MBA 601

Which of the following types of businesses require financial information to operate effectively?

For profit, non-profit, and government entities

Which of the following is an accurate definition of the term asset?

A resource that will be used to produce revenue

Which are true? Cash revenue is an economic benefit that will cause assets and retained earnings to increase. A cash expense is an economic sacrifice that will cause assets and retained earnings to decrease. A cash dividend is a transfer of assets from a business to its owners that will cause the assets and retained earnings of the business to decrease. All of the answers represent true statements

All are true

Which of the financial statements are required by the generally accepted accounting principles (GAAP)?

All of these financial statements are required by GAAP income statement statement of changes in stockholder's equity statement of cash flow balance sheets

Which of the following financial statements provides information about a company as of a specific point of time?

Balance sheet. The balance sheet provides information about a company as of a specific point in time.

Retained earnings at the beginning of the period was $300. During the period, Kilgore Company earned revenue of $1,100 and incurred expenses of $400. Assuming dividends paid to stockholders were $200, the ending balance in retained earnings must have been:

Beginning retained earnings + Net Income - Dividends = Ending retained earnings. First, calculate net income as revenue minus expenses. Net income = $1,100 -$400= $700. Ending retained earnings= $300+$700-$200=$800.

The primary purpose of managerial accounting is to prepare financial statements in accordance with a reporting framework (e.g. GAAP).

False- managers report to themselves however they want. Financial accounts report externally and must follow GAAP so the info is standardized

John Hamilton borrowed $500,000 from Stone Creek Bank to open a new restaurant called Sauce-It-Up. John transferred $450,000 of the cash he borrowed to the Company on the first day of the year. Which of the following appropriately reflects the cash transactions between these reporting entities?

John Hamilton- 50,000 increase Sauce-it-up - $450,000 increase Stone Creek Bank- $500,000 decrease

What does negative retained earnings indicate?

The company has lost some or all of the owner's investment.

Chester Company earned $12,500 of cash revenue, paid $7,500 for cash expenses, and paid a $200 cash dividend to its owners. Which of the following statements is true?

The net cash inflow from operating activities was $5,000. Cash revenue and cash expenses are operating activities. Paying dividends is a financing activity. $12,500 revenue − $7,500 expense = $5,000 cash inflow from operating activities.

Companies maintain accounting records that show assets at the amount of their market value because that information is more relevant than the historical cost. This statement is

false - While market values may be more relevant. In other words, when making decisions, people may find that knowing the current market value of an asset is more useful than knowing what it cost years ago. Even so, accountants favor a conservative path of maintaining asset amounts at their original (historical) cost. The reason for this is that historical costs are verifiable while market values are subjective. More specifically, you can validate the cost of an asset by referring to the receipts showing its cost. In contrast, the market value of an asset is an opinion. No one knows exactly what the market value of an asset is until it is actually sold.

Generally Accepted Accounting Principles (GAAP) are designed to provide guidance for

financial accounting

Which term describes assets earned from operations that have been reinvested into the business?

retained earnings

The repayment of debt is limited by the $600 amount of cash the company has, not the $400 amount of its

retained earnings.

The balance of accounts reported on the Balance Sheet carry forward from one period to the next. This statement is:

true The ending account balances for Year 1 become the beginning account balances for Year 2 for accounts on the Balance Sheet.

A company can have a negative balance in retained earnings. This statement is:

true a company can have a positive of negative ending balance in retained earnings

The following information was drawn from Gore, Inc.'s statement of cash flows. (1) $2,000 net cash outflow from investing activities. (2) $3,000 net cash inflow from financing activities. (3) $6,000 net increase in the cash balance. Based on this information, the amount of cash flow from operating activities appearing on the statement of cash flows must be a

$5,000 net cash inflow. Recall that the $6,000 increase in the cash balance is caused by financing, investing, and operating activities. Focus on how each of these activities changed the cash balance. The cash balance increased by $3,000 due to financing activities and decreased by $2,000 due to the investing activities. This explains $1,000 ($3,000 inflow - $2,000 outflow) of the $6,000 net increase in the cash balance. The remaining $5,000 ($6,000 - $1,000) of the total $6,000 increase must have been caused by a net increase in the cash flow from operating activities.

