Chapter 2

Accrual accounting results in:

recognition of revenues when they are earned (at the point of sale) and recognition of expenses when they are incurred

In the horizontal model, a minus sign next to an expense amount means that net income is ___ because of expenses being ___

reduced, higher

net sales

represents the amount of sales of merchandise to customers, less any sales returns

cost of goods sold

represents the total cost of merchandise sold to customers

Transactions

-are the starting point in the accounting process that ends with the preparation of financial statements -are economic interchanges between entities

An expanded version of the accounting equation could be:

Assets = Liabilities + Paid-in Capital + Beginning Retained Earnings + Revenues - Expenses - Dividends

cumulative

Retained earnings represents the blank net income of the entity that has been retained for use in the business.

-50 Cash in the Assets column and -50 Accounts Payable in the Liabilities column.

Assume that in the current year a company paid $50 in cash for advertising services that were availed in a prior period. This amount was recorded as an expense at the time of availing the services. This transaction would be recorded in the horizontal model with:

comparative

Financial statements that show a column for the current year and the prior year are known as blank financial statements

A minus sign for expenses indicates that net income is reduced because expenses are higher.

Identify a correct statement regarding the usage of plus or minus signs along with the dollar amounts in the horizontal model of financial statements.

matching

The ____ concept does not mean that revenue and expense for a reporting period are equal.

net income affects retained earnings, which is a component of stockholders' equity.

When using the horizontal model, the arrow from net income to stockholders' equity indicates that:

Accounting Equation

A = L + SE is called the ____ ____

accrual

A(n) ____ (accrual/reclassification) period-end adjustment is required when a revenue has been earned but not yet received in cash

Credit entries

decrease expense and loss accounts and increase revenue and gain accounts

Which of the following statements are true regarding the closing process?

-All expense and loss accounts, as well as dividends, are credited for amounts equal to their year-end debit balances. -All revenue and gain accounts are debited for amounts equal to their year-end credit balances.

Which of the following accounts would be closed during the year-end closing process?

-Dividends -Rent Expense -Loss on Sale of Buildings -Sales -Wages Expense

current liability

Davy Ltd. borrows money that has to be repaid within 3 months from a bank. For this transaction, Davy Ltd. debited Cash account and credited Short-term Debt account in its book of accounts. Therefore, Short-term Debt account is an example of

1. Corporation 2. Partnership 3. Proprietorship

Identify the three principal forms of business organization

the company's balance sheet equation will be in balance.

If debits equal credits, then:

left, right

In bookkeeping and accounting, debit means ____, and credit means ____

Consistency

Limiting a firm's ability to switch back and forth between alternative generally accepted accounting methods is driven by which of the following concepts/principles?

cost

Most assets are not recorded at their current market values because of the limitations imposed by the ____ principle.

C. is sometimes referred to as net assets D. is sometimes referred to as net worth E. is equal to assets minus liabilities

Stockholders' equity: A. is equal to net assets plus liabilities B. is generally reported at the current market value of the entity's net assets C. is sometimes referred to as net assets D. is sometimes referred to as net worth E. is equal to assets minus liabilities

cost

The _____ principle refers to the fact that transactions are recorded at their _____ cost of the entity as measured in dollars

assets, liabilities, and stockholder's equity

The balance sheet is a listing of the organization's:

paid-in capital and retained earnings

The two main components reported on the statement of changes in stockholders' equity are:

Objectivity

Which concept/principle suggests that a given transaction should be recorded in the same way in all situations?

-Assets = Liabilities + Stockholders' equity -Assets - Liabilities = Stockholders' equity -Assets = Liabilities + Paid-in capital + Retained earnings (beginning of period) + Revenues (during the period) - Expenses (during the period) -Assets = Liabilities + Paid-in capital + Retained earnings

Which of the following are acceptable/correct expressions of the balance sheet equation?

Conservatism Full disclosure Consistency Materiality

Which of the following concepts/principles relate to financial statements?

Dr. Supplies 300 Cr. Supplies Expense 300

Which of the following entries can be recorded as a reclassification adjusting entry?

Dr. Interest Receivable 200 Cr. Interest Income 200

Which of the following entries can be recorded as an accrual adjusting entry?

Interest Income, Cost of Goods Sold, Dividends, and Gain on Sale of Land

Which of the following groups of accounts would all be closed in the year-end closing process?

A. Cash

Which of the following is a current asset? A. Cash B. Land C. Accounts payable D. Equipment

Gross profit, income from operations, and income before taxes are all subtotals on the income statement

Which of the following is true regarding the income statement?

