ACG challenging questions (exam 1)

In its first month of operations, a company's cash account has total debit entries amounting to $27,500 and total credit entries amounting to $24,900. At the end of the month, the cash account has a amount? credit or debit?

$2,600 debit balance. Solution: Learning objective 3 When a company begins, all of its accounts have a zero balance. This company has debit entries for cash of $27,500 and credits of $24,900 in its cash account during its first month. Debits increase asset accounts' balances, such as cash, and credits decrease assets' accounts balances. The balance in the cash account at the end of the period will be $2,600 debit balance (i.e., $27,500 dr. − $24,900 cr. = $2,600 dr.; when an account's debits exceed its credits, the account has a debit balance).

Bombay Corporation had $48,000 at the beginning of the year and it had cash disbursements of $21,000 during the year. At the end of the year, Bombay Company had $51,000. What was Bombay Corporation's cash receipts for the year?

$24,000 Solution: The ending balance equals beginning cash minus cash disbursements plus cash receipts $51,000 = $48,000 + X - $21,000 Solve for X: Cash disbursements = $24,000. Chapter 2, Learning Objective 5, Pool 4

Jeremiah Company recorded the following cash transactions for the year: Collected $80,000 from lenders Collected $260,000 from customers Paid $130,000 for salaries. Paid $10,000 in dividends. Paid $90,000 of goods and services Paid $20,000 to purchase office equipment. What was the company's net cash provided by operating activities for the year?

$40,000 Solution: A company's activities are divided into three categories: (1) operating activities, (2) investing activities, and (3) financing activities. Operating activities include selling products and/or services, paying suppliers (e.g., buying inventory), employees workers, etc. Cash flows from operating activities are increases by collecting cash for operating activities (e.g., collecting cas from customers) and decreased by paying cash for operating activities (e.g., paying cash to employees for hours worked, paying cash to suppliers for inventory, etc.). This company's net cash provided by operating activities include (i) cash collected from customers, (ii) salaries paid for salaries, and (iii) cash paid for goods and services Net cash flow provided by operating activities = $260,000 - 130,000 - 90,000 = $40,000 Note: Not all cash collections and/or cash payments are operating activities. Some are investing activity cash flows (e.g., paying for property, plant, and equipment, etc.) and others are financing activity cash flows (e.g., paying dividends to shareholders, collecting cash from lenders [e.g., borrowing from banks], etc.). Chapter 1, Learning objective 4, Pool 10

Wilson Company has the following accounts and account balances at the end of its first year: Accounts payable, $3,000 Cash, $19,000 Common stock, ? Dividends, $1,000 Expenses, $14,000 Notes payable, $4,000 Prepaid insurance, $3,000 Revenues, $23,000 What is the balance of its common stock account at the end of the first year?

$7,000 Solution: The basic accounting equation (i.e., Assets = Liabilities + Equity) must stay in balance. The accounting equation can be expanded as follows: Assets = Liabilities + Common stock + Retained earnings Wilson's assets include cash and prepaid insurance (i.e., 19,000 + 3,000 = 22,000). Wilson's liabilities include accounts payable and notes payable (i.e., 3,000 + 4,000 = 7,000). This is Wilson Company's first year. Its retained earnings at the start of the first year is zero. Retained earnings increases y net income and it decreases by dividends. Wilson's retained earnings at the end of the first year equals retained earnings at the start of the current year plus current-year net income minus current year dividends (i.e., 0 + 23,000 - 14,000 - 1,000 = 8,000). Assets = liabilities + retained earnings + common stock Common stock = Assets - liabilities - retained earnings Common stock = 22,000 - 7,000 - 8,000 Common stock = 7,000 3,3,4

Jarrell Company began the year with $124,000 in its Common Stock account and a debit balance in Retained Earnings of $18,000. During the year, the company earned net income of $33,000 and declared and paid $6,000 of dividends. In addition, the company sold additional common stock amounting to $40,000. Based on this information, what is the ending Retained Earnings?

$9,000 Solution: Note: Retained earnings begins with a debit balance indicating the company has had a history of losses rather than profits. A debit balance rarely occurs except with new companies experiencing a slow start. This year's income eliminates is enough to eliminate the debit balance in retained earnings and change it to a credit balance. Ending retained earnings = Beginning retained earnings + net income - dividends. Ending retained earnings = $18,000 (debit) + 33,000 (i.e., credit Retained Earnings) - 6,000 (i.e., debit Retained Earnings) = $9,000 (i.e., credit balance in Retained Earnings). 3,2,1

Chris's Maid Service began the year with total assets of $100,000 and stockholders' equity of $40,000. During the year the company earned $110,000 in net income and paid $5,000 in dividends. Total assets at the end of the year were $240,000. How much are total liabilities at the end of the year?

