ACC 210 FINAL EXAM STUDY GUIDE

Short-term creditors are usually interested in assessing:

Liquidity is cash flow. Short term creditors are concerned with whether the company has liquid assets they can reuse to repay borrowed funds owed to the creditors

Which of the following is not an internal control for cash disbursements?

Make employees who are responsible for making cash disbursements to also be in charge of cash receipts. Choice D is a bad internal control for cash disbursements because it would allow someone to steal the cash and not record the missing cash.

Which principle governs the necessity to estimate warranty expenses?

Matching principle

If ending inventory is understated, then:

Net income will be understated If ending inventory is understated, COGS is overstated. Too much expense means too little net income (understated).

Research and development costs should be capitalized when the:

None of the above are correct as research and development costs are not capitalized under U.S. accounting rules. Research and development costs are always expensed.

When preparing a bank reconciliation, interest paid by the bank on the checking account is:

. Added to the balance per the books. Becomes part of assets

The current ratio is a:

. liquidity ratio

The legal life of a patent is:

20 years

A special repair to a machine will extend the life of the machine an additional four years beyond the original estimated life of 6 years. The $50,000 cost of this repair is:

A capital expenditure. If a repair is expected to add substantial value to an asset, it should be considered a capital expenditure.

Which of the following is an example of an accrued expense?

A company records salary expense before the salaries are paid. The company recording the salary EXPENSE is an accrued expense since the actual payment will take place at a later date. Accruals are entries that precede the cash flow.

Which of the following best describes accounting?

A system for providing quantitative, financial information about entities for decision-making purposes.

Which of the following is an example of a real or permanent account?

Accounts Payable This is the only balance sheet account listed. Income statement accounts are temporary accounts as is the dividends account. Temporary accounts are closed to RE each year.

Under the indirect method of preparing the operating activities section of the Statement of Cash Flows, depreciation expense is

Added back to net income Depreciation expense is not actually a cash amount that is spent

Adjusting entries usually affect:

All adjusting entries involve both a balance sheet account and an income statement account (and never cash).

When comparing the LIFO and FIFO inventory methods, which of the following statements is true when prices are rising?

All else being equal, FIFO will yield higher income taxes than LIFO Because LIFO uses last in first out, If the price of goods has increased since the initial purchase, the cost of goods sold measure will be higher under LIFO and thereby reduce profits and tax burdens. FIFO will cause higher taxable income and higher tax payments

Cost allocation of an intangible asset is referred to as:

Amortization is required for intangible assets.

The essential difference between an unadjusted trial balance and an adjusted trial balance is that:

An unadjusted trial balance is prepared before the adjusting journal entries are made, while an adjusted trial balance is prepared after adjusting journal entries have been recorded Adjusting journal entries happen before the year-end closing of the books. Unadjusted trial balances do not include the adjusting entries

The usual sequence of steps in the transaction recording process is

Analyze, journalize, post to the ledger

Which of the following characteristics is not required for an ordinary annuity?

Annual compounding must occur with each payment. (False) Semi-annual, quarterly, etc. payments are allowed.

The following procedures are followed by a company cashier: count money in the cash drawer, compare the cash count with recorded daily sales, and make notations of any differences on a preprinted form that is forwarded, along with the cash, to the accounting department. These procedures:

Are unacceptable, since they do not follow good internal control practices The same person should not be able to count the money and compare It to the cash count of daily sales. They could easily be taking money

The Balance Sheet includes which three parts?

Assets, Liabilities and Owner's Equity

If the market rate of interest is greater than the stated rate of interest, bonds will sell:

At a discount If the market rate is higher than the original rate/purchase rate, the bonds are being sold at a discount because they are not attractive at face value (@ face value they will only yield the coupon/stated rate—which is too low).

When are adjusting journal entries generally made?

At year-end before the financial statements are prepared. Adjusting entries are made to adjust for whatever economic events happened during the year in order to have the best representation at year end.

Retained earnings at the end of the period is equal to:

Beginning retained earnings plus net income minus dividends

Which of the following accounts would not likely need to be adjusted at year end?

Cash never needs adjustment since any transaction involving cash would be recorded when it occurs

Which of the following transactions is describing a "cash inflow from an investing activity"?

Cash received from the sale of land for a loss.

On the statement of cash flows, which of the following would be an example of a cash inflow from an investing activity?

Cash received from the sale of land.

Treasury stock is a(n)

Contra stockholders' equity account. Treasury stock reduces the total stockholders equity, therefore it is a contra account to the stockholders equity account

Treasury stock is a(an):

Contra-equity account Treasury stock decreases the amount of shares outstanding, thus decreasing equity

Which of the following statements is true regarding the periodic inventory system?

Cost of goods sold will not be recorded at the time of the inventory's sale The calculation of the cost of goods sold under the periodic inventory system is: Beginning inventory + Purchases (net) = Cost of goods available for sale Cost of goods available for sale - Ending inventory = Cost of goods sold We do not keep a running total for inventory sold (like we do for perpetual inventory)

Which of the following ratios usually is not considered to be a test of profitability?

