Accounting 2301 Exam 1 (Chapters 1-3)

Adjusting entries: (Select all that apply.) - are prepared at the beginning of the period. - update the accounts to their proper balances. - are needed before financial statement preparation. - are required in cash-basis accounting only.

- update the accounts to their proper balances. - are needed before financial statement preparation.

Which of the following statements describes the effect that adjusting entries may have on liabilities?

Adjusting entries increase liabilities for the amount of any accrued and unpaid expenses at the end of the period.

Costs of selling products or services

Expenses

Income Statement

How can I tell if a company is profitable?

False (Explanation: Investors and creditors rely heavily on financial accounting information when making investment and lending decisions.)

Investors and creditors rely heavily on managerial accounting information in making investment and lending decisions.

Credit common stock & Debit to cash

Select all that apply Geo Corporation issues stock to investors for $100,000. Recording this transaction will include which of the following? - Credit common stock - Debit to cash - Debit to retained earnings - Credit revenues

revenues, expenses & dividends

Select all that apply The types of accounts which affect retained earnings are - revenues. - expenses. - dividends. - liabilities. - assets.

When a company records an adjusting entry for services previously recorded as Deferred Revenue, it records which two of the following? - debit to Cash - credit to Accounts Receivable - credit to Cash - credit to Deferred Revenue - credit to Revenue - debit to Deferred Revenue

- credit to Revenue - debit to Deferred Revenue

False (Explanation: A trial balance is a list of all accounts and their balances showing debits equals credits. A balance sheet presents assets, liabilities, and stockholders' equity.)

A balance sheet is a list of all accounts and their balances showing that debits equals credits.

False

A ledger provides a chronological record of all transactions affecting the firm.

True (Explanation: An external transaction occurs with a separate economic entity.)

An external transaction is a transaction the firm conducts with a separate economic entity.

Resources of a company

Assets

revenue

Consistent with the _______ recognition principle, companies record revenue at the time goods are provided to customers.

A company bills customers for services provided. The company records this transaction with a:

Credit to Service Revenue

Timmons Corporation purchases office supplies for $350 cash. How would this transaction be recorded?

Debit Supplies $350, credit Cash $350

Distribution to stockholders

Dividends

A code or moral system that provides criteria for evaluating right and wrong behavior. (Explanation: Investors, creditors, government, and the general public rely on general ethical behavior among those who record and report the financial activities of the business.)

Ethics is best described as: - A consensus among different measures. - The rules of financial accounting. - A code or moral system that provides criteria for evaluating right and wrong behavior. - Accounting information that is complete, neutral, and free from error.

A transaction involving a debit to an asset account should be posted on the right side of the T-account.

False

In preparing journal entries, it is acceptable for the amount of total debits to be higher than the amount of total credits.

False

Amounts owed

Liabilities

Completeness (Explanation: Completeness means including all information necessary for faithful representation of the business activity the firm is reporting.)

Part of the inventory of memory chips of a semiconductor company is obsolete because of the launch of more advanced products. However, the company's management still carries this inventory at historical prices in its balance sheet. Which primary qualitative characteristic is being violated here? - Neutrality - Completeness - Correctness - Freedom from error

Sales of products or services to customers

Revenues

Owner's claim to resources

Stockholder's Equity

Stockholders' Equity

The accounting equation is: Assets = Liabilities + - Retained Earnings - Revenues - Creditors' Interest - Stockholders' Equity - Net Income

Liabilities (Explanation:

The accounting equation is: Assets = ________ + Stockholders' Equity.

Investing (business activity)

Transactions involving the purchase and sale of productive assets

Prepaid rent appears in the ______.

balance sheet because it is an asset

Under cash-basis accounting, (Select all that apply.) - expenses are recorded in the period related revenue is generated. - revenues are recorded when cash is received. - expenses are recorded when cash is paid. - revenues are recorded when goods or services are provided.

- revenues are recorded when cash is received. - expenses are recorded when cash is paid.

Bell Company purchased supplies for $700 cash. Which of the following statements correctly shows the effect of this transaction on the accounting equation?

