23. Financial Reporting Mechanics (Web, Sch, CFA)

Which of the following is the least likely to be considered an accrual for accounting purposes? A) Accumulated depreciation. B) Wages payable. C) Unearned revenue.

A Accruals fall into four categories: 1. Unearned revenue. 2. Accrued revenue. 3. Prepaid expenses. 4. Accrued expenses. Wages payable are a common example of an accrued expense. Accumulated depreciation is considered a contra-asset account to property, plant and equipment, not an accrual.

Accruals are best described as requiring an accounting entry: A) when the earliest event in a transaction occurs. B) when an expense has been incurred. C) only when a good or service has been provided.

A Accruals require an accounting entry when the earliest event occurs (paying or receiving cash, providing a good or service, or incurring an expense) and one or more offsetting entries as the exchange is completed.

Prema Singh is the bookkeeper for Octabius Industries. Singh has been asked by the CFO of Octabius to review all purchases that occurred between February 1 and February 8 to investigate an error on the receiving dock. Singh will most likely look at the: A) general journal. B) initial trial balance. C) general ledger.

A Journal entries record every transaction, showing which accounts are changed by what amounts. A listing of all the journal entries in order by date is called the "general journal."

An electrician repaired the light fixtures in a retail shop on October 24 and sent the bill to the shop on November 3. If both the electrician and the shop prepare financial statements under the accrual method on October 31, how will they each record this transaction? Electrician===============Retail shop A. Accrued revenue=======Accrued expense B. Accrued revenue=======Prepaid expense C. Unearned revenue======Accrued expense

A The service is performed before cash is paid. This transaction represents accrued revenue to the electrician and an accrued expense to the retail shop. Since the invoice has not been sent as of the statement date, it is not shown in accounts receivable or accounts payable.

Accumulated depreciation and treasury stock are most likely to be shown as what types of accounts? Accumulated depreciation Treasury stock A) Contra-asset Contra-equity B) Contra-asset Equity C) Liability Equity

A Accumulated depreciation is a contra-asset account to the asset account property, plant & equipment. Treasury stock is a contra-equity account to common stock or additional paid-in capital.

Accounts receivable and accounts payable are most likely classified as which financial statement elements? Accounts receivable=======Accounts payable A. Assets ================Liabilities B. Revenues=============Liabilities C. Revenues=============Expenses

A Accounts receivable are an asset and accounts payable are a liability.

The accounting equation is least accurately stated as: A. owners' equity = liabilities- assets. B. ending retained earnings = assets - contributed capital- liabilities. C. assets = liabilities + contributed capital + beginning retained earnings + revenue — expenses - dividends.

A Owners' equity is equal to assets minus liabilities.

Which of the following elements represents an economic resource? A. Asset. B. Liability. C. Owners' equity

A is correct An asset is an economic resource of an entity that will eitherbe converted into cash or consumed

An analyst has projected that a company will have assets of €2,000 at year-end and liabilities of €1,200. The analyst's projection of total owners' equity should be closest to: A. €800. B. €2,000. C. €3,200.

A is correct. Assets must equal liabilities plus owners' equity and, therefore, €2,000 = €1,200 + Owners' equity. Owners' equity must be €800.

Which of the following items would most likely be classified as a financing activity'? A. Issuance of debt. B. Payment of income taxes. C. Investments in the stock ofa supplier.

A is correct. Issuance of debt would be classified as a financing activity. B is incorrect because payment of income taxes would be classified as an operating activity. C is incorrect because investments in common stock would be generally classified as investing activities

An analyst who is interested in assessing a company's financial position is most likely to focus on which financial statement? A. Balance sheet. B. Income statement. C. Statement ofcash flows.

A is correct. The balance sheet shows the financial position of a company at a particular point in time. The balance sheet is also known as a "statement of financial position."

HVG, LLC paid $1 2,000 of cash to a real estate company upon signing a lease on 31 December 2005. The payment represents a $4,000 security deposit and $4,000 of rent for each of January 2006 and February' 2006. Assuming that the correct accounting is to reflect both January and February' rent as prepaid, the most likely effect on HVG's accounting equation in December 2005 is: A. no net change in assets. B. a decrease in assets of $8,000. C. a decrease in assets of $12,000

A is correct. The payment of January rent represents prepaid rent (an asset), which will be adjusted at the end of January to record rent expense. Cash (an asset) decreases by $12,000. Deposits (an asset) increase by $4,000. Prepaid rent (an asset) increases by $8,000. There is no net change in assets.

