Accounting ch 2

The following items were drawn from a company's accounting records: (1) Accounts receivable (2) Accounts payable (3) Cash paid to purchase land (4) Supplies (5) Supplies expense (6) Cash collected for service to be provided in the future (7) Unearned revenue (8) Prepaid rent (9) Earned revenue (10) Accrued salaries expense (11) Common stock (12) Dividends (13) Cash paid for prepaid rent (14) Retained earnings Which of the items listed above appear on the statement of changes in stockholders' equity?

11, 12, and 14 The statement of changes in stockholders' equity shows the items that affected stockholders equity during an accounting period. Items 11, 12 and 14 are stockholders' equity accounts. While net income is shown on the statement of changes in stockholders' equity, that item is not included in the item list. Further, note that individual revenue and expense items are not shown on the statement of changes in stockholders' equity.

All permanent accounts are adjusted at the end of an accounting period. This statement is

false Many permanent accounts do not require adjustment. For example, land and common stock.

Normally a company closes its books and then adjusts its records to update the account balances before preparing the financial statements. This statement is

false The adjusting process is performed before the closing process. Also, financial statements are normally prepared before the temporary accounts are closed.

On October 1 of Year 1 Zeta Company collected $1,200 cash for services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information, the amount of revenue appearing on the Year 1 income statement would be

$300 Revenue earned per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount earned = $100 per month x 3 months = $300 service revenue Future obligation = $100 per month x 9 months = $900 unearned revenue

Sanka Company's Year 1 balance sheet showed $1,700 cash, $5,200 supplies, $2,300 accounts payable, $4,000 common stock, and $600 retained earnings. The company experienced the following events during Year 2. (1) Purchased $14,000 of supplies on account (2) Earned $19,000 cash revenue (3) Paid $14,200 cash to reduce accounts payable created in Event 1 above (4) Paid a $1,000 cash dividend. (5) Physical count revealed $4,900 of supplies on hand at the end of Year 2 Based on this information, the Year 2 after closing balance in retained earnings is

$4300 Based on the information, provided the company incurred $14,300 of supplies expense ($5,200 beginning balance + $14,000 supplies purchases = $19,200 supplies available for use; $19,200 supplies available for use - $4,900 ending supplies balance = $14,300 supplies used). The Year 1 ending balance in retained earnings becomes the Year 2 beginning balance. Therefore, the Year 2 beginning balance in retained earnings is $600. The entry to close the $19,000 revenue account would increase the retained earnings account. The entry to close the $14,300 supplies expense account would decrease the retained earnings account. The entry to close the $1,000 dividend account would decrease the retained earnings account. Therefore the after closing balance in the retained earnings account is $4,300 ($600 beginning balance + $19,000 revenue - $14,300 expense - $1,000 dividend)

On August 1 of Year 1 Presco Enterprises paid $1,200 cash for an insurance policy that would provide protection for a one year term. The company's fiscal closing date is December 31. Based on this information, the amount of insurance expense appearing on the Year 1 income statement would be

$500 Cost per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount used = $100 per month x 5 months = $500 insurance expense Future benefit = $100 per month x 7 months = $700 prepaid insurance

Sanka Company's Year 1 balance sheet showed $1,700 cash, $5,200 supplies, $2,300 accounts payable, $4,000 common stock, and $600 retained earnings. The company experienced the following events during Year 2. (1) Purchased $14,000 of supplies on account (2) Earned $19,000 cash revenue (3) Paid $14,200 cash to reduce accounts payable created in Event 1 above (4) Paid a $1,000 cash dividend. (5) Physical count revealed $4,900 of supplies on hand at the end of Year 2 Based on this information, the Year 2 before closing balance in retained earnings is

$600 The Year 1 ending balance in retained earnings becomes the Year 2 beginning balance. Therefore the Year 2 beginning balance in retained earnings is $600. This balance does not change before the Year 2 closing process is started. Therefore, the Year 2 before closing balance in retained earnings is $600.

The accounting records of Coastal Company contained the following account balances. Cash 500 Land 800 Notes Payable 200 Common Stock 400 The records also contained an account titled Retained Earnings. Based on this information the balance of the retained earnings account must be

$700

Knoll Company started Year 2 with a $500 in cash, $500 in supplies, and $1,000 in common stock accounts. During Year 2 the company experienced the following events. (1) Paid $400 cash to purchase supplies. (2) Physical count revealed $100 of supplies on hand at the end of Year 2. Based on this information the amount of supplies expense reported on the Year 2 income statement is

$800 Since the Company started the accounting period with $500 of supplies and then purchased an additional $400 of supplies during the accounting period, there was a total amount of $900 ($500 + $400) of supplies that were available to be used during the accounting period. Since there were only $100 of supplies on hand at the end of the accounting period then $800 ($900 - $100) had to be used. Assets, in this case supplies, used in the process of producing revenue are called expenses.