-A five-year (or longer) summary of key financial data -The notes to the financial statements -The report of the external auditor's examination of the financial statements

Which of the following items are normally included as key components of a corporation's annual report?

C. Retained earnings is increased each year by the entity's net income and dividends.

Which of the following statements is incorrect regarding retained earnings? A. Retained earnings is the second principal category of stockholders' equity. B. Retained earnings represent the cumulative net income of the entity that has been retained for use in the business. C. Retained earnings is increased each year by the entity's net income and dividends. E. If retained earnings has a negative balance, it is usually referred to as an accumulated deficit.

When a bank ____ (debits/credits) your account for the interest earned during the month, what it is really communicating is that it is ____ (increasing/decreasing) the ____ (asset/liability) recorded in its accounting records to represent your account from its perspective.

credits, increasing, liability

Normal account balances for:

expense and loss accounts are on the debit side, and the balances for revenue and gain accounts are on the credit side.

balance sheet

generally prepared as of the end of a fiscal reporting period

When using the horizontal model for a transaction that affects both the balance sheet and the income statement, the balance sheet will balance when the:

income statement effect on stockholders' equity is considered.

Debit entries

increase asset accounts and decrease liability and stockholders' equity accounts.

Merchandise inventory

is a current asset account

Balance sheet

is like a snapshot of the organization's financial position, frozen at a specific point in time

Assume that in the current year a company collected $70 in cash from a customer for services that were performed in a prior period. This transaction would be recorded in the horizontal model with:

+70 Cash and -70 Accounts Receivable in the Assets column.

ledger

After transactions have been recorded in a journal, they are posted to a

impact stockholders' equity on the balance sheet.

Although revenues and expenses are reported on the income statement, they also:

debited your account to increase your account balance, which is shown as an asset (accounts receivable) in their accounting records.

Merchants who send you a notice that they have "charged" your account are really communicating that they have:

C. statement of stockholder's equity

The investments by and distributions to owner during a reporting period are reported on the: A. statement of cash flows B. income statement C. statement of stockholder's equity D. balance sheet

presents assets above liabilities and stockholders' equity items.

The report format of the balance sheet:

income

The statement of operations, statement of earnings, and the profit and loss statement are alternative names for the blank statement.

common stock and additional

The two main components of paid-in capital are blank and blank paid-in capital

If debits equal credits, then:

assets will equal the sum of liabilities and stockholders' equity.

Which of the following groups of accounts would be closed in the year-end closing process?

Insurance Expense, Service Revenue, Loss on Sale of Equipment, and Sales

the reporting firm's operating budget for the next fiscal year

A corporation's annual report contains the reporting firm's financial statements and each of the following key components, except:

income statement

It is a link between the balance sheets at the beginning and end of the year

A. Net sales is the difference between gross profit and cost of goods sold. D. Net sales includes only credit sales, not cash sales

Which of the following statements are not true about net sales? A. Net sales is the difference between gross profit and cost of goods sold. B. Net sales results from selling a product or providing a service to a customer C. Net sales represents the amount of sales of merchandise to customers, less any sales returns D. Net sales includes only credit sales, not cash sales

A. is sometimes referred to as owners' equity B. is the equity in the assets that remain after subtracting the liabilities. D. is sometimes referred to as net assets. F. is sometimes referred to as net worth.

Stockholders' equity: A. is sometimes referred to as owners' equity B. is the equity in the assets that remain after subtracting the liabilities. C. is measured as the fair value of the shareholders' equity interests in the corporation's assets. D. is sometimes referred to as net assets. E. is sometimes referred to as net sales. F. is sometimes referred to as net worth. G. is sometimes referred to as net income.

-The reporting firm's financial statements for the year -Management's discussion and analysis of the financial statements -Highlights for the year, including net revenues, diluted earnings per share, and return of stockholders' equity

Which of the following items are normally included as key components of a corporation's annual report?

Net worth

is a misleading term because assets and liabilities are not generally "worth" the amounts reported on the balance sheet

Transactions

-are summarized in accounts, and accounts are further summarized in financial statements -can be seen as the bricks that build financial statements

Which of the following statements regarding the closing process are true?

-All revenue accounts are closed by debiting each account for an amount equal to the adjusted year-end credit balance. -Losses and dividends are closed in the same way that expenses are closed. -All expense accounts are closed by crediting each account for an amount equal to the adjusted year-end debit balance.

Which of the following transactions would require a reclassification adjusting entry?

-Prepaid insurance -Rent received in advance

Which of the following accounts would be closed during the year-end closing process?

