Accounting Final Quiz Questions

Chapter 4 An increase in accounts payable is recorded with a credit. A. True B. False

A. True -Accounts payable is a liability, which is a credit account. Therefore, increases are recorded with a credit, while decreases are recorded with a debit.

Chapter 1/2 Prospective employees of a company would have a reason to use the information provided by financial accounting. A. True B. False

A. True

Chapter 1/2 Amounts owed to suppliers is: A. An Asset B. A Liability C. An Expense D. Revenue

B. A Liability

Chapter 3 Gross profit is calculated by subtracting operating expenses from revenues. A. True B. False

B. False -Gross Profit = Revenues - Cost of Goods Sold

Chapter 9 The FIFO assumption assumes that the most recent purchase of inventory is sold first. A. True B. False

B. False -The FIFO assumption assumes that the earliest purchased inventory is sold first.

Chapter 3 A company reports total assets of $600,000 ($500,000 of which are current). The same company reports total liabilities of $350,000 ($325,000 of which are current). What is the amount of working capital? A. 175,000 B. 250,000 C. 100,000 D. 75,000 E. 150,000

A. 175,000 -Working capital = current assets - current liabilities -500,000 - 325,000 = 175,000

Chapter 4 Grant Company purchases a machine for $7,000, by signing a note payable for $2,000 and paying cash for the remaining amount. Which of the following is true of this transaction? A. Total assets and total liabilities will increase by $2,000 B. Total assets will increase by $7,000 C. Total liabilities will decrease by $2,000 D. Total liabilities will increase by $7,000 E. Total assets and total liabilities will increase by $5,000

A. Total assets and total liabilities will increase by $2,000 -Machine 7,000 Cash 5,000 Notes payable 2,000 -Machine (an asset account) is increasing by 7,000 and cash (an asset account) is decreasing by 5,000, therefore, total assets are increasing by 2,000. -Notes payable (a liability account) is increasing by $2,000, therefore, total liabilities are increasing by 2,000

Chapter 10 The cost of an asset as well as its accumulated depreciation is removed when an asset is sold. A. True B. False

A. True

Chapter 3 Income tax expense is typically reported separately from other expenses on the income statement. A. True B. False

A. True

Chapter 3 The purpose of a statement of cash flows is to show the cash inflows and outflows for a period of time. A. True B. False

A. True

Chapter 5 Revenues and expenses have a balance of zero at the beginning of each reporting cycle. A. True B. False

A. True

Chapter 7 Accounts receivable are presented on the balance sheet at its net realizable value. A. True B. False

A. True

Chapter 5 According to U.S. GAAP, expenses are recorded when cash is paid. A. True B. False

B. False Expenses are recognized in the same time period as the revenue they help to create (Matching Principle)

Chapter 3 The Simpson Corporation has been in business now for six years. At the end of its latest fiscal year, the company reported $740,000 in assets, $320,000 in capital stock, and $180,000 in retained earnings. What are the liabilities? A. 500,000 B. 420,000 C. 240,000 D. 420,000 E. 560,000

C. 240,000 -Assets = Liabilities + Shareholders equity -Shareholders equity = Capital stock + retained earnings -740,000 = x + (320,000 + 180,000) -740,000 = x + 500,000 -x = 240,000

Chapter 8 Phillips Company purchased seven tables for $200 each on May 11. The terms listed on the invoice Phillips received were 1/10 n/30. Phillips paid the invoice on May 18. How much did Phillips pay in total for the tables? A. $1,260 B. $980 C. $1,372 D. $1,400 E. $1,386

E. $1,386 -The payment terms 1/10, n/30 means that the invoice is due in 30 days and any portion of the invoice that is paid within the first ten days from the date of sale would receive a 1% discount. -Since the entire invoice was paid within 10 days from the date of sale, there would be a full 1% discount. -Therefore, the amount paid for the tables would be 1,386 calculated as follows: 7 tables x 200 per table = 1,400 Less: 1% discount (1,400 x .01) (14) Total paid 1,386

Chapter 5 On December 1, 2019 Beta Corporation agreed to provide services to Gamma Company for $12,000. On December 31, 2019 the work was completed, however, payment of the $12,000 is not expected to be received by Beta until January 15, 2020. How much revenue should Beta Corporation record when preparing the adjusting journal entry for 2019 with regards to the work done for Gamma Company? A. $12,000 B. $0 C. $3,000 D. $6,000 E. $9,000

A. $12,000 -In accordance with the Revenue Recognition Principle, revenue is recognized when the earnings process needed to generate the revenue is substantially complete and the amount to be eventually received can be reasonably estimated. -Beta completed their performance obligation of providing services for Gamma on December 31, 2019. Therefore, Beta will record the $12,000 of revenue as an adjusting entry on December 31, 2019.

Chapter 8 Alice began the year with $27,000 in inventory. Alice Corporation cost of goods sold during the year was $15,000. An end of the year count showed $38,000 in inventory. How much was Alice's purchases for the year? A. $26,000 B. $104,000 C. $80,000 D. $50,000 E. $4,000

A. $26,000 -We use the following formula to determine the cost of goods sold; Beginning inventory 27,000+Purchases x-Ending inventory (38,000)=Cost of goods sold 15,000 -Solve for x 27,000 + x - 38,000 = 15,000 x = 15,000 - 27,000 + 38,000 x = 26,000

Chapter 8 Marvel Inc. had a beginning inventory balance of $78,000. During the year, the company purchased $470,000 of inventory. Sales for the period amounted to $826,000. The ending inventory count showed $160,000 in inventory. What is the gross profit of Marvel for the year? A. $438,000 B. $666,000 C. $284,000 D. $388,000 E. $440,000

A. $438,000 -Gross profit = Revenue - Cost of Good Sold Revenue = 826,000 -We use the following formula to determine the cost of goods sold: Beginning inventory 78,000+Purchases 470,000-Ending inventory (160,000)=Cost of goods sold 388,000 Therefore, gross profit is: 438,000 calculated as follows: Revenue 826,000 Cost of goods sold (388,000) Gross Profit 438,000

Chapter 10 Jacobs Company estimates that its new equipment will last 10 years and have a residual value of $6,000. The original cost of the equipment was $86,000. Jacobs uses the straight-line method of depreciation. What would be the net book value of the equipment at the end of year 4? A. $54,000 B. $62,000 C. $48,000 D. $41,000 E. $51,600