$95,000 Solution: Learning objective 5 First, determine the ending balance of stockholders' equity. Ending stockholders' equity = beginning stockholders' equity + net income - dividends. Ending stockholders' equity = $40,000 + 110,000 - 5,000 = $145,000. Second, determine total liabilities. (i.e., Assets = Liabilities + Stockholders' equity) Liabilities = $240,000 - 145,000 = $95,000.

Rose Company has the following accounts and balances: Accounts payable............................. $ 40,000 Accounts receivable............................. 70,000 Accumulated depreciation.................. 50,000 Buildings................................................. 500,000 Cash........................................................ 100,000 Common stock..................................... 690,000 Equipment......................................... 120,000 Inventory................................................ 200,000 Investments in securities (long-term). 20,000 Land......................................................... 150,000 Notes payable..................................... 300,000 Patents................................................ 10,000 Prepaid insurance................................. 20,000 Retained earnings................................. 150,000 Trademarks........................................... 40,000 What is Rose Company's (i) current assets and (ii) property, plant & equipment?

(i) $390,000 and (ii) $720,000 Solution: Classified balance sheets partition a company's assets into four categories: (i) current assets (e.g., cash, accounts receivable, inventory), (ii) long-term investments (e.g., investments in securities other companies, such as stocks and bonds, expected to be held more than one year), (iii) property, plant, and equipment (e.g., buildings, land, equipment, delivery vehicles, and furniture minus accumulated depreciation)), and (iv) intangibles (e.g., goodwill, patents, copyrights, trademarks). Rose's current assets include accounts receivable, cash, inventory, and prepaid insurance. Current assets = 70,000 + 100,000 + 200,000 + 20,000 = 390,000 Rose's property, plant, and equipment includes buildings, equipment and land minus accumulated depreciation. Property, plant and equipment = 500,000 + 120,000 + 150,000 - 50,000 = 720,000 Chapter 2, Learning objective 1, Pool 6

Pilgrim Corporation reports the following on its financial statements. Cash paid for new equipment, $55,000 Cash collected from customers, $90,000 Paid a note payable, $10,000 Cash collected in exchange for issuing additional shares of Pilgrim stock to stockholders, $20,000 Cash dividends paid, $20,000 The company reports $80,000 of net income for the year and it has $100,000 of cash at year-end. What is the company's free cash flow?

15,000 Free cash flow is computed by subtracting capital expenditures and cash dividends from cash provided by operations. The company has only one cash inflow or outflow from operating activities (i.e., cash collected from customers) and it has only one capital expenditure (cash paid for new equipment). Free cash flow = $90,000 - $55,000 - $20,000 = $15,000. The payment of the note payable is not an operating activity cash flow. It is a financing activity cash flow, and it is neither a capital expenditure nor a payment of a dividend so it is not used to compute free cash flow. Similarly, the cash collected from stockholders who paid for additional shares of stock is a financing activity inflow for the company, but it does not affect free cash flow. Chapter 2, Learning objective 5, Pool 2

Clawson Corporation has current assets of $3,750,000 and current liabilities of $2,050,000. If Clawson Corporation pays $500,000 of its accounts payable what will the new current ratio be?

2.10 Solution: Current ratio equals current assets divided by current liabilities. Accounts payable is a current liability. Paying accounts payable reduces cash (i.e., current assets) and reduces accounts payable (i.e., current liabilities). Current ratio = ($3,750,000 − $500,000) ÷ ($2,050,000 − $500,000) Current ratio = 2.0967 (i.e., 2.10 to 1 or 2.10:1) Chapter 2, Learning objective 4

What journal entry is recorded as a result of issuing stock to investors for cash? A debit to Cash and a credit to Common Stock A debit to Cash and a credit to Retained Earnings A debit to cash and a debit to Common Stock

A debit to Cash and a credit to Common Stock *Dad - talk through this one. is it true for every debit there must be equal amounts of credit? Per transaction or just overall? Solution: Learning objective 5 Issuing stock for cash is recorded by debiting Cash and crediting Common Stock. Recall: cash is an asset and assets increase with debits; common stock is an equity account and equity accounts increase with credits.

