Accounting Test 1

Nelson Company experienced the following transactions during Year 1, its first year in operation. ● Issued $6,600 of common stock to stockholders ● Provided $2,900 of services on account ● Paid $1,750 cash for operating expenses ● Collected $2,200 of cash from accounts receivable ● Paid a $130 cash dividend to stockholders What is the net income that will be reported for Year 1?

$1,150

Sheldon Company began Year 1 with $1,200 in its supplies account. During the year, the company purchased $3,400 of supplies on account. The company paid $3,000 on accounts payable by year end. At the end of Year 1, Sheldon counted $1,400 of supplies on hand. Sheldon's financial statements for Year 1 would show:

$1,400 of supplies; $3,200 of supplies expense

Jason Company paid $7,200 for one year's rent in advance beginning on October 1, Year 1. Jason's Year 1 income statement would report rent expense, and its statement of cash flows would report cash outflow for rent, respectively, of

$1,800; $7,200

High Ridge Merchandising Company purchased inventory that had a list price of $10,000. The purchase was made under terms 2/10, net 30 FOB shipping point. Freight costs amounted to $300. Assuming High Ridge paid cash for the inventory after the discount period, the cost of the inventory was:

$10,300

Gomez Company had beginning inventory of $2,500 and ending inventory of $2,100. The cost of goods sold was $4,900. Based on this information, what is the amount of inventory that was purchased by Gomez Company?

$4,500

Darden Company has cash of $40,000, accounts receivable of $60,000, inventory of $32,000, and equipment of $100,000. Assuming current liabilities of $48,000, this company's working capital is:

$84,000.

At March 31, Cummins Company had a balance in its cash account of $9,700. At the end of March, the company determined that it had outstanding checks of $950, deposits in transit of $620, a bank service charge of $25, and an NSF check from a customer for $210. The true cash balance at March 31 is:

$9,465

Harding Corporation acquired real estate that contained land, building and equipment. The property cost Harding $1,900,000. Harding paid $350,000 and issued a note payable for the remainder of the cost. An appraisal of the property reported the following values: Land, $374,000; Building, $1,100,000 and Equipment, $726,000.

$950,000

The following are the income statements for Ace and Diamond Companies. Ace / Diamond Revenue $ 70,000 $ 76,000 COGS 49,000 49,000 Gross margin 21,000 30,400 OE: 9,500 12,500 NI: $ 11,500 17,900 What are the net income percentages for the above companies?

16.4%; 23.6%

Milton Company has total current assets of $46,000, including inventory of $10,000, and current liabilities of $20,000. The company's current ratio is:

2.3

Finn Company reported assets of $1,000 and stockholders' equity of $600. What amount will Finn report for liabilities?

400

The term "Retained Earnings" is best explained by which of the following statements?

A measure of capital generated through earnings.

Timely deposits of cash receipts into a checking account Separation of duties Reconciliation of the bank statementWhich of the following statements concerning internal controls is true? Question options: Strong internal controls cannot be circumvented. A system of internal controls is designed to prevent or detect errors and fraud. Internal controls are limited to the policies and procedures used to protect the company from fraud. The control procedure, separation of duties, prohibits the employment of a husband and wife or other closely related parties within the same company.

A system of internal controls is designed to prevent or detect errors and fraud.

Which ratio would you use to examine a company's ability to pay its debts in the short term?

Acid-test ratio

Which of the following is not a primary role of an independent auditor?

Advise client on tax strategies

Accrual accounting requires the use of many estimates, including: Question options: Uncollectible accounts expense. Warranty costs. Assets' useful lives. All of these answers are correct.

All of these answers are correct.

Financial ratios can be used to assess which of the following aspects of a firm's performance? Liquidity Solvency Profitability

All of these answers are correct.

Which of the following is an accurate depiction of the accounting equation?

Assets = Liabilities + Common Stock + Retained Earnings

You are considering an investment in Frontier Airlines stock and wish to assess the firm's earnings performance. All of the following ratios can be used to assess profitability except: Net margin. Asset turnover. Average days to collect receivables. Return on investment.

Average days to collect receivables.

Wing Company provided services for $30,000 cash. Which of the following shows the impact of this transaction on Wing's accounting equation?

B. Assets=Liabilities+Stockholders' Equity + n/a +

How would accountants estimate the amount of a company's uncollectible accounts expense?

Consider new circumstances that are anticipated to be experienced in the future. Compute as a percentage of credit sales. Consult with trade association and business associates.

Which form of business organization is established as a legal entity separate from its owners?

Corporation

The term "double taxation" refers to which of the following?

Corporations must pay income taxes on their net income, and their stockholders must pay income taxes on the dividends they receive from the corporation.

In Year 1, Dale Company incurred $4,000 of utility expense on account. Dale paid cash for these expenses in Year 2. Which of the following shows how paying cash for utility expense will affect Dale's accounting equation in Year 2?

Credit: Cash (4,000) Credit: Accounts Payable (4,000)

Which resource providers lend financial resources to a business with the expectation of repayment with interest?

Creditors

On a classified balance sheet, the financial statement user will be able to distinguish between:

Current and Non-Current Assets

Stanley Company earns $8,000 of revenue on account in Year 1. Cash collections of receivables amount to $4,500 in Year 1 with the remainder being collected in Year 2. Which of the following shows how the recognition of revenue in Year 1 will affect the company's accounting equation?

