accounting 280

If a bond is issued at a premium, the company receives more money for the bond than it will have to pay back at the end of the bond's life, and as a result the company records no interest expense over the life of the bond. True/false

False

If a lease transfers ownership of the property to the lessee at the end of the lease term, it should be regarded as an operating lease. True/false

False

Estimated liabilities, contingencies, and commitments are usually reported in the long-term liability section of the financial statements. True/false

False

Financial assets may be current or long-term assets. True/False

False

If ending inventory and cost of goods sold are added together, they should equal gross profit True/False

False

Loss contingencies should be recorded in the accounting records whenever it is probable that a loss has been incurred and the amount of loss might be material in amount. True/false

False

Merchandise sold F.O.B. destination belongs to the buyer while in transit. True/Fals

False

Natural resources such as oil or minerals are categorized as intangible assets. True/False

False

The LIFO conformity requirement permits a company to use LIFO for tax purposes only if the company also uses LIFO for internal reporting purposes. True/False

False

The account Discount on Bonds Payable has a debit balance and should appear on the balance sheet as an asset; the account Premium on Bonds payable has a credit balance and should be classified as a liability. True/False

False

The amortization of bond discount by the issuing company decreases the carrying value of its bonds payable. True/false

False

The amortization of discount on bonds payable reduces the amount of interest expense recognized during the period. True/false

False

The balance sheet is prepared first because if it balances, all the accounting information is correct and can be used to prepare the other financial statements true/false

False

The debt ratio measures how quickly a company pays off the long-term liabilities it has incurred. True/False

False

When a company has a fully funded pension plan, they only need to record the present value of pension payments as a current liability True/false

False

When a company sells bonds, the bondholders are permitted to vote for the board of directors. True/False

False

When money is borrowed by issuing a note payable, the borrower records a liability equal to the maturity value of the natte. True/False

False

Worker's compensation premiums are deducted from each employee's gross pay. True/False

False

What are the differences between T-Accounts and Balance Column Ledger Accounts?

T-accounts are just used for illustration while BCL accounts are used in practice. - BCL accounts include transaction date and explanation columns, while also showing balance at the end of every transaction.

Retained Earnings

That portion of stockholders' (owners') equity resulting from profits earned and retained in the business.

Conceptual Framework for Financial Reporting: First Level: The "------"

The "why" purpose of Accounting Objective

Salvage Value

The expected market value or selling price of an asset at the end of its useful life. Residual Value

Deferred income taxes may be classified as assets. True/False

True

During periods of inflation, the LIFO cost flow assumption will yield a lower inventory value than FIFO. True/False

True

Federal unemployment taxes apply to a set of dollar amount of employee wages and tend to decline dramatically as the year progresses. True/False

True

In a periodic inventory system, cost of goods sold is the costs of goods available for sale less ending inventory. True/False

True

In a periodic inventory system, the cost of goods sold is determined by the following end-of-period computation: Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold True/False

True

In a periodic inventory system, understating the amount of ending inventory will cause an understatement of gross profit in the current year. True/False

True

Most companies benefit by using accelerated depreciation methods for income tax purposes. True/False

True

The specific identification method is acceptable only when the actual cost of individual units of merchandise can be determined from the accounting records True/False

True

When the direct write-off method is used to recognize uncollectible accounts expense, an Allowance for Doubtful Accounts is not required true/false

True

When the periodic inventory system is used, determining the cost of the year-end inventory involves two distinct steps: counting the units and pricing the units. True/False

True

Working Capital is equal to current assets less current liabilities. True/False

True

U.C.F.

Uncollectible Funds

Cost Layer

Units of merchandise acquired at the same unit cost. An inventory comprised of several cost layers is characteristic of all inventory valuation methods except average cost.

Requires a high degree of consensus among individuals on a given measurement.

Verifiability.

Cash Equivalents

Very short-term investments that are so liquid that they are considered equivalent to cash. Examples include money market funds, U.S. Treasury bills, certificates of deposit, and commercial paper. These investments must mature within 90 days of acquisition.

W2 form

Wage and Tax Statement; a report furnished by the employer for each employee indicating gross earnings and deductions.

Why is accounting called the Language of Business?

because all organizations set up an accounting information system to communicate data to help people make better decisions.

Summarizing

bringing accounting data together in a way that will further enhance its usefulness, usually by means of reports and statements.