A. $54,000 Cost of equipment 86,000 Less: Residual value (6,000) Depreciable cost 80,000 Divided by / 10 years Annual Depreciation expense 8,000 After 4 years, accumulated depreciation would be 8,000 x 4 = 32,000 Therefore, the net book value of the equipment after three years would be 54,000 calculated as follows: Equipment 86,000 Less: Accumulated depreciation (32,000) Equipment, net 54,000

Chapter 9 Tank Corporation had the following transaction during the month of July: 7/1 Beginning Inventory 140 units @ $6 each 7/5 Sold 80 units @ $10 each 7/12 Purchased 70 units @ $7.30 each 7/20 Sold 100 units @ $11 each 7/25 Purchased 80 units @ $7.50 each Tank Corporation uses a perpetual FIFO system. What is the gross profit for the month of July? A. $768 B. $540 C. $609 D. $1,900 E. $729

A. $768 Using Perpetual FIFO Beginning inventory 140 @ 6 Sold (80) 80 @ 6 = 480 Purchased 70 @ 7.30 Sold (100) 60 @ 6 = 360 40 @ 7.30 = 292 Purchased 80 @ 7.50 Ending Inventory 110 Total CGS 1,132 Revenue: sold 80 units @ $10 each = $800 sold 100 units @ $11 each = $1,100 $1,900 revenue Gross profit = revenue - cost of goods sold 1,900 - 1,132 = 768

Chapter 3 Nevada Inc. reports the following: assets of $600,000, liabilities $200,000 and capital stock of $275,000. What is the amount reported for total shareholders equity? A. 400,000 B. 525,000 C. 325,000 D. 475,000 E. 125,000

A. 400,000 -Assets = Liabilities + Shareholders Equity; -600,000 = 200,000 + x -x= 400,000

Chapter 1/2 Inventory is: A. An Asset B. A Liability C. An Expense D. Revenue

A. An Asset (Balance Sheet)

Chapter 1/2 Advertising expense is: A. An Expense B An Asset C. A Liability D. Revenue

A. An Expense (Income Statement)

Chapter 4 Orange Corporation issues capital stock of $8,000. Which of the following correctly identifies the accounts and their movements for this transaction? A. Cash increases by $8,000; Capital Stock increases by $8,000. B. Cash decreases by $8,000; Capital Stock decreases by $8,000. C. Cash increases by $8,000; Capital Stock decreases by $8,000. D. Capital Stock decreases by $8,000; Note Payable increases by $8,000. E. Cash increases by $8,000; Note Payable increases by $8,000.

A. Cash increases by $8,000; Capital Stock increases by $8,000. -Cash 8,000 Capital stock 8,000 -Cash (an asset account) increases 8,000 and capital stock (a shareholders equity account) increases 8,000.

Chapter 3 Ace Company has been in business for several years selling guitars. The company buys guitars from several vendors and sells them at a local store. At the end of Year Five, the company has a number of account balances including the following. Accounts payable $ 10,000 Advertising expense 30,000 Capital stock 30,000 Cash 20,000 Cost of goods sold 160,000 Dividends paid to owners 8,000 Gain on sale of delivery truck 5,000 Income tax expense 25.000 Inventory 40,000 Salary expenses 100,000 Sales revenue 400,000 Based on just the information that is provided, what is the amount reported for Year Five for Ace as its gross profit and as its net income? A. Gross profit is $240,000 and net income is $90,000 B. Gross profit is $240,000 and net income is $82,000 C. Gross profit is $245,000 and net income is $90,000 D. Gross profit is $245,000 and net income is $82,000

A. Gross profit is $240,000 and net income is $90,000 -Gross profit is sales revenue of $400,000 less cost of goods sold of $160,000 or $240,000. Net income is this gross profit of $240,000 less salary expense of $100,000, less advertising expense of $30,000, plus the gain on the sale of the delivery truck of $5,000, and less income tax expense of $25,000 or $90,000.

Chapter 1/2 A company pays $6,000 in cash for a piece of equipment. What is the impact to the company's net assets? A. Remain the same B. Increase C. Decrease

A. Remain the same -Net assets = Assets - Liabilities -Equipment (an asset) increases by $6,000 and cash (an asset) decreases by $6,000, therefore, net assets remain the same.

Chapter 5 A company pays $60,000 to rent a building for the next thirty days. The company originally recorded the $60,000 payment in rent expense. After twelve days, financial statements are to be prepared. The accountant forgot to make the adjusting entry that was needed. Which of the following is true about the financial statements? A. Shareholder's equity is understated by $36,000 B. Expenses are overstated by $24,000 C. Assets are understated by $24,000 D. Net income is understated by $24,000 E. Net income is overstated by $36,000

A. Shareholder's equity is understated by $36,000 -60,000 for 30 days = 2,000 per day After 12 days have passed: -12 days of rent would be 2,000 x 12 days = 24,000 Prepaid rent would be 2,000 x 18 days = 36,000 If the original entry was: -Rent expense 60,000 Cash 60,000 The adjusting entry after 12 days passed would be as follows: -Prepaid rent 36,000 Rent expense 36,000 Since the adjusting entry was not made: -Rent expense is overstated by 36,000 (should have been 24,000 instead of 60,000), therefore net income and shareholders equity are understated by 36,000 Prepaid rent (asset) is understated by 36,000 (should have been 36,000 instead of 0)

Chapter 10 A subsequent expenditure for property and equipment that keeps the asset running, should be expensed. A. True B. False

A. True -A subsequent expenditure for property and equipment that keeps the asset running, should be expensed. -Whereas, a subsequent expenditure for property and equipment that improves the assets productivity should be capitalized.

Chapter 4 A company receives money from a customer before the company performs the required service. Both assets and liabilities increase as a result of this transaction. A. True B. False

A. True -Cash xxx Unearned revenue xxx -Cash (an asset account) and unearned revenue (a liability account) both increase.

Chapter 4 A company declares and distributes a dividend to its shareholders. As a result of this transaction, assets decrease and shareholder's equity decreases. A. True B. False

A. True -Dividends xxx Cash xxx -Debiting dividends (a shareholders equity account) results in a decrease to shareholders equity, while crediting cash (an asset account) results in a decrease to assets.

