Financial Accounting Study Questions

At the end of the previous year, a company's balance sheet reports cash of $30,000. For the current year, the company's statement of cash flows reports operating cash inflows of $90,000; investing outflows of $110,000; and financing inflows of $40,000. What amount of cash will be reported in the current year's balance sheet?

$50,000

Financial accounting serves which primary function(s)?

(1) Measures business activities. (2) Communicates business activities to interested parties.

Which of the following describes the purpose(s) of closing entries?

(1) Transfer the balances of temporary accounts (revenues, expenses, and dividends) to Retained Earnings. (2) Reduce the balances of the temporary accounts to zero to prepare them for measuring activity in the next period.

The entry to close the expense accounts includes:

A debit to Retained Earnings.

All transactions related to a particular item over a period of time are summarized in a(n):

Account

When employee expenditures with company-issued credit cards are recorded:

Accounts Payable is credited.

A debit is used to decrease which of the following accounts?

Accounts Payable.

Employee purchases of supplies with a company-issued credit card are typically recorded with a credit to

Accounts Payable.

Recording salaries owed to employees that will not be paid by the company until the following accounting period is an example of a(n):

Accrued expense.

Financial statements are prepared from which of the following trial balances?

Adjusted trial balance.

A trial balance can best be explained as a list of

All accounts and their balances at a particular date.

Which of the following is not a step in the process of measuring external transactions?

All of the steps listed are steps in the measurement process of external transactions.

Which of the following is a characteristic of adjusting entries?

Allows for proper application of the revenue recognition principle (revenues) or expense recognition.

Which of the following is considered cash for financial reporting purposes?

Amounts held in checking accounts.

Liabilities represent

Amounts owed to creditors.

Managers should act:

As stewards of the company's assets.

Which of the following represents a resource of the company?

Asset

Which of the following equations correctly represents the fundamental accounting equation?

Assets = Liabilities + Stockholders' Equity.

The financial statement that shows the financial position of a company at a specific point in time is called the:

Balance Sheet.

Which financial statement reports a company's assets and liabilities?

Balance sheet

Which financial statement shows that a company's resources equal claims to those resources?

Balance sheet.

Which of the following is considered cash for financial reporting purposes?

Balances in savings accounts.

The most lucrative activity of public accountants typically is:

Business Consulting

A credit is used to decrease which of the following accounts?

Cash

A company's petty cash refers to:

Cash on hand to pay for minor purchases.

Operating cash flows include which of the following?

Cash paid for supplies.

Financing cash flows include which of the following?

Cash received from the issuance of common stock.

Investing cash flows include which of the following?

Cash received from the sale of a used company truck.

Which of the following describes the information reported in the statement of stockholders' equity?

Change in stockholders' equity through changes in common stock and retained earnings.

A list of all account names used to record transactions of a company is referred to as a:

Chart of accounts.

Which of the following adjusts the bank's balance of cash in a bank reconciliation?

Checks outstanding.

Which of the following is considered cash for financial reporting purposes?

Checks received from customers.

Which of the following is considered cash for financial reporting purposes?

Coins and currency., Debit card sales., Checks received from customers.

Sarbanes-Oxley Act (SOX) was passed in response to:

Corporate scandals involving unethical behavior of top executives.

Expenses represent:

Costs of providing products or services to customers.

The issuance of stock to owners would be recorded with a:

Credit to Common Stock.

The adjusting entry to record interest earned during the period includes a:

Credit to Interest Revenue.

Providing services to customers for cash would be recorded with a:

Credit to Service Revenue

On November 1, a company receives cash of $6,000 from a customer for services to be provided evenly over the next six months. Deferred revenue is recorded at that time. Which of the following adjusting entries is needed on December 31 (two months later)?

Debit Deferred Revenue for $2,000; Credit Service Revenue for $2,000.

The purchase of equipment with cash would be recorded as

Debit Equipment; Credit Cash.

A company owes employee salaries of $5,000 on December 31 for work completed in the current year, but the company doesn't plan to pay those salaries until the following year. What adjusting entry, if any, is needed on December 31?

Debit Salaries Expense for $5,000; Credit Salaries Payable for $5,000.

Purchasing office supplies on account for $100 is recorded as:

Debit Supplies and Credit accounts payable

The payment for utilities of the current month would be recorded as

Debit Utilities Expense; Credit Cash.

