CHAPTER 1

Which of the following statements is true regarding the Sarbanes-Oxley Act (SOX)?

-SOX increased the penalties for financial fraud. Penalties may include fines and imprisonment. -SOX required increased independence of the certified public accountants hired to audit a company's financial statements.

Which of the following questions is important to internal users of a company's accounting information?

-Which product line is most profitable? -Is cash sufficient to pay dividends to stockholders? -What selling price for our product will maximize the company's net income?

Retained earnings is

-equal to the amount of net income minus dividends paid since the company began operations. -an equity account

Which of the following is true with regards to the forms of business organization?

A corporation is a business organized as a separate legal entity owned by stockholders.

Which of the following is not one of the three primary business activities listed on the statement of cash flows?

Advertising activities

Which of the following is an asset?

Inventory

Which activity involves acquiring the property, plant, and equipment that will be used as long-term resources in running the business?

Investing

Which of the following questions tends to be important to external users of a company's accounting information?

Is the company profitable?

Which of the following is considered to be an internal user of accounting data for a given business?

Management

Which of the following is not considered to be an internal user of accounting data for a company?

Owners of the company

Which of the following statements concerning internal and external users of accounting information is not correct?

Regulatory authorities are considered internal users.

Which of the following would appear on a balance sheet?

Retaining earnings

Which of the following did not result from the Sarbanes-Oxley Act (SOX)?

Tax rates on corporations increased.

Which of the following is an internal user of accounting data?

The company's finance personnel

Which of the following is an external user of accounting data?

The company's stockholders

In which of the following sequences are these financial statements usually prepared?

The income statement is prepared before the statement of stockholders' equity.

Which of the following is a primary purpose of the balance sheet?

To report the company's assets and claims to assets at a specific point in time

A company issuing shares of stock for cash from shareholders is an example of

a financing activity

Borrowing money from a bank in exchange for issuing the bank a note is an example of

a financing activity

When expenses exceed revenues, which of the following is true?

a net loss results

When a company purchases goods on account from a supplier it has an obligation to pay for the goods. The obligation to pay for these goods is called

accounts payable

If the auditor issuing the auditor's report is satisfied that the financial statements provide a fair representation of the company's financial position and results of operation, the auditor expresses

an unqualified opinion

Resources owned by a business are referred to as

assets

A balance sheet shows

assets, liabilities, stockholders equity

Which of the following is an expense?

cost of goods sold

Which of the following is not a liability?

cost of goods sold

Paying a dividend

decreases retained earnings

Payments to a corporation's stockholders are called

dividends

Stockholders of a corporation are considered to be

external users of a company's accounting information.

Publicly traded U.S. companies must provide shareholders with an annual report. Which of the following is not part of the annual report provided to shareholders?

general ledger, chart of accounts

The sole proprietorship form of business organization

generally receives favorable tax treatment relative to a corporation.

Debts and obligations of a business are referred to as

liabilities

Which of the following is also referred to as debt?

liabilities

What type of account or account classification is Accounts Payable?

liability

The portion of the annual report that presents management's views on the company's ability to fund operations and expansion is the

management discussion and analysis.

The statement of cash flows reports all of the following except

net cash provided from adjusting activities

Explanations of uncertainties and contingencies of a business, including various statistics and details too voluminous to be included in the financial statements, would be found in the company's

notes to the financial statements

Information about the significant accounting policies and methods used in preparing the financial statements would be found in the

notes to the financial statements.

Collecting cash from customers is an example of a cash flow from

operating activities

Which of the following is not a principal type of business activity?

ordering

Stockholders' equity can be described as claims of

owners on total assets.

The Balance Sheet

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

An income statement

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

Amounts earned on the sale of products or services to customers is known as

revenue

Net income will result during a time period when

revenues exceed expenses

Which of the following would not appear on a balance sheet?

sales revenue, service revenue

Which of the following would appear on an income statement?

service revenue, interest expense

Which of the following is comprised of two parts: (1) common stock and (2) retained earnings?

stockholders equity

The heading or title on the income statement identifies all of the following except

the independent auditor who reviewed the statement.