Chapter 10 When a piece of equipment is purchased, the related employee training costs should be capitalized. A. True B. False

A. True -Equipment is initially recorded at its historical cost (the cost of the equipment), which included all normal and necessary expenditures to get the asset into condition and position to generate revenues, i.e. -- shipping, installation and employee training. -Therefore, employee training costs should be capitalized.

Chapter 8 In a periodic inventory system, cost of goods sold is recorded just before financial statements are produced. A. True B. False

A. True -In a periodic inventory system, cost of goods sold is recorded just before financial statements are produced. -In a perpetual inventory system, cost of goods sold is recorded at the time of sale.

Chapter 4 A company purchases inventory on account. Net assets are unchanged as a result of this transaction. A. True B. False

A. True -Inventory xxx Accounts payable xxx -Inventory (as asset account) increases and accounts payable (a liability account) increases. -Net assets = assets - liabilities -Since both assets and liabilities are increasing by the same amount, there is no change in net assets.

Chapter 1/2 Stockholders in a large corporation like Microsoft do not have a say in the day-to-day operations of the company? A. True B. False

A. True -The day to day operating decisions are made by the company's management.

Chapter 9 Jayco Corporation's cost of goods sold for the year was $164,250. Jayco had a beginning inventory balance of $7,600 and an ending inventory balance of $5,000. The number of days inventory is held is 14. A. True B. False

A. True -The number of days inventory is held = Average inventory / Cost of goods sold per day Average inventory (7,600 + 5,000) / 2 = 6,300 Cost of goods sold per day 164,250 / 365 = 450 Number of days inventory is held = 6,300 / 450 = 14 days

Chapter 8 Ace Company purchased inventory from Beta Corporation on December 29, 2021 for $40,000 FOB Destination. The inventory, which cost Beta $15,000, was shipped by Beta on December 30, 2021 and arrived at Ace Company on January 2, 2022. Beta's inventory at December 31, 2021 was $1,980,000, which excluded the inventory from the sale of the inventory to Ace. What is the correct amount of inventory that Beta should report at December 31, 2021? A. $1,980,000 B. $1,995,000 C. $2,020,000 D. $2,005,000

B. $1,995,000 -The inventory was shipped FOB Destination, which means that title and risk of loss pass from the seller (Beta) to the buyer (Ace) on the date the inventory arrives at the buyer (Ace). -Therefore, the purchase of the inventory by Ace and the sale of the inventory by Beta get recorded when the inventory arrives at ACE, which is on January 2, 2022. -Beta's inventory of $1,980,000 at December 31, 2021 should have included the inventory that was sold to ACE. Therefore, the correct amount of inventory that Beta should report at December 31, 2021 is $1,995,000 ($1,980,000 + $15,000).

Chapter 10 King Corporation purchased machinery on January 1, 2012. The annual depreciation expense for the machinery was $6,000. The net book value of machinery at the end of 2015 was $120,000. What is the original cost of machinery? A. $138,000 B. $144,000 C. $96,000 D. $126,000 E. $150,000

B. $144,000 Machinery purchased on 1/1/12; Annual Depreciation Expense is 6,000 Depreciation expense per year: 2012 6,000 2013 6,000 2014 6,000 2015 6,000 24,000 -- Accumulated Depreciation at 12/31/15 Therefore, the original cost of the machinery is 144,000 calculated as follows: Net book value on 12/31/15 120,000 Add: Accumulated depreciation on 12/31/15 24,000 Original cost of the machinery 144,000

Chapter 9 On June 1, Felix Company purchased 20 umbrellas for $3 each. On June 11, the company purchased additional 20 umbrellas for $4 each. On June 20, it sold 24 umbrellas for $9 each. If Felix is using the averaging method, what would be its ending inventory on June 20? A. $84 B. $56 C. $48 D. $64 E. $76

B. $56 6/1 Purchased 20 units @ $3 per unit 6/11 Purchased 20 units @ $4 per unit 6/20 Sold (24 units) Ending inventory 16 units Average cost method 20 units @ $3 per unit = $60 20 units @ $4 per unit = $80 40 units $140 Average cost per unit $140 / 40 units = $3.50 Ending inventory 16 units x Average cost per unit $3.50 = $56

Chapter 9 The Bon-Air Company starts the year with 5,000 units costing $10 each. The company sells 4,000 units and then buys 5,000 units more at $12 each. The company next sells 4,000 more units and buys a final 5,000 units at $15 each. A physical inventory at the end of the year finds 7,000 units remaining. If the company uses a periodic FIFO system, what does it report as its cost of goods sold? A. $88,000 B. $86,000 C. $98,000 D. $111,000

B. $86,000 Using Periodic FIFO Beginning inventory 5,000 @ 10 Sold (4,000) Purchased 5,000 @ 12 Sold (4,000) Purchased 5,000 @ 15 Ending Inventory 7,000 Cost of goods sold 8,000 units 5,000 @ 10 = 50,000 3,000 @ 12 = 36,000 Total 86,000

Chapter 1/2 Helen R'entro recently bought 100 shares of Netflix common stock. Which of the following is the most probable reason why she would have acquired these shares? A. As an owner, she hopes to influence the future operating decisions of the company. B. As an owner, she hopes the stock will appreciate in value and that she might also receive cash dividends. C. As an owner, she is entitled to a discount on the services provided by the company. D. As an owner, she is entitled to certain considerations if she ever applies for a job with the company.

B. As an owner, she hopes the stock will appreciate in value and that she might also receive cash dividends.

Chapter 5 Central Publishing collected $5,000 in cash from a customer for future subscriptions. Which journal entry should Central make on the date the cash is received? A. Unearned revenue $5,000 Cash $5,000 B. Cash $5,000 Unearned revenue $5,000 C. Unearned revenue $5,000 Revenue $5,000 D. Cash $5,000 Revenue $5,000 E. Revenue $5,000 Unearned revenue $5,000

B. Cash $5,000 Unearned revenue $5,000 -When cash is collected before the work is done or service is provided it cannot be recognized as revenue. -Instead it is recorded as a liability in an account called Unearned Revenue. -Cash 5,000 Unearned Revenue 5,000

Chapter 1/2 Financial accounting would not be important to an investor in a company since they already own shares of the company. A. True B. False

B. False

Chapter 8 If the cause of a discrepancy between the physical count and the inventory T-account is theft, cost of goods sold should be adjusted. A. True B. False

B. False

Chapter 9 The LIFO assumption assumes that the earliest purchased inventory is sold first. A. True B. False

