Financial Accounting Module 1

During its first year of operation, Cade Company experienced the following events. (1) Issued common stock for $7,000 cash. (2) Earned $5,000 of cash revenue. (3) Paid $3,000 of cash expenses. (4) Paid cash dividends amounting to $1,000. After closing on December 31, the balance in the retained earning account would be

$1,000. Since this is the first year of operation, the beginning balance in the retained earnings account is zero. At the end of Year 1 the balances in the revenue, expense, and dividend accounts is transferred (closed) to the retained earnings account. Accordingly, the Year 1 after closing balance in the retained earnings account would be $1,000 ($5,000 revenue - $3,000 expenses - $1,000 dividends).

Kilgore Company experienced the following events during its first accounting period. (1) Issued common stock for $5,000 cash. (2) Earned $3,000 of cash revenue. (3) Paid a $4,000 cash to purchase land. (4) Paid cash dividends amounting to $400. (5) Paid $2,200 of cash expenses. The market value of the land at the end of the accounting period was $4,300. Based on this information the amount of total assets appearing on the year-end balance sheet is

$5,400. $5000 cash from CS + $3000 cash from Rev - $4000 cash from buying land + $4000 land asset - $400 cash paid to dividend - $2200 paid to exp = $5400

At the beginning of Year 2 Clair Company had a $5,500 balance in its retained earnings account. During January of Year 2 Clair earned $2,000 of revenue and incurred $1,400 of expenses. Based on this information, the balance in Clair's retained earning account on January 31, Year 2 is

$5,500. Revenue, expense, and dividend accounts are temporary accounts that are independent from the retained earnings account. The balances in these temporary accounts are transferred (closed) to the retained earnings account at the end of the accounting period, in this case December 31, Year 2. Therefore, the balance in retained earnings on January 31, Year 2 is the same as the $5,500 beginning balance.

Kilgore Company experience the following events during its first accounting period. (1) Issued common stock for $5,000 cash. (2) Earned $3,000 of cash revenue. (3) Paid a $4,000 cash to purchase land. (4) Paid cash dividends amounting to $400. (5) Paid $2,200 of cash expenses. Based on this information the amount of net income is

$800. Revenue of $3000 - Expenses of $2200 = $800

The following items were drawn from the financial statements of Rogers Company: (1) Assets (2) Stockholders Equity (3) Salary expense (4) Land (5) Rent revenue (6) Notes Payable (7) Cash collected from the issue of stock (8) Common stock (9) Cash paid for dividends (10) Cash balance (11) Liabilities (12) Dividends (13) Cash paid to purchase land (14) Retained earnings Which of the items listed above were drawn from the balance sheet?

1)Assets 2)Stockholders Equity 4)Land 6)Notes Payable 8)Common Stock 10)Cash balance 11)Liabilities 14)Retained Earnings

Alexis Company was started in Year 1. At the end of Year 1 the Company's had the following accounting equation. Cash + Land = Notes Payable + CS +RE 600 + 2200 = 1000 + 1400 + 400 During Year 2, the company experienced the following accounting events. • Paid of $500 of its note payable. • Earned $700 of cash revenue. • Paid $400 of cash expenses. • Paid a $100 cash dividend. Based on this information alone, what percent of the company's total assets were provided by creditors?

20%.

Ellen Elder and her brother, Buster started Elder Company when they each invested $600 in the company. After the investments there will be

3 reporting entities. The three reporting entities are Ellen, Buster, and Elder Company.

Which of the following is an accurate definition of the term asset?

A resource that will be used to produce revenue. Assets are resources that a business uses to conduct is operations. Examples, include cash, inventory, equipment, building, land, etc. In the process of conducting operations a business uses some assets in order to produce greater quantities of other assets.

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

Assets = Liabilities + Common Stock + RE (300) = NA + NA + (300)

Juarez Company acquired $1,000 from the issue of common stock. Which of the following shows how this event will affect the company's accounting equation? The letters "NA" indicate that the component of the equation is not affected.

