Accounting Test 1 Cornett

The various rules and conventions that have evolved over time to guide the preparation of financial statements in the U.S. are called ____________________.

generally accepted accounting principles GAAP

List the four financial statements. Explain the connection between these four statements.

1. Balance Sheet 2. Income Statement 3. Statement of Retained Earnings 4. Statement of Cash Flows

1. Other incomes and expenses 2. Income before income taxes 3. Net income 4. Operating expenses 5. Gross margin 6. Net sales 7. Income from operations Select the choice that lists the items in the order they would appear on a multi-step income statement.

6, 5, 4, 7, 1, 2, 3

How is a classified balance sheet useful to decision makers?

A classified balance sheet helps evaluate the liquidity of a company by separating the current assets from long-term assets and current liabilities from long-term liabilities. The user can then determine the amount of working capital and the current ratio, which are both useful measures of liquidity.

What information is provided in an annual report in addition to the financial statements?

An annual report contains the reports of management, the auditor's report, management's discussion and analysis of the amounts appearing in the statements, notes to the financial statements, and a summary of selected financial data over a period of years.

What is the purpose of an income statement?

An income statement reports the company's revenues and expenses for a period of time and shows the company's profitability (or lack of). The income statement's purpose is to demonstrate the financial success or failure of the company over a specific period of time.

Which one of the following events creates a liability for a business?

An obligation to pay for goods purchased on credit from a supplier

Which of the following is a correct fundamental accounting equation?

Assets = Liabilities + Equity

Which of the following best describes the term "current assets"?

Assets expected to be converted into cash within one year or one.

Which one of the following financial statements shows the end of the year cash balance for a business entity?

Balance sheet and statement of cash flows

Which one of the following is not one of the activities on the statement of cash flows?

Business activities

Which one of the following equations represents the statement of retained earnings activity?

Beginning retained earnings + net income dividends = ending retained earnings

Which of the following below generally is the most useful in analyzing companies of different sizes?

Common-size financial statements

Which of the following statements is true regarding vertical analysis?

Common-size financial statements are used to compare companies of different sizes.

What is the difference between comparability and consistency?

Comparability allows comparisons to be made between or among companies. Even though a certain amount of freedom exists in selecting accounting techniques, when this information is disclosed in the financial statements, users can still compare the information when they know what technique is used. Consistency refers to the application of the same accounting techniques over time. It involves the relationships between a set of numbers over several periods, but within one company only, unlike comparability that can be between or among companies.

Select the type of business that is most likely to obtain large amounts of resources by issuing stock.

Corporation

____________________ are cash and other assets that are reasonably expected to be realized in cash withing one year.

Current Assets

How does the definition of a current liability relate to that of a current asset?

Current liabilities are obligations that will be satisfied within the operating cycle or within one year if the cycle is shorter than one year. Current assets will be realized in cash, or sold, or consumed during the operating cycle or within one year if the cycle is shorter. For most companies, both current assets and liabilities are reported on the balance sheet using a one-year time period.

The ____________________ is the private sector group with authority to set accounting standards in the United States.

Financial Accounting Standards Board FASB

What is meant by "generally accepted accounting principles"?

Generally accepted accounting principles (GAAP) are a set of guidelines that are based on a conceptual framework. They represent accounting standards, rules, principles, and procedures that comprise authoritative practice for financial accounting. GAAP was created in response to the need to make it easier to use financial statements over time and across companies.

The independent auditor's report does which of the following?

Gives the auditor's opinion regarding the fairness of the financial statements

Property, plant and equipment is classified as ____________________ assets on the balance sheet.

Noncurrent

Which of the following is one of the elements of stockholders' equity?

Retained earnings

The ____________________ is the U.S. federal government agency with the ultimate authority to determine the accounting rules for companies whose stock is sold to the public.

Securities and Exchange Commission SEC

Which one of the following financial statements shows how and why each equity account in the company's balance sheet changed from one year to the next?