Current ratio The current ratio is used to determine liquidity, not profitability

All of the following are examples of internal control procedures except:

Customer satisfaction surveys are for management, and are not considered internal controls.

In the case of a cash dividend, a liability comes into existence on the:

Date of declaration Once dividends are declared, the company must record a liability to pay them out to shareholders.

. The adjusting journal entry to record the depreciation expense on equipment includes a:

Debit to Depreciation Expense. JE: Depreciation Expense XX Accumulated Depreciation XX

Which of the following ratios is considered to be a measurement of a company's risk?

Debt to Equity Debt to equity ratio shows the total debt owed by the company as a percent of their total equity. If this is a high number, it is risky because they owe a large amount of debt relative to their worth

The acquisition of treasury stock by a corporation:

Decreases its total assets and total stockholders' equity The acquisition of Treasury stock would result in a decrease in cash as well as a decrease in stockholders equity since the Treasury Stock account is a contra-equity account.

Users of financial statements might analyze a company's return on equity in order to:

Determine how well the company has done in producing income, given the amount of investment the common shareholders have made in the company. The return on equity shows how much profit each dollar of common stockholders' equity generates

Distributions of assets (for example, cash) to owners' would be classified as a(an):

Dividend

Which of the following accounts will not appear on a post-closing trial balance?

Dividends Dividends is a temporary account that is closed to RE (reset to zero) at the end of each year

The accounting assumption that requires a company to keep its accounting records separate from the records of its owners is called the:

Economic entity assumption. The idea that a company is an entity, rather than a part of an individual owner or owners, is the economic entity assumption.

When a company uses the allowance method, the write-off of a specific customer's receivable balance would:

Not change the bad debt expense account balance. The write-off reduces both AFDA and A/R. Bad debt expense is not affected.

. If accounts payable have increased during a period

Expenses on an accrual basis are greater than expenses on a cash basis. Accounts payable are deferred expense amounts. On an accrual basis, expenses will be higher because they do not need to be paid to be recognized as expenses.

Scott, Inc. borrows money in May of the current year from a bank and agrees to pay interest of 8% on the maturity date of the loan, which is two years after the money is borrowed. If the proper adjustment is not made this year what would be the effect on the financial statements?

Expenses will be understated. He would have not recorded the interest expense owed at year end, so his expenses would be UNDERstated.

The private-sector, independent body in the U.S. that establishes the standards of financial accounting for nongovernmental entities is the:

Financial Accounting Standards Board

Payments of cash dividends would appear in which section of the Statement of Cash Flows?

Financing Activities. Dividends paid are a stockholders' equity transaction and are classified as financing activities.

An impairment of a long-term asset (e.g., equipment) is indicated if book value exceeds:

Future cash flows

Which of the following is an example of a nominal or temporary account?

Gain on Sale of Machinery This is the only income statement account. Income statement accounts are always temporary

The double-entry system requires that each transaction must be recorded:

In at least two different accounts.

The main difference between the indirect and direct methods of preparing a statement of cash flows is:

In the presentation of only the operating activity section The Indirect method calculates cash flow from operating activities indirectly by adjusting net income for a variety of things. The direct method calculates cash flows from operating activities by simply listing the inflows and outflows of cash that resulted from operating activities

The sale of stock to investors for $50,000 cash would:

Increase cash by a debit.

If a bond is sold at a discount, the carrying value of the bond:

Increases with every interest payment. The CV of the bond will increase to face value over its life as we amortize away the discount

As a company compares and contrasts its' financing alternatives, which of the following statements is true?

Interest costs incurred are tax deductible whereas dividends paid are not A company cannot deduct dividends paid. Interest payments are always tax deductible

Which of the following statements is true regarding a bond issued at a premium with semiannual interest payments and assuming the effective interest method is used?

Interest expense will decrease every six months. When a bond is issued at a premium, the interest expense will decrease after each payment because the CV of the bond is decreasing towards face value as we amortize away the premium.

When bonds are issued at a discount, the total interest expense related to the bonds over the life of the bonds is equal to the amount of the:

Interest payments made over the life of the bonds plus the amount of the discount at issuance. Assume we sell a bond for $900 with a face value of $1,000 (a $100 discount). At maturity we pay back $1,000 (the $100 is additional interest expense on top of the actual interest we paid over the life of the bond)

An advantage of the corporate form of business is that

Its ownership is easily transferable via the sale of shares of stock

Red Company has an inventory turnover of 8.0 and Blue Company has an inventory turnover of 12.0. Which of the following statements would be the best interpretation of these results?

On average, it takes Red Company longer to sell its inventory than Blue Company.

The indirect and direct methods of preparing the statement of cash flows affect the visual presentation for the:

Operating activities section. The Indirect method calculates cash from operating activities by adjusting net income. The direct method instead simply lists the sources and uses of cash related to operations.

Which of the following statements is not correct?

Owners' equity equals assets plus liabilities A= L + SE so...A - L = SE

8. The purchase of two years worth of fire insurance on a factory building in exchange for cash would initially be reflected on the financial statements as a(an):

Prepaid expense. Since the insurance was paid for in cash, it would become a prepaid expense since the actual monthly insurance is not actually used until the month passes by.