Assets = Liabilities + Common Stock + RE $1,000 = NA + $1,000 + NA

Which of the following is an accurate depiction of the accounting equation?

Assets = Liabilities + Common Stock + Retained Earnings

Which of the following shows how borrowing cash from creditors will affect a company's financial statements?

Balance Sheet Income Statement S of CF A= L + E R - E = NI +FA + + NA NA NA NA

Which of the following shows how acquiring cash from the issue of common stock will affect a company's financial statements?

Balance Sheet Income Statement S of CF A= L + E R - E = NI +FA + NA + NA NA NA

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

Balance Sheet Income Statement S of CF A= L + E R - E = NI +OA + NA + + NA +

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

Balance Sheet Income Statement S of CF A= L + E R - E = NI -A NA NA NA NA NA NA

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

Balance Sheet Income Statement S of CF A= L + E R - E = NI -FA - NA - NA NA NA

Which of the following is not a source of assets?

Business obtain assets from three sources. Specifically, businesses can borrow assets from creditors, acquire them from investors (owners), or generate them through operations.

Hector Lopez owns Hector Company . If Hector has 100% ownership interest in the company, the Company's accountant will prepare only one set of statements that reflects the combined assets of Hector and his company. This statement is:

False. Hector Company is a reporting entity that is separate from the owner Hector Lopez. Accountants would keep separate records for each entity. In this case there would be two sets of accounting records.

Resource owners want to provide resources to businesses with high profit potential because those businesses will pay higher taxes. This statement is:

False. When business have to pay taxes, there is less profit available to share with the resource owners. As a result, resource owners want to avoid the consequences of taxation. The reason resource owners are willing to provide resources to companies with high profits is because those business have more profits to share with owners, are able to pay more interest to creditors, and are in a better position to pay higher prices for physical resources and wages. Ask yourself, would you want to work for a company that paid low wages because it had to pay high taxes.

Companies maintain accounting records that show assets at the amount of their market value because that information is more relevant than the historical cost. This statement is

False. While market values may be more relevant. In other words, when making decisions, people may find that knowing the current market value of an asset is more useful than knowing what it cost years ago. The reason for this is that historical costs are verifiable while market values are subjective.

Generally Accepted Accounting Principles (GAAP) are designed to provide guidance for

Financial Accounting

At the end of Year 1 Bowers Company had $6,000 of assets, $2,000 of liabilities, $3,000 of common stock, and $1,000 of retained earnings. During Year 2 Bowers experienced the following events. (1) Borrowed $4,000 cash. (2) Earned $5,000 of cash revenue. (3) Paid $3,000 of cash expenses. (4) Paid $7,000 cash to purchase land Based on this information, the amount of net income, cash flow from investing activities, and total liabilities appearing on the Year 2 financial statements is

Net Income = 2000 Cash Flows from Investing Activities = -7000 Total Liabilities = 6000 The amount of net income is $2,000 (Revenue $5,000 - Expenses $3,000). The only transaction affecting investing activities is the purchase of land. Therefore, there was a $7,000 cash outflow for the purchase of land shown on the statement of cash flows. Liabilities are $6,000 ($2,000 beginning balance + $4,000 borrowed).

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

One land account, Two land accounts, Three land accounts. All of the answers represent possibilities that could exist in Maria's accounting records.

Morrison Company experienced a business event that had the following effect on its accounting equation. Assets = Liabilities + Common Stock + Retained Earnings (25,000) = (25,000) + n/a + n/a Which of the events would have caused this effect.

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

Which of the accounts is closed at the end of an accounting period?

Revenue, Expense, Dividend. These are temporary accts.

