Financial Accounting Exam 1

3 Activities of all companies

Financing, Investing, Operating

Financial Statement Heading

Name of Company Name of Financial Statement Period of Time {Only Use Date for Balance Sheet} Unit of Measure

Income Statement

Revenues-Expenses

Operating

Revenues: Services/Sales Expenses: Wages, Rents, Utilities, Supplies, Insurance, Depreciation

Revenues

Sales, Services

The net income reported on the income statement for the accounting period is reported on what other financial statement?

Statement of Stockholders Equity

A standardized format that is used to accumulate the dollar effect of transactions on each financial statement item is called an account.

True

An entity's assets come from three primary sources: creditors, investors, and profits retained in the business.

True

Borrowing cash from the bank causes assets to increase and liabilities to increase.

True

Borrowing money from the bank is a financing activity.

True

Deferred rent revenue is an example of a liability account that will usually not be satisfied by payment of cash but rather by allowing the tenant to occupy the premises for which they have prepaid.

True

Each adjusting entry affects at least one income statement account and at least one balance sheet account.

True

Every transaction affects two or more accounts

True

External transactions are transactions the firm conducts with a separate economic entity, such as selling products to a customer, purchasing supplies from a vendor, paying salaries to an employee, and borrowing money from a bank.

True

Generally Accepted Accounting Principles (GAAP) are measurement rules used to develop information provided in the financial statements.

True

It is necessary to prepare the income statement first because we need to know net income or loss for the period in order to compute ending retained earnings on the statement of stockholders' equity

True

Revenues increase stockholders' equity, so they are recorded with credits.

True

The Cash at end of month shown on the statement of cash flows must agree with the balance of Cash shown on the end of month balance sheet.

True

The T-account is a simplified representation of an account, and is very useful for summarizing the transaction effects and determining the balance for individual accounts.

True

The accounting period can be one month, three months, six months, one year or any time frame specified by management.

True

The audit report is a report that describes the auditors' opinion of the fairness of the financial statement presentations and the evidence gathered to support that opinion.

True

The matching principle states that expenses are recognized when incurred in earning revenue.

True

The statement of stockholders' equity is used to report the changes in common stock and retained earnings attributed to issuance of additional stock, net income (or net loss) and dividends.

True

On July 1, 20XA, Liz Company borrowed $5,000 cash and signed a 7-month note payable, interest 10 percent, payable on the maturity date, January 31, 20XB. The accounting period ends on December 31; therefore, the required adjustment on December 31, 20XA would be: Increase--Interest expense, $250; Increase--Interest payable, $250.

True (5,000 x .10 x 6/12 = $250). Interest is quoted as an annual rate so Time has to be on the basis of a year. Interest expense for 20XA is based on the length of time the money was borrowed in 20XA which was six months in 20XA (July 1 - December 31 is six months).

The resources (assets) that the company owns are reported on the balance sheet

True, sheet includes A=L+OE

Stockholders' equity is increased by investments of the owners and is decreased by net loss.

True—other things that will change stockholders' equity are dividends and net income.

Expenses

Utilities, Wages, Rent, Advertising, Insurance

The primary purpose of an audit (examination) of the financial reports of a company is to

determine whether the financial reports conform to GAAP

On December 31, 20XD, the effect of recording an adjustment for interest of $1,200, which had accrued on a note payable, would be

nterest expense E+-> SE- and interest payable L+)

Paid $5,000 for an Account payable owed to suppliers

Accounts Payable, Liability, -5,000 Cash, Asset, -5,000

The difference between the equipment account balance and the accumulated depreciation, equipment account balance is called

Book value

Purchased a $200,000 building; paid by signing a $150,000 note payable and the rest in cash.

Building, Asset, +200,000 Cash, Asset, -50,000 Note Payable, Liability, +150,000

Borrowed $75,000 from the bank.

Cash, Asset, +75,000 Note Payable, Liability, +75,000

Issued more stock to owners for $10,000.

Cash, Asset, -10,000 Common stock, stockholders equity, +10,000

Investing activities are needed to provide the funds to start a business

False, financing activities are needed to provide the funds to start a business. Financing activities at start-up include cash provided by owners (stockholders) and cash provided by creditors (borrowings).

Supplies on hand at the beginning of the period equaled $500. During the period $1,200 of supplies were purchased. Since $1,000 of supplies were used during the period, the company would adjust the account balance by reducing the asset account, supplies, and increasing supplies expense for $700.

False, increase supplies expense for $1,000; and decrease supplies $1,000 because that is how much was used. The ending balance in the supplies account would be $700.

A transaction can only occur between the business and an outside individual or entity.

False, internal transactions are transactions to maintain the records of the company; they do not involve an outside entity.

A balance sheet is used to report the activities involving assets, liabilities, and stockholders' equity over a specific time period.

False, it is at a specific date

Liabilities are probable debts or obligations that result from current and future transactions that will be paid for with assets or services.

False, liabilities are based on PAST transactions" not current and future."

An asset with a market value of $21,000 that is purchased for cash of $19,000 should be listed on the balance sheet at $21,000.

False, listed as cash equivalent amount of $19,000

The report of management indicates that the auditor has the primary responsibility for providing the financial statement information.

False, management has responsability

Purchasing equipment using cash causes assets to increase.

False, no change

Rent expense and taxes payable are both elements of the income statement.

False, taxes payable are a liability found on the balance sheet.

The balance sheet is always prepared before the income statement.

False, the income statement is prepared first.

The sale of merchandise on credit and the collection from the customer ten days later constitutes one transaction for accounting purposes.

False, the sale on credit causes the creation of an A/R, collection on the account 10 days later causes the A/R to be satisfied. Two separate transactions have occurred.