Statement of stockholders' equity

Which of the following statements is true regarding a corporation's purchase of treasury stock?

The cost of treasury stock is a reduction in stockholders' equity.

In a common-size financial statement, which of the following is given a percentage of 100 percent?

Total assets

The balance in the retained earnings account represents:

accumulated earnings that have not been distributed to stockholders.

The step of listing the liabilities of the company in order of their time to maturity is performed for a financial statement called

classified balance sheet

Vertical analysis is also known as:

common-size analysis.

Which of the following would appear on an income statement?

cost of sales

All of the following are normally found in a corporation's stockholders' equity section except:

dividends in arrears.

In ____________________ analysis, each financial statement line item is expressed as a percent of a base year, which is typically the earliest year shown.

horizontal

Stockholders' equity:

includes retained earnings and paid-in capital.

In performing a vertical analysis, the base for cost of goods sold is:

net sales.

In a(n) ____________________-step income statement, all expenses and losses are added together, then deducted from the sum of all revenues and gains.

single

The three forms of business organizations are ____________________, ____________________, and ____________________.

sole proprietorship, partnership, corporation

Significant changes in stockholders' equity are reported in:

statement of stockholders' equity.

____________________ is a part of issued stock that is repurchased by the corporation but not retired.

treasury stock

In ____________________ analysis, each financial statement line item is expressed as a percent of the base amount on the statement, which is net sales or total assets for the income statement or balance sheet, respectively.

vertical

The percent of fixed assets to total assets is an example of:

vertical analysis.

Which of the following organizations is primarily responsible for establishing GAAP in the United States?

Financial Accounting Standards Board (FASB)

Presently, the dominant body in the development of accounting principles in the United States is the:

Financial Accounting Standards Board (FASB).

Which of the following is an assumption made in the preparation of the financial statements?

Financial statements are prepared for a specific entity that is distinct from the entity's owners.

Which of the following is not a characteristic of a corporation?

For tax purposes, a corporation's business is not separated from the stockholder.

Paige Company claims that its financial information is useful. Mention any four qualities that must be present in order to have "useful" accounting information? Explain these four qualities.

Four qualitative characteristics of useful accounting information are relevance, reliability, comparability, and consistency. Relevant information has the capacity to make a difference in a decision. It helps users predict future events or provides feedback. Reliable information is dependable, verifiable, and free from bias. Comparability allows comparisons to be made between or among companies. Consistency refers to the application of the same accounting methods over time.

The initials GAAP stand for:

Generally Accepted Accounting Principles.

Four financial statements are usually prepared for a business. The statement of cash flows is usually prepared last. The retained earnings statement (RE), the balance sheet (B), and the income statement (I) are prepared in a certain order to obtain information needed for the next statement. In what order are these three statements prepared?

I, RE, and B

Countries outside the U.S. use financial accounting standards issued by the:

IASB.

Which of the following is the correct date format for the financial statement heading?

Income Statement for the Year Ending December 31, 2012

Which financial statement would you analyze to determine its operating performance for the past year?

Income statement

Which statement demonstrates the financial success or failure of the company over that specific period of time?

Income statement

Which of the following accounts are normally reported as current liabilities on a classified balance sheet?

Income taxes payable and Salaries payable

In which section of the annual report would you find: "The financial statements, in our opinion, present fairly the financial position, operating results, and cash flows, in conformity with U.S. generally accepted accounting principles"?

Independent auditor's report

Which one of the following items is least likely to be found in a corporate annual report?

Internal budget reports

Monaco Lawn Service Company used $250 of fuel to mow customer lawns in June. The fuel was purchased on account and due in July. Fuel Expense should be recorded in:

June

Short-term investments are:

current assets

The analysis that calculates both the absolute and percentage change in each account balance on a financial statement is called:

horizontal analysis.

Expenses can be matched against revenues:

in the same period as the revenue that it helped to generate.

