Exam 1 review

________ indicates whether financial information depicts an economic event in a way that is complete, neutral, and free from error. A) Relevance B) Faithful representation C) Verifiability D) Truthfulness

B) Faithful representation

Why would an accountant engage in financial accounting research?A.When they need to determine the appropriate reporting treatment for a transaction B.When a given transaction requires judgment C.Both A and B D.Neither A nor B

C) Both A and B

Accounting standards allow management discretion in selecting accounting methods, applying those methods, and changing methods or estimates. This can A.reduce comparability between firms .B.reduce consistency within a firm over time. C.Both A and B D.Neither A nor B

C.Both A and B

Unearned revenue Prepaid Rent Sales Cost of Goods Sold

Credit Asset Temporary/ nominal Expense

Shadow's Cleaning Service provides weekly cleaning services for $41 per week. In January, they collected payments from 60 customers for 3 months (12 weeks) of service each. For the month of January, they will recognize ________ of revenue under the cash basis, and ________ under the accrual basis .A) $2,460; $720 B) $3,180; $0 C) $9,840; $29,520 D) $29,520; $9,840

D) $29,520; $9,840

Purchased supplies for $45,000 cash. Paid dividends of $10,000 Purchased a machine for $140,000 by getting a loan from the manufacturer. As a result of these transactions, Pine's total assets would A. Increase by $185,000 B. Increase by $175,000 C. Decrease by $55,000 D. Increase by $130,000

D. Increase by $130,000

How are transactions recorded under accrual accounting? A.Accrual-basis accounting records revenues when cash is received and records expenses when cash is paid. B.Accrual-basis accounting records revenues and expenses in a specific time in the future when it is beneficial for the company to report it. C.Accrual-basis accounting records revenues according to the revenue recognition principle and records expenses based on materiality. D.Accrual-basis accounting records revenues when earned and expenses when incurred, regardless of when cash is received or paid.

D.Accrual-basis accounting records revenues when earned and expenses when incurred, regardless of when cash is received or paid.

What is the effect on the accounting equation when a company uses services (such as utilities) but does not pay for them yet? A.Assets increase and liabilities increase B.Liabilities increase and stockholders' equity increases C.Assets decrease and stockholders' equity decreases D.Liabilities increase and stockholders' equity decreases

D.Liabilities increase and stockholders' equity decreases

10. Bradley Company paid $25,000 in dividends to its shareholders. This transaction ________. A. increased expenses B.decreased revenues C.increased liabilities D.decreased shareholders' equity

D.decreased shareholders' equity

What group or organization both protects investors and oversees the accounting standard-setting process in the United States?

United States Securities and Exchange Commission

Which organization is responsible for create/promulgating U.S. GAAP? a. Financial Accounting Standards Board b. Public Company Accounting Oversight Board c. International Accounting Standards Board d. Securities Exchange Commission e. none of the above

a. Financial Accounting Standards Board

In its 2017 financial statements, Bamboo Co. reported salaries expense of $180,000 in its income statement and cash paid for salaries of $120,000 in its cash flow statement. Accrued salaries payable at December 31, 2016, was $40,000. What amount should Bamboo report as salaries payable in its December 31, 2017, balance sheet? A.$100,000 B.$40,000 C.$60,000 D.$20,000

A) 100,000 120,000-40,000 = 80,000 180,000 - 80,000 = 100,000

3.What is the effect on the accounting equation when a company gets a loan from a bank? A.Assets increase; liabilities increase B.Assets decrease; liabilities increase C.Assets increase; stockholder's equity increases D.Assets increase; expenses increase

A) Assets increase; liabilities increase

The tendency to use the data that is most readily available or most easily recalled to make a decision, as opposed to considering all relevant data is called A. the availability bias B. the overconfidence bias C. the anchoring bias D. the confirmatory bias

A. the availability bias

Which of the following statements is false? a. The Income Statement shows a snapshot in time, and all accounts are closed at year-end b. FASB writes all GAAP standards, and the SEC enforces these standards c. When revenue is recorded, the matching principle requires that associated expenses be recorded in the same period d. If market value received is less than book value of the long-term asset given on sale, a loss is recorded e. All of the above are true

a. The Income Statement shows a snapshot in time, and all accounts are closed at year-end

What is the term that describes the process of identifying, measuring, and communicating financial information about an economic entity to various user groups? a. financial reporting b. accounting standard setting c. financial statement d. financial accounting e. none of the above

d. financial accounting

Which of the following is not one of the four general recognition criteria under U.S. GAAP?

material

All of the following are primary components of the conceptual framework for financial reporting except ________.

standards

TNT Inc charges $125 per month for a storage unit. In the first quarter of the year (January to March), they collected $6,125. On January 1, ten customers pre-paid for three months rental, on February 1, seven customers pre-paid for two months rental, and on March 1, five customers paid for one month. For the month of March, TNT will recognize $_______ using the cash basis of accounting and $_________ using the accrual basis.