Assets will remain unchanged, liabilities will remain unchanged, and stockholders' equity will remain unchanged

journal

A chronological record of all economic events affecting a firm are recorded in a(n) - journal - ledger - balance sheet - trial balance

ledger

A transaction is initially recorded in the journal, and then subsequently posted to the general:

account; general ledger

A(n) ______ is maintained for each financial statement item, whereas a(n) ______ contains all of the accounts of the company. - account; general ledger - general ledger; journal - account; journal - journal; general ledger

external

A(n) ____________ transaction involves an exchange between the company and a separate economic entity.

Livingston Company pays utilities of $2,500 in cash. How would this transaction be recorded?

Debit Utilities Expense $2,500, credit Cash $2,500

Costs of providing products and services. (Explanation: Expenses are the costs of providing products and services.)

Expenses are best defined as: - Amounts owed to creditors. - Amounts the owners have invested in the business. - Costs of providing products and services. - Distributions to stockholders.

Debit cash $3,000; credit note payable $3,000.

Rawlings Corp. borrows $3,000 on a note payable from Third National Bank. Which of the following is used to record this transaction? - Debit note payable $3,000; credit note receivable $3,000. - Debit cash $3,000; credit note payable $3,000. - Debit cash $3,000; credit note receivable $3,000. - Debit account receivable $3,000; credit note payable $3,000.

posting

The process of transferring information from the journal to the ledger is referred to as - transaction analysis. - preparing journal entries. - preparing adjustments. - posting.

Journal entries are instantly posted to the ledger

Which of the following represents a common advantage of a computerized accounting system? - Journal entries are instantly posted to the ledger - Ensures accuracy of all the accounts in the general ledger - Prevents errors in the preparation of journal entries

Revenue

Which type of account is increased with a credit? - Dividend - Revenue - Asset - Expense

Expense

Which type of account is increased with a debit? - Liability - Expense - Revenue - Stockholders' Equity

Management's discussion and analysis (Explanation: The management's discussion and analysis (MD&A) section typically includes management's views on significant events, trends, and uncertainties pertaining to the company's operations and resources.)

You are reading a particular section of a bank's annual report. This section provides the bank's views about the impact of an upcoming regulation on the banking industry as a whole and the bank in particular. Which section of the annual report are you reading? - The income statement - The statement of stockholders' equity - Management's discussion and analysis - Note disclosures to the financial statements

Reporting revenues when goods or services are provided and expenses in the period they are incurred to generate related revenues is referred to as ___________ -basis accounting

accrual

Prepaid insurance is a(n) ______.

asset in the balance sheet

Depreciation is an allocation of the ______ of buildings, vehicles, and equipment to expense over time as they are used.

cost

_________ is defined as the "cost of borrowing money."

interest

The adjusting entry for a deferred revenue includes a debit to a(n) ______ account and a credit to a(n) _____ account.

liability; revenue

After the adjusting entries have been completed, the adjusted balance in the Supplies Expense account represents the cost of supplies:

used during the accounting period

On January 1, a company pays one year of rent in advance for $12,000 ($1,000 per month). On January 31, the adjusting entry is recorded as: - Debit Prepaid Rent $1,000, Credit Cash $1,000 - Debit Rent Expense $1,000, Credit Cash $1,000 - Debit Rent Expense $1,000, Credit Prepaid Rent $1,000 - Debit Rent Expense $12,000, Credit Prepaid Rent $12,000

- Debit Rent Expense $1,000, Credit Prepaid Rent $1,000

A publisher sends magazines on a monthly basis to a customer throughout Year 2. The customer had paid for this subscription in December Year 1. For the February Year 2 edition of the magazine, the publisher purchases paper in January Year 2 by paying cash. When should the company report the costs associated with the purchase of paper? - December Year 1 - January Year 2 - February Year 2 - March Year 2

- February Year 2

The balance of which permanent account is affected by closing entries? - Cash - Retained Earnings - Common Stock - None of these.