Gains (or losses) on sales of marketable securities, as well as any unrealized holding gains (or losses) on investments in available for sale securities, are reported in the income statement. true/false

false

Generally accepted accounting principles were established by the American Accounting Association in 1934 and are updated annually by Congress true/false

false

Internal control is strengthened by a policy of making payments by check, from cash receipts, or from a petty cash fund. true/false

false

Ledger accounts are updated first, and then transactions are recorded in the journal true/false

false

Liability accounts should only be debited and never credited true/false

false

Measures of Profitability tell us how quickly current assets can be converted into profits true/false

false

Most disclosures appear within the body of the financial statements; however, a few disclosures may also appear in the notes that accompany the financial statements true/false

false

Short-term investments in marketable securities may not be reported in the balance sheet at values higher than original cost true/false

false

Since most companies update their Retained Earnings balances only once per year, the Retained Earnings balance will always have a $0 balance in the trial balance true/false

false

The ledger is a chronological, day-by-day, record of business transactions true/false

false

First-In

first-out (FIFO) method,A method of computing the cost of inventory and the cost of goods sold based on the assumption that the first merchandise acquired is the first merchandise sold and that the ending inventory consists of the most recently acquired goods.

the accounts listed on the post closing trial balance are...

general ledger accounts with balances after the closing entries are posted

Salary

generally considered to be compensation for managerial or administrative services, expressed in terms of a month or year.

Net earnings

gross pay less payroll deductions; an employee's take home pay.

Gross profit percentage

gross profit divided by net sales.

Chronological

in accounting, to record in order of time.

a trial balance prepared after the closing entries are posted is called...

post closing trial balance

keywords in accounts

prepaid = assets receivable = assets payable = liability unearned = liability

Fixed assets

property of a relatively permanent nature used in the operation of a business and not intended for resale.

Benefits exceed cost

the benefits of the information disclosed must be greater than the costs of providing the information.

Debtor

the business or individual who owes a debt.

A basic characteristic of all marketable securities is that they can be purchased or sold quickly and easily at quoted market prices. True/false

true

A company's annual report includes comparative statements for several years true/false

true

A compensating balance is often required by a bank as a condition for granting a loan. true/false

true

A credit to a ledger account refers to the entry of an amount on the right side of an account true/false

true

A major purpose of using an Allowance for Doubtful Accounts is to recognize uncollectible accounts expense in the same accounting period as the related sales that caused the expense. true/false

true

A transaction that causes an increase in an asset may also cause a decrease in another asset, an increase in a liability, or an increase in owners' equity true/false

true

A trial balance proves that equal amounts of debits and credits were posted to the ledger true/false

true

Adjusting entries are needed whenever transactions affect the revenue or expenses of more than one accounting period true/false

true

After all the closing entries have been posted the Income Summary account will have a zero balance true/false

true

All internal control systems need to be monitored true/false

true

Marketable securities include investments in bonds and in the capital stocks of publicly traded corporations. true/false

true

Notes payable and accounts payable both require a company to pay an amount owed by a certain date Notes payable generally have interest, while accounts payable generally do not true/false

true

Omission of the adjusting entry needed to accrue an expense at the end of the period would cause liabilities to be understated true/false

true

The Allowance for Doubtful Accounts is called a valuation account, or contra-asset account, and normally has a credit balance true/false

true

when a company makes a sale by accepting a bank-issued credit card from the customer, the sale is recorded as a cash sale true/false

true

Accounting entries involve a minimum of how many accounts?

two

What is a capital Account?

used by sole proprietorships and partnerships to track the net investment balance of their owner(s) from the perspective of the business. In essence, the capital account contains the following transactions: + Investments made by the owner or partner + Subsequent profits of the business - Subsequent losses of the business - Subsequent draws paid to the owner or partner = Ending balance in the capital account

after the adjusting entry for supplies has been posted, supplies expense has an up to date balance, which is the ....

value of supplies used during the fiscal period

Stockholders

Owners of capital stock in a corporation.

Retail sales tax

a tax imposed on tangible personal property sold at retail.

Income tax

a tax levied on the earnings of individuals and businesses by federal, state, and local governments.

Purchases

a temporary owner's equity account used to record the buying of merchandise for resale.

Sales

a temporary owner's equity account used to record the earning of revenue.