B. False

Chapter 9 On June 1, Felix Company purchased 20 umbrellas for $3 each. On June 11, the company purchased additional 20 umbrellas for $4 each. On June 20, it sold 24 umbrellas for $9 each. If Felix is using the FIFO method, what would be its ending inventory? A. $92 B. $48 C. $76 D. $64 E. $216

D. $64 -6/1 Purchased 20 units @ $3 per unit -6/11 Purchased 20 units @ $4 per unit -6/20 Sold (24 units) -Ending inventory 16 units Using FIFO: Ending inventory is as follows: 16 @ $4 per unit = 64 Cost of Goods sold is as follows: 20 units @ $3 per unit = 60 4 units @ $4 per unit = 16 76

Chapter 5 A company pays $6,000 on November 1, 2019 for insurance expense for the next five months. On that date, the company debited insurance expense and credited cash for $6,000. The adjusting entry made on December 31, 2019 will include a $2,400 debit to prepaid insurance. A. True B. False

B. False -6,000 for 5 months = $1,200 per month -If the original entry on November 1, 2019 was: Insurance expense 6,000 Cash 6,000 -After 2 months have passed (November and December): Insurance expense for those two months should be 1,200 x 2 months = 2,400 Prepaid insurance at December 31, 2019 should be 1,200 x 3 months = 3,600 -The adjusting entry at December 31, 2019 (after 2 months have passed) would be as follows: Prepaid insurance 3,600 Insurance expense 3,600 -Insurance expense would therefore be 2,400 (2 months of November and December) for 2019, and prepaid insurance would be 3,600 (3 months of January, February and March) at December 31, 2019.

Chapter 3 A balance sheet presents the assets, liabilities and shareholders equity of a company for a period of time. A. True B. False

B. False -A balance sheet presents assets, liabilities and shareholders equity at a particular date. Not for a period of time.

Chapter 8 A periodic inventory system provides an ongoing record of all inventory items. A. True B. False

B. False -A perpetual inventory system provides an ongoing record of all inventory items.

Chapter 7 A decrease in the allowance for doubtful accounts is recorded with a credit. A. True B. False

B. False -Allowance for doubtful accounts ("ADA") is a contra asset account, which is a credit account. -Therefore increases to ADA will be recorded with a credit, while decreases to ADA will be recorded with a debit.

Chapter 7 A company ends the current year with sales of $900,000, accounts receivable of $200,000, and an unadjusted allowance for doubtful accounts with a $3,000 credit balance. Bad debts are estimated to be 5 percent of sales. On the financial statements, the allowance for doubtful accounts will be reported as having a $42,000 credit balance. A. True B. False

B. False -Bad debt expense is estimated to be 5% of sales. Therefore, bad debt expense is 900,000 (sales) X .05 = 45,000 The journal entry to record this bad debt expense is: -Bad debt expense 45,000 ADA 45,000 -The ADA had a 3,000 credit balance before the bad debt expense was recorded. Therefore, after the bad debt expense is recorded the ADA will have a credit balance of 48,000 (45,000 + 3,000)

Chapter 5 Assets, liabilities and stockholders' equity accounts will all start each new accounting period with a zero balance. A. True B. False

B. False -Balance sheet accounts start the following period with their prior period ending balance as the beginning balance.

Chapter 4 An increase in capital stock is recorded with a debit. A. True B. False

B. False -Capital stock is a shareholders equity account, which is a credit account. Therefore, increases are recorded with a credit, while decreases are recorded with a debit.

Chapter 1/2 Financial accounting is the communication of information within an organization so that internal decisions can be made appropriately. A. True B. False

B. False -Financial accounting is the communication of information about a business so individuals can assess its financial health and future prospects.

Chapter 5 In producing financial statements for the Mayberry Corporation, prepaid insurance is accidentally reported as an expense. As a result, reported net income will be overstated for that period. A. True B. False

B. False -If a prepaid expense was accidentally reported as an expense, expenses would be overstated, therefore net income would be understated.

Chapter 12 If an investor has the ability to exercise significant influence over the operations of the investee, dividends from the investee are accounted for by debiting Cash and crediting Dividend Income. A. True B. False

B. False -If an investor has the ability to exercise significant influence over the operations of an investee, the investor uses the equity method of accounting to account for the investment. -Under the equity method of accounting, an investor records dividends received as a reduction to the carrying value of the investment by debiting cash and crediting the investment account.

Chapter 9 In periods of inflation, FIFO is associated with lower reported net income and ending inventory. A. True B. False

B. False -In periods of inflation, FIFO is associated with higher reported net income and ending inventory, because the earliest purchased (least expensive) inventory is the inventory that is deemed to have been sold first.

Chapter 8 The cost of inventory only includes the purchase price and the cost of transportation. A. True B. False

B. False -Inventory is initially recorded at its historical cost (purchase price), which includes normal and necessary amounts to get the inventory into condition to be sold (i.e. transportation, assembly, etc.)

Chapter 1/2 For financial statements to be fairly presented they must be free from any misstatements. A. True B. False

B. False -MATERIAL Misstatements would make this true.

Chapter 4 A company repays money it owes to a bank. Only assets will decrease as a result of this transaction. A. True B. False

B. False -Notes payable xxx Cash xxx -Notes payable (a liability account) and cash (an asset account) both decrease.

Chapter 1/2 The International Accounting Standards Board is responsible for setting accounting standards in the United States of America. A. True B. False

B. False -The Financial Accounting Standards Board (FASB) is responsible for setting accounting standards in the United States of America.

Chapter 9 In periods of inflation, LIFO will yield a higher ending inventory than the other costing methods. A. True B. False

B. False -The LIFO assumption assumes that the most recently purchased (more expensive) inventory is sold first. Therefore, in periods of inflation, LIFO will yield a lower ending inventory than the other costing methods.

Chapter 10 The straight-line method and units of production method are the only depreciation methods allowed by U.S. GAAP. A. True B. False

B. False -U.S. GAAP requires the use of a depreciation method that is systematic and rational, which includes the use of an accelerated method.