Debit: AR for $4,500 CR: RE for $8,000

The recognition of depreciation expense acts to:

Decrease assets and stockholders' equity, and does not affect cash flow.

Which of the following terms is used to identify the process of expense recognition for property, plant and equipment?

Depreciation

If retained earnings decreased for the year, and no dividends were paid, which of the following must be true?

Expenses for the year exceeded revenues.

Selling costs are recognized as expenses in the period when goods are sold.

False: Selling costs are recognized as expenses in the period in which they are incurred.

Which type of accounting information is intended to satisfy the needs of external users of accounting information?

Financial accounting

Financial accounting standards are known collectively as GAAP. What does that acronym stand for?

Generally Accepted Accounting Principles

Current financial reporting standards assume that users of accounting information:

Have a reasonably informed knowledge of business.

The accounting concept or principle that is perhaps the greatest single culprit in distorting the results of financial statement analysis is the:

Historic cost principle.

The study of an individual item or account over several periods in the same financial year or over many years is known as:

Horizontal analysis

Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's french fries. Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote. As a result of the lawsuit, Burger Barn should:

Ignore the lawsuit in its financial statements.

What term is used to describe the situation where there is a permanent decline in the value of an intangible asset? Amortization Impairment Depletion Depreciation

Impairment

Amber Company recognized accrued salary expense. Which of the following financial statements are affected by this accounting event?

Income statement and the balance sheet

Which of the following terms is applied to long-term assets that have no physical substance and provide rights, privileges and special opportunities to businesses?

Intangible assets

Which of the following is not subject to depreciation? Computers Buildings Land Office furniture

Land

Which of the following would be classified as a tangible asset? Land Goodwill Copyright Trademark

Land

Which of the following would be considered as primarily a merchandising business? KPM Accounting and Tax Service West Consulting Sandridge and Associates Law Offices Martin's Supermarket

Martin's Supermarket

What is the primary goal of the accrual basis of accounting?

Match revenues and expenses in the proper period.

Which of the following statements is true about period costs?

Most period costs are expensed in the period the costs are incurred.

The payment of a previously declared cash dividend will: Question options: decrease assets and equity. increase liabilities and decrease equity. decrease liabilities and increase equity. None of these answer choices are correct.

None of these answer choices are correct.

Which of following illustrates how selling land for cash affects the financial statements?

Option A: Balance SheetIncome StatementStatement of Cash FlowsAssets=Liabilities+Stockholders' EquityRevenue−Expense=Net Income n/a n/a n/a n/a n/a n/a + IA

The Dalen Company purchased office equipment that cost $3,000 cash on January 1. In addition, the Company paid $500 cash for installation fees to get the equipment ready for use. The equipment had an estimated five-year useful life and an estimated salvage value of $750. The company uses the straight-line method. The amount of accumulated depreciation shown on the balance sheet and the amount of cash flow from investing activities shown of the statement of cash flows at the end of the first year, respectively, would be: Balance Sheet Statement of Cash Flows A.$3,500 $(3,500) B.$ 550 $(3,500) C.$ 450 $(3,000) D.$ 0 $ (550)

Option B.

Monthly remittance of sales tax:

Reduces liabilities.

The return on investment measure is also referred to as:

Return on Assets

If a company's total assets increased while liabilities and common stock were unchanged, then which of the following statements is true?

Revenues were greater than expenses.

Which method of depreciation is used by most U.S. companies for financial reporting purposes?

Straight-line

Santa Fe Company was started on January 1, Year 1, when it acquired $8,400 cash by issuing common stock. During Year 1, the company earned cash revenues of $4,100, paid cash expenses of $2,950, and paid a cash dividend of $500. Based on this information, which of the following statements is true?

The Year 1 statement of cash flows would show a net cash flow from financing activities of $7,900.

The term "FOB Shipping Point" means:

The buyer pays the shipping cost.

What happens when a company collects cash from accounts receivable?

Total assets are not affected.

Even a good system of internal controls can be overridden by collusion among employees.

True

A company's amount of cost of goods sold reported on the income statement will be the same with a periodic inventory system as it would be with a perpetual system.

True: The choice of perpetual or periodic inventory method does not affect the amount of cost of goods sold. It only affects the way it is entered into the accounting system.

Which of the following is a disadvantage of a sole proprietorship? Question options: Entrenched management. Double taxation. Unlimited liability. Excessive regulation.

Unlimited Liability

Benitez Company had sales of $800,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. Based on this information:

Warranty expenses would decrease net earnings by $24,000 in Year 1.

A discount given to encourage prompt payment is called:

a cash discount. a sales discount by the seller. a purchase discount by the buyer.

The amount of retained earnings is shown on the

balance sheet and statement of changes in stockholders' equity.

The year-end adjusting entry to recognize uncollectible accounts expense will:

decrease assets and decrease stockholders' equity.

The recognition of depletion expense:

decreases assets and stockholders' equity, and does not affect cash flow.

The primary reason for a business to allow customers to purchase goods or services on account is to:

increase sales.

The amount of accounts receivable that is actually expected to be collected is known as the:

net realizable value.

A company that uses the allowance method to account for uncollectible accounts:

reports the net realizable value of its accounts receivable on the balance sheet.

The reason bonds are sometimes issued at a discount is:

the stated rate of interest is lower than the rate being paid on investments in the securities market with comparable risk.

What do the credit terms, 2/15, n/30, mean?

two percent discount can be deducted if the invoice is paid before the 15th day following the date of the sale.