On October 1 of Year 1 Lesikar Company paid $1,200 cash for an insurance policy that would provide protection for a one year term. The company's fiscal closing date is December 31. Based on this information, the amount of prepaid insurance appearing on the Year 1 balance sheet would be

$900 Cost per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount used = $100 per month x 3 months = $300 insurance expense Future benefit = $100 per month x 9 months = $900 prepaid insurance

On November 1 of Year 1 Falloch, Inc. paid $2,400 cash for a contract allowing the company to use office space for one year. The company's fiscal closing date is December 31. Based on this information, the amount of cash flow from operating activities appearing on the Year 1 statement of cash flows would be

($2,400) The cash outflow is not affected by how much of the office space has or has not been used. Since $2,400 cash was paid in Year 1, there would be a $2,400 cash outflow from operating activities shown on the Year 1 statement of cash flows. There would be zero cash flow shown on the Year 2 statement of cash flows.

The following items were drawn from a company's accounting records: (1) Accounts receivable (2) Accounts payable (3) Cash paid to purchase land (4) Supplies (5) Supplies expense (6) Cash collected for service to be provided in the future (7) Unearned revenue (8) Prepaid rent (9) Earned revenue (10) Accrued salaries expense (11) Common stock (12) Dividends (13) Cash paid for prepaid rent (14) Retained earnings Which of the items listed above appear on the balance sheet

1, 2, 4, 7, 8, 11, and 14 The balance sheet shows a company's assets, liabilities and stockholders' equity. Items 1, 4, and 8 are asset accounts; items 2 and 7 are liability accounts; and items 11 and 14 are stockholders' equity accounts.

Alexis Company was started in Year 1. At the end of Year 1 the Company's had the following accounting equation. Cash (600) + land (2200) = notes payable (1000) + common stock (1400) + retained earnings (400) During Year 2, the company experienced the following accounting events. • Paid of $500 of its note 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% Begin by recording the events in the accounting equation and the determine the amount of the account balances as of December 31, Year 2. The correct result is as follows: Finally, divide the ending balance of notes payable by the total amount of assets $500 ÷ ($300 + $2,200) = 20% Be sure you understand the following terminology. When a business acquires assets from a creditor, the company is said to have incurred a liability. Normally, the company has to sign an agreement that specifies, among other things, when the liability must be repaid. The agreement is frequently called a note payable.

Alexis Company was started in Year 1. At the end of Year 1 the Company's had the following accounting equation. Cash (600) + land (2200) = notes payable (1000) + common stock (1400) + retained earnings (400) During Year 2, the company experienced the following accounting events. • Paid of $500 of its note 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 earnings?

24% Begin by recording the events in the accounting equation and the determine the amount of the account balances as of December 31, Year 2. The correct result is as follows: Finally, divide the ending balance of retained earnings by the total amount of assets $600 ÷ ($300 + $2,200) = 24%

The following items were drawn from a company's accounting records: (1) Accounts receivable (2) Accounts payable (3) Cash paid to purchase land (4) Supplies (5) Supplies expense (6) Cash collected for service to be provided in the future (7) Unearned revenue (8) Prepaid rent (9) Earned revenue (10) Accrued salaries expense (11) Common stock (12) Dividends (13) Cash paid for prepaid rent (14) Retained earnings Which of the items listed above appear on the statement of cash flows?

3, 6, and 13 The statement of cash flows shows the sources and uses of cash during an accounting period. The statement is subdivided into cash flows from financing, investing, and operating activities. Items 6 and 13 result from operating activities. Item 3 results from an investing activity.

The following items were drawn from a company's accounting records: (1) Accounts receivable (2) Accounts payable (3) Cash paid to purchase land (4) Supplies (5) Supplies expense (6) Cash collected for service to be provided in the future (7) Unearned revenue (8) Prepaid rent (9) Earned revenue (10) Accrued salaries expense (11) Common stock (12) Dividends (13) Cash paid for prepaid rent (14) Retained earnings Which of the items listed above are temporary accounts?

5, 9, 10, and 12 Temporary accounts include revenue, expense and dividend accounts.

The following items were drawn from a company's accounting records: (1) Accounts receivable (2) Accounts payable (3) Cash paid to purchase land (4) Supplies (5) Supplies expense (6) Cash collected for service to be provided in the future (7) Unearned revenue (8) Prepaid rent (9) Earned revenue (10) Accrued salaries expense (11) Common stock (12) Dividends (13) Cash paid for prepaid rent (14) Retained earnings Which of the items listed above appear on the income statement?

5, 9, and 10 The income statement shows a company's revenues and expenses. Item 9 is a revenue account. Note that item 7 is a liability account even though its name has the word revenue in it. Items 5 and 10 are expense accounts.

During Year 1 Xing Enterprises experienced the following events. (1) Earned $4,000 of revenue on account. (2) Incurred $3,500 of expenses on account. Based on this information the amount of total assets, net income, and cash flow from operating activities appearing on the year 1 financial statements is

As indicated by the totals in the statements model, after the accrued revenue and expense has been recognized total assets amount to $4,000, net income is $500, and there is no effect on cash flow.