Chapter 1/2 A measure of the inflow or increase in net assets generated by the sales of goods and services made by a business is termed as: A. Net Asset B. Liability C. Asset D. Expense E. Revenue

E. Revenue (Income Statement)

Chapter 7 A company ends the current year with sales of $800,000, accounts receivable of $150,000, and an unadjusted allowance for doubtful accounts with a $500 debit balance. Uncollectible amounts are estimated to be 3 percent of receivables. On the financial statements, the bad debt expense will be reported at $4,500. A. True B. False

B. False -Uncollectible amounts are estimated to be 3% of receivables. Therefore, uncollectible amounts are 150,000 (A/R) x .03 = 4,500 -The 4,500 represents the ending credit balance in the ADA. The ADA had an unadjusted debit balance of $500, therefore, bad debt expense is $5,000 ($4,500 + $500)

Chapter 10 If property and equipment has a fair value greater than its book value, a gain should be recorded. A. True B. False

B. False -Under U.S GAAP, property and equipment is never written up to fair value. A gain is only recorded if the property and equipment is sold for an amount greater than its book value. -However, property and equipment that is impaired is written down to fair value.

Chapter 3 When a company sells inventory for more than the cost of the inventory, a gain is reported on the income statement. A. True B. False

B. False -When a company sells inventory, they report the Revenue and Cost of Goods Sold for the sale on the income statement. -A gain is not reported from the sale of a company's inventory.

Chapter 7 U.S. GAAP requires a company to record bad debt expense in the period when the receivable is determined to be uncollectible. A. True B. False

B. False In accordance with the Matching Principle, US GAAP requires you to estimate uncollectible accounts (record bad debt expense) in the same period that the related credit sales are made.

Chapter 1/2 A company sells a service to a customer for $70,000, but payment will not be made for several months. What is the impact to the company's net assets? A. Decrease B. Increase C. Remain the same

B. Increase -Net assets = Assets - Liabilities -Accounts receivable (an asset) increases by $70,000 and liabilities remain the same, therefore, net assets increase by $70,000.

Chapter 1/2 Which of the following statements is true of financial accounting? A. Managerial Accounting is another name for Financial Accounting B. It is used by external parties to make financial decisions C. It is primarily used to make internal decisions of a business D. The effectiveness of advertising can be judged using Financial Accounting E. It is used to make lease or purchase decisions

B. It is used by external parties to make financial decisions

Chapter 4 Ace Company buys inventory for $40,000 on December 1, Year One. The inventory is sold to a customer for $50,000 on December 17, Year One and the customer takes possession of the goods on that date. The customer will not make the $50,000 payment until January 17, Year Two. Which of the following statements is true? A. On its Year One income statement, Ace will report a gain of $50,000 from the sale of inventory. B. No effect will be recognized on the Year Two income statement. C. Revenue should never be reported by a company until the cash has actually been collected. In this case, that would be Year Two. D. Cost of goods sold will be recognized as $40,000 in Year One while sales revenue will be $50,000 in Year Two.

B. No effect will be recognized on the Year Two income statement. -Ace's performance obligation is satisfied in Year One. Thus, both the sales revenue and the cost of goods sold should be recognized in Year One. A gain (or loss) reflects a transaction that is not part of the primary operations of the business. For inventory, sales and cost of goods sold are reported separately at the time when the performance obligation is satisfied.

Chapter 1/2 Who makes the decision to pay dividends in a company? A. Stockholders B. The Board of Directors C. Employees D. Management E. Creditors

B. The Board of Directors

Chapter 4 When a company collects an accounts receivable: A. Cash decreases B. Total Assets are unchanged C. Revenue increases D. Accounts Receivable increases E. Shareholder's Equity increases

B. Total Assets are unchanged -Cash xxx Accounts receivable xxx -Cash (an asset account) is increasing while accounts receivable (an asset account) is decreasing, therefore, total assets are unchanged

Chapter 4 Denville Corporation prepays $6,000 for insurance that will cover the next 5 months. Which of the following is true of this transaction? A. Cash will not be affected B. Total Assets will be unchanged C. Insurance Expense will increase D. Both Assets and Liabilities are affected E. Total Assets will decrease

B. Total Assets will be unchanged -Prepaid insurance 6,000 Cash 6,000 -Prepaid insurance (an asset account) is increasing, while cash (an asset account) is decreasing, therefore, total assets will be unchanged.

Chapter 4 When inventory is sold on account, Accounts Receivable increases and: A. Cash decreases B. A gain is recorded if the inventory is sold for more than its cost C. Inventory increases D. Liabilities decrease E. Sales Revenue increases

E. Sales Revenue increases -Accounts receivable xxx Sales revenue xxx -Both accounts receivable and sales revenue increase.

Chapter 10 Ando Company purchases a machine on April 1, 2019 for $14,000. The estimated life is 8 years with a salvage value of $2,000. Ando uses the straight line method of depreciation. What is the net book value of the machine on December 31, 2020? A. $12,875 B. $11,750 C. $11,375 D. $9,375 E. $11,000

C. $11,375 Asset purchased on 4/1/19 Cost of machine 14,000 Less: salvage value (2,000) Depreciable cost 12,000 Divided by 8 years / 8 years Annual depreciation expense 1,500 2019 depreciation expense for the months of April through December (9 months): 1,500 x (9/12) = 1,125 2020 depreciation expense 1,500 Accumulated depreciation at 12/31/20 2,625 Net book value of machine at 12/31/20 is 11,375 calculated as follows: Machine 14,000 Less: Accumulated depreciation (2,625) Machine, net 11,375

Chapter 8 A company starts the year with 5,000 units of merchandise costing $4 each. During the year, the company acquires another 22,000 also at $4 each. The company is using a periodic inventory system. The company sells its inventory items for $10 each and reports revenue of $160,000. A warehouse fire then destroys much of the company's inventory. Only 1,000 units remain. Assuming that no items were lost or stolen prior to the fire, what is the cost of the units lost in the fire? A. $100,000 B. $104,000 C. $40,000 D. $44,000

C. $40,000 -The company has had 27,000 units of inventory (5,000 plus 22,000). The company reports total revenue of $160,000. Items are sold for $10 each so that is 16,000 units that have been sold. The company should have 11,000 units remaining (27,000 total units less 16,000 sold). Because only 1,000 units remain, the other 10,000 must have been destroyed in the fire. At a cost of $4 each, that is a loss of $40,000.

