Accounting 614 Exam 1

Which of the following accounts has a normal credit balance? -Rent Expense -Notes Receivable -Prepaid Rent -Rent Revenue

Rent Revenue

Borrowing money is an example of a(n) -financing activity. -investing activity. -delivering activity. -operating activity.

financing activity.

The convention of consistency refers to consistent use of accounting principles -throughout the current accounting period. -from period to period. -within industries. -among firms.

from period to period.

The common characteristic possessed by all assets is -future economic benefit. -tangible nature. -long life. -great monetary value.

future economic benefit.

An item is considered material if -the cost of reporting the item is greater than its benefits. -it is of a tangible good. -it does not cost a lot of money. -its size is likely to influence the decision of an investor or creditor.

-its size is likely to influence the decision of an investor or creditor.

The two fundamental qualities of useful information are -verifiability and timeliness. -understandability and consistency. -relevance and faithful representation. -comparability and flexibility.

-relevance and faithful representation.

The historical cost principle requires that when assets are acquired, they be recorded at -selling price. -the amount paid for them. -list price. -fair market value.

-the amount paid for them.

An awareness of the normal balances of accounts would help you spot which of the following as an error in recording? -A credit balance in an expense account -A credit balance in a revenue account -A debit balance in the Dividends account -A credit balance in a liabilities account

A credit balance in an expense account

The accounting equation may be expressed as -Assets = Liabilities + Stockholders' Equity. -Assets + Stockholders' Equity = Liabilities. -Assets + Liabilities = Stockholders' Equity. -Assets = Stockholders' Equity - Liabilities.

Assets = Liabilities + Stockholders' Equity.

What organization issues U.S. accounting standards? -Financial Accounting Standards Board -Securities and Exchange Commission -International Accounting Standards Committee -International Auditing Standards Committee

Financial Accounting Standards Board

International standards are developed by the -IASB. -FASB. -IFRS. -GAAP.

IASB.

International standards are referred to as -FASB. -IASB. -IFRS. -GAAP.

IFRS.

Which financial statement is prepared first? -Income statement -Balance sheet -Retained earnings statement -Statement of cash flows

Income statement

In which balance sheet section would trademarks be reported? -Property, plant, and equipment -Investments -Current assets -Intangible assets

Intangible assets

Why should the income statement be prepared first? -The income statement does not have to be prepared first. Financial statements can be prepared in any order. -The statement of cash flows should be prepared first because it determines the sources of cash. That information is then used in preparing the income statement. -Net income from the income statement flows into the retained earnings statement. The ending retained earnings balance then flows into the balance sheet. -None of these answer choices are correct.

Net income from the income statement flows into the retained earnings statement. The ending retained earnings balance then flows into the balance sheet.

Ending retained earnings for a period is equal to beginning -Retained earnings + Net income - Dividends. -Retained earnings - Net income + Dividends. -Retained earnings + Net income + Dividends. -Retained earnings - Net income - Dividends.

Retained earnings + Net income - Dividends.

Net income results when -Revenues > Expenses. -Assets > Liabilities. -Revenues < Expenses. -Revenues = Expenses.

Revenues > Expenses.

The periodicity assumption states -every economic entity can be separately identified and accounted for. -the business will remain in operation for the foreseeable future. -only those things that can be expressed in money are included in the accounting records. -The life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared.

The life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared.

Why are expenses increased with a debit? -They are always paid by cash, which is credited. Thus expenses are debited. -None of the statements are correct. -They decrease stockholders' equity. Thus they are increased with a debit. -They have the same rules of debits and credits as the retained earnings account.

They decrease stockholders' equity. Thus they are increased with a debit.

The internal control standards of Sarbanes-Oxley are applicable to -International companies listed on U.S. exchange. -all U.S. and international companies. -U.S. companies listed on U.S. exchange. -U.S. and international companies listed on U.S. exchange.

U.S. companies listed on U.S. exchange.

The right to receive money in the future is called a(n) -revenue. -account payable. -liability. -account receivable.

account receivable.

For the basic accounting equation to stay in balance, each transaction recorded must -affect two or less accounts. -affect the same number of asset and liability accounts. -affect two or more accounts. -always affect exactly two accounts.

affect two or more accounts.