The balance sheet is not affected by the sale of merchandise for cash.

False, when cash (an asset) is received it causes the balance sheet to be affected.

A company that ships product to its customers in January 20XB but records them as revenue in December 20XA has not violated the revenue principle because they were manufactured and ready for sale before the accounting year-end.

False, when revenue was recorded in December 20XA it had not been earned yet; this is in violation of the revenue recognition principle. Record revenue when it is earned...it will be earned when it is shipped to the customer.

We record insurance as an expense when we pay for a three-year policy.

False, when we pay for items in advance we have an asset. The asset will slowly become an expense as it is used up to earn revenue.

Trial Balance

Listing of all accounts (assets, liabilities, OE including dividends, revenues, expenses) All debits must equal credits

At the end of its accounting period, December 31, 20XD, Jay Corporation owed $1,000 for property taxes which had not been recorded or paid. Therefore, the 20XD, adjusting entry should be

$1,000 increase to a liability account and increase to an expense account.

On July 1, 20XD, Allen Company signed a $50,000, 18-month, 10 percent note payable. At due date, December 31, 20XE, the principal and interest will be paid. Interest expense should be reported on the income statement (for the year ended December 31, 20XD) as

(PxRxT) $50,000 x .1 x 6/12 = $2,500 (July 1 - December 31 is six months)

On January 1, 20XB, Grover Inc., started the year with a $50,000 credit balance in its retained earnings account. During 20XB, the company earned net income of $100,000 and declared and paid dividends of $30,000. Also, the company received cash of $15,000 as an additional investment by its owners. Therefore, the balance in retained earnings on December 31, 20XB, would be

120,000

Assets total $450,000, liabilities total $120,000, and common stock totals $200,000. What is the dollar amount of retained earnings?

130,000

On July 1, 20XD, Thomas Company paid $2,400 for a two-year insurance policy on the building. The accounting period ends December 31. At the end of 20XD, the financial statements should report

2400/24 months = 100 per month. Used 6 months or $600 expense; $1800 remains in prepaid insurance.

Prepaid or Deferred Expenses

Asset

Accounting Equation

Assets = Liabilities + Owner's Equity

Extended Accounting Equation

Assets = Liabilities + Owners Equity + Revenue - Expenses

Balance Sheet

Assets= Liabilities + Owners Equity

Stockholders Equity

Common Stock + Retained Earnings

Financing

Creditors: Borrowing money Investors: Common stock

Liabilities

Current: Accounts Payable, Salaries, Utilities, Salaries Payable Long Term: Notes Payable

Assets

Current: Cash, Accounts Receivable, Supplies, Prepaids Long Term: Equipment, Furniture, Buildings, Land

DEA-LOR

Debit: Dividends, Expenses, Assets (+-) Credit: Liabilities, Owners equity, Revenue (-+)

Which of the following accounts is closed at the end of the year but does not enter the calculation of net income?

Dividends declared are not on the income statement....but they are closed at the end of the accounting period.

Retained Earnings

Ending Retained Earnings= Beginning + Net Income - Dividends

Buying equipment for use in the business is an operating activity.

False, Its Investing

If at the end of the accounting period the total of all the asset accounts is $450,000 and the total of all stockholder equity accounts is $300,000, then the total of all the liability accounts must be $750,000

False, Liabilities would be $150,000

Net income measured under the accrual basis will equal the change in cash during the accounting period (as found on the statement of cash flows).

False, accrual accounting does not equal cash basis accounting. Net income will not likely equal the change in cash because of timing issues...if it does then there are no timing issues.

If the assets of a company are $4,000,000 and its total liabilities equal $1,500,000, then total common stock equals $2,500,000.

False, also need Retained earnings

Most companies list assets on the balance sheet in order of the size of the dollar amount of each asset.

False, assets are listed in order of liquidity (nearness to cash or being used up). Cash is always the first asset shown on a balance sheet (assuming the company has cash).

Receiving cash in advance from a customer for services to be provided in the future causes assets to increase and stockholders' equity to increase.

False, assets increase (CASH) and liabilities increase (UNEARNED REVENUE).

When to record revenue

In the period the good or service was provided or "earned"

Owners Equity

Investment: Common Stock Earnings: Retained Earnings, Dividends

Investing

LT Assets: Furniture, Equipment, Computers, Trucks, Buildings, Land

All amounts recorded in the journal entry are posted to the

Ledger account

Statement of Cash Flow

Operating Activities + Investing Activities + Financing Activities + Cash

Describe the relationships that exist between the four financial statements. (For example: What is the order the financial statements are prepared and why?)

Order (IS, SSE, BS, SCF); Income statement is first because we need net income to prepare the Statement of Stockholders' Equity (in retained earnings); the Statement of Stockholders' Equity is next because we need to determine ending retained earnings to prepare the Balance sheet. The Statement of cash flows is last; it shows how cash has changed over the accounting period...the ending cash balance should reconcile with cash on the balance sheet.

Revenue Recognition Principle

Recognition of revenue includes: 1: Providing a good or service 2: Collection is probable

The ending amount reported on the statement of cash flows is also reported on what other financial statement?

balance sheet

The term credit, as it applies to accounts in the accounting system, means to increase the balance of an account.

false, means right side of the table

What items on the balance sheet are considered to be sources for financing economic resources (assets).

liabilities and stockholder's equity

Deferred revenue is

liability, not a revenue

Accounting

measure the activities of a company and communicate it to others

Adjusting Entries

to record events that have occurred but that have not been recorded adjusts the balance sheet account, records income statement account Never affects cash

Failure to make an adjusting entry to recognize accrued income taxes payable would cause an

understatement of expenses and liabilities and an overstatement of stockholders' equity.