Chapter 8 XYZ Corporation. has inventory with original cost of $57. XYZ believes the inventory could be sold for $62 after spending $7 for repairs. At what amount should this piece of inventory be reported? A. $62 B. $56 C. $55 D. $57 E. $50

C. $55 -Inventory is reported on the balance sheet at the lower of cost and net realizable value. -Net realizable value is estimated sales value less estimated costs to generate the sale. Cost 57 -Net realizable value 55 (estimated sales value 62 - estimated costs to generate the sale 7) -Inventory is presented on the balance sheet at the lower of its cost 57 and net realizable value of 55 -Therefore, it is presented at 55

Chapter 7 On the first day of Year Two, the Bridgewater Corporation holds accounts receivable of $400,000 and an allowance for doubtful accounts of $16,000 for a net realizable value of $384,000. During the year, credit sales were $960,000, and cash collections amounted to $475,000. In addition, $22,000 in receivables were written off as uncollectible. If 2 percent of credit sales is estimated as uncollectible each year, what is the net accounts receivable reported at the end of Year Two on Bridgewater's balance sheet? A. $845,740 B. $39,560 C. $849,800 D. $837,800 E. $843,800

C. $849,800 -The transactions to record during the year are as follows: 1) Credit sales of 960,000 -A/R 960,000 Revenue 960,000 2) Cash collections of 475,000 -Cash 475,000 A/R 475,000 3) Write off of A/R of 22,000 -ADA 22,000 A/R 22,000 -Next we post these entries to the A/R and ADA T-Accounts to determine balances prior to recoding bad debt expense A/R 863,000 ADA 6,000 -Then we calculate the uncollectible accounts, which are 2% of credit sales -960,000 (credit sales) x .02 = 19,200 which represents the bad debt expense recorded as follows: -Bad debt expense 19,200 ADA 19,200 -We then determine the ending balance in the ADA by posting the bad debt expense to the ADA account: ADA 13,200 The net accounts receivable is as follows: A/R 863,000 ADA (13,200) A/R, net 849,800

Chapter 1/2 Determine the 2019 annual rate of return on an investment in JKL Company stock: Stock price on 1/1/19 $100 Stock price on 12/31/19 $ 97 Dividends paid per share by JKL Company in 2019 $ 5 A. 3% B. (3%) C. 2% D. 5% E. 8%

C. 2% -97 ending investment - 100 beginning investment = (3) loss on value of investment -(3) loss on value of investment + $5 dividends received = 2 amount returned on investment -2 amount returned on investment / 100 beginning investment = .02 -.02 x 100 = 2% rate of return

Chapter 3 The Peach Company began operations on January 1, Year One. In Year One, the company reported net income of $24,000 and, in Year Two, reported net income of another $32,000. In the current year of Year Three, the company reported net income of $36,000. Peach Company paid dividends of $4,000 in Year One, $6,000 in Year Two and $10,000 in Year Three. On the December 31, Year Three, balance sheet, what is reported as retained earnings? A. 26,000 B. 70,000 C. 72,000 D. 38,000 E. 92,000

C. 72,000 -Retained earnings = net income - dividends [From the inception of the company] -Retained earnings at the end of year 3 = net income (years 1, 2 & 3) - dividends (years 1, 2 & 3) -net income (24,000 + 32,000 + 36,000) - dividends (4,000 + 6,000 + 10,000) -92,000 - 20,000 = 72,000

Chapter 1/2 Which of the following tasks do a corporation's Board of Directors perform? A. Allocation of the advertising budget among business units B. Determining how many students to hire from a particular college C. Appointment of senior management D. Selection of the company's cafeteria food vendor E. Determining how many part time workers the company should hire

C. Appointment of senior management

Chapter 5 On December 1, 2019, the Tenco Corporation paid $84,000 for insurance for the next six months. The appropriate journal entry was made at that time. Which of the following adjusting entries should be made on December 31, 2019? A. Debit insurance expense $70,000; and credit prepaid insurance $70,000 B. Debit prepaid insurance $14,000; and credit insurance expense $14,000 C. Debit insurance expense $14,000; and credit prepaid insurance $14,000 D. Debit prepaid insurance $70,000; and credit insurance expense $70,000 E. Debit insurance expense $28,000; and credit prepaid insurance $28,000

C. Debit insurance expense $14,000; and credit prepaid insurance $14,000 -84,000 for 6 months = 14,000 per month -The original journal entry on December 1, 2019 was: Prepaid insurance 84,000 Cash 84,000 -The adjusting entry at December 31, 2019 (after 1 month has passed) would be as follows: Insurance expense 14,000 Prepaid insurance 14,000 -Insurance expense would therefore be 14,000 (1 month of December) for 2019, and prepaid insurance would be 70,000 (5 months of January, February, March, April and May) at December 31, 2019.

Chapter 1/2 Financial information that contains no material misstatements in accordance with an accepted standard for financial reporting is termed as: A. Free from uncertainty B. Fraudulent reporting C. Fairly presented D. Inconsistent E. Universal reporting

C. Fairly presented

Chapter 4 In February, Yames, Inc. received a payment in advance from a customer for work to be performed in April. To record this, Yames' accountant debited Cash and credited Revenue. Which of the following is true? A. Gross profit is understated B. Revenue is correctly stated C. Liabilities are understated

C. Liabilities are understated -Debiting cash (an asset account) and crediting unearned revenue (a liability account) is the correct entry to make when cash is received before the work is performed. Since the company credited revenue rather than unearned revenue, liabilities are understated.

Chapter 1/2 A company borrows $500,000 from a bank on a loan. What is the impact to the company's net assets? A. Decrease B. Increase C. Remain the same

C. Remain the same -Cash (an asset) increases by $500,000 and loan due to a bank (a liability) increases by $500,000. -Since assets and liabilities each increase by $500,000, net assets remain the same.