Providing services to customers on account for $100 is recorded as

Debit accounts receivable and credit service revenue

Ambassador Hotels purchases one year of fire insurance coverage on December 1 for $24,000 ($2,000 per month), debiting Prepaid Insurance. On December 31, Ambassador would record the following year-end adjusting entry:

Debit insurance expense and credit prepaid insurance

Chan Sports purchases one year of rent on November 1 for $12,000 ($1,000 per month), debiting Prepaid Rent. On December 31, Chan Sports would record the following year-end adjusting entry:

Debit rent expense and credit prepaid rent

Paying dividends to stockholders would be recorded with a:

Debit to Dividends.

The adjusting entry to record supplies used during the period includes a:

Debit to Supplies Expense

On December 10, a company pays $500 for advertising to appear on December 20. On which date should the expense be recorded under cash-basis accounting?

December 10

On December 10, a company pays $500 for advertising to appear on December 20. On which date should the expense be recorded under accrual-basis accounting?

December 20.

A credit to Cash will:

Decrease assets.

Which of the following is possible for a particular business transaction?

Decrease assets; decrease liabilities.

A debit to Salaries Expense will:

Decrease stockholders' equity.

Which of the following adjusts the bank's balance of cash in a bank reconciliation?

Deposits outstanding.

Financial accounting helps with:

Development of more complex societies, Exchange of goods and services among individuals., Maintaining records of multiple business transactions.

Which of the following describes distributions to stockholders?

Dividends

Section 404 of the Sarbanes-Oxley Act requires companies to:

Document and assess internal controls.

What is the concept behind separation of duties in establishing internal control?

Employee fraud is less likely to occur when access to assets and access to accounting records are separated.

Which of the following generally would be considered a good internal control over cash payments?

Ensure checks are serially numbered and signed only by authorized employees.

The balance of retained earnings in the adjusted trial balance:

Equals the balance of retained earnings at the beginning of the accounting period.

Which of the following describes the cost of selling to customers?

Expenses

Which of the following does not represent an external business transaction

Expiration of an insurance policy over time.

On January 17, Papa's Pizza signs a contract with Bug Zappers for exterminating services related to a recent sighting of cockroaches in the restaurant. Papa's pays for the extermination service on January 29, and Bug Zappers sprays for bugs on February 7. On which date should Papa's Pizza record the extermination expense?

February 7 (date of extermination service).

Fraudulent reporting by management could include

Fictitious revenues from a fake customer, Improper asset valuation., Mismatching revenues and expenses.

The Sarbanes-Oxley Act of 2002 applies to all companies that:

File reports with the Securities and Exchange Commission.

Financial accounting and reporting standards in the United States are established primarily by the

Financial Accounting Standards Board (FASB).

Which body has the primary responsibility for the establishment of Generally Accepted Accounting Principles?

Financial Accounting Standards Board (FASB).

Based on the introductory section of this chapter, which course is most like financial accounting?

Foreign language.

After transactions are recorded in the journal, they are posted to the:

General ledger.

The body of rules and procedures that guide the measurement and communication of financial accounting information is known as

Generally Accepted Accounting Principles (GAAP).

The term GAAP stands for:

Generally Accepted Accounting Principles.

After the closing entries are posted to the accounts, all temporary accounts:

Have zero balances.

What is a benefit to a career in accounting?

High salaries, wide range of job opportunities, and high demand for accounting graduates

Which of the following could cause a company to have a high ratio of cash to noncash assets?

Highly volatile operations., Low dividend payments., Significant foreign operations.

Under cash-basis accounting, companies typically record revenue:

In the period in which the company receives cash from customers for goods and services.

The revenue recognition principle states that companies typically record revenue:

In the period in which we provide goods and services to customers.

Under accrual-basis accounting, companies typically report expenses:

In the same period as the revenue they help to generate.

Under cash-basis accounting, companies typically report expenses:

In the same period in which cash is paid.

In which financial statement does a company report its expenses?

Income Statement.

In which financial statement does a company report its revenues?

Income Statement.

Which of the following statements best explains the company's profits generated for owners during the period?

Income Statement.

Which financial statement conveys a company's ability to generate profits in the current period?

Income statement.

Which of the following causes the accounting equation not to balance?

Increase assets; increase dividends.

Providing services to customers for cash would have what effect on the accounting equation?

Increase total assets and total stockholders' equity.

The Sarbanes-Oxley Act (SOX) mandates which of the following?

Increased regulations related to auditor-client relations., Increased regulations related to internal control., Increased regulations related to corporate executive accountability.

Which of the following best describes financial accounting?

Information measurement/communication process.

Which of the following adjusts the company's balance of cash in a bank reconciliation?

Interest on bank deposit.

Financial accounting provides information primarily to:

Investors and creditors.

Which of the following transactions causes an increase in total assets?

Issue common stock in exchange for cash

Why does financial accounting have a positive impact on our society?

It allows investors and creditors to redirect their resources to successful companies and away from unsuccessful companies.