625 2750

The first financial statement prepared from the adjusted trial balance is the ________. A.Income Statement B.Balance Sheet C.Statement of Cash Flows D.Statement of Retained Earnings

A) Income statement

Which of the following statements is true? A. Standard setters look to the Conceptual Framework for guidance in writing new accounting standards or modifying existing ones. B. The Securities and Exchange Commission (SEC) writes all U.S. generally accepted accounting principles (GAAP) standards, and the Financial Accounting Standards Board (FASB) enforces these standards in U.S. markets. C. The Conceptual Framework identifies investors and customers as the two primary users of financial statements. D. External auditors verify that a company is performing well or performing poorly.

A) Standard setters look to the Conceptual Framework for guidance in writing new accounting standards or modifying existing ones

Which of the following defines fair value? A) The amount at which an asset could be bought or sold in a current transaction between willing parties. B) The market value of an asset determined by a transaction between related parties. C) The amount at which an asset could be sold in a transaction occurring within the last year. D) The amount at which an asset could be bought or sold in a current transaction between any two parties.

A) The amount at which an asset could be bought or sold in a current transaction between willing parties.

The failure to properly record an adjusting entry to accrue salaries expense item will result in an A. Understatement of expenses and an understatement of liabilities. B. Overstatement of expenses and an overstatement of liabilities. C. Overstatement of expenses and an overstatement of assets. D. Understatement of expenses and an understatement of assets.

A) Understatement of expenses / equity and an understatement of liabilities

Formally setting all the temporary accounts to zero in the accounting system is called ________. A. Closing B. Journalizing C. Preparing D. Posting

A) closing

Which attribute of a fundamental characteristic makes explicit the assumption of the full disclosure principle? A) completeness B) relevance C) materiality D) verifiability

A) completeness

Which statement is NOT accurate? A. Potential creditors reviewing a company's long-term liabilities financial statement footnote to determine the company's ability to assume additional debt is an example of a faithful representation because the information is understandable. B. A company disclosing both favorable and unfavorable legal settlements is an example of a faithful representation because the information is neutral. C. A company discloses a write-off of an accounts receivable from a major customer that accounts for 35% o the company's current assets is an example of relevant information because it is material.D. Determining that this year's reported earnings per share is $0.10 below analysts' forecast is an example of relevant information because it has confirmatory value.

A. Potential creditors reviewing a company's long-term liabilities financial statement footnote to determine the company's ability to assume additional debt is an example of a faithful representation because the information is understandable.

Which of the following statements is true? A. The Income Statement shows economic performance over a period of time, and all accounts are closed at year-end. B. SEC writes all U.S. GAAP standards, and the FASB enforces these standards in U.S. markets. C. The Conceptual Framework identifies investors, managers and shareholders as the primary users of financial statements. D. The Balance Sheet shows a snapshot in time, and all accounts are closed at year-end.E. None of the above are true.

A. The Income Statement shows economic performance over a period of time, and all accounts are closed at year-end.

An airplane manufacturer with a 5-year operating cycle prepares financial statements every quarter. Which underlying assumption does this example represent? A.Periodicity assumption B.Economic entity concept C.Monetary unit assumption D.Going concern concept

A.Periodicity assumption

IFRS is more of is more of a ____________ standard whereas U.S. GAAP is more _______. A.Principles-based; rules-based B.Rules-based; principles-based C.Theory-based; exceptions-based D.Exceptions-based; theory-based

A.Principles-based; rules-based

Which of the following types of information would be categorized as financial information?

Asset values governed by accounting standards Footnote disclosures in annual reports Auditor's report

What is the effect on the accounting equation when a company receives payment of an account receivable? A. Assets increase; liabilities increase B. Assets increase; assets decrease C. Assets increase; liabilities decrease D. Assets decrease; expenses increase

B) Assets increase, assets decrease

Airlines Insider is a well-respected publication for the airline industry. The publication prescribes a certain accounting treatment which differs from what is indicated in the Codification. How should this be handled? A) Follow the treatment discussed in Airlines Insider. B) Follow the treatment discussed in the Codification. C) Choose whichever treatment is most conservative. D) Create a blend of the two treatments.