Chapter 7 On the first day of Year Two, the Krause Corporation holds accounts receivable of $200,000 and an allowance for doubtful accounts of $12,000 for a net realizable value of $188,000. During the year, credit sales were $500,000 and cash collections amounted to $370,000. In addition, $19,000 in receivables were written off as uncollectible. If 5 percent of accounts receivable is estimated as uncollectible, what is the bad debt expense reported for Year Two on Krause's income sheet? A. $25,000 B. $293,000 C. $8,550 D. $22,550 E. $15,550

D. $22,550 -The transactions to record during the year are as follows: 1) Credit sales of 500,000 -A/R 500,000 Revenue 500,000 2) Cash collections of 370,000 -Cash 370,000 A/R 370,000 3) Write off of A/R of 19,000 -ADA 19,000 A/R 19,000 -Next we post these entries to the A/R and ADA T-Accounts to determine balances prior to recoding bad debt expense A/R 311,000 ADA 7,000 -Then we calculate uncollectible accounts, which are 5% of accounts receivable 311,000 (accounts receivable) x .05 = 15,550 which represents the ending balance in the ADA -We then calculate the bad debt expense 15,550 + 7,000 = 22,550 ADA 15,550 (22,550-7,000) The journal entry to record bad debt expense is: -Bad debt expense 22,550 ADA 22,550

Chapter 9 At the beginning of 2019, Trannik had 60 units in its inventory, each costing $7. In January, Trannik purchased 10 units for $9 each. On February 1, Trannik sold 30 units. Assuming a LIFO cost flow assumption, what would be Trannik's cost of goods sold? A. $210 B. $300 C. $280 D. $230 E. $291

D. $230 1/1/19 Beginning inventory 60 units @ 7 Jan. Purchased 10 units @ 9 Feb. Sold (30 units) Ending inventory 40 units Using LIFO Cost of goods sold is: 10 units @ $9 per unit = 90 20 units @ $7 per unit = 140 230 Ending inventory is: 40 units @ $7 per unit = 280

Chapter 10 On January 1, 2017, Hilton Inc. buys equipment for $100,000 with a twelve-year life with an expected residual value of $4,000. The straight-line depreciation method is used. On December 31, 2018, when this equipment is worth $88,000, it is traded for a truck that is worth $100,000. Hilton also gives cash of $11,000. What gain or loss is recognized on this asset exchange? A. $3,000 gain B. $15,000 gain C. $7,000 loss D. $4,000 gain E. $5,000 gain F. $16,000 gain

D. $4,000 gain The steps required to record the journal entry when one asset is exchanged for another asset are as follows: 1) Remove both the cost and the related accumulated depreciation of the old asset (the property or equipment we are surrendering) 2) Record any cash involved in the exchange 3) Record the new asset at the fair value of the asset(s) we are surrendering 4) Record any gain or loss on the exchange Therefore, the first thing to do is to calculate the accumulated depreciation for the equipment at the time of the exchange (12/31/18) as follows: Cost of equipment 100,000 Less: Residual value (4,000) Depreciable cost 96,000 Divided by 12 years /12 years Annual depreciation 8,000 Therefore the accumulated depreciation on 12/31/18 is 16,000 calculated as follows: 2017 8,000 2018 8,000 16,000 Now we will record the journal entry for the exchange following the steps above: -Accumulated depreciation [step 1] 16,000 -Truck - new asset [step 3] 99,000* Equipment - old asset [step 1] 100,000 Cash [step 2] 11,000 Gain on exchange [step 4] 4,000 *The new asset(s) is an asset exchange of property and equipment is recorded at the fair value of the asset(s) we are surrendering. In this example we are surrendering equipment with a fair value of 88,000 and cash of 11,000, therefore the new asset gets recorded at 99,000 (88,000 + 11,000). We disregard the fair value of the asset being received. Another way to think about the gain: On the books: Truck 99,000 Off the books: Equipment (100,000 - 16,000) (84,000) Cash (11,000) (95,000) Gain on exchange 4,000

Chapter 8 Oliver Company purchases inventory costing $42 on September 14. The company spends $4 to transfer the inventory to its store and an additional $2 to set it up. What would be the amount of inventory purchase? A. $42 B. $46 C. $44 D. $48 E. $49

D. $48 -Inventory is initially recorded at its historical cost (purchase price), which includes normal and necessary amounts to get the inventory into condition to be sold (i.e. transportation, assembly, etc.) -Therefore, the inventory purchase would be recorded at 48, calculated as follows: Cost of inventory 42 Transportation 4 Set up 2 Total 48

Chapter 7 Greenway Corporation estimates bad debt expense using the percentage of accounts receivable method. At the end of the year, Greenway has $450,000 in accounts receivable and a $6,000 credit in its allowance for doubtful accounts before any entry is made for bad debts. Sales for the year were $1.5 million. The percentage that Greenway has historically used to calculate uncollectible accounts is 4 percent of accounts receivable. Which of the following is true? A. Greenway would report an allowance for doubtful accounts of $24,000 B. Greenway's bad debt expense for the year is $60,000 C. Greenway's bad debt expense for the year is $18,000 D. Greenway's bad debt expense for the year is $12,000 E. Greenway would report an allowance for doubtful accounts of $58,000

D. Greenway's bad debt expense for the year is $12,000 -Uncollectible accounts is 4% of accounts receivable. Therefore the ending balance in the ADA is 450,000 (accounts receivable) x .04 = 18,000 -Since the ADA has an unadjusted credit balance of $6,000, the bad debt expense is 18,000 - 6,000 = 12,000 T-Account: ADA 6,000 BDE 12,000 Final ADA 18,000

Chapter 1/2 Which of the following is an importance in accounting standards? A. It helps in making financial reporting free from uncertainties. B. It helps in projecting a loss-incurring company as a profit-making company. C. It helps in reporting the financial information with exactness. D. It helps in evaluating the financial health and future prospects of an organization. E. It helps in covering the material misstatements made unintentionally.

D. It helps in evaluating the financial health and future prospects of an organization.

Chapter 1/2 Sale of a product is: A. An Asset B. A Liability C. An Expense D. Revenue

D. Revenue (Income Statement)

Chapter 5 During the month of December 2019, Delmo Corporation's employees worked and earned total salaries of $12,000, which will be paid to the employees on January 2, 2020. Delmo's accountant made the appropriate adjusting entry on December 31, 2019 with regards to these salaries. What entry would Delmo make on January 2, 2020 when the salaries are paid? A.Salaries expense $12,000 Cash $12,000 B. Prepaid salaries $12,000 Cash $12,000 C. Salaries payable $12,000 Salaries expense $12,000 D. Salaries payable $12,000 Cash $12,000 E. Salaries expense $12,000 Salaries payable $12,000

D. Salaries payable $12,000 Cash $12,000 -In accordance with the Matching Principle expenses are recognized in the same time period as the revenue they help to create. -Therefore, Delmo's adjusting entry at December 31, 2019 would have included the following accrual for salaries expense: -Salaries expense 12,000 Salaries payable 12,000 -On January 2, 2020, Delmo would record the following entry for the payment of the salaries owed to the employees: -Salaries payable 12,000 Cash 12,000

Chapter 7 A journal entry to reinstate an account previously thought to be worthless includes: A. a debit to Allowance for Doubtful Accounts. B. a debit to Cash. C. a credit to Accounts Receivable. D. a debit to Accounts Receivable. E. a credit to Bad Debt Expense.