The following items were drawn from the financial statements of Rogers Company: (1) Assets (2) Stockholders' Equity (3) Salary expense (4) Land (5) Rent revenue (6) Notes payable (7) Cash collected from the issue of stock (8) Common stock (9) Cash paid for dividends (10) Cash (11) Liabilities (12) Dividends (13) Cash paid to purchase land (14) Retained earnings Which of the items listed above were drawn from the balance sheet?

1, 2, 4, 6, 8, 10, 11, and 14

Alexis Company was started in Year 1. At the end of Year 1 the Company had the following accounting equation. Assets=Liabilities+Stockholders' EquityCash+Land=Notes Payable+Common Stock+Retained Earnings600+2,200=1,000+1,400+400 During Year 2, the company experienced the following accounting events. Paid off $500 of its notes payable. Earned $700 of cash revenue. Paid $400 of cash expenses. Paid a $100 cash dividend. Based on this information alone, what percent of the company's assets at the end of Year 2 were provided by creditors?

20 %

Kilgore Company experienced the following events during its first accounting period. (1) Borrowed $10,000 cash from a creditor. (2) Earned $5,000 of cash revenue. (3) Paid $2,000 cash to pay off a portion of its note payable. (4) Paid cash dividends amounting to $100. (5) Paid $2,200 cash for operating cash expenses. Based on this information, what is the amount of expense shown on the income statement?

2200 Expenses are economic sacrifices incurred to produce revenue. In this case, the company's sacrifice was a decrease in assets (cash). Note that dividends are not expenses. Dividends are not paid in order to produce revenue. Instead they are transfers of wealth from the business to its owners. Paying back a portion of the note payable is also not an expense. It will decrease assets (cash) and decrease liabilities (note payable) by $2,000.

At the beginning of Year 2, Jones Company had a balance in common stock of $200,000 and a balance of retained earnings of $5,000. During Year 2, the following transactions occurred: Issued common stock for $50,000 Earned net income of $30,000 Paid dividends of $10,000 Issued a note payable for $20,000 Based on the information provided, what is the total stockholders' equity on December 31, Year 2?

275,000 The total stockholder's equity equals Ending Common Stock + Ending Retained Earnings. First, ending common stock is calculated as: beginning common stock + stock Issued or $200,000 + $50,000 = $250,000 ending common stock. Next, ending retained earnings is calculated as: beginning retained earnings + Net income - Dividends or $5,000 + $30,000 - $10,000 = $25,000 ending retained earnings. Finally, ending common stock of $250,000 + ending retained earnings of $25,000 = total stockholders' equity of $275,000. Paying back a portion of a note payable does not affect stockholders' equity and therefore it is not included in the calculation.

Ellen Elder and her brother, Buster started Elder Company when they each invested $600 in the company. After the investments there will be

3

John Hamilton borrowed $500,000 from Stone Creek Bank to open a new restaurant called Sauce-It-Up. John transferred $450,000 of the cash he borrowed to the restaurant on the first day of the year. How many reporting entities exist in this scenario?

3

How many financial statements does a company prepare each accounting period?

4 The Balance Sheet, Income Statement, Statement of Changes in Stockholders' Equity and the Statement of Cash Flows are prepared each accounting period.

Kilgore Company experienced the following events during its first accounting period. (1) Issued common stock for $5,000 cash. (2) Earned $3,000 of cash revenue. (3) Paid a $4,000 cash to purchase land. (4) Paid cash dividends amounting to $400. (5) Paid $2,200 of cash expenses. Based on this information, the amount of cash flow from investing activities appearing on the statement of cash flows is

4000 outflow Investing activities include the purchase or sale of long-term assets. The only transaction affecting investing activities is the purchase of land. Therefore, there was a $4,000 cash outflow for investing activities shown on the statement of cash flows for the purchase of land.