B) Follow the treatment discussed in the Codification.

Which of the following types of information is a focus of the primary objective of financial reporting? A. Information that helps the company's auditors determine areas of highest risk within the company. B. Information that helps a potential equity investor decide whether to invest in the company. C. Information that helps a company's board of directors decide whether a the CEO should be fired. D. Information that helps a production manager determine the efficiency and effectiveness of inventory operations.

B) Information that helps a potential equity investor decide whether to invest in the company

Which of the following situations might influence management to intentionally bias estimates for the financial statements and impede the use of good judgment? A) Earnings are on track to surpass analysts' forecasts. B) Management's bonuses are tied to net income. C) Employees work for commission. D) All of the above

B) Management's bonuses are tied to net income.

Unearned revenue is an example of a ________________ element and lives on the _____________. A. Period-of-time; Balance Sheet B. Point-in-time; Balance Sheet C. Period-of-time; Income Statement D. Point-in-time; Income Statement

B) Point- in - time; Balance sheet

Bill Smith is on assignment for his first audit, when he runs into an accounting practice he's never dealt with before. Rather than asking a more experienced colleague for advice, Bill decides he knows enough to handle it. After all, he passed the CPA exam, didn't he? Bill is exhibiting ________. A) arrogance bias B) overconfidence bias C) anchoring bias D) poor judgment

B) overconfidence bias

Sycamore College sells season tickets to its basketball games. Fans buy a package of 15 home-game tickets for $90. In September, Sycamore received cash payments from 30 customers. In October, Sycamore received cash payments from 70 customers. In November they received cash payments from 300 customers. They played no games in October and two home games in November. For the month of November, they will recognize ________ of revenue under the cash basis (hint: think about cash collected), and ________ of revenue under the accrual basis .A. $27,000, $27,000 B. $27,000, $4,800 C. $4,800, $27,000 D. $36,000, $4,800

B. $27,000, $4,800

________ occurs when managers use the flexibility provide by GAAP to opportunistically report financial information to make the firm's financial position and performance look better than they really are. A. Financial statement analysis B. Earnings management C. Fraud D. Conformance with U.S. GAAP

B. Earnings management

To be relevant, financial information should have which of the following attributes? A. Neutrality B. Predictive value C. Understandability D. Costs and benefits

B. Predictive value

In determining net income, managers have incentives to do which of the following? A. Report lower net income than the prior year's net income. B. Report net income just above zero, rather than reporting a net loss. C. Report net income only when it is necessary. D. Ignore analysts' forecasts because analysts are usually not accountants.

B. Report net income just above zero, rather than reporting a net loss.

On January 1, Mountbatten Corporation paid $14,000 for a year's advance rent on a building and recorded it as Rent Expense. The rental period begins on January 1. When financial statements are prepared on March 31, the adjusting entry should include ________. (Do not round intermediary calculations. Only round your final answer to the nearest dollar.) A. a credit to Cash for $10,500 B. a credit to Rent Expense for $10,500 C. a credit to Prepaid Rent for $3,500 D. a debit to Rent Expense for $3,500

B. a credit to Rent Expense for $10,500

On March 1, Stella Enterprises received $36,000 in payment for annual advertising contracts and recorded it as unearned revenue. If the revenue is earned equally each month, the adjusting entry on December 31 will include a ________. A. credit to Unearned Revenue for $30,000 B. credit to Advertising Revenue for $30,000 C. debit to Unearned Revenue for $6,000 D. credit to Advertising Revenue for $6,000

B. credit to Advertising Revenue for $30,000

Diamond, Inc. had a board meeting to discuss future investment opportunities. Joe was a loud proponent of investing in Neutron Corporation, so much so that nobody else got a word in edgewise. Many board members didn't really think investing in Neutron was a good idea, but agreed to invest in Neutron in order to keep Joe happy, and get the meeting over with. The board is exhibiting ________. A. anchoring bias B. groupthink bias C. confirmatory bias D. availability bias

B. groupthink bias

An attitude that includes a questioning mind and a critical assessment of audit evidence is known as ________. A. independent thinking B. professional skepticism C. groupthink D. credibility

B. professional skepticism

How does a principles-based standard differ from a rules-based standard? A. U.S. GAAP establishes a principles-based standards only, not rules-based standards. B. A rules-based standard is consistent with a theoretical framework. In contrast, a principles-based standard does not necessarily rely on a consistent framework. Rather, it contains more specific and prescriptive rules. C. A principles-based standard is consistent with a theoretical framework. In contrast, a rules-based standard does not necessarily rely on a consistent theoretical framework. Rather, it contains more specific and prescriptive rules. D. IFRS establishes a principles-based standard, while U.S. GAAP establishes a rules-based standard.