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.

Daemon Company paid cash to purchase land. Which of the following shows how this event will affect the company's accounting equation? The letters "NA" indicate that the component of the equation is not affected.

Assets (- +) = Liabilities (NA) + Common Stock (NA) + Retained Earnings (NA) Paying cash to purchase land is an asset exchange event. The event would cause one asset account (Cash) to decrease and another asset account (Land) to increase.

Juarez Company acquired $1,200 from the issue of common stock. Which of the following shows how this event will affect the company's accounting equation? The letters "NA" indicate that the component of the equation is not affected.

Assets (1200)=Liabilities (NA) + Common Stock (1200) + Retained Earnings (NA) Acquiring cash through the issue of common stock is an asset source event. The event would cause the Cash (asset) account and the Common Stock account to increase.

Fen Company paid a $300 cash dividend. Which of the following shows how this event will affect the company's accounting equation? The letters "NA" indicate that the component of the equation is not affected.

Assets (300) = Liabilities (NA) + Common Stock (NA) + Retained Earnings (300) A dividend is a distribution of assets obtained through earnings. In other words, it is a transfer of assets from the business to its owners. It is an asset use event. The event causes the Cash (asset) account decrease and the Retained Earnings account to decrease.

During Year 1, Pang Enterprises experienced the following events. (1) Earned $4,000 of revenue on account. (2) Collected $3,500 cash from accounts receivable. The remainder of the receivable was collected in Year 2. Based on this information, the amount of accounts receivable, net income, and cash flow from operating activities appearing on the Year 2 financial statements is

By the end of Year 2 all of the accounts receivables have been collected leaving a remaining balance of zero. The Year 2 net income is zero because all of the revenue was recognized in Year 1. The cash flow from operations for Year 2 is $500. More specifically, the accounts receivable balance at the end of Year 1 is equal to the total amount of accounts receivable generated in Year 1 minus the amount of the receivable collected in Year 1 ($4,000 - $3,500 =$500). The $500 amount of the accounts receivable at the end of Year 1 is collected in Year 2.

Which of the following is not an asset source transaction?

Collected cash from accounts receivable. Collecting cash from an account receivable is an asset exchange transaction. One asset account (cash) increases and another asset account (accounts receivable) decreases. There is no effect on total assets. All three of the other answers result in an increase in total assets. Therefore these answers represent asset source transactions.

Which of the following shows how the event "collected cash for services to be rendered in the future" affects a company's financial statements?

Collecting cash for services to be rendered in the future is an asset source transaction. The asset account (cash) increases and the liability account (unearned revenue) increases. There is no effect on the income statement. A cash inflow from operating activities is shown on the statement of cash flows.

Which of the following shows how collecting cash from accounts receivable will affect a company's financial statements?

Collecting receivables results in an increase in one asset account (cash) and a decrease in another asset account (accounts receivable) leaving total assets unaffected. The income statement is not affected because the revenue was recognized when the receivable was created. The increase in cash is an operating activity.

Which of the following is not a source of assets?

Creditors Investors Operations All of the answers represent sources of assets.

On May 1 of Year 1 Matthew Company paid $2,400 cash for an insurance policy that would protect the company for one year. The company's fiscal closing date is December 31. Based on this information, the amount of insurance expense and the cash flow from operating activities shown on the Year 1 financial statements would be

Insurance expense- $1600 Cash Flow - $2400 Cost per month = $2,400 total ÷ 12 months = $200 per month As of December 31, Year 1: Amount used = $200 per month x 8 months = $1,600 insurance expense Future benefit = $200 per month x 4 months = $800 prepaid insurance Since all of the cash was paid in Year 1, the total $2,400 cash outflow would be shown on the Year 1 statement of cash flows. Zero would be shown in Year 2.

Which of the following accounts would be closed at the end of an accounting period?

None of the accounts listed would be closed at the end of an accounting period. Only temporary accounts (revenue, expense, and dividends) are closed at the end of an accounting period. Accounts receivable and supplies are asset accounts. Unearned revenue is a liability account. Asset and liability accounts are permanent accounts that are not closed at the end of an accounting period. Instead, their balances carry forward to the next accounting period. Think of this from the perspective of an individual. Individuals think of how much income they make per year. At the end of one year, they wipe the slate clean and start counting the next year's earnings from zero. In contrast, assets and liabilities carry forward from one year to the next. For example, if you have $10,000 cash at the end of Year 1, you still have $10,000 cash at the beginning of Year 2. Likewise, if you owe the bank $10,000 at the end of Year 1, you still owe the bank $10,000 at the beginning of Year 2.

Bookmyer Company experienced a business event that affected its financial statements as indicated below.

Paid cash to purchase supplies. Paying cash to purchase supplies is an asset exchange transaction. One asset (cash) decreases and another asset (supplies) increases. Total assets are not affected. The income statement is not affected at the time supplies are purchased. Instead, the income statement will be affected at the time the amount of supplies used is determined at the end of the accounting period. Since cash was paid to purchase the supplies, there will be a cash outflow from operating activities shown on the statement of cash flows.