Kilgore Company experienced the following events during its first accounting period. (1) Issued common stock for $5,000 cash. (2) Earned $3,000 of cash revenue. (3) Paid a $4,000 cash to purchase land. (4) Paid cash dividends amounting to $400. (5) Paid $2,200 of cash expenses. The market value of the land at the end of the accounting period was $4,300. Based on this information the amount of total assets appearing on the year-end balance sheet is

5400

At the time of liquidation, Owens Company reported assets of $260,000, liabilities of $180,000, common stock of $90,000 and retained earnings of ($10,000). What amount of Fairchild's assets are the shareholders entitled to receive?

80000 Creditors receive first priority in asset distribution during a business liquidation. Therefore, creditors would collect the $180,000 owed to them, leaving the shareholders with the remaining $80,000

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

Assets = Liabilities + Common Stock + Retained Earnings

Ending cash balance is shown on which of the following financial statements?

Balance Sheet and Statement of Cash Flows The ending cash balance is listed on the Statement of Cash Flows and Cash listed on the Balance Sheet is the balance as of the end of the year.

Which of the following is normally shown first on the statement of cash flows?

Cash flow from operating activities

Which of the following is an example of revenue?

Cash received from providing services to customers is an example of revenue, and is an asset source transaction. Cash received from the bank loan results in a liability, notes payable. Cash investments made by owners increase the stockholders' equity account common stock. Cash received from the sale of land is an asset exchange transaction that decreases one asset, land, and increases another asset, cash.

The Statement of Changes in Stockholders' Equity shows changes in which of the following accounts?

Common Stock and Retained Earnings Stockholders' equity is made up of two accounts: Common Stock and Retained Earnings. The Statement of Changes in Stockholders' Equity shows changes in those two accounts over the period.

Resource owners want to provide resources to businesses with high profit potential because those businesses will pay higher taxes. This statement is

False - When business must pay taxes, there is less profit available to share with the resource owners. Thus, resource owners want to avoid the consequences of taxation. The reason resource owners are willing to provide resources to companies with high profits is because those businesses have more profits to share with owners, are able to pay more interest to creditors, and are in a better position to pay higher prices for physical resources and wages. Ask yourself, would you want to work for a company that paid low wages because it had to pay high taxes.

If at the end of Year 1 an appraiser provides a certified opinion that the market value of the land is $2,800 the company would continue to list the land on its books at $2,200. This statement is

Generally Accepted Accounting Principles (GAAP) requires businesses to follow the historical cost concept which dictates that assets be maintained in the accounting records at the amount of their original cost. This means that assets are presented at the amount a company originally pays for them regardless of changes in the market value. There are exceptions to the historical cost rule. Some of these exceptions will be discussed in subsequent chapters. However, at this point you should assume that assets are maintained in the accounting records at their historical costs which is the amount that they originally cost.

Paying a cash dividend decreases the asset account (Cash) and decreases the equity account (Retained Earnings). Paying a dividend is not recognized as an expense. Therefore, it has no effect on the

INCOME STATEMENT

Net income appears on which of the following financial statements?

Income Statement and Statement of Changes in Stockholders' Equity Net income is shown on the Income Statement. It is also shown as an addition to Retained Earnings on the Statement of Changes in Stockholders' Equity.

Kilgore Company experienced the following events during its first accounting period. (1) Issued common stock for $5,000 cash. (2) Earned $3,000 of cash revenue. (3) Paid $4,000 cash to purchase land. (4) Paid cash dividends amounting to $400. (5) Paid $2,200 of cash expenses. Based on this information the amount of net income is

Net income is $800 (Revenue of $3,000 − Expenses of $2,200). Expenses are economic sacrifices incurred to produce revenue. In this case, the company's sacrifice was a decrease in assets (cash). Note that dividends are not expenses. Dividends are not paid in order to produce revenue. Instead they are transfers of wealth from the business to its owners.

Durango Company started Year 2 with beginning balances of $1,000 cash, $500 note payable, and $400 common stock. During the year, Durango generated $400 of cash revenue and $300 of cash expenses. Durango also purchased land for $900 cash. If the note payable is due on January 1, Year 3, was it a good idea to purchase the land?