- Retained Earnings

Which of the following is a temporary account? - Retained Earnings - Salaries Expense - Accounts Receivable - Cash

- Salaries Expense

Which of the following provides the balance of retained earnings to be used in a classified balance sheet? - Statement of stockholders' equity - Adjusted trial balance - Income statement - Statement of cash flows

- Statement of stockholders' equity

During a discount sale, Larry buys a CD from Best Buy. Rather than paying cash, Larry uses his Best Buy card to buy the CD on account. Under the accrual basis of accounting, when will Best Buy record revenue from this sale? - after cash is received - after the discount period is over - at the time of sale - in the next accounting period

- at the time of sale

The statement of stockholders' equity includes these amounts: (Select all that apply.) - net income - total revenues for the period - ending balance retained earnings - dividends for the period - cash

- net income - ending balance retained earnings - dividends for the period

If an adjusting entry's debit is to an expense account, then the credit must be to which of the following? (Select all that apply.) - cash expense - prepaid expense - revenue - liability

- prepaid expense - liability

The post-closing trial balance helps to verify that: (Select all that apply.) - the accounts are ready for next period's transactions - the company was profitable during the current period - we prepared and posted adjusting entries correctly - we prepared and posted closing entries correctly

- the accounts are ready for next period's transactions - we prepared and posted closing entries correctly

chronological record of all transactions affecting a firm.

A journal provides a - chronological record of all transactions affecting a firm. - listing of all accounts used by a firm. - summary of all the debits and credits made during the period.

trial balance

A list of all accounts and their balances at a particular date showing that debits equal credits is referred to as a(n)

True (Explanation: The cost constraint indicates that financial accounting information is provided only when the benefits of doing so exceed the costs.)

According to the cost constraint, financial accounting information is provided when the benefits of providing the information exceed the costs.

assets.

Accounts receivable are - a component of net income and retained earnings. - stockholders' equity accounts. - liabilities. - assets.

the amounts owed by customers.

Accounts receivable are assets which represent - the amounts owed by customers. - the amounts owed to suppliers. - total revenues for the period. - net income for the period.

How do adjusting entries for accrued expenses affect liabilities and expenses?

Adjusting entries for accrued expenses can increase liabilities and increase expenses.

debits and credits.

An account should have an account title, account number, a place for the date of the transaction, and two columns for - revenues and expenses. - closing and post-closing. - debits and credits. - assets and liabilities.

Deferred revenue is a(n) ______.

liability

At year-end, companies that utilize accrual-based accounting systems complete the measurement process through

recording of adjusting entries

The two major categories reported in the income statement are: - equity - assets - revenue - expense

revenue & expense

Hoya Corporation reports the following amounts: Assets = $18,000; Liabilities = $3,000; Stockholders' equity = $15,000; Dividends = $3,000; Revenues = $17,000; and Expenses = $12,000. What amount is reported for net income?

revenues - expenses: $17,000 - $12,000 = $5,000

Closing entries move the balances from the ______ accounts into the Retained Earnings account.

temporary

After the adjusting entries have been completed, the adjusted balance in the Deferred Revenue account represents:

the amount of the sales or services still owed to the customer.

Beta Company paid utilities expense of $2,000 for the current month. Which of the following statements correctly shows the effect of this transaction on the accounting equation?

Assets will decrease by $2,000, liabilities will remain unchanged, and stockholders' equity will decrease by $2,000

Amber Corporation provided services to customers on account for $26,000. Which of the following statements correctly shows the effect of this transaction on the accounting equation?

Assets will increase by $26,000, liabilities will remain unchanged, and stockholders' equity will increase by $26,000

Palmer Corporation borrows $40,000 cash by signing a note with the bank. Which of the following statements correctly shows the effect of this transaction on the accounting equation?

Assets will increase by $40,000, liabilities will increase by $40,000, and stockholders' equity will remain unchanged

materiality (Explanation: Materiality reflects the impact of financial accounting information on the decisions of investors and creditors.)

Based on the concept of _____, big companies probably do not record all their assets as assets. - faithful representation - materiality - relevance - reliability

Debit cash; credit common stock.

Carnival Company issues common stock to investors for $50,000. Which of the following is used to record this transaction? - Debit cash; credit common stock. - Debit cash; credit revenue. - Debit common stock; credit retained earnings. - Debit common stock; credit cash.