If total liabilities decreased by $15,000 and total stockholders' equity increased by $5,000 during a period of time, then total assets must have changed by what amount and direction during that same period?

$10,000 decrease Solution: The accounting equation: Assets = Liabilities + Stockholders' Equity If liabilities decreased by $15,000 and stockholders' equity increased by $5,000 then the right side of the accounting equation decreased by $10,000. Therefore, assets must have decreased by $10,000 to keep the accounting equation in balance [i.e., ($15,000) + $5,000 = ($10,000)].

A corporation had the following accounts and balances: Accounts payable $ 3,000 Accounts receivable 8,000 Buildings 25,000 Cash 10,000 Common stock 12,000 Equipment 30,000 Notes payable 6,000 Retained earnings Not given Unearned service revenue 2,000 What is the balance of the company's retained earnings account?

$50,000 Solution: Assets = Accounts receivable + buildings + cash + equipment = 8,000 + 25,000 + 10,000 + 30,000 = 73,000 Liabilities = accounts payable +notes payable + unearned revenue = 3,000 + 6,000 + 2,000 = 11,000 Assets = liabilities + stockholders' equity Stockholders' equity = assets - liabilities = 73,000 - 11,000 = 62,000 Stockholder's equity = common stock + retained earnings Retained earnings = stockholders' equity - common stock = 62,000 - 12,000 = 50,000

If total liabilities decreased by $75,000 and stockholders equity increased by $25,000 during a period of time, then total assets must change by what amount and direction during that same period?

$50,000 decrease Solution: The accounting equation is: Assets = Liabilities + Equity. The accounting equation must stay in balance (i.e., assets must equal the sum of liabilities plus stockholders' equity). If one side increases by $1 then the other side must increase by $1. If liabilities decreased by $75,000 and stockholders' equity increased by $25,000 then the net decrease for liabilities and stockholders' equity is $50,000. Assets must have decreased by $50,000.

0 / 0.5 pts A company's retained earnings at the start of the year was $375,000. It compiled the following financial information as of the end of the current year: Accounts payable, $100,000 Accounts receivable, $75,000 Cash, $125,000 Common stock, $150,000 Dividends, $50,000 Equipment, $425,000 Retained earnings, Not given Salaries expense, $625,000 Service revenue, $700,000 Supplies, $25,000 What is the company's total stockholders' equity at year-end?

$550,000 Solution: Ending retained earnings = Beginning retained earnings + revenues - expenses - dividends Ending retained earnings = 375,000 + 700,000 - 625,000 - 50,000 = 400,000 Total stockholders' equity = Common stock + Retained earnings = 150,000 + 400,000 = 550,000

In which of the following sequences are these three financial statements usually prepared?

(i) Income statement, (ii) statement of stockholders' equity, and (iii) balance sheet.

A business organized as a corporation

-is owned by its stockholders. - is advantaged in terms of raising funds

In the annual report, where would a financial statement reader find out if the company's financial statements give a fair depiction of its financial position and operating results?

Auditors report

Which of the following is considered to be an external user of accounting data for given company?

Creditors

Which of the following is true with regards to dividends?

Dividends represent a portion of corporate profits that are paid to the shareholders.

At the end of the year, a corporation has assets of $6,500 and liabilities of $2,000. How much is the company's equity at the end of the year?

$4,500 Solution: Assets = Liabilities + Equity Using the accounting equation, equity can be computed by subtracting liabilities from assets. Equity = $6,500 - 2,000 = $4,500.

A company recorded the following cash transactions for the year: Paid $150,000 for salaries. Paid $45,000 to purchase inventory. Borrowed $10,000 from a bank. Collected $265,000 from customers. What is the company's net cash from operating activities for the year?