No, because the company will not have enough cash to pay off the note. Management has mismanaged the assets. On January 1, Year 3 there is not enough cash to pay off the note. There is $200 in cash and there is a $500 note due.

Which of the following transactions would be reported on the Statement of Changes in Stockholders' Equity?

Paid a $100 cash dividend to the owners Dividends are reported as a deduction from retained earnings on the Statement of Changes in Stockholders' Equity. The other transactions listed (borrowing cash from the bank, purchasing land for cash and Paying off a portion of a note payable) do not affect stockholders' equity.

Accounting provides a service to society by gathering and reporting information about a company's profit potential. This statement is

True

Businesses earn profits by converting financial, physical, and labor resources into goods and services that satisfy consumer demands. This statement is

True

The income statement presents

a comparison of the benefits and the sacrifices a company experiences from its operations.

The balance sheet presents

a list of a company's assets and the sources of those assets.

Which of the following are shown on the Balance Sheet? a. Total assets b. Land c. Common Stock d. Net Change in Cash e. Revenue f. Notes Payable g. Stockholders' Equity h. Total Liabilities and Stockholders' Equity i. Expenses j. Net Income k. Ending cash balance l. Beginning cash balance m. Dividends

a, b, c, f, g, h, k The Balance Sheet lists a company's Assets, Liabilities and Stockholders' Equity. From the information given, land, cash, total assets, common stock, notes payable, stockholders' equity, and total liabilities and stockholders' equity would be listed on the Balance Sheet.

Which of the following is an asset source event?

all - received cash from the issue of a stock, borrowed cash from creditors, and earned cash revenue Businesses can acquire assets from three sources including owners, creditors, and customers.

The statement of changes in stockholders' equity presents

an explanation of the changes in the beginning and ending balances of stockholders' equity.

Simpson Company paid cash to purchase land. This event is

asset exchange transaction Paying cash to purchase land causes an increase in one asset account (land) and a decrease in another asset account (cash). The total amount of assets is not affected. Therefore, the cash purchase of land is an asset exchange transaction.

Sims Company received cash from the issue of a note payable to a bank. This event is

asset source transaction- Collecting cash from the issue of a note payable causes assets (cash) and liabilities (notes payable) to increase. Since the total amount of assets increases, this is an asset source transaction.

Sims Company earned cash revenue by providing services to its customers. This event is

asset source transaction- Earning cash revenue causes assets (cash) and stockholders' equity (retained earnings) to increase. Since the total amount of assets increases, this is an asset source transaction.

Sims Company received cash from the issue of common stock. This event is

asset source transaction-Collecting cash from the issue of common stock causes assets (cash) and stockholders' equity (common stock) to increase. Since the total amount of assets increases, this is an asset source transaction.

Barnett Company paid a cash dividend. This event is

asset use transaction Paying a cash dividend causes assets (cash) to decrease and stockholders' equity (retained earnings) to decrease. Since total assets decrease, this is an asset use transaction.

Which of the following financial statements reports financial results as of a specific date?

balance sheet The Balance Sheet reports financial results as of a specific date. The other three financial statements show what happened over a period.

Public accountants perform which of the following functions to ensure that financial information provided by a Company to investors is in accordance with G.A.A.P.?

conduct an audit -One of the jobs of a public accountant is to conduct an audit of a Company's financial information. An audit ensures that financial information provided by the Company is in compliance with G.A.A.P. Investors rely on an audit to ensure the accuracy of financial information in order to make informed financial decisions.

Sources of assets?

creditors, investors, operations

Which term describes a distribution of the Company's assets back to the owners of the business?

dividend

Which of the following are shown on the Income Statement? a. Total assets b. Land c. Common Stock d. Net Change in Cash e. Revenue f. Notes Payable g. Stockholders' Equity h. Total Liabilities and Stockholders' Equity i. Expenses j. Net Income k. Ending cash balance l. Beginning cash balance m. Dividends

e, i , j The Income Statement lists a company's Revenue, Expenses and Net Income for the period.