When, at the end ofan accounting period, a revenue has been recognizedin the financial statements but no billing has occurred and no cash has been received, the accrual is to: A. unbilled (accrued) revenue, an asset. B. deferred revenue, an asset. C. unbilled (accrued) revenue, a liability

A is correct. When cash is to be received after revenue has been recognized but no billing has actually occurred, an unbilled (accrued) revenue is recorded. Such accruals would usually occur when an accounting period ends prior to a company billing its customer. This type of accrual can be contrasted with a simple credit sale, which is reflected as an increase in revenue and an increase in accounts receivable. No accrual is necessary.

An accounting entry that updates the historical cost of an asset to current market levels is best described as: A) a contra account. B) a valuation adjustment. C) accumulated depreciation.

B In some cases, accounting standards require balance sheet values of certain assets to reflect their current market values. Accounting entries that update these assets' values from their historical cost are called valuation adjustments. To keep the accounting equation in balance, changes in asset values are also changes in owners' equity, through gains or losses on the income statement or in "other comprehensive income."

The following amounts were drawn from the records of JME Company: total assets = $1,200; total liabilities = $750; contributed capital = $600. Based on this information alone, retained earnings must be equal to: A) $150. B) -$150. C) $450.

B (1,200 ? 750 ? 600) = ?150

Annual depreciation and accumulated depreciation are most likely classified as which financial statement elements? Depreciation=======Accumulated depreciation A. Expenses========Contra liabilities B. Expenses========Contra assets C. Liabilities========Contra assets

B Annual depreciation is an expense. Accumulated depreciation is a contra asset account that typically offsets the historical cost of property, plant, and equipment.

The best description of the general ledger is that it: A) groups accounts into the categories that are presented in the financial statements. B) sorts the entries in the general journal by account. C) is where journal entries are first recorded.

B Information flows through an accounting system in four steps: 1. Journal entries record every transaction, showing which accounts are changed by what amounts. A listing of all the journal entries in order by date is called the "general journal." 2. The general ledger sorts the entries in the general journal by account. 3. At the end of the accounting period, an initial trial balance is prepared that shows the balances in each account. If any adjusting entries are needed, they will be recorded and reflected in an adjusted trial balance. 4. The account balances from the adjusted trial balance are presented in the financial statements.

Which of the following is the best description of the flow of information in an accounting system? A) General ledger, trial balance, general journal, financial statements. B) Journal entries, general ledger, trial balance, financial statements. C) Trial balance, general ledger, general journal, financial statements.

B Information flows through an accounting system in four steps: 1. Journal entries record every transaction, showing which accounts are changed by what amounts. A listing of all the journal entries in order by date is called the "general journal." 2. The general ledger sorts the entries in the general journal by account. 3. At the end of the accounting period, an initial trial balance is prepared that shows the balances in each account. If any adjusting entries are needed, they will be recorded and reflected in an adjusted trial balance. 4. The account balances from the adjusted trial balance are presented in the financial statements.

An auditor needs to review all of a company's transactions that took place between August 15 and August 17 of the current year. To find this information, she would most likely consult the company's: A. general ledger. B. general journal. C. financial statements.

B The general journal lists all of the company's transactions by date. The general ledger lists them by account.

An analyst has collected the following information regarding a company in advance of its year-end earnings announcement (in millions): Estimated net income ===============$200 Beginning retained earnings ==========$1,400 Estimated distributions to owners =====$100 The analyst's estimate of ending retained earnings (in millions) should be closest to: A. $1,300. B. $1,500. C. $1,700.

B is correct Beginning retained earnings ====$1,400 +Net income=================$200 —Distributions to owners=======$(100) =Ending retained earnings======$1,500

TRR Enterprises sold products to customers on 30 June 2006 for a total price of €10,000. The terms of the sale are that payment is due in 30 days. The cost of the products was €8,000. The most likely net change in TRR's total assets on 30 June 2006 related to this transaction is: A. €0. B. €2,000. C. €10,000

B is correct The sale of products without receipt of cash results in an increase in accounts receivable (an asset) of €10,000. The balance in inventory (an asset) decreases by €8,000. The net increase in assets is €2,000. This would be balanced by an increase in revenue of €10,000 and an increase in expenses (costs of goods sold) of €8.000.

Squires & Johnson, Ltd., recorded €250,000 of depreciation expense in December 2005. The most likely effect on the company's accounting equation is: A. no effect on assets. B. a decrease in assets of €250,000. C. an increase in liabilities of €250,000.