C) A principles-based standard is consistent with a theoretical framework. In contrast, a rules-based standard does not it contains more specific and prescriptive rules

________ is the amount of cash that the firm actually paid to acquire an asset. A.Current market value B.Current cost C.Historical cost D.Net realizable value

C) Historical cost

Caesar Company needs to purchase a new delivery truck. Rather than taking the time to research which truck would best fit the company's needs, the manager calls his friend to ask which truck he would recommend. The manager is exhibiting ________. A) bad judgment B) overconfidence bias C) availability bias D) anchoring bias

C) availability bias

Which underlying assumption presumes that the owner's personal residence should not be included as an asset on the company balance sheet? A) monetary unit assumption B) periodicity assumption C) economic entity concept D) common sense assumption

C) economic entity concept

The process by which an accountant reaches a decision in situations with multiple alternatives is referred to as ________. A) earnings management B) GAAP C) judgment D) financial reporting

C) judgment

The process of reporting an economic event in the financial statements is known as ________. A) recording B) writing C) recognition D) transcribing

C) recognition

How are transactions recorded under accrual accounting?? A. Accrual-basis accounting records revenues when cash is received and records expenses when cash is paid. U.S. GAAP is based on accrual-basis accounting as opposed to a cash-basis system. B. Accrual-basis accounting records revenues and expenses in a specific time in the future when it is beneficial for the company to report it. C. Accrual-basis accounting records revenues when earned and expenses when incurred. D. Accrual-basis accounting records revenues according to the revenue recognition principle and records expenses based on materiality.

C. Accrual-basis accounting records revenues when earned and expenses when incurred.

Connect Company purchased a one-year insurance policy for $6,600 on September 30. What is the necessary adjusting journal entry at December 31? A. Prepaid Insurance 1,650 Insurance Expense 1,650 B. Insurance Expense 4,950 Prepaid Insurance 4,950 C. Insurance Expense 1,650 Prepaid Insurance 1,650 D. Insurance Expense 6,600 Prepaid Insurance 6,600

C. Insurance Expense 1,650 Prepaid Insurance 1,650

Which of the following is most accurate about judgment in accounting? A. Cognitive biases such as the confirmatory bias and hindsight can influence a manager's estimates made in financial reporting. B. Managers would not use their discretion to meet the earnings forecast of a financial analyst if the underlying economics would be incorrectly reported. C. Professional skepticism can minimize biases in financial reporting that lead to earnings management. D. Auditors should assume that a company's management is dishonest because of their personal incentives and the amount of judgment in financial reporting.

C. Professional skepticism can minimize biases in financial reporting that lead to earnings management.

Managers have which of the following reasons to manage earnings? A. To report the underlying economic activities of the business B. To avoid confrontation with auditors C. To get a bigger bonus D. To prevent violating securities laws

C. To get a bigger bonus

How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the seller's financial statements before the performance? A. Revenue for the entire proceeds B. Revenue to the extent of related costs expended C. Unearned revenue for the entire proceeds D. Unearned revenue to the extent of related costs expended

C. Unearned revenue for the entire proceeds

Elm Company recorded journal entries for the issuance of common stock for $100,000, the payment of cash on salaries payable of $40,000, and the receipt of cash for services performed of $32,000. What net effect do these entries have on stockholders' equity?A.Increase of $82,000. B.Increase of $140,000. C.Increase of $132,000. D.Decrease of $8,000.

C.Increase of $132,000.

Who is charged with enforcing accounting standards in the United States? A.American Institute of Certified Public Accountants B.Financial Accounting Standards Board C.Securities and Exchange Commission D.Governmental Accounting Standards Board

C.Securities and Exchange Commission

Cedar Company pays its employees on a weekly basis each Friday. During the week ended Friday, January 2, 2017, the company had a weekly payroll of $145,000. The company's year-end is December 31, 2017, which was a Wednesday. Cedar has a five-day work week. Daily wages are always the same. What adjusting journal, if any, would be made on December 31, 2017? A.Wages Payable 145,000 Wage Expense 145,000 B.Wage Expense 58,000 Wages Payable 58,000 C.Wage Expense 87,000 Wages Payable 87,000 D.Wage Expense 145,000 Wages Payable 145,000

C.Wage Expense 87,000 Wages Payable 87,000 (145,000/5) x 3 = 87,000

Why would an accountant NOT engage in financial accounting research using the Accounting Standards Codification? A. Because a company is engaging in a new and complex transaction. B. When they need to determine the appropriate reporting treatment. C. Because a given transaction requires judgment. D. Because the company implemented a new information technology (IT) system.