Fair Value Principle

based principle that calls for the use of fair value measurements in the financial statements. Pg.58

Every business transaction is recorded by a debit to a balance sheet account and a credit to an income statement account true/false

false

Every transaction affects equal numbers of ledger accounts and is recorded by equal dollar amounts of debits and credits true/false

false

after the closing entries are posted, the only accounts with balances are _____ accounts

permanent

Describe the Impact That Constraints Have On Reporting Accounting Information (The constraints and their impact are as follows. (1)

(1) Cost constraint: The cost of providing the information must be weighed against the benefits that can be derived from using the information.

Explain the Application of the Basic Principles of Accounting (1)

(1) Measurement principle: Existing GAAP permits the use of historical cost, fair value, and other valuation bases. Although the historical cost principle (measurement based on acquisition price) continues to be an important basis for valuation, recording and reporting of fair value information is increasing.

Explain the Application of the Basic Principles of Accounting (2)

(2) Revenue recognition principle: A company generally recognizes revenue when (a) realized or realizable and (b) earned.

What are the three main points of accounting?

-Identifying -Recording -Communicating

SOX- Sarbanes-Bosley Act

-initiated to stop abuses at companies that share stock to the public. -requires that these companies apply both accounting oversight & stringent internal controls -desired results are more transparency, accountability, & truthfulness in transaction recording

Dodd-Frank Wall St. Reform & Customer Protection Act

-promote accountability -put an end to "too big to fail" -protects taxpayers by ending bailouts -protects consumers from abusive financial services

Conceptual Framework for Financial Reporting: Second level Elements?

1. Assets 2. Liabilities 3. Equity 4. Investment by owners 5. Distribution by owners 6. Comprehensive income 7. Revenues 8. Expenses 9. Gains 9. Loses

Qualitative Characteristics: Enhancing Qualities

1. Comparability 2. Verifiability 3. Timeliness 4. Understandability

Usefulness of the income statement

1. Evaluate the past performance of the company. 2. Provide a basis for predicting future performance. 3. Help assess the risk or uncertainty of achieving future cash flows.

Qualitative Characteristics: What are the Characteristics?

1. Fundamental Qualities A. Relevance B. Faith representation 2. Enhancing qualities

Making an ethical decision

1. Identify ethical concerns- use personal ethics to recognize concern 2. Analyze options- consider all good & bad consequences 3. Make ethical decision- choose best option given circumstances

Conceptual Framework for Financial Reporting: Principles

1. Measurement 2. Revenue recognition 3. Expense recognition 4. Full disclosure

Qualitative Characteristics: Fundamental Qualities: Relevance are...

1. Predictive Value 2. Confirmatory Value 3. Materiality

Conceptual Framework for Financial Reporting: Second Level "What are the two concepts?

1. Qualitative Characteristics 2. Elements

Three Organizations that is development of financial Accounting Standards (GAAP)

1. Securities and Exchange Commission (SEC) 2. American Institute of Certified Public Accountants (AIPA) 3. Financial Accounting Standard Board (FASB)

What three things must double entry accounting require?

1.) at least two accounts , with one debit and one credit. 2.) the total amount debited must equal the total amount credited 3.) the accounting equation cannot be violated.

Four Accounting Assumptions

1.)Going-Concern Assumption 2.) Monetary Unit Assumption 3.)Time Period Assumption 4.) Business Entity Assumption

What are the four steps of posting journal entries?

1.)Identify debit account in ledger: Enter date, journal page, amount, and balance. 2.)Enter the debit account number from the ledger in the PR column of journal. 3.)Identify the credit account in Ledger: Enter date, Journal Page, Amount, and balance. 4.)Enter the credit account number from the Ledger in the PR column of the Journal.

Calculation of Age of Accounts Receivable

365 days divided by Accounts Receivable Turnover

Business Entity

A business enterprise that is separate and distinct from the person or persons who own it.

Corporation

A business organized as a separate legal entity and chartered by a state, with ownership divided into transferable shares of capital stock.

Service business

A business that preforms an activity for a fee.

Operating Activities

A category in the statement of cash flows that includes the cash effects of all revenues and expenses included in the income statement.

Classified Balance Sheet

A balance sheet where current assets and current liabilities are listed separately from noncurrent assets and noncurrent liabilities.

Rate

the annual percentage rate used to compute interest.

Noncash Charge or Expense

A charge against earnings—either an expense or a loss—that does not require a cash expenditure at or near the time of recognition. The charge reduces net income but does not affect cash flows (except, perhaps, for income tax payments). Examples are depreciation and the write-off of asset values because an asset has become impaired.

Journal

A chronological record of transactions, showing for each transaction the debits and credits to be entered in specific ledger accounts. The simplest type of journal is called a general journal.