B is correct. Depreciation is an expense and increases accumulated depreciation. Accumulated depreciation is a contra account which reduces property, plant, and equipment (an asset) by €250,000. Assets decrease by €250,000, and expenses increase by €250,000.

When, at the end of an accounting period, cash has been paid with respect to an expense, the business should then record: A. an accrued expense, an asset. B. a prepaid expense, an asset. C. an accrued expense, a liability.

B is correct. Payment of expenses in advance is called a prepaid expense which is classified as an asset.

The collection of all business transactions sorted by account in an accounting system is referred to as: A. a trial balance. B. a general ledger. C. a general journal.

B is correct. The general ledger is the collection of all business transactions sorted by account in an accounting system. The general journal is the collection of all business activities sorted by date.

The statement of cash flows presents the flows into which three groups of business activities? A. Operating, Nonoperating, and Financing. B. Operating, Investing, andFinancing. C. Operating, Nonoperating, and Investing.

B is correct. The three sections of the statement of cash flows are operating, investing, and financing activities.

A company's chart of accounts is: A) used for entries that offset other accounts. B) the set of journal entries that makes up the components of owners' equity. C) a detailed list of the accounts that make up the five financial statement elements.

C A company's chart of accounts is a detailed list of the accounts that make up the five financial statement elements and the line items presented in the financial statements. Contra accounts are used for entries that offset other accounts. The categories that make up owners' equity are capital, additional paid-in capital, retained earnings and other comprehensive income.

Allowance for bad debts and investment in affiliates are most likely to be shown as what types of accounts? Allowance for bad debts Investment in affiliates A) Contra-asset Liabilities B) Liabilities Asset C) Contra-asset Asset

C Allowance for bad debts is a contra-asset account to accounts receivable. Investments in affiliates are considered assets.

What is the fundamental balance sheet equation? A) Assets = Stockholders' Equity - Liabilities (A = E - L). B) Liabilities = Assets + Stockholders' Equity (L = A + E). C) Assets = Liabilities + Stockholders' Equity (A = L + E).

C The fundamental balance sheet equation is Assets = Liabilities + Stockholders' Equity (A = L + E). This is the fundamental accounting relationship that sets the basis for recording all financial transactions.

A listing of all the firm's journal entries by date is called the: A) general ledger. B) adjusted trial balance. C) general journal.

C A listing of all the journal entries in order by date is called the "general journal." The general ledger sorts the entries in the general journal by account. At the end of the accounting period, an initial trial balance is prepared that shows the balances in each account. If any adjusting entries are needed, they will be recorded and reflected in an adjusted trial balance. The account balances from the adjusted trial balance are presented in the financial statements.

Wichita Corporation reported the following balances as of December 31, 2007: Cash $? Accounts payable 16,000 Accounts receivable 58,000 Additional paid-in capital 42,000 Common stock 19,600 Inventory 12,000 Plant and equipment 26,800 Notes payable 20,000 Retained earnings 32,000 Calculate Wichita's cash and total assets as of December 31, 2007 based only on these entries. Cash=========Total assets A) $16,000=====$129,600 B) $32,800=====$113,600 C) $32,800=====$129,600

C Liabilities plus equity are equal to $129,600 ($16,000 accounts payable + $20,000 notes payable + $19,600 common stock + $42,000 additional paid-in capital + $32,000 retained earnings). Since assets must equal liabilities plus equity, cash must equal $32,800 ($129,600 total assets - $58,000 accounts receivable - $12,000 inventory - $26,800 plant and equipment).

Paul Schmidt, a representative for Westby Investments, is explaining how security analysts use the results of the accounting process. He states, "Analysts do not have access to all the entries that went into creating a company's financial statements. If the analyst carefully reviews the auditor's report for any instances where the financial statements deviate from the appropriate accounting principles, he can then be confident that management is not manipulating earnings." Schmidt is: A. correct. B. incorrect, because the entries that went into creating a company's financial statements are publicly available. C. incorrect, because management can manipulate earnings even within the confines of generally accepted accounting principles.

C Schmidt is correct in stating that analysts do not have access to the detailed accounting entries that went into a company's financial statements. However, he is incorrect in stating that an analyst can be sure management is not manipulating earnings if the audit report does not list deviations from accounting principles. Because accruals and many valuations require management's judgment, there is considerable room within the accounting standards for management to manipulate earnings.