Morrison Company experienced a business event that had the following effect on its accounting equation. Assets (25000) = Liabilities (25000) + Common Stock (n/a) + Retained Earnings (n/a)

Paid off debt The decrease in assets indicates that assets have been used. The decrease in liabilities indicates that the assets were used to pay off debt.

Which of the following shows how the event "paying cash for an insurance policy that protects the company for some future time period" affects a company's financial statements?

Paying cash for insurance that will be used in the future is an asset exchange transaction. One asset account (cash) decreases and another asset account (prepaid insurance) increases. The amount of total assets is not affected (NA). The income statement is not affected. The cash outflow is shown in the operating activities section of the statement of cash flows.

Which of the following shows how paying cash to purchase supplies will affect a company's financial statements?

Paying cash to purchase supplies is an asset exchange transaction. One asset (cash) decreases and another asset (supplies) increases. Total assets is not affected. The income statement are not affected at the time supplies are purchased. Instead, the income statement will be affected at the time the amount of supplies used is determined at the end of the accounting period. Since cash was paid to purchase the supplies, there will be a cash outflow from operating activities shown on the statement of cash flows.

On June 1 of Year 1 Doe Company paid $1,800 cash for an insurance policy that would protect the company for one year. The company's fiscal closing date is December 31. Based on this information alone, the amount of prepaid insurance and insurance expense shown on the Year 2 financial statements would be

Prepaid insurance - zero Insurance expense - $750 Cost per month = $1,800 total ÷ 12 months = $150 per month As of December 31, Year 1: Amount used = $150 per month x 7 months = $1,050 insurance expense Future benefit = $150 per month x 5 months = $750 prepaid insurance As of December 31, Year 2: Amount used = $150 per month x 5 months = $750 insurance expense Since all of the insurance is used by the end of Year 2, there would be a zero balance in the prepaid insurance account at the end of Year 2.

Which of the following statements is false?

Prepaid insurance is shown on the income statement. Prepaid insurance is an asset account that appears on the balance sheet not the income statement.

Kim Company recorded a claims exchange transaction that had the following effects on its financial statements: Which of the following adjustments could have caused these effects?

Recognized a portion of unearned revenue as earned revenue. When a company performs services to satisfy an unearned revenue liability, the amount of revenue increases which causes net income and ultimately retained earnings to increase. Settling the unearned revenue liability will cause liabilities to decrease. There is no effect on cash flow because cash flow would have already been recognized at the time the company collected the cash that created the unearned revenue liability. Since liabilities decrease and equity increases this is a claims exchange transaction.

Knopp Company experienced an event that had the following effects on its financial statements.

Recognized accrued salary expense Recognizing an accrued expense means that the company recognizes the expense in the current accounting period and will pay for the expense is a subsequent accounting period. As a result, liabilities increase. The expense recognition causes expenses to increase and thereby net income to decrease. The decrease in net income causes stockholders' equity (retained earnings) to decrease. There is no effect on cash flow in the current period because the cash is paid in a subsequent accounting period.

Kim Company recorded an asset use transaction that had the following effects on its financial statements: Which of the following adjustments could have caused these effects?

Recognized expense associated with prepaid insurance. The adjusting entry to recognize the expense associated with prepaid insurance causes a decrease in an asset account (prepaid insurance) and increases the insurance expense account. The increase in insurance expense causes net income and ultimately stockholders' equity (retained earnings) to decrease. The adjustment has no effect on cash flow because the cash flow would have been recognized at the time cash was paid to purchase the insurance. Since total assets and equity decrease this is an asset use transaction.

Which of the following shows how recognizing accrued expense will affect a company's financial statements?

Recognizing an accrued expense means that the company recognizes the expense in the current accounting period and will pay for the expense is a subsequent accounting period. As a result, liabilities increase. The expense recognition causes expenses to increase and thereby net income to decrease. The decrease in net income causes stockholders' equity (retained earnings) to decrease. There is no effect on cash flow in the current period because the cash is paid in a subsequent accounting period.

Which of the following shows how adjusting the accounts to recognize supplies expense will affect a company's financial statements?

Recognizing supplies expense at the end of the accounting period is an asset use transaction. The asset account (cash) decreases, supplies expense increases, net income decreases, and stockholders' equity (retained earnings) decreases. There is no effect on cash flow. The effect on cash flow occurs at the time the company pays for the supplies not when the supplies are expensed.

Which of the following most accurately depicts the steps in an accounting cycle?

Record transaction data → Adjust accounts → Prepare Statements → Close temporary accounts. Transaction data are recorded in accounts during the accounting period. However, some accounts are not updated during the accounting period. For example, used supplies are not recognized as an expense until the end of the accounting period. As a result, many accounts must be adjusted (updated) before the financial statements can be prepared. After the accounts have been adjusted, the financial statements are prepared. Finally, the temporary accounts (revenue, expense, and dividend accounts) are closed so that they begin the next accounting period with a zero balance.

