Intermediate Accounting Quiz 1

Generally Accepted Accounting Principles (GAAP) are designed to provide guidance for A. financial accounting B. tax accounting C. managerial accounting D. audit service accounting

A Financial accounting reports are prepared for external users. Since the users operate outside the confines of a company they are not privy to the way management chooses to report accounting events. For example, suppose a company provides a service to a customer in year one but does not collect cash from its customer until year two. One company may decide to report revenue when the company earned it while another company may decide it is better to wait until the company receives the cash in year two. An external user would need to know how each company chooses to report its earnings in order to make comparisons between the companies. This is just one example of many alternative reporting methods that may be used to report on a variety of accounting transactions. To promote comparisons between companies, users need a standardized set of reporting rules. The rules that have evolved over time are called Generally Accepted Accounting Principles (GAAP). Since internal users are familiar with their company's reporting practices, there is no need to establish a set of rules for reporting managerial accounting practices. Tax rules are established by laws not GAAP and audit rules cover audit practice not financial reporting.

John Hamilton borrowed $500,000 from Stone Creek Bank to open a new restaurant called Sauce-It-Up. John transferred $450,000 of the cash he borrowed to the Company on the first day of the year. Which of the following appropriately reflects the cash transactions between these reporting entities? John Hamilton Sauce-It-Up Stone Creek Bank A.$50,000 increase $450,000 increase $500,000 decrease B.$500,000 increase $450,000 increase $ 500,000 decrease C.$500,000 decrease $500,000 increase $ 500,000 decrease D.$450,000 increase $50,000 increase $ 500,000 decrease A. Option A B. Option B C. Option C D. Option D

A John Hamilton's cash increase of $50,000 is calculated by subtracting the $450,000 in cash he transferred to Sauce-It-Up from the $500,000 in cash he borrowed from Stone Creek Bank. Sauce-It-Up will report an increase in cash of $450,000 from the transfer of cash from John Hamilton. Finally, Stone Creek Bank will report a decrease in cash of $500,000 due to the loan it provided John Hamilton.

Which of the following is an accurate depiction of the accounting equation? A. Assets = Liabilities + Common Stock + Retained Earnings B. Assets = Liabilities + Common Stock − Expenses C. Assets = Liabilities + Retained Earnings − Dividends D. Assets = Liabilities + Common Stock + Dividends

A The accounting equation shows the equality between a company's assets and the sources of those assets. The sources include liabilities, common stock and retained earnings. Therefore, Assets = Liabilities + Common Stock + Retained Earnings.

John Hamilton borrowed $500,000 from Stone Creek Bank to open a new restaurant called Sauce-It-Up. John transferred $450,000 of the cash he borrowed to the restaurant on the first day of the year. How many reporting entities exist in this scenario? A. one reporting entity B. two reporting entities C. three reporting entities D. four reporting entities

C The three reporting entities are John Hamilton, Stone Creek Bank, and Sauce-It-Up.

Paul Savage purchased a restaurant named Burger Haven from Larry Jones. The purchase would cause the number of reporting entities to A. Increase B. Decrease C. Remain Constant D. the answer cannot be determined from the information provided.

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

Which of the following types of businesses require financial information to operate effectively? A. For profit businesses B. Governmental entities C. Non-profit businesses D. All of these businesses require financial information

D Financial information is required for all types of businesses. Governmental and non-profit business types differ from a for-profit business in regards to their profit motives. However, all business entities require financial information to monitor the cost of acquiring resources and converting them into saleable goods or services.

Which term describes assets earned from operations that have been reinvested into the business? A. liability B. dividend C. common stock D. retained earnings

D When a Company has an increase in assets from operations and chooses to reinvest the profits into the business it is referred to as retained earnings. If the business chooses to distribute the increase in assets from operations to the owners of the business it is called a dividend. A liability would represent an obligation to repay debt to an external party. Common stock represents the proportionate share of ownership each stockholder has in the business.

Liabilities A. represent obligations to repay debts. B. may increase when assets increase. C. are found on the claims side of the accounting equation. D. All of the answers are characteristics of liabilities.

D When a business borrows money from a creditor it accepts an obligation (liability) to repay the money to the creditor in the future. Borrowing money causes the business' assets and its liabilities to increase. In the accounting equation, assets must equal claims. Liabilities and stockholders' equity represent the claims on assets.