Free cash flow represents -all of these answer choices are correct. -cash provided by operations less adjustments for capital expenditures and dividends. -a measurement of a company's cash generating ability. -a measure of solvency.

all of these answer choices are correct.

The cost of assets consumed or services used is also known as -a revenue. -a liability. -an expense. -an asset.

an expense.

Generally accepted accounting principles -are sound in theory but rarely used in real life. -are accounting rules formulated by the Internal Revenue Service. -are accounting rules that are recognized as a general guide for financial reporting. -have eliminated all errors in accounting.

are accounting rules that are recognized as a general guide for financial reporting.

Liabilities -are debts and obligations. -are future economic benefits. -are things of value owned by a business. -possess service potential.

are debts and obligations.

The periodicity assumption states that the economic life of a business can be divided into -cyclical time periods. -artificial time periods. -equal time periods. -perpetual time periods.

artificial time periods.

A balance sheet shows -revenues, liabilities, and stockholders' equity. -revenues, expenses, and dividends. -assets, liabilities, and stockholders' equity. -expenses, dividends, and stockholders' equity.

assets, liabilities, and stockholders' equity.

Resources owned by a business are referred to as -revenues. -stockholders' equity. -assets. -liabilities.

assets.

Common stock is reported on the: -balance sheet. -retained earnings statement. -income statement. -statement of cash flows.

balance sheet.

Stockholders' equity is comprised of -common stock and dividends. -common stock and retained earnings. -dividends and retained earnings. -net income and retained earnings.

common stock and retained earnings.

Different companies using the same accounting principles is an application of -materiality. -full disclosure. -comparability. -consistency.

comparability.

The quality of consistency is a type of -materiality. -relevance. -comparability. -faithful representation.

comparability.

Characteristics associated with faithfully representative accounting information are -verifiable and neutral. -verifiable and timely. -relevance and verifiable. -complete and neutral.

complete and neutral.

A company using the same accounting principles from year to year is an application of -consistency. -full disclosure. -timeliness. -materiality.

consistency.

A business organized as a separate legal entity is a -government unit. -proprietor. -corporation. -partnership.

corporation.

Liabilities of a company are owed to its -owners. -creditors. -stockholders. -debtors.

creditors.

An account will have a credit balance if the -last transaction entered was a credit. -first transaction entered was a credit. -debits exceed the credits. -credits exceed the debits.

credits exceed the debits.

The current ratio is -current assets minus current liabilities. -current assets times current liabilities. -current assets plus current liabilities. -current assets divided by current liabilities.

current assets divided by current liabilities.

Working capital is calculated by taking -current assets times current liabilities. -current assets minus current liabilities. -current assets plus current liabilities. -current assets divided by current liabilities.

current assets minus current liabilities.

On a classified balance sheet, short-term investments are classified as -long-term investments. -current assets. -property, plant, and equipment. -intangible assets.

current assets.

In a classified balance sheet, assets are usually classified as -current assets; long-term assets; property, plant, and equipment; and intangible assets. -current assets; long-term investments; property, plant, and equipment; and common stocks. -current assets; long-term investments; property, plant, and equipment; and intangible assets. -current assets; long-term investments; tangible assets; and intangible assets.

current assets; long-term investments; property, plant, and equipment; and intangible assets.

Liabilities are generally classified on a balance sheet as -small liabilities and large liabilities. -current liabilities and long-term liabilities. -tangible liabilities and intangible liabilities. -present liabilities and future liabilities.

current liabilities and long-term liabilities.

Current assets divided by current liabilities is known as the -capital structure. -profit margin. -working capital. -current ratio.

current ratio.

When a company has performed a service but has not yet received payment, it -debits revenue from services and credits accounts payable. -debits revenue from services and credits accounts receivable. -makes no entry until the cash is received. -debits accounts receivable and credits service revenue.

debits accounts receivable and credits service revenue.

A useful measure of solvency is the -return on assets ratio. -debt to assets ratio. -current ratio. -earnings per share.

debt to assets ratio.

Dividends paid -increase expenses. -decrease retained earnings. -increase assets. -decrease revenues.

decrease retained earnings.