D. a debit to Accounts Receivable. -A journal entry to reinstate an account previously thought to be worthless would be as follows: -A/R xxx ADA xxx

Chapter 10 QRS Company buys a donut-maker on January 1, Year One, for $20,000. QRS pays another $1,000 to have this machine shipped from the vendor to its retail location where it will start producing donuts for sale. The donut maker is expected to have a ten-year useful life and a residual value of $3,000. The straight-line depreciation method is applied. What is the net book value of the donut-maker that appears on the balance sheet of QRS at December 31, Year Three? A. $14,600 B. $14,000 C. $14,700 D. $15,000 E. $15,600

E. $15,600 Asset purchased on 1/1/Year One Cost of asset 20,000 Shipping costs 1,000 Total cost of asset 21,000 Less: salvage value (3,000) Depreciable cost 18,000 Divided by useful life / 10 years Annual depreciation expense 1,800 Depreciation per year: Year One 1,800 Year Two 1,800 Year Three 1,800 Accumulated Dep. at 12/31/Year Three 5,400 Net book value at 12/31/Year Three: Equipment 21,000 Accumulated depreciaton (5,400) Equipment, net 15,600

Chapter 7 A company is preparing to produce a set of financial statements. The balance sheet being created shows a total for assets of $750,000. Just prior to the end of the year, an additional credit sale for the sale of a service of $4,000 is made and a receivable of $3,000 is determined to be uncollectible and written off. No other event or adjustment is made. What should the company now report as the total of its assets after recording these final events? A. $750,000 B. $753,000 C. $751,000 D. $757,000 E. $754,000 F. $749,000

E. $754,000 -Total assets prior to the last two transactions are: 750,000 The two additional transactions are as follows: 1) Sale of a service on credit for 4,000 -Accounts receivable 4,000 Revenue 4,000 Impact on total assets: increases total assets by 4,000 2) Write of an uncollectible account for $3,000 -ADA 3,000 Accounts receivable 3,000 Impact on total assets: NONE -Therefore after these two additional transactions, total assets are 754,000 (750,000 + 4,000)

Chapter 1/2 A probable future economic benefit owned or controlled by a company is termed as a(n): A. Net Asset B. Liability C. Expense D. Revenue E. Asset

E. Asset (Balance Sheet)

Chapter 4 Davidson Company purchased a truck that cost $70,000 by paying $40,000 cash and signing a note for the remainder. What is the financial impact of this transaction? A. Truck increases by 30,000 B. Notes Payable increases by 40,000 C. Truck increases by 40,000 D. Cash decreases by 70,000 E. Notes Payable increases by 30,000

E. Notes Payable increases by 30,000 -Truck 70,000 Cash 40,000 Notes payable 30,000 -Truck is increasing 70,000; Cash is decreasing 40,000; and Notes payable is increasing 30,000

Chapter 12 Dandy Corporation purchased 3,000 shares of York Company for $4 per share on January 1, 2018 representing a 20% ownership interest. Dandy has the ability to exercise significant influence over the operations of York. During 2018 Dandy received $200 of dividends from York. York's net income for 2018 was $3,000. On December 31, 2018, York's stock was selling for $6 per share. On January 1, 2019, Dandy sold all of its shares of York for $7 per share. What is the amount of gain or loss on the sale? A. $9,000 gain B. $2,500 gain C. $3,000 gain D. $8,400 gain E. $3,000 loss F. $8,600 gain

F. $8,600 gain -Dandy has the ability to exercise significant influence over the operations of York, therefore, Dandy is required to use the equity method of accounting. 1/1/18 Purchase of shares: 3,000 shares @ $4 per share = 12,000 -Investment in York 12,000 Cash 12,000 2018 dividends received: -Cash 200 Investment in York 200 2018 share of York's income 3,000 x 20% = 600 -Investment in York 600 Investment income York 600 The investment account at 12/31/18 is 12,400 1/1/19 sale of York shares 3,000 shares @ $7 each = 21,000 -Cash 21,000 Investment in York 12,400 Gain on sale 8,600

Chapter 10 Alejendaro Company buys an office building on January 1, Year One, for $1 million. It is expected to last 20 years and have no residual value. The straight-line method is applied. The office building will be rented to a variety of tenants and the company hopes to generate rent revenue of $100,000 per year. On January 1, Year Six, it becomes apparent that the area around the building has fallen into disrepair. Consequently, the value of the building might be impaired. The building is judged by an outside expert to have a fair value of only $520,000. The company believes that it will still be able to generate cash rental revenue of $45,000 for each of the remaining 15 years of the building's life. Assume no cash expenses are anticipated. What impairment loss, if any, should this company report at the beginning of Year Six? A. None B. $230,000 C. $75,000 D. $155,000

Impairment of property and equipment is a 2 step test. Step 1 -- compare the net book value ("NBV") of the asset to the expected future cash flows ("EFCF") the asset is expected to generate. If the EFCF is greater than or equal to NBV there is no impairment. If the EFCF is less than the NBV then you go to step 2. Step 2 -- compare the fair value of the asset to the NBV of the asset. If the fair value is greater than or equal to the NBV there is no impairment. If the fair value is less than the NBV then the asset is impaired and written down to its fair value. The impairment would be calculated as fair value less NBV. In this example we need to start with calculating the NBV of the office building on January 1, Year Six. Straight-line Method Cost of office buliding 1,000,000 Less: residual value 0 Depreciable cost 1,000,000 Divided by expected life /20 years Annual Depreciation expense 50,000 Accumulated depreciation after 5 years (50,000 x 5) 250,000 Step 1: NBV at 1/1/Yr 6 (Cost of building 1,000,000 - Accumulated depreciation 250,000) = 750,000 EFCF at 1/1/Yr 6 (45,000 x 15 years) = 675,000 EFCF of 675,000 is less than NBV of 750,000, therefore we go to step 2. Step 2: Fair value at 1/1/Yr 6 520,000 Fair value of 520,000 is less than NBV of 750,000, therefore the building is impaired Impairment = Fair value of 520,000 - NBV of 750,000 = 230,000 FYI: Journal entry to record the impairment is: -Impairment loss 230,000 Building 230,000