On September 1 Christopher Company collected $1,200 for an agreement to provide insurance coverage that protects its client for a one year term starting immediately. On December 31 the company adjusted the accounts to show the portion of the insurance that had been provided. Which of the following shows how the adjustment will affect the company's financial records?

Revenue earned per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount earned = $100 per month x 4 months = $400 service revenue When the company settles an unearned revenue obligation, the liability account (unearned revenue) decreases and the revenue account increases. The increase in revenue causes net income to increase. The increase in net income causes stockholders' equity (retained earnings) to increase. There is no effect on cash flow because the cash flow was previously recognized at the time the cash was collected from the client.

Which of the following shows how the adjustment to recognize the portion of prepaid rent that has been used affects a company's financial statements?

The year-end adjustment to show the amount of rent that has been used is an asset use transaction. The asset account prepaid rent decreases. Rent Expense increases thereby decreasing net income. The decrease in net income decreases stockholders' equity (retained earnings). There is no effect on cash flow. The effect on cash flow occurred at the time the company paid for the rent not at the time it adjusts its records to reflect the amount of rent used.

On June 1 of Year 1 Zoe Company collected $1,800 cash for medical services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information the amount of unearned revenue and service revenue shown on the Year 1 financial statements would be

Unearned revenue - $750 Service revenue - $1050 Revenue earned per month = $1,800 total ÷ 12 months = $150 per month As of December 31, Year 1: Amount earned = $150 per month x 7 months = $1,050 service revenue Future obligation = $150 per month x 5 months = $750 unearned revenue

Which of the following shows how the adjusting entry to recognize services provided to a client who paid for the services prior to the work being performed?

When a company collects cash for services before they are provided, the company recognizes an obligation to provide the services in the future (unearned revenue). When the company settles its obligation by providing services, the liability account (unearned revenue) decreases and the revenue account increases. This is a claims exchange transaction. The increase in revenue causes net income to increase. The increase in net income causes stockholders' equity (retained earnings) to increase. There is no effect on cash flow because the cash flow was previously recognized at the time the cash was collected from the client.

When a company incurs accrued expenses

When a company recognizes an accrued expense it also recognizes an obligation (accrued liability) that will be paid in a subsequent accounting period. As a result the liability (accounts payable) increases. The expense recognition also lowers net income which causes stockholders' equity (retained earnings) to decrease. The event is a claims exchange transaction that does not affect assets.

Which of the following shows how paying off an accrued liability such as salaries payable will affect a company's financial statements?

When an accrued liability is paid the asset account (cash) decreases and the associated liability account (salaries payable) decreases. Expenses in the current period are not affected because they were recognized in a subsequent accounting period. The since the cash outflow was caused by previous period expense recognition it is classified as an operating activity.

Brown Company's December 31, Year 1 balance sheet showed $1,800 cash, $200 accounts payable, $600 common stock, and $1,000 retained earnings. The company experienced the following events during year 2. (1) On April 1, Year 2 the company paid $1,800 cash to rent office space for the coming year starting immediately. (2) Earned $1,700 cash revenue. (3) Paid a $300 cash dividend. Based on this information, the company would report

a $1,050 balance in retained earnings on the Year 2 balance sheet. Cost per month = $1,800 total ÷ 12 months = $150 per month As of December 31, Year 2: Amount used = $150 per month x 9 months = $1,350 rent expense for Year 2 income statement. Amount unused = $150 per month x 3 months = $450 prepaid rent for Year 2 balance sheet. Net cash flow from operating activities: $1,700 cash inflow from customers (revenue) - $1,800 cash outflow for rent = $100 net cash outflow. Ending retained earnings balance: $1,000 beginning balance in retained earnings + $1,700 revenue - $1,350 rent expense - $300 cash dividend = $1,050 ending retained earnings balance on the Year 2 balance sheet.

Hector Company's December 31, Year 1 balance sheet showed $900 cash, $600 supplies, $500 accounts payable, $400 common stock, and $600 retained earnings. The company experienced the following events during year 2. (1) Purchased $1,200 of supplies on account. (2) Earned $1,800 cash revenue. (3) Paid $1,100 cash to reduce accounts payable created in Event 1 above. (4) Physical count revealed $200 of supplies on hand at the end of Year 2. Based on this information, the company would report

a $1,600 supplies expense on the Year 2 income statement. a $600 balance in the accounts payable account on the Year 2 balance sheet. a $700 net cash inflow from operating activities on the Year 2 statement of cash flows. Amount of supplies expense: $600 beginning balance in supplies + $1,200 supplies purchased = $1,800 supplies available for use; $1,800 supplies available for use - $200 ending balance of supplies = $1,600 supplies expense shown on the Year 2 income statement. Amount of accounts payable balance: $500 beginning balance + $1,200 increase due to purchase of supplies - $1,100 payment to reduce accounts payable = $600 ending balance of accounts payable shown on the Year 2 balance sheet. Net cash flow from operating activities: $1,800 cash inflow from customers (revenue) - $1,100 cash outflow to reduce accounts payable = $700 net cash inflow.