As used in accounting, the "Notes to the Financial Statements" should be:

included as an integral part of the financial statements.

Management's discussion and analysis:

provides a discussion and analysis of the financial activities of the company by the company's management.

Doughtry's Pet Shop reported a net loss of $1,500,000 and total expenses of $2,900,000. How much were the total sales?

$1,400,000 $2,900,000 (Total expenses) - 1,500,000 (Net loss) = $1,400,000 (Total sales)

The assets and liabilities of the company are $175,000 and $40,000, respectively. Equity should equal:

$135,000.

Ranger Company has assets of $5,000,000, liabilities of $3,000,000, and retained earnings of $1,200,000. How much is total equity?

$2,000,000

Which of the following is not a form of a business entity? Sole proprietorship Partnership Entrepreneurship Corporation

-Entrepreneurship

Who among the following generally lends funds to a business entity and expects repayment of the funds?

A creditor

Which of the following best describes the term "expenses"?

A decrease in resources resulting from the sale of goods or provision of services.

Which one of the following financial statements reports an entity's financial position at a specific date?

Balance sheet

Which one of the following is a correct basic structure of the cash flow statement?

Cash flows provided (used) by operating activities + / - cash flows provided (used) by investing activities + / - cash flows provided (used) by financing activities = net increase (decrease) in cash

Which set of items below are classified as current assets?

Cash, Accounts receivable, Inventory, and Office supplies

An accountant is uncertain about the best estimate of an amount for a business transaction. If there are two possible amounts that could be recorded, the amount least likely to overstate assets and earnings is selected. Which of the following qualities is

Conservatism

If assets are expected to be realized in cash, sold, or consumed within one year, how are they reported on a classified balance sheet?

Current assets

Which of the following concepts relates to separating the reporting of business and personal economic transactions?

Economic entity assumption

Which one of the following is the authoritative body having the primary responsibility for developing accounting principles in the United States?

FASB

Which of the following are noncurrent assets?

Machinery and equipment

Which of the following qualitative characteristic of useful accounting information implies that only items that meet or exceed certain thresholds will affect decisions?

Materiality

Which one of the following is not one of the three business activities as shown in statement of cash flows?

Measuring

Which of the following items will be found in a corporate annual report?

Notes to the financial statements

Which of the following best describes a company's operating activities?

Operating activities are cash flows directly related to earning income.

Gain and losses are reported on the multi-step income statement under which of the following classifications?

Other revenues and expenses

Which one of the following items appears on a balance sheet?

Retained earnings

How is the balance sheet linked to the other financial statements?

Retained earnings from the statement of retained earnings is reported on the balance sheet.

What does the phrase, "Revenue is recognized when earned" mean?

Revenue is recorded in the accounting records and reported on the income statement when goods are sold and delivered to a customer.

Scott Brothers, Inc. follows the qualitative characteristic of consistency. This means that:

Scott applies the same accounting methods each period.

Which organization has the power to set accounting rules for companies whose stock is publicly-traded in the U.S. stock markets, but has delegated its power to another organization?

Securities and Exchange Commission (SEC)

Which of the items below is a business entity?

Sole proprietorship

If stockholders want to know how money flowed into and out of the company, what financial statement would they use?

Statement of cash flows

Who among the following invest funds into a business and are considered owners?

Stockholders

Which one of the following items is a classification on the classified balance sheet?

Stockholders' equity

Which of the following best describes the term "retained earnings" of a company?

The accumulated net income of a company that has not been distributed to owners in the form of dividends.

A question asked by stockholders is, "How much gross profit did the company make?" What financial statement would have the "gross profit" indicated as a separate line item?

The multi-step income statement

Which of the following represents one of the purposes of the auditor's report?

To provide the CPA's opinion of the fairness of the financial statements

Monaco Lawn Service Company creates revenue each time:

a lawn is mowed.

The income statement shows:

a summary of the results of operations for a period of time.

