Chapter 1-1

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. If Marino uses the straight-line method, the amount of depreciation expense recognized on the Year 2 income statement is

$10,000. Depreciation expense per year = (Cost of the asset - Salvage value) ÷ Useful life Depreciation expense per year = ($48,000 Cost - $8,000 Salvage) ÷ 4 Year life = $10,000 Straight-line depreciation recognizes the same amount of expense for each year of useful life. In this case, $10,000 will be recognized in Year 1, Year 2, Year 3, and Year 4. The depreciation expense account is a temporary account that is closed at the end of each accounting period. Therefore, the depreciation expense account for the truck has a zero balance at the beginning of each accounting period and a before closing balance that is equal to one year's depreciation ($10,000) at the end of each accounting period

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. If Marino uses the straight-line method, the amount of accumulated depreciation shown on the Year 2 balance sheet is

$20,000. Depreciation expense per year = (Cost of the asset - Salvage value) ÷ Useful life Depreciation expense per year = ($48,000 Cost - $8,000 Salvage) ÷ 4 Year life = $10,000 The accumulated depreciation account is a permanent contra asset account. As its name implies, the balance accumulates each year. In this case the after closing (ending) balance in the accumulated depreciation account will be $10,000 in Year 1, $20,000 in Year 2, $30,000 in Year 3, and $40,000 in Year 4.

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. If Marino uses the straight-line method, the amount of book value shown on the Year 2 balance sheet is

$28,000. Depreciation expense per year = (Cost of the asset - Salvage value) ÷ Useful life Depreciation expense per year = ($48,000 Cost - $8,000 Salvage) ÷ 4 Year life = $10,000 The book value is the amount of the cost of the asset minus the accumulated depreciation. At the end of Year 2, the book value is $28,000 ($48,000 Cost - $20,000 Accumulated depreciation).

Kilgore Company experienced the following events during its first accounting period. (1) Issued common stock for $5,000 cash. (2) Earned $3,000 of cash revenue. (3) Paid a $4,000 cash to purchase land. (4) Paid cash dividends amounting to $400. (5) Paid $2,200 of cash expenses. Based on this information, the amount of cash flow from investing activities appearing on the statement of cash flows is

$4,000 outflow. Investing activities include the purchase or sale of long-term assets. The only transaction affecting investing activities is the purchase of land. Therefore, there was a $4,000 cash outflow for investing activities shown on the statement of cash flows for the purchase of land.

Keisha Dress Shops experienced the following events during its third accounting period. (1) Sold merchandise that cost $92,000 for $140,000 cash. (2) Paid $30,000 of operating expenses. (3) Paid a $4,000 cash dividend. Based on this information, the amount of the gross margin is

$48,000. Gross margin is determined by subtracting cost of goods sold from the sales revenue. In this case, the gross margin is $48,000 ($140,000 sales revenue - $92,000 cost of goods sold). Operating expenses are subtracted from the gross margin to determine the net income. Dividends are not shown on the income statement.

Alexis Company was started in Year 1. At the end of Year 1 the Company's had the following accounting equation. Assets = Liabilities + Stockholders' Equity Cash + Land = Notes Payable + Common Stock + Retained Earnings 600 + 2,200 = 1,000 + 1,400 + 400 During Year 2, the company experienced the following accounting events. Paid of $500 of its note payable. Earned $700 of cash revenue. Paid $400 of cash expenses. Paid a $100 cash dividend. Based on this information alone, what percent of the company's assets at the end of Year 2 were provided by earnings?

24% Begin by recording the events in the accounting equation and the determine the amount of the account balances as of December 31, Year 2. The correct result is as follows: Assets = Liabilities + Stockholders' Equity Cash + Land = Notes Payable + Common Stock + Retained Earnings 600 + 2,200 = 1,000 + 1,400 + 400 (500) + = (500) + + 700 + = + + 700 (400) + = + + (400) (100) + = + + (100) 300 + 2,200 = 500 + 1,400 + 600 Finally, divide the ending balance of retained earnings by the total amount of assets $600 ÷ ($300 + $2,200) = 24%

Which of the following types of businesses require financial information to operate effectively?

All of these businesses require financial information

The accounting records of Coastal Company contained the following account balances. Cash $ 500 Land $ 800 Notes Payable $ 200 Common Stock $ 400 The records also contained an account titled Retained Earnings. Based on this information the balance of the retained earnings account must be

As show below the only amount that would balance the accounting equation is $700. Assets = Liabilities + Common Stock + Retained Earnings 500 + 800 = 200 + 400 ? = 700

Public accountants perform which of the following functions to ensure that financial information provided by a Company to investors is in accordance with G.A.A.P.?