Beta Company reported the following financial statement information: December 31, 2006: Assets $58,000 Liabilities 28,000 December 31, 2007: Assets ? Liabilities 38,000 During 2007: Stockholder investments 15,500 Net income 18,000 Dividends 7,750 Calculate Beta's total assets and stockholders' equity as of December 31, 2007. Total assets=====Stockholders' equity A) $93,750======$30,000 B) $79,250======$55,750 C) $93,750======$55,750

C Stockholders' equity, as of December 31, 2006, was $30,000 ($58,000 assets - $28,000 liabilities) and stockholders' equity, as of December 31, 2007, was $55,750 ($30,000 beginning equity + $15,500 stockholder investments + $18,000 net income - $7,750 dividends). Total assets, as of December 31, 2007, are $93,750 ($38,000 liabilities + $55,570 stockholders' equity).

If a firm raises $10 million by issuing new common stock, which of its financial statements will reflect the transaction? A. Income statement and statement of owners' equity. B. Balance sheet, income statement, and cash flow statement. C. Balance sheet, cash flow statement, and statement of owners' equity.

C The $10 million raised appears on the cash flow statement as a cash inflow from financing and on the statement of owners' equity as an increase in contributed capital. Both assets (cash) and equity (common stock) increase on the balance sheet. The income statement is unaffected by stock issuance.

A decrease in assets would least likely be consistent with a(n): A. increase in expenses. B. decrease in revenues. C. increase in contributed capital.

C The expanded accounting equation shows that assets = liabilities + contributed capital + beginning retained earnings + revenue- expenses- dividends. A decrease in assets is consistent with an increase in expenses or a decrease in revenues but not with an increase in contributed capital.

An analyst has compiled the following information regarding Rubsam, Inc. Liabilities at year-end =============€1,000 Contributed capital at year-end =====€500 Beginning retained earnings========€600 Revenue during the year===========€5,000 Expenses during the year ==========€4,300 There have been no distributions to owners. The analyst's most likely estimate of total assets at year-end should be closest to: A. €2,100. B. €2,300. C. €2,800.

C is correct Assets= Liabilities + Contributed capital+Beginning retained earnings —Distributions to owners + Revenues — Expenses Liabilities ====================$1,000 + Contributed capital ===========$500 + Beginning retained earnings ====$600 —Distributions to owners ========(0) + Revenues ==================$5,000 —Expenses ==================$(4,300) = Assets =====================$2,800

On 30 April 2006, Pinto Products received a cash payment of $30,000 as a deposit on production of a custom machine to be delivered in August 2006. This transaction would most likely result in which of the following on 30 April 2006? A. No effect on liabilities. B. A decrease in assets of$30,000 C. An increase in liabilities of$30,000.

C is correct The receipt of cash in advance of delivering goods or sendees results in unearned revenue, which is a liability. The company has an obligation to deliver $30,000 in goods in the future. This balances the increase in cash (an asset) of $30,000.

A group of individuals formed a new company with an investment of $500,000. The most likely effect ofthis transaction on, the company's accounting equation at the time of the formation is an increase in cash and: A. an increase in revenue. B. an increase in liabilities. C. an increase in contributed capital

C is correct This is a contribution of capital by the owners. Assets would increase by $500,000 and contributed capital would increase by $500,000, maintaining the balance of the accounting equation.

Which ofthe following statements about cash received prior to the recognition ofrevenue in the financial statements is most accurate? The cash is recorded as: A. deferred revenue, an asset. B. accrued revenue, a liability. C. deferred revenue, a liability

C is correct. Cash received prior to revenue recognition increases cash and deferred or unearned revenue. This is a liability until the company provides the promised goods or services.

If a company reported fictitious revenue, it could try to cover up its fraud by: A. decreasing assets. B. increasing liabilities. C. creating a fictitious asset.

C is correct. In order to balance the accounting equation, the company would either need to increase assets or decrease liabilities. Creating a fictitious asset would be one way of attempting to cover up the fraud.

Which of the following elements represents a residual claim? A. Asset. B. Liability. C. Owners' equity.

C is correct. Owners' equity is a residual claim on the resources of a business.

Which of the following items would most likely be classified as an operating activity? A. Issuance of debt. B. Acquisition of a competitor. C. Sale ofautomobiles by an automobile dealer

C is correct. Sales of products, a primary business activity, are classified as an operating activity. Issuance of debt would be a financing activity. Acquisition of a competitor and the sale of surplus equipment would both be classified as investing activities.

When, at the end of an accounting period, cash has not been paid with respect to an expense that has been incurred, the business should then record: A. an accrued expense, an asset. B. a prepaid expense, an asset. C. an accrued expense, a liability.

C is correct. When an expense is incurred and no cash has been paid, expenses are increased and a liability ("accrued expense") is established for the same amount.