Financial Transactions

Julia runs a printing company and has an antique printing press that she uses in her business. She purchased the press from a friend for $5,000. Similar presses are selling on the market today for about $8,000. Julia has a colleague who recently paid $9,000 for an antique printing press. According to the historical cost basis of asset measurement, how much should Julia initially record the printing press for on her books?

$5,000

Cash flows is broken down into three sections:

1. Cash flows from operating activities, 2. cash flows from investing activities, 3. and cash flows from financing activities.

Which of the following appears on the balance sheet? A. Current assets B. Revenues C. Expenses D. Cost of goods sold

A. Current assets

Accounting Equation (double-entry accounting)

Assets = Liabilities + Owners' Equity

Which of the following statements is TRUE regarding the balance sheet? A. The balance sheet shows the financial performance of a company over a certain period of time, such as a quarter or a year. B. Assets are generally presented on the balance sheet in order of liquidity. C. The accounts that appear on the balance sheet include revenues and expenses. D. Balance sheets are usually manipulated by understating assets or overstating liabilities.

B. Assets are generally presented on the balance sheet in order of liquidity.

Which of the following statements is TRUE with regard to gross profit? A. Gross profit is equal to revenues less operating expenses. B. Gross profit is equal to net sales less cost of goods sold. C. Gross profit is another term for net income. D. Gross profit is the top line of the income statement.

B. Gross profit is equal to net sales less cost of goods sold.

When looking at a set of financial statements, on which statement would you find notes payable, current assets, retained earnings, and accumulated depreciation?

Balance sheet

David runs a local catering company. He keeps his books on a calendar year and uses the accrual basis of accounting. In December of Year 1, a customer placed an order with him to cater the food for a party that would take place in February of Year 2. The contract was signed and the balance was paid in full when the order was placed in December. When should David report the revenue from this party and the associated expenses of catering it?

Both the revenue and expenses should be recorded in February.

Which of the following is FALSE regarding cash-basis accounting? A. Expenses are recorded in the accounting system as soon as they are paid. B. Cash-basis accounting is simpler to use than accrual-basis accounting. C. Cash-basis accounting focuses on tracking a company's future cash flow. D. Revenues are recorded in the accounting system when a company receives cash.

C. Cash-basis accounting focuses on tracking a company's future cash flow.

Which of the following is an acceptable justification for a departure from generally accepted accounting principles (GAAP)? A. Departing from GAAP would make the company appear more profitable B. Adhering to GAAP is significantly more expensive than using an alternative method C. The literal application of GAAP would render the financial statements misleading D. None of the above

C. The literal application of GAAP would render the financial statements misleading

Which of the following statements is TRUE with regard to the statement of cash flows? A. The statement of cash flows shows a company's financial position at a specific point in time. B. There are four types of cash flows: cash flows from operating activities, from investing activities, from financing activities, and from revenue activities. C. The statement of cash flows is often used in tandem with the income statement to determine a company's true financial performance. D. The statement of cash flows is not always necessary because most companies operate under cash-basis accounting rather than accrual-basis accounting.

C. The statement of cash flows is often used in tandem with the income statement to determine a company's true financial performance.

Chapman Inc. has always used the first-in, first-out (FIFO) inventory valuation method when calculating its cost of goods sold. This is also the standard inventory valuation method for other comparable entities in Chapman's industry. Chapman's controller wants to change to the weighted-average cost method because it will make Chapman's net income appear much larger than the FIFO valuation will. After several years of poor performance, management wants to boost the company's appearance to potential investors. However, Chapman must continue to use the FIFO inventory valuation method. This is reflected in which of the qualitative characteristics of financial reporting?