Conduct an audit One of the jobs of a public accountant is to conduct an audit of a Company's financial information. An audit ensures that financial information provided by the Company is in compliance with G.A.A.P. Investors rely on an audit to ensure the accuracy of financial information in order to make informed financial decisions.

Which of the following is not a tangible asset?

Copyright Tangible assets are things that can be perceived by the sensory system. In other words, tangible assets are things that you can see or touch including things like buildings, land, or gold. On the other hand, a copyright is a privilege granted by the government. A privilege is an intangible asset. While it provides an economic benefit, it cannot be seen or touched.

Which of the following is not a source of assets?

Creditors Investors Operations *All the answers represent sources of assets.

Resource owners want to provide resources to businesses with high profit potential because those businesses will pay higher taxes. This statement is

False

Which of the following accurately describes the characteristics of managerial and financial accounting?

False

Generally Accepted Accounting Principles (GAAP) are designed to provide guidance for

Financial Accounting

John Hamilton borrowed $500,000 from Stone Creek Bank to open a new restaurant called Sauce-It-Up. John transferred $450,000 of the cash he borrowed to the Company on first day of the year. Which of the follow appropriately reflects the cash transactions between these reporting entities? John Hamilton Sauce-It-Up Stone Creek Bank A. $ 50,000 increase $ 450,000 increase $ 500,000 decrease B. $ 500,000 increase $ 450,000 increase $ 500,000 decrease C. $ 500,000 decrease $ 500,000 increase $ 500,000 decrease D. $ 450,000 increase $ 50,000 increase $ 500,000 decrease

Option A. John Hamilton's cash increased by $50,000 is calculated by subtracting the $450,000 in cash he transferred to Sauce-It-Up from the $500,000 in cash it borrowed from Stone Creek Bank. Sauce-It-Up will report an increase in cash of $450,000 from the transfer of cash from John Hamilton. Finally, Stone Creek Bank will report a decrease of $500,000 in cash due to the loan it provided John Hamilton.

On December 31, Year 1, Kardashian Company recorded an adjusting entry to recognize $5,470 of uncollectible accounts expense. Which of the following shows how this entry will affect Kardashian's financial statements? Balance sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. A. (5,470) = NA + (5,470) NA − 5,470 = (5,470) (5,470) OA B. (5,470) = NA + (5,470) NA − 5,470 = (5,470) NA C. (5,470) = NA + (5,470) NA − 5,470 = (5,470) (5,470) FA D. (5,470) = (5,470) + NA NA − 5,470 = (5,470) NA

Option B Under the allowance method when a company recognizes uncollectible accounts expense, it increases the contra asset account, allowance for doubtful accounts. The increase in the contra asset account decreases total assets. Also, the recognition increases total expenses and decreases net income which ultimately decreases stockholders' equity (retained earnings). Since the expense recognition does not require the payment of cash, the statement of cash flows is not affected.

Which of the following shows how recognizing accrued expense will affect a company's financial statements? Balance sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Rev. - Exp. = Net Inc. A. − = NA + − NA - NA = NA NA B. NA = + + − NA - + = − NA C. NA = + + − NA - + = − − OA D. NA = + + − NA - + = − − FA

Option B Recognizing an accrued expense means that the company recognizes the expense in the current accounting period and will pay for the expense is a subsequent accounting period. As a result, liabilities increase. The expense recognition causes expenses to increase and thereby net income to decrease. The decrease in net income causes stockholders' equity (retained earnings) to decrease. There is no effect on cash flow in the current period because the cash is paid in a subsequent accounting period.

On December 31, Year 1 Hilton Company recognized $600 of accrued salary expense. Hilton paid cash to the employees in Year 2. Which of the following shows how these events will affect Hilton's financial statements on December 31, Year 1? Balance sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Rev. - Exp. = Net Inc. A. NA = (600) + (600) NA - (600) = (600) − OA B. NA = 600 + (600) NA - 600 = (600) NA C. NA = 600 + 600 NA - 600 = (600) − OA D. NA = 600 + (600) NA - (600) = (600) NA

Option B Under accrual accounting the full amount of the expense is recognized in Year 1 regardless of the fact that cash was not paid until Year 2. Since no cash was paid in Year 1 there is no affect on the Statement of Cash Flows.

