QUIZ CH 2

During Year 2, Fancy Foods Incorporated earned $104,000 of revenue on account. The beginning balance in accounts receivable was $26,000, and the ending balance was $4,000. Based solely on this information, what was the amount of cash collected from accounts receivable? -$74,000 -$82,000 -$126,000 -$134,000

$126,000 Explanation Year 2 Changes in Accounts Receivable: Beginning accounts receivable balance + Increases due to sales on account - Decreases due to receivables collections = Ending accounts receivable balance. $26,000 + $104,000 - X = $4,000. X= $126,000.

Revenue on account amounted to $5,000. Cash collections of accounts receivable amounted to $2,300. Expenses for the period were $2,100. The company paid dividends of $450. What was net income for the period? -$1,200 -$2,900 -$2,850 -$2,450

$2,900 Explanation Net income = Revenue of $5,000 − Expenses of $2,100 = $2,900; dividends decrease retained earnings but do not affect net income.

Revenue on account amounted to $9,000. Cash collections of accounts receivable amounted to $8,100. Cash paid for operating expenses was $7,500. The amount of employee salaries accrued at the end of the year was $900. What was the net cash flow from operating activities? -$900 -$600 -$1,500 -$8,700

-$600 Explanation Cash collected on accounts receivable of $8,100 − Cash paid for operating expenses of $7,500 = $600. Revenue earned on account and accrued salaries are not cash flow activities.

Mize Company provided $45,500 of services on account, and collected $38,000 from customers during the year. The company also incurred $37,000 of expenses on account, and paid $32,400 against its payables. How do these events impact the elements of the horizontal financial statements model? -Total assets would increase. -Total liabilities would increase. -Total equity would increase. -All of these answer choices are correct.

All of these answer choices are correct. Explanation Change in total assets = Increase in accounts receivable because of services provided on account of $45,500 − Decrease in account receivable because of collections on account of $38,000 + Increase in Cash because of Collection on Account receivable of $38,000 − Decrease in Cash because of payments on account of $32,400 = $13,100 increaseChange in total liabilities = Increase in accounts payable because of expenses incurred on account $37,000 − Decrease in accounts payable because of payments on account of $32,400 = $4,600 increaseChange in stockholders' equity = Increase in retained earnings (revenue) of $45,500 − Decrease in retained earnings (expenses) of $37,000 = $8,500 increase

Recognizing an expense may be accompanied by which of the following? -An increase in liabilities -A decrease in liabilities -A decrease in revenue -An increase in assets

An increase in liabilities Explanation Recognizing an expense may be accompanied by an increase in liabilities (i.e. accounts payable, salaries payable).

On December 31, Year 1, Gaskins Co. owed $4,500 in salaries to employees who had worked during December but will not be paid until January, Year 2. If the year-end adjustment is properly recorded on December 31, Year 1, what will be the effect of this accrual on net income and cash flows from operating activities reported for Year 1? -No effect on net income; no effect on cash flow from operating activities -Decrease in net income; no effect on cash flow from operating activities -Increase in net income; decrease in cash flow from operating activities -No effect on net income; decrease in cash flow from operating activities

Decrease in net income; no effect on cash flow from operating activities Explanation Recording the adjustment will increase salaries expense, which will reduce net income and it will increase salaries payable, a liability. It will not affect cash flows.

Reynolds Company experienced an accounting event that affected its financial statements as indicated below: Assets=Liab.+Equity Rev.−Exp.=Net Inc. Stmt ofCash Flows + (=) NA (+) + + (−) NA (=) + +OA Which of the following accounting events could have caused these effects on the elements of Reynolds' statements? -Paid a cash dividend. -Earned cash revenue. -Borrowed money from a bank. -The information provided does not represent a completed event.

Earned cash revenue. Explanation Earning cash revenue is an event that affected the financial statements as indicated because it increased revenue and net income on the income statement and was reported as a cash inflow for operating activities on the statement of cash flows. Also, this event affected the Balance Sheet by increasing Assets (Cash) and Equity (Retained Earnings).

The Merry Maids provided cleaning services to Orange Company on account. Which of the following would describe the transaction's effect on the Merry Maids' financial statements? -Option A -Option B -Option C -Option D

Option B Explanation The Merry Maids provided services to Orange Company on account. From the perspective of the Merry Maids, it has earned revenue but not been paid for the services. The Merry Maids must record an asset to represent the amount of money it is waiting to receive from Orange Company. On the Merry Maids' balance sheet, the asset account, Accounts Receivable, will increase and the stockholders' equity account, Retained Earnings, will increase. On the Merry Maids' income statement, revenue will increase and net income will increase.

Which of the following choices accurately reflects how the recording of accrued salary expense affects the financial statements of a business? Assets=Liab.+EquityRev.−Exp.=Net Inc.Stmt ofCash Flows A.NA(=) + (+) − − (−) + (=) NA NA B.NA(=)NA (+) +/− NA (−) NA (=) NA NA C.NA(=) + + − NA − + = − NA D.+ (=) + + NA NA − + = − − OA Option A Option B Option C Option D

Option C 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.

Perez Company paid a $300 cash dividend. Which of the following accurately reflects how this event affects the company's horizontal financial statements model? Option A Option B Option C Option D Assets=Liab.+Equity Rev.−Exp.= Net Inc. Stmt ofCash Flows A.NA = 300 + (300)NA−300=(300) NA B.(300) = NA + (300)NA−300=(300) (300) FA C.(300) = NA + (300)NA−NA=NA (300) FA D.(300) = NA + (300)NA−NA=NA (300) OA

Option C Explanation Paying cash dividends decreases assets (cash) and decreases stockholders' equity (retained earnings) on the balance sheet. It does not affect the income statement, but is reported as a cash outflow for financing activities on the statement of cash flows.

Which of the following statements is true regarding accrual accounting? -Revenue is recorded only when cash is collected. -Expenses are recorded when they are incurred. -Revenue is recorded in the period when it is earned. -Revenue is recorded in the period when it is earned and expenses are recorded when they are incurred.

-Revenue is recorded in the period when it is earned and expenses are recorded when they are incurred. Explanation Revenue is recognized when earned and expenses are recognized when incurred, regardless of when cash is exchanged.

Which of the following are "matched" under the matching concept? -Expenses and revenues -Expenses and liabilities -Assets and equity -Assets and liabilities

-Expenses and revenues Explanation The matching concept refers to the matching of expenses to the revenues that those expenses produce.

If retained earnings decreased during the year, and no dividends were paid, which of the following statements must be true? -Expenses for the year exceeded revenues. -The company did not have enough cash to pay its expenses. -Total equity decreased. -Liabilities increased during the year.

-Expenses for the year exceeded revenues. Explanation If retained earnings decreased and no dividends were paid, the company must have reported a net loss. A net loss would have been the result if expenses for the year exceeded revenues.

What is the term used to describe the policies and procedures that are designed to reduce the opportunities for fraud? -Internal controls -Asset source transactions -Accounting standards -Financial systems

-Internal controls Explanation Internal controls are policies and procedures designed to reduce the opportunities for fraud.

Which of the following is an asset source transaction? -Issued common stock -Paid a cash dividend to stockholders -Collected cash from customers in settlement of accounts receivable -Accrued salary expense

-Issued common stock Explanation Issuing common stock is an asset source transaction that increases assets (cash) and increases stockholders' equity (common stock). Paying a cash dividend is an asset use transaction, receiving a payment on accounts receivable is an asset exchange transaction, and accruing salary expense is a claims exchange transaction.