$584,000 (Explanation: Stockholders' Equity at the beginning of the year = Common Stock ($320,000) + Retained Earnings ($195,000) = $515,000. The change in Stockholders' Equity during the year = Issuance of Common Stock ($28,000) + Net Income ($46,000) − Dividends ($5,000) = $69,000. Stockholders' Equity at the end of the year = $515,000 + $69,000 = $584,000.)

Catalina Corporation begins the year with a $195,000 balance in Retained Earnings and a $320,000 balance in Common Stock. During the year, the company generated net income of $46,000, issued additional common stock for $28,000, and paid a dividend of $5,000. What is total stockholders' equity at the end of the year? - $515,000 - $584,000 - $589,000 - $594,000

During December, Mainzel Interior Design Corporation redecorated the reception areas of a local hotel. The project was completed on December 31 with payment due in 30 days. Payment was received on January 21 of the following year. When should Mainzel recognize the related revenue using accrual accounting?

December 31

False (Explanation: Financial accounting measures the business activities of a company and communicates those measurements to external parties for decision-making purposes.)

Financial accounting primarily deals with the methods accountants use to provide information to an organization's internal users.

True (Explanation: If auditors find mistakes or fraudulent reporting behavior, they require the company to correct all significant information before issuing financial statements.)

If mistakes or fraudulent reporting behavior are discovered, auditors require the company to correct all significant information before issuing financial statements.

debit

In a double-entry accounting system, the _____ represents the left side of the account.

Which of the following statements is true? - The income statement reports the financial position of a company at a point in time. - The balance sheet reports financial activities only for the current accounting period. I- ncome statement accounts are temporary accounts, while balance sheet accounts are permanent accounts.

Income statement accounts are temporary accounts, while balance sheet accounts are permanent accounts.

Income Statement and Statement of Stockholders' Equity (Explanation: Net income from the Income Statement is reported in the Statement of Stockholders' Equity as part of the calculation of retained earnings.)

Net income appears in which two financial statements? - Balance Sheet and Statement of Cash Flows - Balance Sheet and Statement of Stockholders' Equity - Income Statement and Statement of Cash Flows - Income Statement and Statement of Stockholders' Equity

Transactions related to revenues and expenses

Operating (business activity)

Which of the following statements regarding the statement of cash flows are correct? - Reports cash receipts - The final financial statement that is typically prepared - Reports cash disbursements - The financial statement that is typically prepared first - It is an optional financial statement

Reports cash receipts, The final financial statement that is typically prepared, & Reports cash disbursements

_____ are recorded in the period that goods and services are provided to customers and _____ are recorded in the period that costs are incurred while providing those goods and services.

Revenues; expenses

Credit note payable & Debit cash

Select all that apply Pluto Inc. borrows $3,000 from Second National Bank by signing a promissory note. Recording this transaction will include which of the following? - Debit notes receivable - Credit note payable - Credit revenue - Debit cash

credit to notes payable & debit to cash

Select all that apply Roland Corporation borrows $10,000 from the bank by signing a promissory note. Recording this transaction will include: - debit to accounts receivable - credit to notes payable - debit to cash - credit to retained earnings

communicate information to external parties for decision making purposes & measure business activities of the company.

Select all that apply The two roles of financial accounting are to: - communicate information to external parties for decision making purposes. - report cost accounting information for internal decisions. - measure business activities of the company. - measure and report results to taxing authorities.

the account title & columns for debits and credits.

Select all that apply The type of information included in an account includes - a posting reference. - the account title. - columns for debits and credits. - a daily total.

Retained earnings & Common stock

Select all that apply Which of the following are stockholder equity accounts? - Accounts receivable - Inventory - Retained earnings - Common stock - Notes payable

Which of the following financial statements typically is prepared last?

Statement of cash flows

Which financial statement would report all of the following information: beginning balances for common stock and retained earnings; current period net income or loss; current period dividends; common stock issued during the year; ending balances of common stock and retained earnings? - Income statement - Comprehensive income statement - Statement of stockholders' equity - Retained earnings statement - Balance sheet

Statement of stockholders' equity

Tells about economic resources, claims to resources, and changes in resources and claims. (Explanation: Recall that financial accounting refers to accounting information that is provided to external users.)