The primary purpose of managerial accounting is to prepare financial statements in accordance with a reporting framework (e.g. GAAP). True False

False The primary purpose of managerial accounting is to assist mangers within the Company in determining how much it costs to acquire resources and convert them into saleable goods and services. There are no official rules for managerial accounting; the type and quantity of information collected and used by management is at their discretion. In contrast, financial accounting information is prepared in accordance with a reporting framework (e.g. G.A.A.P.) and primarily utilized by investors and creditors that are external to the Company. These parties rely on financial information to assist them in deciding whether to provide resources to the Company.

How accounting transactions are recorded will vary depending on the entity perspective taken. This statement is True False

True How you record accounting transactions will vary depending on the perspective you take. For example, if cash is exchanged for a building, the seller will record an increase in cash but the buyer will record a decrease in cash.

Owners of the business who contribute money to the business take more risk than creditors who loan money to the business. This statement is True False

True Owners of a business take more risk than creditors because they share both the gains and losses of a business. A business must repay the full amount of debt borrowed from a creditor regardless of whether it incurs a profit or not. Whereas a Company is under no obligation to repay owners of the business regardless of the success of its operations.

Which of the following is an accurate definition of the term asset? A. An obligation to creditors B. A resource that will be used to produce revenue C. transfer of wealth from the business to its owners D. A sacrifice incurred from operating the business

B Assets are resources that a business uses to conduct its 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. For example, Walmart may use (sell) some of its inventory in order to receive cash from a customer. The cash received is revenue. In this case, the remaining inventory is a resource (asset) that will be used (sold) in the future to produce revenue.

Public accountants perform which of the following functions to ensure that financial information provided by a Company to investors is in accordance with G.A.A.P.? A. Prepare a budget B. Conduct an audit C. Tax return preparation D. None of the above

B One of the jobs of a public accountant is to conduct an audit of a Company's financial information. An audit ensures that financial information provided by the Company is in compliance with G.A.A.P. Investors rely on an audit to ensure the accuracy of financial information in order to make informed financial decisions.

Which term describes a distribution of the Company's assets back to the owners of the business? A. liability B. dividend C. retained earnings D. common stock

B When a Company redistributes its assets back to the owners of the business it is referred to as a dividend. A liability would represent an obligation to repay debt to an external party. Retained earnings are the profits that have been retained within the Company rather than distributed to the owners. Common stock represents the proportionate share of ownership each stockholder has in the Company.

If total assets increase, then A. liabilities must decrease and retained earnings must increase. B. common stock must increase and retained earnings must decrease. C. liabilities, common stock, or retained earnings must increase. D. liabilities, common stock, or retained earnings must decrease.

C If total assets increase, then assets were to be received from some source. Since the accounting equation must balance (i.e. assets must equal claims), the increase on the asset (left) side of the accounting equation must be offset by an increase on the claims (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.

Ellen Elder and her brother, Buster started Elder Company when they each invested $600 in the company. After the investments there will be A. One reporting entity B. Two reporting entities C. Three reporting entities D. Four reporting entities

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

Which of the following is not a source of assets A. Creditors B. Investors C. Operations D. All the answers represent sources of assets.

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

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

False When business must pay taxes, there is less profit available to share with the resource owners. Thus, 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 businesses 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.

The three primary types of reporting entities are consumers, resource owners, and businesses. True False

True

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

True Businesses add value by converting financial, physical, and labor resources into goods and services that consumers want. For example, a homebuilder may borrow $150,000 from a bank and spend the money to buy labor and materials to build a house. The house may sell for $180,000 because a completed house is more valuable than unconverted labor and materials. In this case, the profit is $30,000 ($180,000 sales price of the house minus $150,000 cost of labor and materials).

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

True Businesses that efficiently produce products customers want are rewarded with high profits. For example, the invention and production of the IPhone generated billions of dollars of profit for Apple Inc. Resource owners prefer to provide resources to businesses with high earnings potential because such companies are better able to compensate them. Accounting provides a valuable service to society because it provides information that investors, creditors, owners of physical resources, and workers rely on to evaluate which businesses are worthy of receiving their resources.