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. If Marino uses the straight-line method, which of the following shows how the adjusting entry to recognize depreciation expense at the end of Year 3 will affect the Company's financial statements? Balance sheet Income Statement Cash Flow Statement Assets = Cash + Truck − Acc. Dep. = Liab. + Equity Rev. − Exp. = Net Inc. A. NA + NA − 30,000 = NA + 30,000 NA − 30,000 = (30,000) NA B. NA + NA − 30,000 = NA + 10,000 NA − 10,000 = (10,000) NA C. NA + NA − 10,000 = NA + 10,000 NA − 10,000 = (10,000) (10,000) OA D. NA + NA − 10,000 = NA + (10,000) NA − 10,000 = (10,000) NA

Option D Depreciation expense per year = (Cost of the asset - Salvage value) ÷ Useful life Depreciation expense per year = ($48,000 Cost - $8,000 Salvage) ÷ 4 Year life = $10,000 The adjusting entry to recognize depreciation expense will cause the accumulated depreciation account to increase by $10,000. Note that the question is not asking for the balance in the allowance account but instead it is asking how the entry to recognized depreciation expense will affect the financial statements. The recognition of depreciation expense will cause net income to decrease and ultimately equity (retained earnings) to decrease. There is no impact on the statement of cash flows because the associated cash outflow would have been recognized previously when the truck was purchased.

Edwards Shoe Store sold shoes that cost the company $5,700 for $8,200. Which of the following shows how the recognition of the cost of goods sold will affect the Company's financial statement? (Ignore the effects of the associated revenue recognition.) Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. - Exp. = Net Inc. A. − = NA + − NA - + = − − OA B. − = NA + − NA - NA = NA NA C. + = NA + + + - NA = + + OA D. − = NA + − NA - + = − NA

Option D When inventory is sold, the cost of the inventory must be removed from the inventory account thereby reducing assets. The cost of goods sold is recognized as an expense on the income statement thereby reducing net income and ultimately stockholders' equity (retained earnings). The statement of cash flows is not affected because cash flow is recognized when the company pays for the inventory, not when the inventory is sold.

Which of the following is an intangible asset?

Patent Copyright Trademark All of the answers are names of intangible assets. Intangible assets cannot be seen or touched. Do not be confused by the fact that you can see a trademark. The image you see is not the intangible asset. The intangible asset is the exclusive right to use the image for branding a product. Similarly, you can see a book that is protected by a copyright. Again, the intangible asset is not the book but instead the exclusive privilege to publish, reproduce, sell, or otherwise distribute the content contained in the book.

Accounting provides a service to society by gathering and reporting information about a company's profit potential. This statement is

True

Businesses earn profits by converting financial, physical, and labor resources into goods and services that satisfy consumer demands. This statement is

True

Capitalizing the cash cost of a piece of equipment is

an asset exchange event Capitalizing the cost of equipment means to record its cost in an asset account. Capitalizing the cost is an asset exchange event. One asset account (cash) decreases and another asset (equipment) increases. Total assets are not affected.

Simpson Company paid cash to purchase land. This event is

an asset exchange transaction. Paying cash to purchase land causes an increase in one asset account (land) and an decrease in another asset account (cash). The total amount of assets is not affected. Therefore, the cash purchase of land is an asset exchange transaction

Sims Company received cash from the issue of a note payable to a bank. This event is

an asset source transaction. Collecting cash from the issue of a note payable causes assets (cash) and liabilities (notes payable) to increase. Since the total amount of assets increases, this is an asset source transaction.

Sims Company received cash from the issue of common stock. This event is

an asset source transaction. Collecting cash from the issue of common stock causes assets (cash) and stockholders' equity (common stock) to increase. Since the total amount of assets increases, this is an asset source transaction.

Barnett Company paid a cash dividend. This event is

an asset use transaction. Paying a cash dividend causes assets (cash) to decrease and stockholders' equity (retained earnings) to decrease. Since total assets decrease, this is an asset use transaction.

Most companies expect to collect the full balance of all of their accounts receivable. This statement is

false. Most companies recognize that they will be unable to collect some portion of their accounts receivable. For example, some of their customers may go bankrupt. You cannot collect from someone who does not have the money to pay.