Adams Company adjusted its records to recognized accrued salary expense at the end of its Year 1 accounting period. The recognition is

a claims exchange transaction. Recognizing accrued salary expense causes net income to decrease. The decrease in net income causes stockholders' equity (retained earnings) to decrease. Liabilities (salaries payable) increase. In summary, the event causes stockholders' equity to decrease and liabilities to increase. Therefore, it is a claims exchange transaction.

Crowe Company collected $18,000 in advance for services to be performed in the future. The year-end adjusting entry necessary to recognize the portion of the revenue that was earned during the year is

a claims exchange transaction. The adjusting entry would cause earned revenue to increase and a liability (unearned revenue) to decrease. The increase in revenue would cause net income to increase and ultimately stockholders' equity (retained earnings) to increase. In summary, the liability claim (unearned revenue) decreases and the equity claim (stockholders' equity) increases. Therefore the event is a claims exchange transaction.

On December 1, Year 3 Walton Company paid $3,600 cash for office space to be used during the coming year. This event is

an asset exchange transaction. Paying cash for office space to be used in the future causes in increase in one asset account (prepaid rent) and a decrease in another asset account (cash). Total assets are not affected. The cash purchase of prepaid rent is, therefore, an asset exchange transaction.

Styles Company paid cash to purchase supplies. This event is

an asset exchange transaction. Paying cash to purchase supplies causes an increase in one asset account (supplies) and a decrease in another asset account (cash). Total assets are not affected. The cash purchase is, therefore, an asset exchange transaction.

Crowe Company collected $18,000 in advance for services to be performed in the future. This event is

an asset source transaction. Collecting cash in advance for services to be performed in the future causes in increase in the asset account (cash) and an increase the liability account (unearned revenue). It is an asset source transaction.

On December 1, Year 3 Walton Company paid $3,600 cash for office space to be used during the coming year. This transaction was recorded as an asset exchange transaction. Based on this information, the year-end adjusting entry to recognize rent expense is

an asset use transaction. The adjusting entry to recognize rent expense causes a decrease in an asset account (prepaid rent) and an increase in the rent expense account. The increase in rent expense causes net income and ultimately stockholders' equity (retained earnings) to decrease. Since total assets and equity decrease this is an asset use transaction.

During its Year 2 accounting cycle Styles Company had $4,000 of supplies available for use. A year-end physical count of supplies found $300 of supplies on hand. Based on this information, the year-end adjusting entry necessary to recognize supplies expense is

an asset use transaction. The year-end adjusting entry to recognize supplies expense causes a decrease in an asset account (supplies) and an increase in the supplies expense account. The increase in expense causes a decrease in net income and ultimately a decrease in stockholders' equity (retained earnings). In summary, assets (supplies) and stockholders' equity (retained earnings) both decrease. This is an asset use transaction.

AAA Consulting Services collected cash for services to be provided in the future. Recognizing this event would cause the company's

assets and liabilities to increase Collecting cash for services to be provided in the future is an asset source transaction. The asset account (cash) and the liability account (unearned revenue) increase. The income statement is not affected. A cash inflow from operating activities would be shown on the statement of cash flows.

The unearned revenue account appears of which of the following financial statements?

balance sheet Unearned revenue is a liability account that appears on the balance sheet. The account represents a company's obligation to provide its clients goods or services in the future.

The following accounting equation represents the financial position of Qualtro Company. cash (400) + land (2200) = notes payable (800) + common stock (1200) + retained earnings (600) Based on this equation, Qualtro

can pay a $300 cash dividend. According to the accounting equation the total amount of cash in the business is $400. Therefore the company cannot pay $600 dividend. Note there is no cash in the retained earnings account. Retained earnings represents a source of assets not an amount of cash. Also, the $400 of cash is insufficient to pay the total liabilities of $800 or even a $600 partial payment of them.

Lawyers Inc. accepted a $12,000 retainer for which the company agreed to provide services in the future. Recognizing this event would

defer the recognition of revenue. cause the company's assets to increase. cause the company's liabilities to increase Collecting cash for services to be provided in the future is an asset source transaction. The asset account (cash) and the liability account (unearned revenue) increase. The revenue recognition is deferred until the services are actually performed.

A deferral

exists when a company pays cash before recognizing the associated expense. provides better matching of revenues with their associated expenses than does cash basis accounting.

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.

Recognizing an expense may cause

liabilities to increase. An expense is an economic sacrifice. A business experiences a sacrifice when the amount of its total assets decrease or its total liabilities increase. This definition applies to individuals as well as businesses. For example, you experience a sacrifice if you wreck your car (the value of your assets decline). Further, if the police officer who investigates the accident tickets you for reckless driving, you experience a sacrifice because you will have to pay the ticket in the future (your liabilities increase). Accordingly, an expense can be defined as a decrease in assets or an increase in liabilities.