-Rent Expense -Gain on Sale of Land -Cost of Goods Sold -Service Revenue

Expense and loss accounts:

-increase with debit entries -decrease with credit entries -normally have a debit balance

cost of goods sold

-represents the total cost of merchandise sold to customers -is frequently called cost of sales or cost of products sold -is normally shown as a separate expense because of its significance

chart of accounts

-serves as an index to a company's ledger. -will differ for each company, depending on the nature of their transactions and the kinds of accounts used in their bookkeeping system. -is usually sequenced with assets listed first, followed by liabilities, stockholders' equity, revenues, and expenses.

income statement is sometimes called the:

-statement of earnings -profit and loss statement -statement of operations

Under accrual accounting, year-end adjustments are made: (Select all that apply).

-to ensure that expenses are recognized in the year in which they are incurred. -because revenue receipts may occur before or after the event that causes revenue recognition.

the users of the data can easily spot changes in the firm's financial position and in its results of operations

A firm prepares comparative financial statement so that _____.

reclassification

A(n) ____ (accrual/reclassification) period-end adjustment is required when the cash related to a revenue has been received but the revenue has not yet been recognized.

balance sheet

An entity's financial position at the end of a reporting period is reported on the:

Which of the following entries can be recorded as an accrual adjusting entry?

Dr. Wages Expense 100 Cr. Wages Payable 100

-An expense is accrued when the expense has been incurred but not yet paid for in cash. -A revenue is accrued when the revenue has been earned but not yet received in cash.

Identify the statements that are correct about accrual year-end adjustments.

the arrow pointing from net income to stockholders' equity indicates that net income affects retained earnings

In the horizontal model representation of the financial statements, _____.

B. is a subtotal on the income statement that is not affected by the firm's tax rate or by the amount of interest expense incurred D. is frequently called earnings from operations E. is frequently called operating income

Income from operations: A. appears on the income statement after income before taxes B. is a subtotal on the income statement that is not affected by the firm's tax rate or by the amount of interest expense incurred C. is frequently referred to as net margin D. is frequently called earnings from operations E. is frequently called operating income

original (historical) cost

Most assets are reported on the balance sheet based on their:

retained earnings in the statement of changes in retained earnings

Net income from the income statement is added to the beginning balance of:

expenses incurred to generate revenues must be matched to revenues earned for any given period

The matching concept means that:

common stock issued during the year dividends for the year net income for the year total stockholders' equity at the end of the year the year-end balance of retained earnings

The statement of changes in stockholders' equity reports:

Conservatism

Understating assets and/or overstating liabilities when making judgments and estimates is driven by which of the following concepts/principles?

increasing your account balance, which is shown as a liability from its perspective.

When a bank credits your account for the interest earned during the month, what it is really communicating is that it is:

A. Accounts payable is an example of liabilities B. Liabilities are probable future sacrifices of economic benefits

Which of the following statements are true about liabilities of a firm? A. Accounts payable is an example of liabilities B. Liabilities are probable future sacrifices of economic benefits C. Liabilities are probable future economic benefits D. Liabilities represent the amount of resources controlled by the firm E. Liabilities are sometimes referred to as owners' equity

B. Liabilities are present obligations to transfer assets or provide services to other organizations. D. Liabilities are amounts owed to other entities. E. Liabilities are claims against the firm by its creditors.

Which of the following statements are true about liabilities of a firm? A. Liabilities are reported in the income statement. B. Liabilities are present obligations to transfer assets or provide services to other organizations. C. Liabilities include accounts receivable, merchandise inventory, and accounts payable. D. Liabilities are amounts owed to other entities. E. Liabilities are claims against the firm by its creditors.

A. the economic benefits associated with assets must be obtained or controlled by the firm B. Assets represent the amount of resources controlled by the firm C. Assets result from past transactions or events of the firm D. Assets are probable future economic benefits to the firm

Which of the following statements are true about the assets of a firm? A. the economic benefits associated with assets must be obtained or controlled by the firm B. Assets represent the amount of resources controlled by the firm C. Assets result from past transactions or events of the firm D. Assets are probable future economic benefits to the firm E. Assets must be tangible to be recorded on the balance sheet of a firm F. Accounts receivable are not assets because the cash has not yet been received by a firm

-Expenses are recorded in the period in which they are incurred. -Revenues are recorded in the period in which they are earned.

Which of the following statements are true regarding the matching concept?

-Cash paid for the purchase of buildings or equipment is an investing activity, and the activity is a use of cash. -Net income from the income statement is the starting point for determining cash provided or used by operating activities. -Cash received from the sale of common stock is a financing activity, and the activity is a source of cash.

Which of the following statements are true regarding the statement of cash flows? (Check all that apply).