At the end of Year 1, Clayton Company had $6,000 of cash, $7,000 land, $2,000 of liabilities, $3,000 of common stock, and $8,000 of retained earnings. During Year 2, Clayton experienced the following events. 1. Borrowed $1,500 cash. 2. Earned $6,500 of cash revenue. 3. Paid $4,000 of cash expenses. 4. Paid $5,000 cash to purchase land. Based on this information the amount of total assets, total liabilities, and retained earnings appearing on the Year 2 financial statements is

Total Assets = $17000 Total Liabilities = $3500 RE = $10500. The amount of cash is $5,000 ($6,000 beginning balance + $1,500 borrowed + $6,500 from revenue - $4,000 to pay expenses - $5,000 to purchase land). Land shown on the balance sheet is $12,000 ($7,000 beginning balance + $5,000 purchased) . Total assets is $17,000 ($5,000 cash + $12,000 land). Liabilities amount to $3,500 ($2,000 beginning balance + $1,500 borrowed). Retained earnings is $10,500 ($8,000 beginning balance + $6,500 revenue - $4,000 expenses).

Businesses earn profits by converting financial, physical, and labor resources into goods and services that satisfy consumer demands. This Statement is:

True. Businesses add value by converting financial, physical, and labor resources into goods and services that consumers want.

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

True. Businesses that efficiently produce products customers want are rewarded with high profits.

The income statement presents

a comparison of the benefits and the sacrifices a company experiences from its operations.

The balance sheet presents

a list of a company's assets and the sources of those assets.

Simpson Company paid cash to purchase land. This event is

an asset exchange transaction. Paying cash to purchase land causes an increase in one asset account (land) and an decrease in another asset account (cash). The total amount of assets is not affected. Therefore, the cash purchase of land is an asset exchange transaction.

Sims Company earned cash revenue by providing services to its customers. This event is

an asset source transaction. Earning cash revenue causes assets (cash) and stockholders' equity (retained earnings) to increase. Since the total amount of assets increases, this is an asset source transaction.

Barnett Company paid a cash dividend. This event is

an asset use transaction. Paying a cash dividend causes assets (cash) to decrease and stockholders' equity (retained earnings) to decrease. Since total assets decrease, this is an asset use transaction.

The following accounting equation represents the financial position of Bentley Company. Cash + Land = Notes Payable +Common Stock + RE 600 + 2200 = 1000 + 1400 + 400 Based on this equation, Bentley

can pay a $600 cash dividend, can pay off its note payable, or can pay only $400 of its note payable. None of these answers are correct. Retained earnings represents the portion of assets that have been generated through earnings. Since dividends are a distribution of asset that have been generated through earnings, the company cannot pay more than $400 of dividends, regardless of the fact that it has $600 cash. Since the company has $600 cash it cannot pay off its $1,000 note payable. However, it can make a $600 partial payment on the $1,000 note payable. The repayment of debt is limited by the $600 amount of cash the company has, not the $400 amount of its retained earnings.

If total assets increase then

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

Paul Savage purchased a restaurant named Burger Haven from Larry Jones. The purchase would cause the number of reporting entities to

remain constant. There are three reporting entities Paul Savage, Burger Haven, and Larry Jones. These same entities existed before and the purchase of the restaurant.

Liabilities

represent obligations to repay debts, may increase when assets increase, have priority in business liquidations. When a business borrows money from creditors is accepts an obligation (liability) to repay the money to the creditor in the future. Borrowing the money causes the business' assets and its liabilities to increase. The obligation to the creditor has priority over the business' commitments to its investors.

Emerald Company was established in January, Year 1. During Year 1 the company experienced the following events. • Collected $50,000 cash from the issue of common stock. • Borrowed $45,000 cash from the state bank. • Earned $120,000 of cash revenue. • Paid $180,000 cash expenses. The company was liquidated at the end of Year 1. Based on this information

the creditor (the bank) would receive $35,000. While creditors have first priority in a business liquation, they cannot receive assets that the business does not have.

During its first year of operation, Cade Company experienced the following events. (1) Issued common stock for $7,000 cash. (2) Earned $5,000 of cash revenue. (3) Paid $3,000 of cash expenses. (4) Paid cash dividends amounting to $1,000. Before closing on December 31, the balance in the retained earning account would be

zero. Since this is the first year of operation, the beginning balance in the retained earnings account is zero. Also, since the question specifies the before closing balance, none of the Year 1 information from the temporary accounts has been transferred to the retained earnings account. Therefore, at this point the retained earnings balance is zero.