If total assets increase then

liabilities, common stock, or retained earnings must increase. If total assets increase, then assets had to be received from some source. In accordance with the accounting equation, the increase on the asset (left) side of the accounting equation must be offset by an increase on the source (right) side of the equation. Since liabilities, common stock, and retained earnings appear on the rights side of the equation, an increase in an asset account must be offset by an increase in one of these right side accounts.

Baltimore Company paid cash to purchase insurance that would protect the company during the coming year. The recognition of this event would

not affect total assets or equity. The payment of cash for insurance that protects a company in the future is an asset exchange transaction. One asset account (cash) decreases and another asset account (prepaid insurance) increases. The amount of total assets is not affected. The income statement is not affected until the insurance is actually used to provide protection. However, the statement of cash flows is affected. More specifically, the cash outflow is shown in the operating activities section.

Maria Company began Year 2 with $85,000 in its Land account. During Year 2 the company made two separate purchases of land. The first purchase of land cost $52,000. The second purchase of land cost $94,000. Based on this information the company's accounting records will have

one land account. two land accounts. three land accounts. All of the answers represent possibilities that could exist in Maria's accounting records.

On May 1 of Year 1 Matthew Company collected $2,400 cash for services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information, the amount of service revenue and the cash flow from operating activities shown on the Year 1 financial statements would be

service revenue - $1600 cash flow - $2400 Revenue earned per month = $2,400 total ÷ 12 months = $200 per month As of December 31, Year 1: Amount earned = $200 per month x 8 months = $1,600 service revenue All of the cash was collected in Year 1, the cash flow from operating activities on the December 31, Year 1 statement of cash flows would be $2,400.

Which of the following accounts would most likely need to be adjusted at the end of an accounting cycle?

supplies Normally, it is impractical to record supplies expense as the supplies are being used. For example, it would require too much time to record supplies expense every time a staple is used to attach a couple of pieces of paper together. Instead, companies wait until the end of the accounting period to determine the amount of supplies on hand. The amount of supplies on hand is then subtracted from the amount of supplies that were available for use during the period to determine the total amount of supplies that have been used during the accounting period. The company then adjusts the supplies account in a single entry that recognizes supplies expense and reduces the balance in the supplies asset account. In contrast, accounts receivable and payable are normally maintained during the accounting cycle. For example, the accounts receivable account is increased at the time the company performs services on account. The company does not wait until the end of the accounting period to adjust the accounts receivable account. Similarly, the account payable account is decreased at the time the company pays it debt. Since these accounts are maintained on an "as you go" basis, they do not need to be adjusted at the end of the accounting cycle.

If a company recognizes $5,000 of accrued salary expense on December 31, Year 1,

the December 31, Year 1 expense recognition will not affect the cash account. The recognition of the accrued salary expense on December 31, Year 1 would cause the Accrued Salaries Expense account to increase and the Accrued Salaries Payable account to increase by $5,000. At the end of the Year 1 accounting cycle the expense account would be closed to retained earnings resulting in a zero balance in the account on January 1, Year 2. The Accrued Salaries Payable account is a permanent account that is not closed at the end of accounting cycle. Therefore the balance in the Accrued Salaries Payable account on January 1, Year 2 would be the same as it was on December 31, of Year 1 which is $5,000. Recognizing an accrued expense does not affect the cash account at the time the expense is recognized on December 31, Year 1. Recall that the definition of an accrued expense is that the cash is paid after the expense is recognized.

Alpha Company's December 31, Year 1 balance sheet showed $1,700 cash, $1,000 common stock, and $700 retained earnings. The company experienced the following event during Year 2. (1) On March 1, paid $1,200 to purchase insurance coverage for one year beginning immediately. Based on this information alone,

the Year 2 balance sheet would show $200 of prepaid insurance. Cost per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 2: Amount used = $100 per month x 10 months = $1,000 insurance expense Future benefit = $100 per month x 2 months = $200 prepaid insurance The $1,000 expense is shown on the Year 2 income statement and the $200 remaining balance in the prepaid insurance account is shown on the Year 2 balance sheet.

Fowler Company's December 31, Year 1 balance sheet showed $1,700 cash, $1,000 common stock, and $700 retained earnings. The company experienced the following event during Year 2. (1) On October 1, collected $1,200 in advance for an agreement to provide office space for one year beginning immediately. Based on this information alone,

the Year 3 income statement would show $900 of rent revenue. Earnings per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 2: Amount earned = $100 per month x 3 months = $300 earned revenue Future obligation = $100 per month x 9 months = $900 unearned revenue The $300 earned revenue is shown on the Year 2 income statement and the $900 remaining balance in the unearned revenue account is shown on the Year 2 balance sheet. As of December 31, Year 3: Amount earned = $100 per month x 9 = $900 earned revenue Since all of the revenue has been earned by December 31, Year 3, the balance in the unearned revenue account on the Year 3 balance sheet is zero