$70,000 Solution: Business activities include financing activities, investing activities, and operating activities. After a company obtains financing from owners and creditors and after the company has invested in property, plant, and equipment, the company is ready for day-to-day operating activities. Examples of operating activities include buying and selling inventory, paying employees' wages, and other activities (e.g., paying for marketing). This company's net cash from its operating activities equals cash collected from customers minus payments for employee salaries (i.e., 265,000 - 150,000 - 45,000 = 70,000). Paying a dividend is a financing activity.

Retained earnings at the end of the period is equal to which of the following?

Retained earnings at the beginning of the period plus net income minus dividends

Which of the following is not an asset?

Revenue

Which of the following is required as a result of the Sarbanes-Oxley Act (SOX) passed into law in 2002?

SOX increased independent auditors' independence.

In which forms of business organization are the owners personally liable for the debts of the business?

Sole proprietorships and partnerships

Which of the following best defines accounting?

The information system that identifies, measures, and communicates the economic events of an organization to interested users.

Which of the following is the most appropriate definition of accounting information?

The information system that identifies, records, and communicates the economic events of an organization to interested users

What section of a cash flows statement shows the amount of cash collected from customers during the most recent accounting period?

The operating section

Which financial statement is divided into three sections including operating activities, investing activities, and financing activities?

The statement of cash flows

The segment of the annual report that presents an opinion regarding the fairness of the presentation of the financial position and results of operations is/are the

auditor's opinion

Which financial statement reports assets, liabilities, and stockholders' equity as of a given date?

balance sheet

Which of the following financial statements is concerned with the company at a point in time?

balance sheet

A corporation began the year with retained earnings of $465,000. During the year, the company did the following: Issued common stock, $630,000 Incurred expenses, $1,800,000 Declared and paid dividends, $120,000 The company's ending retained earnings is $495,000,. What was the company's revenue for the year?

$1,950,000 Solution: Beginning retained earnings + Net income - Dividends = Ending retained earnings Replace net income with revenue - expenses Beginning retained earnings + Revenue - Expenses - Dividends = Ending retained earnings Re-arranging this equation to solve for revenues: Revenue = Ending retained earnings - Beginning retained earnings + Expenses + Dividends Revenue = 495,000 - 465,000 + 1,800,000 + 120,000 Revenue = 1,950,000

The financial records for a corporation included the following information: Accounts receivable, $60,000 Accounts payable, $5,000 Cash, $30,000 Common stock, $5,000 Dividends, $20,000 Insurance expense, $10,000 Salaries and wages expense, $40,000 Sales revenue, $150,000 Based on this information, how much was its net income?

$100,000 Solution: Net income equals the revenues earned during the year minus the expenses incurred during the year. Use the balances of the revenue and expense accounts to measure revenues and expenses. Net income = Revenue - expenses Net income = $150,000 - 40,000 - 10,000 = $100,000

A corporation began the year with total assets of $125,000 and stockholders' equity of $40,000. During the year the company reported the following: Net income, $90,000 Dividends, $20,000 Total assets at the end of the year were $215,000. How much were total liabilities at the end of the year?

$105,000 Solution: First, determine the ending balance of stockholders' equity. Ending stockholders' equity = beginning stockholders' equity + net income - dividends. Ending stockholders' equity = $40,000 + 90,000 - 20,000 = $110,000. Second, determine total liabilities (i.e., Assets = Liabilities + Stockholders' equity) Liabilities = $215,000 - 110,000 = $105,000

A company recorded the following cash transactions for the year: Paid employees salaries of $135,000. Paid $60,000 to purchase office equipment. Paid $6,000 in dividends. Collected $245,000 from customers. What is the company's net cash from operating activities for the year?

$110,000 Solution: Business activities include financing activities, investing activities, and operating activities. After a company obtains financing from owners and creditors and after the company has invested in property, plant, and equipment, the company is ready for day-to-day operating activities. Examples of operating activities include buying and selling inventory, paying employees' wages, and other activities (e.g., paying for marketing). This company's net cash from its operating activities equals cash collected from customers minus payments for employee salaries (i.e., 245,000 - 135,000 = 110,000). Buying equipment is an investment activity. Paying a dividend is a financing activity.