Materiality

A company-specific aspect of relevance, an item is said to be material if its inclusion or omission would influence or change the judgment of a reasonable person; it is immaterial, and therefore irrelevant, if it would have no impact on a decision-maker. The point involved is one of relative size and importance; that is, both quantitative and qualitative factors should be considered. Pg.49

Deflation

A decline in the general price level, resulting in an increase in the purchasing power of the monetary unit.

According to the FASB conceptual framework, an entity's revenue may result from

A decrease in a liability from primary operations

Capital (Type A) Lease

A lease contract that finances the eventual purchase by the lessee of leased property. The lessor accounts for a capital lease as a sale of property; the lessee records an asset and a liability equal to the present value of the future lease payments. Also called a financing lease.

Operating (Type B) Lease

A lease contract that is in essence a rental agreement. The lessee has the use of the leased property, but the lessor retains the usual risks and rewards of ownership. The periodic lease payments are accounted for as rent expense by the lessee and as rental revenue by the lessor.

Bankruptcy

A legal status in which the financial affairs of an illiquid business (or individual) are managed, in large part, by the U.S. Bankruptcy Court.

Risk Assessment

A process of identifying, analyzing, and managing those risks that pose a threat to the achievement of the organization's objectives.

Just-In-Time (JIT) Inventory System

A technique designed to minimize a company's investment in inventory. In a manufacturing company, this means receiving purchases of raw materials just in time for use in the manufacturing process and completing the manufacture of finished goods just in time to fill sales orders. Just-in-time also may be described as the philosophy of constantly striving to become more efficient by purchasing and storing less inventory.

F.O.B. Destination

A term meaning the seller bears the cost of shipping goods to the buyer's location. Title to the goods remains with the seller while the goods are in transit.

After-Closing Trial Balance

A trial balance prepared after all closing entries have been made. Consists only of accounts for assets, liabilities, and owners' equity.

Allowance for Doubtful Accounts

A valuation account or contra-asset account relating to accounts receivable and showing the portion of the receivables estimated to be uncollectible.

Capitalize

A verb with two different meanings in accounting. The first is to debit an expenditure to an asset account, rather than directly to expense. The second is to estimate the value of an investment by dividing the annual return by the investor's required rate of return.

Objectivity

Accountants' preference for using dollar amounts that are relatively factual—as opposed to merely matters of personal opinion. Objective measurements can be verified.

Periodicity Assumption

Accounting assumption that implies that a company can divide its economic activities into artificial time periods. These time periods vary, but the most common are monthly, quarterly, and yearly. Pg.63

Commitments

Agreements to carry out future transactions. Although they are not a liability (because the transaction has not yet been performed), they may be disclosed in notes to the financial statements.

Reliability:

All accounting information can be verified with objective evidence.

Depletion

Allocating the cost of a natural resource to the units removed as the resource is mined, pumped, cut, or otherwise consumed.

Accounts Receivable

Amounts Owed to the Business

Accounts Payable

Amounts a business owes for items or services purchased on credit not involving a promissory note.

Consistency (in Inventory Valuation)

An accounting principle that calls for the use of the same method of inventory pricing from year to year, with full disclosure of the effects of any change in method. Intended to make financial statements comparable.

Fiscal Year

Any 12-month accounting period adopted by a business.

What side is Supplies under?

Asset

Items characterized by future economic benefit.

Assets

Equation for Assets

Assets = Liabilities + Common stock + Retained earnings - Dividends + Net profit + Minority interest

Assets Liabilites Equity Equation

Assets = Liabilities + Equity

The financial statement that reports the assets, liabilities, and stockholders' (owner's) equity at a specific date is the

Balance Sheet

liabilities, revenues, capital

CREDIT

Accrual Basis

Calls for recording revenue in the period in which it is earned and recording expenses in the period in which they are incurred. The effect of events on the business is recognized as services are rendered or consumed rather than when cash is received or paid.

Financial Assets

Cash and assets convertible directly into known amounts of cash (such as marketable securities and receivables).

Current Assets

Cash and other assets that can be converted into cash or used up within a relatively short period of time without interfering with normal business operations. cash, accounts receivable, short term investments, goods for sale, prepaid expenses.

Unearned Revenue

Cash received in advance of providing products or services.(Debit Liability, Credit Revenue)

Sinking Fund

Cash set aside by a corporation at regular intervals (usually with a trustee) for the purpose of repaying a bond issue at its maturity date.