Which ratio best measures the extent by which selling prices cover all of a company's expenses?

Profit margin ratio = net income/sales This ratio shows how much of each dollar of sales we ultimately keep after covering all costs.

An employee authorized to sign checks should not:

Record cash disbursement transactions If the same person were able to sign a check and then record the cash disbursement, they

assets

Resources belonging to a company that have future benefit to the company.

A stock dividend would:

Result in a transfer of retained earnings to contributed capital Retained earnings is what dividend payments come out of. If a company were to give stock dividends, they would take the amount out of retained earnings and put it in contributed capital since it would no longer be in their hands.

Swiss Company is a retailer and uses a perpetual inventory system. Which of the following statements is correct?

Returns of merchandise inventory by Swiss Company to a manufacturer are credited to merchandise inventory.

Which of the following types of accounts are closed to Retained Earnings at the end of an accounting period?

Revenue and expense accounts Revenue and expense accounts are what make up net income, and net income is what is closed to Retained Earnings

Which of the following is a contra-revenue account?

Sales Discounts Sales discounts is a revenue account with a normal debit balance.

Which of the following is a contra-revenue account?

Sales Returns & Allowances Sales returns and allowances would end up decreasing the already "made" sale.

Which of the following is not a step in the accounting cycle?

Selling goods or providing services. Choices A,B, and C are all steps in the accounting cycle. Selling goods or services is part of the business operations.

Which account will have a zero balance after closing entries have been journalized and posted?

Service Revenue

Which of the following costs should not be included in the inventory account when inventory is acquired?

Shipping costs paid by the seller. Shipping costs paid by the seller is not included in the price of inventory since it is paid by the seller (not the buyer)

A balance sheet

Shows the relationships among assets, liabilities, and owner's equity. A=L+E

Simple interest differs from compound interest in that

Simple interest is computed on the principal balance only

Simple interest differs from compound interest in that:

Simple interest is computed on the principal balance only Compounded interest is based on the carrying value amount which will include accrued, but unpaid, interest that has been earned (or owed).

Which of the following is not a financial statement?

Statement of Operating Revenues

Which of the following describes the classification and normal balance of the retained earnings account?

Stockholders' equity, credit

The primary organization that establishes financial accounting reporting standards for U.S. based companies is the

The FASB is responsible for the accounting standards used by both PUBLIC and PRIVATE entities.

All else being equal, when inventory costs are rising over time, which of the following statements is true when comparing the FIFO and LIFO methods?

The LIFO method will yield a lower cost of ending inventory. If cost of inventory is increasing, the earliest inventory prices (cheaper) will be left in ending inventory if you are using LIFO (FISH IN EI).

The Securities and Exchange Commission (SEC) has been granted the authority to require audited annual financial reports for

The SEC is only responsible for public corporations.

What should be the source used to prepare the annual financial statements?

The adjusted trial balance These balances are correct and can be used to prepare the financials

When a bond sells above the face value:

The coupon rate is greater than the market rate These would be an attractive buy at face value because they would yield the coupon rate. They will sell at a premium because there will be demand for these bonds.

When using the perpetual inventory method

The current inventory balance is always known.

Which of the following would not be a factor that affects a company's gross profit ratio?

The gross profit ratio deals with net revenues and COGS. Interest expense would not affect either net sales revenue or COGS.

When a company has a stock split, which of the following statements is true?

The number of shares outstanding will increase With a stock split, the company multiplies the shares outstanding and thus decreases the share price.

The objective of financial reporting is

To provide useful information for decision-making.

The purpose of the Statement of Cash Flows is:

To show all sources and uses of cash for the year and to explain the change in the cash balance The statement of cash flows shows the use of cash in investing, operating, and financing activities during the year.

Failure to make an adjusting entry to recognize accrued wages payable would cause an

Understatement of expenses, liabilities, and overstatement of equity

Which of the following companies, in the same industry, would most likely experience a short-term cash flow problem?

Which of the following companies, in the same industry, would most likely experience a short-term cash flow problem?

External users want answers to all of the following questions except

Will the company be able to afford employee pay raises this year?

Woods Company made an ordinary repair to a delivery truck at a cost of $500. Woods' accountant debited the asset account, Equipment. Was this treatment an error, and if so, what will be the effect on Woods' financial statements?

Yes, the error overstated assets and net income Ordinary repairs and maintenance are required to be expensed. This lack of expense recorded would result in a higher net income than it should have and a higher valued asset balance for the truck that what should be.

re the economic resources of a company, resulting from past transactions or events

assets

Accumulated depreciation:

is a contra asset account. Accumulated depreciation reduces the value of the assets on a company's books.

Which of the following amount descriptions would not be found on the multi-step income statement?

total contributed capital Contributed capital is not a part of the income statement, as it is a part of the balance sheet in the stockholders equity section

If the market rate of interest exceeds the stated rate of interest at the time of issuance, bonds:

will be issued at a discount. If the market rate is higher than the stated rate, the bonds sell at a discount since they are not an attractive investment at face value (they will only yield the coupon/stated rate).