On January 17, Papa's Pizza signs a contract with Bug Zappers for exterminating services related to a recent sighting of cockroaches in the restaurant. Papa's pays for the extermination service on January 29, and Bug Zappers sprays for bugs on February 7. Using cash-basis accounting, on which date should Papa's Pizza record the extermination expense?

January 29 (date of cash payment).

Transactions are recorded using debits and credits in a(n):

Journal

Financial accounting is often referred to as a:

Language of business.

In the language of accounting, the term "debit" always means

Left-hand side.

Which of the following represents an obligation of the company?

Liabilities

An adjusted trial balance

Lists all accounts and their balances at a particular date after updating account balances for adjusting entries, Includes balances for revenues, expenses, and dividends, Is used to prepare the financial statements

Closing entries are:

Made to transfer the balances of temporary accounts to retained earnings.

A company's ratio of cash to noncash assets provides some indication of the company's ability to:

Maintain normal operations, Respond quickly to new opportunities, Prevent bankruptcy

Financial accounting information is essential to:

Making good business decisions.

Who ultimately is responsible for properly applying GAAP? The company's:

Management

Which of the following is an example of detective controls?

Management periodically determines whether the amount of physical assets agree with the accounting records.

On March 4, Tonkawa Law asks Green Lawn Services for basic lawn maintenance totaling $200. Green Lawn provides maintenance on March 8, and Tonkawa pays for the lawn maintenance on March 12. Under accrual-basis accounting, on which date should Tonkawa record an increase in accounts payable?

March 8 (date of lawn maintenance service).

On May 5, Johnson Plumbing receives a phone call from a customer needing a new water heater and schedules a service visit for May 7. On May 7, Johnson installs the new water heater. The customer pays for services on May 10. Using cash-basis accounting, on which date should Johnson record service revenue?

May 10 (date of cash receipt).

On May 5, Johnson Plumbing receives a phone call from a customer needing a new water heater and schedules a service visit for May 7. On May 7, Johnson installs the new water heater. The customer pays for services on May 10. According to the revenue recognition principle, on which date should Johnson record service revenue?

May 7 (date of service).

The primary function(s) of financial accounting is (are) to:

Measure business activities of a company and communicate information about business activities to outside users.

Which definition best describes financial accounting?

Measuring a company's business activities and communicating those measurements to external parties.

Which of the following describes the information reported in the statement of cash flows?

Net cash flows from operating, investing, and financing activities.

Which single piece of information best explains most companies' stock price performance?

Net income

A company reports the following in its income statement: Total revenues of $500,000 and total expenses of $300,000. Which of the following is true?

Net income equals $200,000.

Which of the following describes the information reported in the income statement?

Net income for the period is calculated by subtracting expenses from revenues.

Purchasing land with cash would have what effect on the accounting equation?

No effect

On March 4, Tonkawa Law asks Green Lawn Services for basic lawn maintenance totaling $200. Green Lawn provides maintenance on March 8, and Tonkawa pays for the lawn maintenance on March 12. Using cash-basis accounting, on which date should Tonkawa record an increase in accounts payable?

None of the choices are correct.

On September 9, Clearmore Services receives a request for services from a customer. The service is scheduled for September 15. On September 15, the service is provided, and the customer pays one week later on September 22. Using cash-basis accounting, on which date should Clearmore Services record an increase in accounts receivable?

None of the choices are correct.

Which of the following adjusts the company's balance of cash in a bank reconciliation?

Note received by the bank on behalf of the company.

On November 15, Meier Company received $3,000 cash from a customer for services that were performed on November 1. According to the Revenue Recognition Principle, on which date should the revenue be recorded?

November 1

On November 15, Meier Company received $3,000 cash from a customer for services that were performed on November 1. On which date should the revenue be recorded under cash-basis accounting?

November 15

In response to widespread fraudulent reporting in the late 1990's and early 2000's, Congress:

Passed the Sarbanes-Oxley Act.

Which of the following transactions decreases total assets?

Pay dividends to stockholders.

Which of the following transactions decreases stockholders' equity?

Pay salaries for the current period.

Which of the following transactions causes a decrease in stockholders' equity?

Paying advertising expense for the current month.

Operating cash flows would include which of the following?

Payment for employee salaries.

Investing cash flows would include which of the following?

Payment for land.

Operating cash flows would include which of the following?

Payment for prepaid insurance.

Which of the following represents an external transaction?

Payment of utility bill.

Corporate executive accountability under the Sarbanes-Oxley Act requires corporate executives to:

Personally certify the company's financial statements.