The FASB has explicitly stated the specific objectives of financial accounting. Which of the following is not one of those objectives? - Helps to predict cash flows. - Tells about economic resources, claims to resources, and changes in resources and claims. - It is useful to investors and creditors in making decisions. - It is useful to company management in making decisions.

Presents the financial position of a company at a point in time. (Explanation: The balance sheet is a financial statement that presents the financial position of the company as of a particular date.)

The balance sheet: - Presents the financial position of a company at a point in time. - Indicates if a company is profitable. - Shows the net change in cash over a period of time. - Reports the difference between revenues and expenses.

True (Explanation: Financial accounting serves two main functions: (1) it measures business activities, and (2) it communicates those measurements to investors and creditors.)

The main functions of financial accounting are to measure business activities and to communicate those measurements to investors and creditors.

International Accounting Standards Board (Explanation: The goal of the International Accounting Standards Board (IASB) is to create a single set of global accounting standards. The standards being developed and promoted by the IASB are called International Financial Reporting Standards (IFRS).)

The organization responsible for creating a single set of global accounting standards is the: - International Accounting Standards Board - Internal Revenue Service - Financial Accounting Standards Board - Securities and Exchange Commission

provide in a single location the list of transactions affecting each account and the account's balance.

The purpose of a general ledger is to - record a chronological listing of the accounts used by a particular company. - record all transactions for a particular item. - provide in a single location the list of transactions affecting each account and the account's balance.

common stock and retained earnings.

The two components of stockholders' equity are - assets and liabilities. - common stock and retained earnings. - revenues and dividends. - retained earnings and notes payable.

False (Explanation: The two functions of financial accounting are to measure business activities and communicate those measurements to external parties for decision-making purposes.)

The two functions of financial accounting are to measure business activities and prepare tax returns.

Financing (business activity)

Transactions with lenders and owners

An increase in revenues increases net income, and net income increases stockholders' equity.

True

provided goods or services to a customer.

Ursula Company's bookkeeper records revenue relating to a customer transaction. This indicates that the company - provided goods or services to a customer. - received a cash payment from a customer. - signed a contract with a customer.

$21,000 (Explanation: Net Income = Revenues ($82,000) − Expenses ($61,000) = $21,000.)

Use the following amounts to calculate net income: Assets, $165,000; Dividends, $9,000; Expenses, $61,000; Liabilities, $74,000; Revenues, $82,000. - $12,000 - $21,000 - $30,000 - $91,000

Revenues, expenses, and dividends

What are the three components of retained earnings? - Assets, liabilities, and stockholders' equity - Assets, liabilities, and income - Common stock, net income, and notes payable - Revenues, expenses, and dividends

It set forth accounting and disclosure requirements for initial offerings of securities. (Explanation: The 1933 act sets forth accounting and disclosure requirements for initial offerings of securities (stocks and bonds).)

What was the objective of the 1933 Securities Act? - It set forth accounting and disclosure requirements for initial offerings of securities. - It provided for the regulation of auditors and the types of services they furnish to clients. - It paved the way for the creation of the Public Company Accounting Oversight Board. - It created a government agency, the Securities and Exchange Commission (SEC).

Net income (Explanation: No single piece of company information better explains stock price performance than does financial accounting net income.)

Which of the following best explains a company's stock price performance? - Dividends - Net income - Accounts receivable - Preferred stock

General ledger

Which of the following contains a list of transactions affecting each account and the account's balance? - Account - General ledger - General journal

A change in marketing strategy

Which of the following events will not pose an immediate impact on the accounting equation of a retail company? - Sale of merchandise - A change in marketing strategy - Payment of employee salaries - Purchase of supplies

Double Taxation (Explanation: Double taxation is, in fact, a disadvantage of the corporate form of business ownership.)