-Depreciation expense is added back to net income in the operating activities section. -Cash received from the sale of long-term debt is a financing activity, and the activity is a source of cash. -The increase in accounts payable for the year is a source of cash and is shown as an operating activity. -Cash received from the sale of buildings or equipment is an investing activity, and the activity is a source of cash.

Which of the following statements are true regarding the statement of cash flows? (Check all that apply).

-The net increase in cash for the year is equal to the sum of the net cash provided or used by operating, investing, and financing activities. -If a current liability account increases for the year, this will show up as a source of cash in the operating activities section.

Which of the following statements are true regarding the statement of cash flows? (Check all that apply).

-Cash paid for the purchase of buildings or equipment is an investing activity, and the activity is a use of cash. -Net income from the income statement is the starting point for determining cash provided or used by operating activities. -Cash received from the sale of common stock is a financing activity, and the activity is a source of cash.

Which of the following statements are true regarding the statement of cash flows? (Check all that apply). -Cash paid for the purchase of buildings or equipment is an investing activity, and the activity is a use of cash. -Payment of cash dividends on common stock is an investing activity, and the activity is a use of cash. -The increase in accounts receivable for the year is a source of cash and is shown as a financing activity. -Net income from the income statement is the starting point for determining cash provided or used by operating activities. -Cash received from the sale of common stock is a financing activity, and the activity is a source of cash.

A. The net increase in cash for the year is equal to the sum of the net cash provided or used by operating, investing, and financing activities. C. If a current liability account increases for the year, this will show up as a source of cash in the operating activities section. D. Payment of cash dividends on common stock is a financing activity, and the activity is a use of cash.

Which of the following statements are true regarding the statement of cash flows? (Check all that apply). A. The net increase in cash for the year is equal to the sum of the net cash provided or used by operating, investing, and financing activities. B. The decrease in accounts payable for the year is a source of cash and is shown as an operating activity. C. If a current liability account increases for the year, this will show up as a source of cash in the operating activities section. D. Payment of cash dividends on common stock is a financing activity, and the activity is a use of cash. E. If a current asset account increases for the year, this will show up as a source of cash in the operating activities section.

A. Accounts receivable is recorded for the company's gross profit on credit sales.

Which of the following statements is not true regarding accounts receivable? A. Accounts receivable is recorded for the company's gross profit on credit sales. B. Accounts receivable is normally due within a specified period of time. C. Accounts receivable is reported as current asset on the balance sheet. D. Accounts receivable represents amount due from a customer who has purchased merchandise on credit.

balance sheet

as of the end of one period is the balance sheet at the beginning of the next period

A. Cash received from the sale of long-term debt is a financing activity, and the activity is a source of cash. B. The increase in accounts payable for the year is a source of cash and is shown as an operating activity. D. Cash received from the sale of buildings or equipment is an investing activity, and the activity is a source of cash. E. Depreciation expense is added back to net income in the operating activities section.

Which of the following statements is true regarding the statement of cash flows? (Check all that apply). A. Cash received from the sale of long-term debt is a financing activity, and the activity is a source of cash. B. The increase in accounts payable for the year is a source of cash and is shown as an operating activity. C. The increase in accounts payable for the year is a source of cash and is shown as an operating activity. D. Cash received from the sale of buildings or equipment is an investing activity, and the activity is a source of cash. E. Depreciation expense is added back to net income in the operating activities section.

B. Revenues D. Gains G. Losses H. Expenses

Which of the following types of accounts are reported on the income statement? A. Assets B. Revenues C. Liabilities D. Gains E. Cash flows from operations F. Stockholders' equity G. Losses H. Expenses

Accounting entity

_____ _____ refers to the entity for which the financial statements are being prepared.

Normal account balances

are on the debit side for assets and on the credit side for liability and stockholders' equity accounts.

Merchants who send you a notice that they have "charged" your account are really communicating that they have ____ (debited/credited) your account in their accounting records to ____ (increase/decrease) your account balance, which is shown as a(n) ____ (asset/liability) from their perspective, since you owe them money

debited, increase, asset

When a bank ____ (debits/credits) your account for the service charges incurred during the month, what it is really communicating is that it is ____ (increasing/decreasing) the ____ (asset/liability) recorded in its accounting records to represent your account from its perspective.

debits, decreasing, liability

Income from operations

is a subtotal on the income statement that is not affected by the firm's tax rate or by amount of interest expense incurred

The account format of the balance sheet:

presents assets on the left and liabilities and stockholders' equity items on the right.

Current assets include cash and other assets:

that are likely to be converted into cash or used to benefit the entity within one year