A net loss occurs when

expenses are greater than revenue

Certain transactions entered into the accounting equation will cause the equation not to balance. This statement is

false

The Statement of Changes in Stockholders' Equity is used to inform the creditors how their stake in the company changed over the period. This statement is:

false The Statement of Changes in Stockholders' Equity is used to inform the investors (i.e. owners) how their stake in the company changed over the period. The creditors' claims to the company are reported in the liabilities section of the balance sheet.

The stockholders of a business have a priority claim to its assets in the event of liquidation. This statement is:

false This is false. Creditors have priority over stockholders in the event of a company's liquidation.

The financial statement that reports the revenues and expenses for a period of time such as a year or a month is the

income statement The income statement reports the revenues and expenses for a period of time such as a year, month or quarter. The balance sheet reports the company's assets and the sources of those assets as of a specific date. The statement of cash flows does not report revenues and expenses.

The statement of cash flows presents

information in three categories including operating, investing, and financial activities

if total assets increase, then

liabilities, common stock, or retained earnings must increase

What is the process of dividing up assets and allocating them to resource providers (creditors and investors)?

liquidation

Which of the following is a financing activity?

paying cash dividends

Paul Savage purchased a restaurant named Burger Haven from Larry Jones. The purchase would cause the number of reporting entities to

remain constant - These same entities existed before and after the purchase of the restaurant.

Liabilities

represent obligations to pay debts, may increase when assets increase, are found on the claims side of the accounting equation

The three primary types of reporting entities are consumers, resource owners, and businesses.

true

Emerald Company was established in January, Year 1. During Year 1 the company experienced the following events. Collected $50,000 cash from the issue of common stock Borrowed $45,000 cash from the state bank Earned $120,000 of cash revenue Paid $180,000 cash expenses The company was liquidated at the end of Year 1. Based on this information

the creditor (the bank) would receive $35,000. The stockholders reap the reward of a profitable business and suffer the consequences of losses incurred. In this case the business incurred a $60,000 loss ($120,000 Revenue − $180,000 Expenses). As a result, the stockholders would receive zero. The $60,000 loss would more than wipe out their $50,000 investment. Indeed, even the creditor would suffer a $10,000 loss. At the end of the Year 1 there would only be $35,000 cash left in the business ($50,000 from investors + $45,000 from the bank, $120,000 from revenue − $180,000 of expenses). While creditors have first priority in a business liquation, they cannot receive assets that the business does not have. In this case, even though the creditors put $45,000 in the business, they would only receive $35,000 back. While creditors get first claim on assets, they are still at risk of losing some or all of the assets loaned to a business. First claim increases security but it does not eliminate risk.

Watt Company was established in January, Year 1. During Year 1 the company experienced the following events. Collected $6,000 cash from the issue of common stock. Borrowed $3,000 cash from the state bank. Earned $4,000 of cash revenue. Paid $2,000 cash expenses. The company was liquidated at the end of Year 1. Based on this information

the stockholders would receive $8,000. The stockholders reap the reward of a profitable business and suffer the consequences of losses incurred. In this case the business earned $2,000 ($4,000 Revenue − $2,000 Expenses). As a result, the stockholders would receive $8,000 in the liquidation ($6,000 original investment + $2,000 retained earnings).

At the end of Year 1, Clayton Company had $6,000 of cash, $7,000 land, $2,000 of liabilities, $3,000 of common stock, and $8,000 of retained earnings. During Year 2, Clayton experienced the following events. Borrowed $1,500 cash. Earned $6,500 of cash revenue. Paid $4,000 of cash expenses. Paid $5,000 cash to purchase land. Based on this information the amount of total assets, total liabilities, and retained earnings appearing on the Year 2 financial statements is

total assets = 1700 total liabilities = 3500 retained earnings of 1050

How accounting transactions are recorded will vary depending on the entity perspective taken. This statement is

true

The Statement of Changes in Stockholders' Equity is measured for a period of time such as a year. This statement is:

true

Owners of the business who contribute money to the business take more risk than creditors who loan money to the business. This statement is

true - Owners of a business take more risk than creditors because they share both the gains and losses of a business.