Which of the following is a feature of the corporate form of business ownership? - unlimited liability - lower tax rates - limited resources - double taxation

Assets − Liabilities = Stockholders' Equity (Explanation: The accounting equation illustrates a fundamental model of business valuation. It shows that a company's resources (assets) equal the creditors' claims (liabilities) and owners' claims (stockholders' equity) to those resources.)

Which of the following is an alternate form of the accounting equation? - Assets − Liabilities = Stockholders' Equity - Revenues − Expenses = Net Income - Assets = Liabilities − Stockholders' Equity - Expenses − Dividends = Net Income

Total liabilities (Explanation: A company's debt level is an important indicator of management's ability to respond to business situations and the possibility of bankruptcy)

Which of the following is an important indicator of a company management's ability to respond to business situations and the possibility of bankruptcy? - Inventory - Accumulated depreciation - Total stockholders' equity - Total liabilities

Accounts Payable

Which of the following is not an asset account? - Accounts Payable - Cash - Equipment - Supplies

Trial Balance (Explanation: There are four primary financial statements: the income statement, the statement of stockholders' equity, the balance sheet, and the statement of cash flows.)

Which of the following is not one of the four primary financial statements? - Balance Sheet - Trial Balance - Income Sheet - Statement of Cash Flows

Will the company be capable of repaying its debt when it is due? (Explanation: Creditors make decisions related to lending money to the company.)

Which of the following questions is most likely to be asked by a creditor

To complete the measurement process, companies need to update balances of assets, liabilities, revenues and expenses for changes created by _____ entries.

adjusting

To complete the measurement process, companies need to update balances of assets, liabilities, revenues and expenses for changes created by ______ entries

adjusting

In recording an accrual adjusting entry to account for revenues earned but not yet collected, ______.

an asset is increased since cash will be collected at a later date

At the beginning of the accounting period, the balances of temporary accounts

are zero

A classified balance sheet shows subtotals for current ______ and current ______.

assets; liabilities

Reporting revenues only when cash is received and expenses only when cash is paid is called the _____ basis of accounting

cash

The entries that transfer the balances of all temporary accounts to retained earnings are referred to as - closing entries - external entries - post-closing entries - adjusting entries

closing entries

A company borrows cash from a local bank. The company records this transaction with a:

debit to cash

Supplies should be ______ and Supplies Expense should be ______ for the cost of supplies used up during the period.

decreased; increased

The process of allocating the cost of an asset to expense over the useful life of the asset is called

depreciation

If an adjusting entry's credit is to a liability account, then the debit must be to ______.

expense

A classified balance sheet ______.

groups asset and liabilities into current and long-term categories

An adjusting entry is necessary to record interest expense at year-end because the interest:

has already been incurred

A primary purpose of adjusting entries is to record events that

have occurred but that have not yet been recorded.

Revenues and expenses are reported in the:

income statement

On June 30, a company provides $900 of services to customers on account. It usually takes the company one week to mail bills to customers and another week for customers to pay. In June, the adjusting entry is recorded as:

Debit Accounts Receivable $900, Credit Service Revenue $900

A company receives $450 in February for services that will be performed in March. In March, the adjusting entry is recorded as:

Debit Deferred Revenue $450, Credit Service Revenue $450

Depreciation on a company's equipment for the year is $6,000. The adjusting entry for depreciation is recorded as:

Debit Depreciation Expense $6,000, Credit Accumulated Depreciation $6,000

At the end of May, a company receives a utility bill for $500 associated with operations in May. The company plans to pay the bill on June 10. In May, the adjusting entry is recorded as:

Debit Utilities Expense $500, Credit Utilities Payable $500

The closing entry for Salaries Expense includes: - A debit to Retained Earnings. - A credit to Retained Earnings. - A debit to Salaries Expense. - A credit to Salaries Payable.

- A debit to Retained Earnings.

A company receives a utility bill for operations in May. The company does not expect to pay the bill until June. This scenario is an example of a(n): - Accrued expense - Accrued revenue - Deferred revenue - Prepaid expense

- Accrued expense

Which of the following groups is not among the external users for whom financial statements are prepared?

Customers, suppliers, and employees are all external users of financial statements.