Which of the following is the correct sequence of events in the recording process? Analyze a transaction; post it to the ledger; record it in the journal None of the answer choices provides the correct sequence Record a transaction in the journal; analyze the transaction; post it to the ledger Analyze a transaction; record it in the journal; post it to the ledger Post to the ledger; analyze a transaction; record it in the journal

Analyze a transaction; record it in the journal; post it to the ledger

Which pair of accounts follows the rules of debits and credits in relation to increases and decreases in the same manner? Retained Earnings and Supplies Dividends and Accumulated Depreciation--Equipment Interest Expense and Accounts Payable Cash and Income Tax Expense Common Stock and Rent Expense

Cash and Income Tax Expense

Which of the following is an expense? Dividends All of these Wages payable Cost of goods sold Accounts receivable

Cost of goods sold Solution: Accounts are classified into categories including assets, liabilities, equities, revenues, expenses, and dividends. Expenses are the cost of assets consumed or services used. Expenses occur when companies generate (or attempt to generate) revenues. Common examples of expenses include wage expenses, interest expenses, marketing expenses, etc. Most expenses have the word "expense" in their title, but cost of goods sold is an exception. Cost of goods sold is an expense that tracks the cost of inventory sold to customers. Chapter 1, Learning objective 3, Pool 1

Which of the following is an indicator of profitability? Earnings per share All of these Current ratio Debt to total assets ratio Working capital

Earnings per share Solution: The earnings per share ratio is a measure of profitability. The others are measures of solvency or liquidity. Chapter 2, Learning objective 2

Which of the following would not be reported among property, plant, and equipment on a classified balance sheet? Land Delivery vehicles Inventory Buildings Accumulated depreciation

Inventory Solution: Classified balance sheets partition a company's assets into four categories: (i) current assets (e.g., inventory), (ii) long-term investments, (iii) property, plant, and equipment (e.g., buildings, land, equipment, and accumulated depreciation which is the total amount of depreciation that the company has expensed thus far on its property, plant and equipment), and (iv) intangibles. Chapter 2, Learning objective 1, Pool 4

Which of the following best describes stockholders' equity? Stockholders' equity are the economic resources of the firm. Stockholders' equity is the difference between revenues and expenses. Stockholders' equity are the claims of creditors. Stockholders' equity is the cash collected from owners. Stockholders' equity are the claims of owners.

Stockholders' equity are the claims of owners. Solution: Learning objective 5 Stockholders' equity represents claims of owners. Assets are the resources owned by the firm and liabilities are the claims of creditors against the firm's assets.

Which of the following is not a fundamental quality of useful accounting information? Verifiability All of these are fundamental qualities of useful accounting information. Faithful representation Neutrality Relevance

Verifiability Solution: Verifiability refers to the process or capability of being able to prove or verify that the data is free from error. This is one of the enhancing qualities of useful information. Relevance is accounting information that would make a difference in a business decision It is one of the fundamental qualities of useful information. To be a faithful representation, financial information must be neutral. It cannot be biased or presented with the intent to influence the decision towards a predetermined goal. If information is a faithful representation or factual, then it depicts what really happened. Faithful representation is one of the fundamental qualities of useful information. Chapter 2, Learning objective 7

The payment of dividends is an example of which type of activity?

a financing activity. Solution: The payment of dividends is an example of a financing activity. Financing activities include cash inflows from selling (i.e., issuing stock to owners) and borrowing from creditors, and cash outflows for financing activities paying cash to stockholders to repurchase stock, paying dividends to stockholders, and paying creditors the amounts borrowed. Chapter 1, Learning objective 3, Pool 4

A company paying cash to its suppliers for inventory to be sold to its customers is an example of which type of activity?

an operating activity. *Dad Solution: Companies engage in three types of cash flow activities: (i) operating activities, (ii) investing activities, and (iii) financing activities. Operating activities include paying cash to buy inventory (and materials to be converted into inventory) and collecting cash from customers. It also includes paying employees' salaries and wages, paying suppliers (e.g., for inventory purchased) and certain other transactions (e.g., paying interest to creditors and collecting interest from debtors). Chapter 1, Learning objective 3, Pool 2

If a company buys supplies on account, then liabilities increase and liabilities decrease. assets increase and liabilities increase. assets increase and stockholders' equity increases. assets decrease and liabilities increase. assets increase and assets decrease.

assets increase and liabilities increase. Solution: Buying supplies indicates that supplies are acquired, and supplies are assets so assets increase. Buying "on account" indicates that cash has not been paid. Rather, a liability is created for the amount owed. This transaction increases an asset (i.e., supplies) and increases a liability (i.e., accounts payable). Stockholders' equity is not affected. Chapter 3, Learning objective 1, Pool 9

Carpenter Company pays the coming year's one-year insurance policy. This transaction will immediately affect the

balance sheet and cash flows statement only.