Alpha Company's December 31, Year 1 balance sheet showed $1,700 cash, $1,000 common stock, and $700 retained earnings. The company experienced the following event during Year 2. (1) On March 1, paid $1,200 to purchase insurance coverage for one year beginning immediately. Based on this information alone,

the Year 3 statement of cash flows would show zero outflow to purchase insurance. Since all of the cash was paid in Year 2, there would be zero cash flow associated with the Year 3 statement of cash flows. Cost per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 2: Amount used = $100 per month x 10 months = $1,000 insurance expense for Year 2 As of December 31, Year 3: Amount used = $100 per month x 2 months = $200 insurance expense for Year 3

The accounts payable account appears on

the balance sheet Accounts payable is a liability account. It is a permanent account that is not closed and is carried forward from one accounting period to the next. The ending balance of the account appears on the balance sheet.

A prepaid rent account appears of which on the following financial statements?

the balance sheet Prepaid rent is an asset that represents a future benefit, the use of rented space. Like all other assets, it appears on the balance sheet.

On December 31, Year 3 Snack, Inc. adjusted its records to recognize $5,000 of accrued salaries. Based on this information alone

the balance sheet at the beginning of Year 4 would show $5,000 of accrued salaries payable. The adjusting entry recognizes accrued salary expense and accrued salaries payable. The expense account would be closed at the end of Year 3 and would not be shown on the Year 4 income statement. However, the accrued salaries payable account is a permanent account. The account would not be closed. Instead, the balance would be carried forward to the beginning Year 4 balance sheet.

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 liquidation, 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 increase security but it does not eliminate risk.

If a company recognizes accrued salary expense

the employees have completed work but have not been paid.

The closing process normally occurs at

the end of an accounting cycle. Temporary accounts (revenue, expense, and dividend) are used to capture data that occurs during a single accounting cycle. At the end of the cycle it is necessary to transfer the balances from these accounts to a permanent account (retained earnings) so that income and dividend data from one accounting cycle is not mixed with income and dividend data from a different accounting cycle. Closing allows temporary accounts to start each accounting period with a zero balance thereby making them ready to capture data pertaining only to the current accounting cycle.

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).

When a company collects cash from accounts receivable,

total assets are not affected When a company collects an account receivable one asset account increases (cash) and another asset account decreases (accounts receivable). The amount of total assets is not affected.

When a company pays cash to reduce accounts payable

total assets decrease Paying cash to reduce accounts payable reduces total assets (cash) and the liability account (accounts payable). Stockholders' equity, including retained earnings, is not affected.

When a company pays cash to purchase supplies

total assets is not affected. When a company pays cash to purchase supplies one asset account (cash) decreases and another asset account (supplies increases). The amount of total assets is not affected. Expenses and liabilities are not affected. The cash flow associated with the purchase of supplies is an operating activity not an investing activity.

Delta Company started Year 2 with a $1,700 in cash, $700 in supplies, and $2,400 in common stock accounts. During Year 2 the company experienced the following events. (1) Paid $1,600 cash to purchase supplies. (2) Physical count revealed $400 of supplies on hand at the end of Year 2. Based on this information the year-end adjusting entry to recognize supplies expense would cause

total stockholders' equity to decrease by $1,900. The amount of supplies available for use is $2,300 ($700 beginning balance in the Supplies account plus the $1,600 amount of supplies purchased). Given that there was $400 of supplies on hand at the end of the accounting period, $1,900 ($2,300 available - $400 ending balance) of supplies must have been used during the period. The amount of supplies used would be recorded as an expense. The expense recognition would cause assets (supplies) to decrease by $1,900, supplies expense to increase by $1,900 and equity (retained earnings) to decrease by $1,900. The amount of cash flow from operating activities is a $1,600 outflow.

A cost may be recorded as an expense or as an asset purchase. This statement is

true

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

true

Alexis Company was started in Year 1. At the end of Year 1 the Company's had the following accounting equation. Cash (600) + land (2200) = notes payable (1000) + common stock (1400) + retained earnings (400) 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

true 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.

Unearned revenue is a liability account that normally needs to be adjusted at the end of an accounting cycle. This statement is

true Many times it is impractical to recognize revenue as it is being earned. For example, a lawyer cannot stop in the middle of closing arguments to recognize revenue. Under such circumstances, it is better to determine the amount of revenue that has been earned during the entire accounting period and to recognize it all at once in a single adjusting entry just prior to making the financial statements.

On August 1 of Year 1 Accounting Associates collected $1,200 cash for consulting services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information, the amount of unearned revenue appearing on the Year 2 balance sheet would be

zero Revenue earned per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount earned = $100 per month x 5 months = $500 service revenue Future obligation = $100 per month x 7 months = $700 unearned revenue As of December 31, Year 2: Amount earned = $100 per month x 7 months = $700 service revenue All of the revenue has been earned by the end of Year 2 so the amount of unearned revenue is zero on December 31, Year 2.