D) Because the company implemented a new information technology system

If a company is facing bankruptcy, which underlying assumption would not be valid? A. Periodicity assumption B. Economic entity concept C. Monetary unit assumption D. Going concern concept

D) Going concern concept

Which of the following statements correctly identifies accounting standard setters? A) The AICPA promulgates accounting standards in the U.S. and the IFRS issues international accounting standards. B) The AICPA promulgates accounting standards in the U.S. and the IASB issues international accounting standards. C) The FASB promulgates accounting standards in the U.S. and the IFRS issues international accounting standards. D) The FASB promulgates accounting standards in the U.S. and the IASB issues international accounting standards.

D) The FASB promulgates accounting standards in the U.S. and the IASB issues international accounting standards.

7) Under U.S. GAAP, ________ is an example of a period-of-time element and appears on the ________. A) accounts receivable; balance sheet B) depreciation expense; statement of shareholders' equity C) salary payable; balance sheet D) sales revenue; income statement

D) sales revenue; income statement

On July 21, Birch Books Co. purchased the copyright to a book for $35,000 and agreed to pay royalties equal to 10% of book sales, with a guaranteed minimum royalty of $120,000. Birch had book sales of $1,600,000 during the year. In its income statement, what amount should Birch report as royalty expenses for the year? A. $35,000 B. $120,000 C. $155,000 D. $160,000

D. $160,000

Which of the following types of information is a focus of the primary objective of financial reporting? A. Information that helps internal auditors determine areas of highest risk within the company. B. Information that helps a company's board of directors decide whether the CEO should receive a bonus. C. Information that helps a manager assess the efficiency and effectiveness of operations. D. Information that helps a debt investor decide on acquiring a company's bonds in public debt markets.

D. Information that helps a debt investor decide on acquiring a company's bonds in public debt markets.

When is meant by comparability when discussing financial accounting information? A. Similar economic activity in different companies has predictive or feedback value. B. Similar economic activity in different companies is reasonably free from error. C. Different economic activity is measured and reported the same across companies. D. Similar economic activity is measured and reported in a similar fashion across companies.

D. Similar economic activity is measured and reported in a similar fashion across companies.

Owl Company's accountant did not make an adjusting journal entry to accrue salaries payable at the end of the year. What is the effect on the financial statements? A.Net income to too low (understated). B.There is no effect on assets or liabilities .C.Expenses are too high (overstated). D.Net income is too high (overstated).

D.Net income is too high (overstated).

11. Which of the following is most accurate about judgment in accounting? A.Cognitive biases such as the anchoring bias and recall can influence a manager's estimates made in financial reporting. B.Auditors should assume that a company's management is dishonest because of their personal incentives and the amount of judgment in financial reporting. C.Managers would not use their discretion to increase earnings in order to obtain a higher bonus if the underlying economics would be incorrectly reported. D.Professional skepticism can minimize biases in financial reporting

D.Professional skepticism can minimize biases in financial reporting

Four accounts Cost of Goods Sold Account Receivable Dividends Common Stock Unearned revenue Prepaid Rent Sales

Expense Permanent / Real (Debit) Equity (Temporary/Nominal) Credit (Permanent / Real) Credit Asset Temporary/ nominal

Which party involved in the financial reporting process provides assurance that the financial statements prepared by management fairly present the financial position and performance of the company?

External auditors

What is primary source of GAAP in the United States.

FASB Accounting Standards Codification

Which of the following is NOT accurate about judgment in accounting?

Financial statement users should assume that a company's management is dishonest because of their personal incentives and the amount of judgment in financial reporting.

According to the FASB's Conceptual Framework, free from error is an attribute of Relevance Faithful Representation

No Yes

Asset Equity Expense Liability Revenue

Point in time Point in time Period of time Point in time Period of time

Which of the following is most likely based on an assumption?

b. decision for which method of depreciation to use

Retained earnings

beginning retained earnings + net income - dividends

total assets

current assets + non-current assets additional capital stock +purchase equipment

Which type of standard relies on theories and concepts that are linked to a well-developed theoretical framework?

principles-based standard

Which of the following is not considered to be a primary user of financial information for which financial reporting standards are designed?

regulator