by the end of the year, $11,000 of that amount had been paid with cash. Assuming that these are the only accounting events that affected Rushmore during Year 1, which of the following statements is true?

The amount of net income shown on the income statement is $11,000. explanation: Net income = $39,000 revenue − $28,000 expenses = $11,000 Revenue is recognized when it is earned and expenses when they are incurred, regardless of when cash changes hands.

Which of the following statements about the balance in a revenue account at the beginning of an accounting period is true?

The beginning balance of a revenue account will always be zero

Galaxy Company sold merchandise costing $3,700 for $6,400 cash. The merchandise was later returned by the customer for a refund. If the perpetual inventory method is used, what effect will the sales return have on the accounting equation?

Total assets and total stockholders' equity decrease by $2,700. explanation: The sales return will increase assets (merchandise inventory) and decrease cost of goods sold, which will increase stockholders' equity, by $3,700 each. It will also decrease assets (cash) and decrease sales revenue, which will decrease stockholders' equity, by $6,400 each. The net effect is a decrease in total assets and total stockholders' equity of $2,700.

Bledsoe Company received $25,000 cash from the issue of stock on January 1, Year 1. During Year 1, Bledsoe earned $9,500 of revenue on account. The company collected $8,000 cash from accounts receivable and paid $6,400 cash for operating expenses. Based on this information alone, during Year 1, which of the following statements is true?

Total assets increased by $28,100 explanation: $25,000 (cash) + $9,500 (accounts receivable) + $8,000 (cash) − $8,000 (accounts receivable) − $6,400 (cash) = $28,100 increase

The Wilson Company purchased $39,000 of merchandise from the Poole Wholesale Company. Wilson also paid $3,200 for freight costs to have the goods shipped to its location. Which of the following statements regarding the necessary entries for the transactions is true? Wilson uses the perpetual inventory system.

Total increases to the inventory account would be $42,200 explanation: When the perpetual system is used, the inventory account is increased when inventory is purchased; that account is also increased when the company (as the buyer of the merchandise) pays the transportation costs.

Under a periodic system, the payment of shipping costs on goods received from the vendor will increase the:

Transportation-in account

Effective internal controls for cash include:

disbursements made by pre-numbered check, cash deposited in the bank on a timely basis, written cash receipts given to customers as evidence of payment