Carpenter Company receives cash in advance from customers. This transaction will immediately affect which statement(s)?

balance sheet and cash flows statement only. Solution: When collecting cash in advance from customers, the company receives cash (which increases its assets) and increases its liabilities (the liability account is called unearned revenues). Thus, assets increase and liabilities increase by the same amount. Collecting cash also affects the cash flows statement. This transaction does not affect income statement accounts (e.g., revenues and expenses). It also does not affect retained earnings or the retained earnings statement. Chapter 3, Learning objective 1, Pool 2

Accounting information has relevance is it would make a difference in a business decision. Characteristics associated with relevant accounting information include being faithfully represented and neutral. being material and having predictive value. being consistent and understandabible. being neutral and verifiable. being historical and timely.

being material and having predictive value. Solution: To be useful for decision-making, accounting information needs to possess certain fundamental qualities: (i) relevance and (ii) faithful representation. Information is considered to be relevant if it provides information that has predictive value, that is, it helps provide accurate expectations about he future, and has confirmatory value (i.e., it confirms or corrects prior expectations). Materiality is another aspect of relevance. An item of information is material if its size makes it likely to influence decision-making. Faithful representation means information accurately depicts what actually happened. To provide a faithful representation, information must be complete (i.e., nothing important omitted), neutral (i.e., the information s not biased toward one position of another), and free from error. In addition to qualities of useful information, there are several enhancing qualities of useful information. These include comparability, consistency, verifiability, timeliness, and understandability. Chapter 2, Learning objective 7

Issuing a note means that the company is ... This would affect what accounts how?

borrowing money. inc assets and inc liabilities

The effects of paying a dividend on the basic accounting equation are to decrease assets and decrease liabilities. increase assets and decrease assets by the same amount. decrease assets and decrease stockholders' equity. increase assets and increase liabilities. Total assets do not change. increase liabilities and increase stockholders' equity.

decrease assets and decrease stockholders' equity. *Dad Solution: Basic accounting equation: Assets = Liabilities + Stockholders' Equity Paying a dividend decreases cash (i.e., decreases assets) and decreases retained earnings which is an equity account. Thus, asset decrease and equity decreases. Chapter 3, Learning objective 1, Pool 1 Q,3,1,1, Analyzing transactions

If a previously unrecorded expense is recorded when it is paid with cash recording the the transaction will increase expenses and increase retained earnings. increase expenses and decrease assets. decrease expenses and increase liabilities. increase expenses and increase liabilities. increase expenses and decrease expenses by an equal amount.

increase expenses and decrease assets. *Dad - dual effect - is the accounting equation staying equal on both sides? Solution: When an expense is paid with cash, cash (i.e., assets) will be decreased and expenses will be increased. Increasing expenses will reduce net income which reduces retained earnings. Liabilities will not be affected. For example, when a company pays a previously unrecorded insurance bill, it will decrease cash and increase its "insurance expense." Chapter 3, Learning objective 1, Pool 4

Paying for a one-year insurance policy that will expire next year increases assets and decreases assets. increases stockholders' equity and decreases stockholders' equity. increases liabilities and increases assets. increases liabilities and decreases liabilities. decreases liabilities and increases assets.

increases assets and decreases assets. Solution: Paying for a one-year insurance policy reduces the company's cash so assets decrease. In exchange for the cash, the company receives insurance coverage that will benefit the company for the next 12 months, and that coverage is an asset. So, assets increase and decrease by equal amounts, and liabilities and stockholders' equity are not affected. Chapter 3, Learning objective 1, Pool 8

The periodicity assumption states

the life of a business can be divided into artificial time periods for financial reporting purposes.

Accounts are listed on the trial balance in the order in which they are posted. alphabetical order. the order that they appear in the ledger. chronological order. order of largest balances to smallest balances.

the order that they appear in the ledger.

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

will remain in operation for the foreseeable future.

Clawson Corporation has current assets of $3,010,000 and current liabilities of $2,150,000. If Clawson Corporation pays $200,000 of its accounts payable what will its new current ratio be?

1.44

what category is common stock?

Long term investments

paying interest to creditors and collecting interest from debtors are which type of activity?

Operating *Dad!

what category is accounts receivable? Current assets Long-term assets PP&E Intangible Assets

current assets

Accounts with normal debit balances include

expenses dividends and assets.

A company borrows money from a bank. It should report the cash received from the bank on its statement of cash flows as which type of activity?

financing

The following ratios are available for Rock Inc. and Pebble Inc. . Rock Inc. Pebble Inc. Current Ratio 1.8 2.1 Compared to Rock Inc., Pebble Inc. has

higher liquidity.

What are claims of creditors

liabilities (against the firm's assets)

If cash is received from owners as an investment by stockholders retained earnings will increase and assets will increase. stockholders' equity will increase and assets will increase. assets will decrease and liabilities will decrease. liabilities will increase and assets will increase. assets will increase and liabilities will decrease.

stockholders' equity will increase and assets will increase. Receiving cash from stockholders as an investment in the company by stockholders is a contribution to capital. This transaction increases the company's assets (specifically, it increases the cash account) by the amount of cash received and it increases the company's stockholders' equity (specifically, it increases the common stock account). Chapter 3, Learning objective 1, Pool 6