Payments to stockholders are called -assets. -expenses. -liabilities. -dividends.

dividends.

A current asset is -an asset which is currently being used to produce a product or service. -expected to be converted to cash or used in the business within one year or one operating cycle, whichever is longer. -the last asset purchased by a business. -usually found as a separate classification in the income statement.

expected to be converted to cash or used in the business within one year or one operating cycle, whichever is longer.

The principle that indicates that assets should be reported at the price that would be received to sell the asset is the -historical cost principle. -full disclosure principle. -fair value principle. -consistency principle.

fair value principle.

Accounting information should be verifiable in order to enhance -faithful representation. -consistency. -comparability. -relevance.

faithful representation.

Claims of owners are called -stockholders' equity. -liabilities. -dividends. -income payable.

stockholders' equity.

Free cash flow provides an indication of a company's ability to -generate cash to invest in new capital expenditures and to pay dividends. -generate cash to invest in new capital expenditures, but not to pay dividends. -generate cash to pay dividends, but not to invest in new capital expenditures. -generate net income.

generate cash to invest in new capital expenditures and to pay dividends.

The concept that a business has a reasonable expectation of remaining in business for the foreseeable future is called the -going concern assumption. -economic entity assumption. -periodicity assumption. -monetary unit assumption.

going concern assumption.

Notes to the financial statements -are optional. -need not be read in detail if an unqualified opinion accompanies the financial statements. -are generally brief and few in number. -help clarify information presented in the financial statements.

help clarify information presented in the financial statements.

In order for accounting information to be relevant, it must -help predict future events or confirm prior expectations. -not be reported to the public. -be used by many different firms. -have very little cost.

help predict future events or confirm prior expectations.

Valuing assets at their fair value rather than at their cost is inconsistent with the -periodicity assumption. -full disclosure principle. -economic entity assumption. -historical cost principle.

historical cost principle.

To show how successfully your business performed during a period of time, you would report its revenues and expenses in the -income statement. -retained earnings statement. -statement of cash flows. -balance sheet.

income statement.

Buying assets needed to operate a business is an example of a(n) -delivering activity. -investing activity. -financing activity. -operating activity.

investing activity.

The partnership form of business organization -enjoys an unlimited life. -has limited liability. -is a separate legal entity. -is a common form of organization for service-type businesses.

is a common form of organization for service-type businesses.

A business organized as a corporation -is owned by its stockholders. -requires that stockholders be personally liable for the debts of the business. -has tax advantages over a proprietorship or partnership. -is not a separate legal entity in most states.

is owned by its stockholders.

A person who wants to determine the balance of a particular account should refer to the -journal. -ledger. -source document. -chart of accounts.

ledger.

After transaction information has been recorded in the journal, it is transferred to the -general journal. -ledger. -income statement. -trial balance.

ledger.

Free cash flow is net cash provided by operating activities -less capital expenditures. -less capital expenditures and cash dividends. -less cash dividends. -less capital expenditures and salaries expense.

less capital expenditures and cash dividends.

Debts and obligations of a business are referred to as -assets. -expenses. -liabilities. -equities.

liabilities.

The ability of a business to pay obligations that are expected to become due within the next year or operating cycle is -wealth. -liquidity. -leverage. -profitability.

liquidity.

The relationship between current assets and current liabilities is important in evaluating a company's -liquidity. -profitability. -market value. -solvency.

liquidity.

Working capital is a measure of -solvency. -profitability. -liquidity. -consistency.

liquidity.

The assumption that requires that only those things that can be expressed in money are included in the accounting records is the -monetary unit assumption. -going concern assumption. -periodicity assumption. -economic entity assumption.

monetary unit assumption.

A company can change to a new method of accounting if management can justify that the new method results in -more meaningful financial information. -less likelihood of clerical errors. -a lower net income for tax purposes. -a higher net income.

more meaningful financial information.

Earnings available to common stockholders is equal to -net income - preferred dividends. -net income + preferred dividends. -total revenues. -preferred dividends - net income.

net income - preferred dividends.