A company recorded the following cash transactions for the year: Paid $150,000 for salaries. Paid $45,000 to purchase office equipment. Borrowed $10,000 from a bank. Collected $265,000 from customers. What is the company's net cash from operating activities for the year?

$115,000 Solution: Business activities include financing activities, investing activities, and operating activities. After a company obtains financing from owners and creditors and after the company has invested in property, plant, and equipment, the company is ready for day-to-day operating activities. Examples of operating activities include buying and selling inventory, paying employees' wages, and other activities (e.g., paying for marketing). This company's net cash from its operating activities equals cash collected from customers minus payments for employee salaries (i.e., 265,000 - 150,000 = 115,000). Buying equipment is an investment activity. Paying a dividend is a financing activity.

If total assets decreased by $15,000 and total stockholders' equity increased by $5,000 during a period of time, then total liabilities must have changed by what amount and direction during that same period?

$20,000 decrease Solution: The accounting equation: Assets = Liabilities + Stockholders' Equity If assets decreased by $15,000 then liabilities plus stockholders' equity decreased by $15,000. Since stockholders' increased by $5,000 then liabilities must have decreased by $20,000 [i.e., ($15,000) = ($20,000) + $5,000].

If total liabilities increased by $15,000 and total stockholders' equity increased by $5,000 during a period of time, then total assets must have changed by what amount and direction during that same period?

$20,000 increase Solution: The accounting equation: Assets = Liabilities + Stockholders' Equity If liabilities increased by $15,000 and stockholders' equity increased by $5,000 then the right side of the accounting equation increased by $20,000. Therefore, assets must have increased by $20,000 to keep the accounting equation in balance [i.e., $20,000 = $15,000 + $5,000].

A corporation started the year with total assets of $200,000 and total liabilities of $160,000. During the year the business recorded the following: Recognized revenues, $400,000 Incurred expenses, $220,000 Declared and paid dividends, $40,000 Issued common stock. $20,000 What is the stockholders' equity at the end of the year?

$200,000 Solution: The basic accounting equation is: Assets = Liabilities + Stockholders' equity At the start of the year, stockholders' equity is $40,000 (i.e., equity = assets - liabilities = 200,000 - 160,000 = 40,000). During the year equity increased by revenues, decreased by expenses, decreased by dividends, and increased by additional stock issued. Equity increased from $40,000 to $210,000 (i.e., $40,000 + 420,000 - 200,000 - 40,000 + 20,000 = 200,000).

A corporation started the year with total assets of $200,000 and total liabilities of $160,000. During the year the business recorded the following: Recognized revenues, $420,000 Incurred expenses, $220,000 Declared and paid dividends, $40,000 Issued common stock, $10,000 What is the stockholders' equity at the end of the year?

$210,000 Solution: The basic accounting equation is: Assets = Liabilities + Stockholders' equity At the start of the year, stockholders' equity is $40,000 (i.e., equity = assets - liabilities = 200,000 - 160,000 = 40,000). During the year equity increased by revenues, decreased by expenses, decreased by dividends, and increased by additional stock issued. Equity increased from $40,000 to $210,000 (i.e., $40,000 + 420,000 - 220,000 - 40,000 + 10,000 = 210,000).

If total liabilities increased by $46,000 during a period of time and stockholders equity decreased by $18,000 during the same period, then the amount and direction (increase or decrease) of the period s change in total assets is a(n)

$28,000 increase Solution: The accounting equation is: Assets = Liabilities + Equity. The accounting equation must stay in balance (i.e., assets must equal the sum of liabilities plus stockholders' equity). If one side increases by $1 then the other side must increase by $1. If liabilities increased by $46,000 and stockholders' equity decreased by $18,000 then the net increase for liabilities and stockholders' equity is $28,000. Assets must have increased by $28,000.