The following income statements were drawn from the annual report of The Western Sales Company. Year 2 Year 1 Sales 40,000 40,000 Cost of Goods Sold (25,000 ) (25,000 ) Gross Margin 15,000 15,000 Operating Expenses (7,000 ) (9,000 ) Operating Income 8,000 6,000 Gain on the sale of land 0 5,000 Net Income 8,000 11,000 If the trends continue, investors can expect the company's net income for Year 3 to

increase. By definition gains and losses are not expected to recur on a regular basis. Therefore, future expectations are established on the basis of operating (recurring) income rather than net income which includes the effects of gains and losses. Since the operating income increased from Year 1 to Year 2, the pattern of increasing operating income is expected to continue. Since operating income is expected to increase and no gains or losses are expected, net income is expected to increase.

The gross margin appears on a

multistep income statement. Gross margin is the difference between sales revenue and the cost of goods sold expense. It is normally shown as the first step in a multi-step income statement. The operating expenses are then subtracted from gross margin to determine the amount of net income. In contrast, on a single step income statement cost of goods sold is shown as one of a number of operating expenses that are subtracted from sales revenue to determine net income. This single-step format does not show the determination of gross margin. Multistep and single-step formats are used only for income statements, they do not apply to the statement of cash flows.

Maria Company began Year 2 with $85,000 in its Land account. During Year 2 the company made two separate purchases of land. The first purchase of land cost $52,000. The second purchase of land cost $94,000. Based on this information the company's accounting records will have

one land account. two land accounts. three land accounts. All of the answers represent possibilities that could exist in Maria's accounting records. Companies have a great deal of flexibility concerning the number of accounts included in their accounting records. The number of accounts depends on the level of detail that management finds to be useful. For example, one company may want a separate account for each parcel of land while a different company may desire only a single summary account that contains the total amount of all land purchased. In this case, Maria may have three accounts, one for each parcel of land. The land could be divide into two categories such as land in Texas versus Land in New Mexico. This scenario would result in two land accounts. Alternatively, Maria could choose to maintain only one land account that contains the total cost of all land the company owns. There is no set number of accounts a company must maintain. Instead the number of accounts a company uses depends on the informational needs of its management team.

When a merchandising company sells inventory it will

recognize revenue and expense. When a merchandising company sells inventory, it will recognize sales revenue for the amount of the sales price. The company will also recognize a cost of goods sold expense for the amount of the cost of the goods that were sold.

Paul Savage purchased a restaurant named Burger Haven from Larry Jones. The purchase would cause the number of reporting entities to

remain constant. There are three reporting entities Paul Savage, Burger Haven, and Larry Jones. These same entities existed before and after the purchase of the restaurant.

Alpha Company's December 31, Year 1 balance sheet showed $1,700 cash, $1,000 common stock, and $700 retained earnings. The company experienced the following event during Year 2. (1) On March 1, paid $1,200 to purchase insurance coverage for one year beginning immediately. Based on this information alone,

the Year 3 statement of cash flows would show zero outflow to purchase insurance. Since all of the cash was paid in Year 2, there would be zero cash flow associated with the Year 3 statement of cash flows. Cost per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 2: Amount used = $100 per month × 10 months = $1,000 insurance expense for Year 2 As of December 31, Year 3: Amount used = $100 per month × 2 months = $200 insurance expense for Year 3

Watt Company was established in January, Year 1. During Year 1 the company experienced the following events. Collected $6,000 cash from the issue of common stock. Borrowed $3,000 cash from the state bank. Earned $4,000 of cash revenue. Paid $2,000 cash expenses. The company was liquidated at the end of Year 1. Based on this information

the stockholders would receive $8,000. The stockholders reap the reward of a profitable business and suffer the consequences of losses incurred. In this case the business earned $2,000 ($4,000 Revenue − $2,000 Expenses). As a result, the stockholders would receive $8,000 in the liquidation ($6,000 original investment + $2,000 retained earnings).

John Hamilton borrowed $500,000 from Stone Creek Bank to open a new restaurant called Sauce-It-Up. John transferred $450,000 of the cash he borrowed to the restaurant on first day of the year. This statement includes how many reporting entities?

three reporting entities.

The net realizable value of accounts receivable represents an estimate of the amount of the accounts receivable that a company realistically expects to collect. This statement is

true. The net realizable value of accounts receivable is determined by subtracting the balance in the allowance for doubtful accounts from the balance in the accounts receivable. The balance in the allowance account represents the estimated amount of accounts receivable that are not collectible. Therefore, the balance in accounts receivable minus the balance in the allowance account results in the amount of receivables that the company realistically expects to collect.