Comparability

____________ is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items.

Comparability

______________ refers to the use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities.

Consistency

It is considered acceptable practice to deviate from generally accepted accounting principles (GAAP) in which of the following circumstances? A. It is common practice in the industry to give particular transactions a specific accounting treatment B. Adherence to GAAP would produce misleading results C. There is concern that assets or income would be overstated D. All of the above

D. All of the above

Which of the following could be used to balance the accounting equation if cash were stolen? A. Reducing a liability B. Increasing another asset C. Reducing revenue D. All of the above

D. All of the above

Which of the following types of accounts are decreased by debits? A. Revenue B. Liabilities C. Owners' equity D. All of the above

D. All of the above

Most companies present which of the following as the first line item on the income statement? A. Net profit B. Operating expenses C. The cash balance D. Net sales

D. Net sales

Which of the following statements is FALSE regarding the statement of cash flows? A. The statement of cash flows shows a company's financial position at a specific point in time. B. The statement of cash flows is often used in tandem with the income statement to determine a company's true financial performance. C. There are three types of cash flows: cash flows from operating activities, from investing activities, and from financing activities. D. The statement of cash flows reports a company's sources and uses of cash during the accounting period.

D. The statement of cash flows reports a company's sources and uses of cash during the accounting period.

Credits _____________ asset and expense accounts (Increase/Decrease?)

Decrease

Debits _____________ liabilities, revenue, and owners' equity accounts (Increase/Decrease?)

Decrease

If a fraudster wants to conceal the misappropriation of cash, which of the following actions will NOT result in a balanced accounting equation?

Decreasing another asset

Delta, a Certified Fraud Examiner (CFE), was hired to serve as an expert accounting witness in a case of alleged financial statement fraud. As part of her expert testimony, Delta explained how, under International Financial Reporting Standards (IFRS), management must make every effort to ensure that the company's financial statements are complete, neutral, and free from error. Delta was explaining the concept of:

Faithful representation

Entries to the left side of an account are referred to as credits, while entries to the right side of an account are referred to as debits (T/F?)

False

Gross revenues refer to the total amount of sales made by a company during an accounting period after deductions are made (T/F?)

False

The management at a publicly traded company may choose which set of financial reporting practices it wants its company to follow (T/F?)

False

The qualitative financial reporting characteristic of comparability prohibits any change in an accounting principle previously employed (T/F?)

False

The statement of cash flows includes the following categories: cash flows from strategic activities, cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities (T/F?)

False

Both U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) are considered rules-based accounting frameworks (T/F?)

False - IFRS is considered more of a principle-based accounting framework, whereas U.S. GAAP is known to be more of a rules-based accounting framework

The assumption that a business will continue indefinitely is reflected in the accounting concept of:

Going concern

Generally speaking, _________________ is the proper basis for initially recording a piece of equipment on a company's books.

Historical cost

The ____________ details how much profit (or loss) a company earned over a particular period of time.

Income statement

The statement of changes in owners' equity acts as the connecting link between which two financial statements?

Income statement and balance sheet

Credits _____________ liabilities, revenue, and owners' equity accounts (Increase/Decrease?)

Increase

Debits _____________ asset and expense accounts (Increase/Decrease?)

Increase

If a fraudster wants to conceal the removal of a liability from the books, which of the following actions will NOT balance the accounting equation?

Increasing an asset

Which accounting principle requires corresponding expenses and revenue to be recorded in the same accounting period?

Matching

Calculating _____________ determines a company's earnings for an accounting period by deducting its operating expenses from gross profit.

Net profit

According to the going concern disclosure requirements, if there is substantial doubt about a company's ability to fulfill its financial obligations over a reasonable period of time, it must be disclosed in the company's financial statements (T/F?)

True

As a sale is made, the appropriate charges for cost of goods sold, or other expenses directly corresponding to the sale, should be recorded in the same accounting period (T/F?)

True

Assets, liabilities, and owners' equity are all items that appear on a company's balance sheet (T/F?)

True

In accrual-basis accounting, revenues are generally recognized when goods are delivered or services are rendered to a customer (T/F?)

True

Revenue should NOT be recognized for work that is to be performed in subsequent accounting periods, even though the work might currently be under contract (T/F?)

True

The accounting framework that an entity should use depends on the rules of the jurisdiction(s) in which the entity operates (T/F?)

True