A corporation had the following accounts and balances: Accounts payable $ 6,000 Accounts receivable 8,000 Cash 7,000 Common stock 15,000 Equipment 44,000 Notes payable 8,000 Prepaid insurance 4,000 Retained earnings Not given Supplies 2,000 Unearned service revenue 3,000 What is the balance of the company's retained earnings account?

$33,000 Solution: Assets = Accounts receivable + cash + equipment + prepaid insurance + supplies = 8,000 + 7,000 + 44,000 + 4,000 + 2,000 = 65,000 Liabilities = accounts payable + notes payable + unearned revenue = 6,000 + 8,000 + 3,000 = 17,000 Assets = liabilities + stockholders' equity Stockholders' equity = assets - liabilities = 65,000 - 17,000 = 48,000 Stockholder's equity = common stock + retained earnings Retained earnings = stockholders' equity - common stock = 48,000 - 15,000 = 33,000

During the year, a company did the following: Recognized revenues of $800,000 Incurred expenses of $620,000 Issued common stock for $90,000 Paid dividends of $60,000 Its ending retained earnings is $500,000. What was the company beginning retained earnings?

$380,000 Solution: Ending retained earnings = Beginning retained earnings + Net income - Dividends Replace net income with revenue - expenses Ending retained earnings = Beginning retained earnings + Revenue - Expenses - Dividends Re-arranging to solve for beginning retained earnings: Beginning retained earnings = Ending retained earnings - Revenue + Expenses + Dividends Beginning retained earnings = 500,000 - 800,000 + 620,000 + 60,000 Beginning retained earnings = 380,000

A corporation began the year with total liabilities of $100,000 and stockholders' equity of $40,000. During the year the company reported the following: Net income, $110,000 Dividends, $5,000 Total liabilities at the end of the year were $240,000. How much were total assets at the end of the year?

$385,000 Solution: 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. Assets = Liabilities + Stockholders' equity Assets = $240,000 + 145,000 Assets = $385,000

The financial records for a corporation included the following information: Accounts receivable, $60,000 Accounts payable, $20,000 Cash, $25,000 Common stock, $10,000 Dividends, $10,000 Insurance expense, $5,000 Salaries and wages expense, $50,000 Sales revenue, $120,000 Based on this information, how much was its net income?

$65,000 Solution: Net income equals the revenues earned during the year minus the expenses incurred during the year. Use the balances of the revenue and expense accounts to measure revenues and expenses. Net income = Revenue - expenses Net income = $120,000 - 50,000 - 5,000 = $65,000

A company began the year with retained earnings of $570,000. During the year, the company did the following: Recognized revenues, $600,000 Issued common stock, $50,000 Incurred expenses, $380,000 Declared and paid dividends, $140,000 What is its retained earnings at the end of the year?

$650,000 Solution: Ending retained earnings = Beginning retained earnings + Net income - Dividends Replace net income with revenue - expenses Ending retained earnings = Beginning retained earnings + Revenue - Expenses - Dividends Ending retained earnings = 570,000 + 600,000 - 380,000 - 140,000 Ending retained earnings = 650,000

The partnership form of business organization

-is the type of business that is harder to transfer ownership in comparison to a corporation. -is tax advantaged in comparison to a corporation

When the auditor is satisfied that the financial statements provide a fair representation of the company's financial position and results of operation in accordance with generally accepted accounting principles, the auditor will express

An unqualified opinion

Which of the following best describes stockholders' equity?

Stockholders' equity are the claims of owners.

The cost of assets consumed or services used in the process of generating revenues is also known as

an expense

An annual report provided to shareholders includes all of the following except

an income tax return

The annual report provided to shareholders includes an auditor's report. The auditor's report includes an opinion about the fairness of the financial statements. The party expressing that opinion is

an independent auditor who is a Certified Public Accountant.

In terms of the principal types of cash flow activities, paying for goods and services is an example of

an operating activity