The economic entity assumption states that economic events -of different entities can be combined if all the entities are corporations. -must be reported to the Securities and Exchange Commission. -of every entity can be separately identified and accounted for. -of a sole proprietorship cannot be distinguished from the personal economic events of its owners.

of every entity can be separately identified and accounted for.

Buying and selling products are examples of -operating activities. -delivering activities. -investing activities. -financing activities.

operating activities.

Stockholders' equity can be described as claims of -debtors on total assets. -customers on total assets. -owners on total assets. -creditors on total assets.

owners on total assets.

Characteristics associated with relevant accounting information are -comparability and timeliness. -consistency and understandability. -neutral and verifiable. -predictive value and confirmatory value.

predictive value and confirmatory value.

An income statement -presents the revenues and expenses for a specific period of time. -reports the assets, liabilities, and stockholders' equity at a specific date. -summarizes the changes in retained earnings for a specific period of time. -reports the changes in assets, liabilities, and stockholders' equity over a period of time.

presents the revenues and expenses for a specific period of time.

Buildings are classified on the balance sheet as -an intangible asset. -a long-term investment. -property, plant, and equipment. -a current asset.

property, plant, and equipment.

Most business enterprises in the United States are -partnerships. -corporations. -proprietorships and partnerships. -government units.

proprietorships and partnerships.

The balance sheet -presents the revenues and expenses for a specific period of time. -reports the assets, liabilities, and stockholders' equity at a specific date. -summarizes the changes in retained earnings for a specific period of time. -reports the changes in assets, liabilities, and stockholders' equity over a period of time.

reports the assets, liabilities, and stockholders' equity at a specific date.

Dividends are reported on the -balance sheet. -retained earnings statement. -income statement and balance sheet. -income statement.

retained earnings statement.

The financial statement that summarizes the changes in retained earnings for a specific period of time is the -income statement. -retained earnings statement. -balance sheet. -statement of cash flows.

retained earnings statement.

An income statement shows -expenses, dividends, and stockholders' equity. -assets, liabilities, and stockholders' equity. -revenues, expenses, and net income. -revenues, liabilities, and stockholders' equity.

revenues, expenses, and net income.

A liquidity ratio measures the -ability of a company to survive over a long period of time. -short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. -income or operating success of a company over a period of time. -percentage of total financing provided by creditors.

short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.

The debt to assets ratio is a -profitability ratio. -none of the answer choices is correct. -solvency ratio. -liquidity ratio.

solvency ratio.

Long-term creditors are usually most interested in evaluating -profitability. -consistency. -solvency. -liquidity.

solvency.

The retained earnings statement -summarizes the changes in retained earnings for a specific period of time. reports the assets, liabilities, and stockholders' equity at a specific date. -presents the revenues and expenses for a specific period of time. -reports the changes in assets, liabilities, and stockholders' equity over a period of time.

summarizes the changes in retained earnings for a specific period of time.

Retained earnings is -the stockholders' claim on total assets. -equal to cash. -equal to revenues. -the amount of net income kept in the corporation for future use.

the amount of net income kept in the corporation for future use.

If accounting information has relevance, it is useful in making predictions about -the future events of a company. -new accounting principles. -foreign currency exchange rates. -future IRS audits.

the future events of a company.

For accounting information to have relevance, it must be -consistent. -understandable. -timely. -verifiable.

timely.

Expenses are incurred -to produce assets. -to generate revenues. -only on rare occasions. -to produce liabilities.

to generate revenues.

The debt to assets ratio is computed by dividing -long-term liabilities by average assets. -total liabilities by average assets. -long-term liabilities by total assets. -total liabilities by total assets.

total liabilities by total assets.

Information that is presented in a clear fashion, so that users of that information can interpret it, is an example of -relevance. -faithful representation. -comparability. -understandability.

understandability.

Working capital is -used to evaluate a company's solvency and long-term debt paying ability. -used to evaluate a company's liquidity and short-term debt paying ability. -calculated by subtracting current assets from current liabilities. -calculated by dividing current assets by current liabilities.

used to evaluate a company's liquidity and short-term debt paying ability.

The going concern assumption assumes that the business -will remain in operation for the foreseeable future. -will be liquidated in the near future. -will be purchased by another business. -is in a growth industry.

will remain in operation for the foreseeable future.