Account balances in the general ledger are updated for transactions through the process of:

Posting

The process of transferring debit and credit information from the general journal to the general ledger is known as:

Posting

Which step in the process of measuring external transactions involves assessing the equality of total debits and total credits?

Prepare a trial balance.

Public accounting firms refer to:

Professional service firms that traditionally focus on auditing and tax preparation

In a classified balance sheet, long-term physical assets used in the normal course of business are known as

Property, plant, and equipment.

The purpose of a petty cash fund is to

Provide cash on hand for minor expenditures.

Which of the following transactions causes an increase in stockholders' equity?

Provide services to customers on account.

Which of the following transactions increases total assets?

Provide services to customers on account.

Which of the following is an example of an accrued revenue?

Providing services to a customer without having yet collected the cash.

Which of the following transactions increases total liabilities?

Purchase office supplies on account.

Which of the following is not a characteristic of adjusting entries?

Reduce the balances of revenue, expense, and dividend accounts to zero.

Which of the following is an example of a prepaid expense?

Rent has been purchased in advance.

Which of the following transactions causes a decrease in total liabilities?

Repay amounts previously borrowed from the bank.

Financing cash flows would include which of the following?

Repayment of long-term borrowing to the bank.

Which of the following generally would not be considered good internal control of cash receipts?

Requiring the employee receiving the cash from the customer to also deposit the cash into the company's bank account.

Sales of products or services are referred to as

Revenues

Which of the following accounts is not listed in a post-closing trial balance?

Salaries Expense.

Which of the following accounts is listed in a post-closing trial balance?

Salaries Payable.

On September 9, Clearmore Services receives a request for services from a customer. The service is scheduled for September 15. On September 15, the service is provided, and the customer pays one week later on September 22. Using accrual-basis accounting, on which date should Clearmore Services record an increase in accounts receivable?

September 15 (date of service)

Which of the following accounts normally has a credit balance?

Service Revenue

A credit is used to increase which of the following accounts?

Service Revenue.

Which of the following accounts is not listed in a post-closing trial balance?

Service Revenue.

Which of the following generally would be considered good internal control of cash disbursements?

Set maximum purchase limits on debit cards and credit cards.

Which financial statement shows a company's inflows and outflows of cash?

Statement of Cash Flows.

The owners' claims to resources are referred to as

Stockholders' equity.

When preparing a bank reconciliation, outstanding checks would be:

Subtracted from the bank's cash balance.

When preparing a bank reconciliation, nonsufficient funds (NSF) checks would be:

Subtracted from the company's cash balance.

Which of the following accounts normally has a debit balance?

Supplies

Traditional careers in public accounting include:

Tax prepares/planners, auditors, business consultants

Based on the introductory section of this chapter, financial accounting can also be described as a way to

Tell the financial story of a company

The balance in retained earnings represents:

The amount of income earned over the company's life minus the dividends paid to shareholders over the company's life.

Who is ultimately responsible for the establishment and success of a company's internal control system?

The company's top executives.

At any given time, the amount of cash in the petty cash fund should equal:

The established balance of the fund less all vouchers written during the accounting period. Correct

Consistent with the COSO framework, an effective internal control system includes the control environment. The control environment refers to:

The ethical tone set by top management.

Which of the following shows a chronological record of all transactions?

The general journal.

In a classified balance sheet, liabilities are separated into two categories based on

The length of time until the obligation is expected to be satisfied—less than one year versus more than one year.

Effective internal control over cash includes the requirement that:

The person who makes deposits should NOT record the deposits.

The primary reason the balance of cash in the company's records will differ from the balance of cash in the bank's records includes:

Timing differences of recording cash transactions by the company and by the bank.

The ethical tone set by top management.

To improve the accuracy and reliability of accounting information.

Which of the following best describes an important function of financial accounting?

To support the efficient distribution of society's resources.

If a company has an increase in total expenses of $10,000, which of the following is possible?

Total assets decrease by $10,000.

Which of the following describes the information reported in the balance sheet?

Total assets equal total liabilities plus stockholders' equity.

If a company has an increase in total revenues of $10,000, which of the following is possible?

Total assets increase by $10,000.

Which of the following is true about a trial balance?

Total debit amounts should always equal total credit amounts.

A company reports the following in its balance sheet: Total assets of $800,000 and total liabilities of $700,000. Which of the following is true?

Total stockholders' equity equals $100,000.

Which of the following describes the closing process?

Transfer the balances of temporary accounts (revenues, expenses, and dividends) to retained earnings.

Posting is the process of

Transferring the debit and credit information from the journal to individual accounts in the general ledger.

Which of the following correctly describes a list of accounts and their balances, showing that total debits equal total credits?

Trial balance.

A debit is used to increase which of the following accounts?

Utilities Expense.