An entity that is organized according to state or federal statutes and in which ownership is divided into shares of stock is a:

corporation.

"Economic resources" are known as:

assets

Liabilities are reported on the:

balance sheet

Which financial statement would you refer to in order to determine how many resources (assets) the company owns?

balance sheet

You are a potential creditor and are concerned that a particular company you are ready to give a loan to might have too much debt. Which financial statement would provide you information needed in order to evaluate your concern?

balance sheet

In order for accounting information to be useful in making informed decisions, it must be:

both relevant and reliable.

If an investor can use accounting information for two different companies to evaluate the types and amounts of expenses, the information is said to have the quality of:

comparability.

Which of the following terms best describes a distribution of the net income of a corporation to its owners?

dividends

Which of the following is not an asset?

equity

The resources used to generate revenues during a period are called:

expenses.

The time period assumption is necessary because:

external users of financial statements want accurately-reported net income for a specific period of time.

The type of business activity that relates to obtaining funds from either issuing stock or borrowing money is called

financing

Cash investments made by stockholders in exchange for capital stock in a business are reported on the statement of cash flows in the:

financing activities section.

The names of the four basic financial statements are the ____________________, the ____________________, the ____________________, and the ____________________

income statement, balance sheet, statement of retained earnings, statement of cash flows

The three financial statements in which net income can be found are the ____________________, the ____________________ and the ____________________.

income statement, statement of retained earnings, statement of cash flows using the indirect method

Revenues" are best described as:

increases in resources resulting from the sale of goods or the provision of services.

Which one of the following is not categorized as a long-term assets?

inventory

Cash used to purchase a truck to transport lawn mowers and other tools to customer locations is reported on the statement of cash flows in the:

investing activities section.

Which of the following would not be considered an intangible asset?

investments

Information that is material means that an error in recording the dollar amount of a transaction would:

likely affect the judgment of someone relying on the financial statements.

PTG Enterprises purchases many small pieces of office furniture, such as trash cans, that cost less than $100 each. PTG accounts for these items as expenses when acquired rather than reporting them as property, plant, and equipment on its balance sheet. The company's accountant states that no accounting principle has been violated. Justification for PTG's policy of expensing these furniture items is based on cost vs. benefit considerations as well as qualitative characteristic of accounting information of:

materiality

Which of the following underlying assumptions for the conceptual framework is the reason the dollar is used in the preparation of financial statements? A) economic entity B) continuity C) time period D) monetary unit

monetary unit

Cash received from customers for mowing their lawns is reported on the statement of cash flows in the:

operating activities section.

On a multi-step income statement, subtracting total operating expenses from gross profit will equal:

operating income.

The statement of cash flows classifies cash flow into ____________________, ____________________ and ____________________ activities.

operating, investing, financing

Mullins, Inc. manufactures furniture. Mullins has given you its most recent annual report in an effort to obtain a sizeable loan. The company is very profitable and appears to have a strong financial position. However, based on a news report you saw on television last night, you are aware that Mullins is a defendant in a class action lawsuit related to defective products. Serious injuries were allegedly caused by Mullins' infant high chairs overturning. The television news report is an example of financial information that is:

relevant

One of the qualitative characteristics of accounting information include:

reliability

Net income from the income statement increases

retained earnings

The Securities Exchange Commission (SEC) is concerned with:

setting accounting rules for publicly-traded companies in the United States.

Most businesses in the United States are:

sole proprietorships.

Both net income and dividends can be found on the financial statement called the

statement of retained earnings

The principle of conservatism is concerned with:

the avoidance of overstating assets or income in the preparation of financial statements.

The going concern assumption is concerned with:

the company's ability to continue operations long enough to carry out its existing obligations.

"Matching principle" is best described as:

the principle that expenses should be recorded in the period resources are used to generate revenues.

An analysis in which all the components of an income statement are expressed as a percentage of net sales is called:

vertical analysis.