Accounts

Categories under the Assets, Liabilities and Owner's Equity headings.

Calculation of Inventory Turnover

Cost of goods sold for period ÷ Average inventory

Accrued expenses

Costs incurred in a period that are both unpaid and unrecorded. (Debit Expense, Credit Liability)

Capital Expenditures

Costs incurred to acquire a long-lived asset. Expenditures that will benefit several accounting periods.

In T-Accounts what does the right side represent?

Credit

assets, expenses, withdrawals

DEBIT

In T-Accounts what does the left side represent?

Debit

What will usually cause an asset account to increase?

Debit

Which term is associated with "left" or "left-side"?

Debit

DEA LOR

Debit: Dividends Expenses Assets Credit: Liabilities Owners equity (Stockholders equity) Revenue

When cash is received, the account Cash will be

Debited

Entries to expenses such as Rent Expense are usually

Debits

Declares and pays cash dividends to owners.

Distribution to owners

Decreases assets by purchasing the company's own stock.

Distribution to owners

All economic data is recorded in what?

Dollars

How do you document a balance of zero for a Trial balance?

Either list it with a zero in the normal balance column (or omit it entirely)

Point-of-Sale (POS) Terminals

Electronic cash registers used for computer-based processing of sales transactions. The POS terminal identifies each item of merchandise from its bar code and then automatically records the sale and updates the computer-based inventory records. These terminals permit the use of perpetual inventory systems in many businesses that sell a high volume of low-cost merchandise.

Default

Failure to pay interest or principal of a promissory note at the due date.

Neutrality is an ingredient of this primary quality of accounting information.

Faithful representation.

A bond with a $100,000 face value that is issued at a premium will have a higher maturity value than a bond with a $100,000 face value that is issued at a discount. True/false

False

Interim Financial Statements

Financial statements prepared for periods of less than one year (includes monthly and quarterly statements).

Describe the Basic Assumptions of Accounting

Four basic assumptions underlying financial accounting are as follows. (1) Economic entity: The activity of a company can be kept separate and distinct from its owners and any other business unit. (2) Going concern: The company will have a long life. (3) Monetary unit: Money is the common denominator by which economic activity is conducted, and the monetary unit provides an appropriate basis for measurement and analysis. (4) Periodicity: The economic activities of a company can be divided into artificial time periods.

Future Value of a Lump Sum

Future Value = Present Value X FV Factor

Future Value of an Annuity

Future Value of Annuity = Payment X FVA Factor

Arises from peripheral or incidental transactions.

Gains and Losses

Gross Profit Margin

Gross profit expressed as a percentage of net sales. Also called gross profit rate.

Net Sales

Gross sales revenue less sales returns and allowances and sales discounts. The most widely used measure of dollar sales volume; usually the first figure shown in an income statement.

IASB International accounting standards board

Group that identifies preferred accounting practices & encourages global acceptance; issues IFRS

Liquidity

Having the financial ability to pay debts as they become due.

Current Ratio

Helps assess the company's ability to pay its debts in the near future. Current assets divided by the current liabilities.

Marketable Securities

Highly liquid investments, primarily in stocks and bonds, that can be sold at quoted market prices on organized securities exchanges.

Statement of cash flows

Identifies cash inflows(receipts) and cash outflows (payments) over a period of a time.

Corporate Governance

Includes the corporate structures and processes for overseeing a company's affairs, for example, the board of directors and the company's internal control processes.

The financial statement that reports the revenues and expenses for a period of time such as a year or a month is the

Income statement

Positive Cash Flows

Increases in cash that add to the enterprise's cash balance.

External Users

Individuals and other enterprises that have a financial interest in the reporting enterprise but that are not involved in the day-to-day operations of that enterprise (e.g., owners, creditors, labor unions, suppliers, customers).

Internal Users

Individuals who use accounting information from within an organization (for example, board of directors, chief financial officer, plant managers, store managers).

General-Purpose Information

Information that is intended to meet the needs of multiple users that have an interest in the financial activities of an enterprise rather than tailored to the specific information needs of one user.

Fraud

Intentional manipulation- focus on prevention. Once fraud is committed, loses are rarely retrieved.

Increases ownership interest.

Investment by owners;Comprehensive income

Trial Balance

LISTS ALL ACCOUNTS total debits = total credits

Obligation to transfer resources arising from a past transaction.

Liabilities

Estimated Liabilities

Liabilities known to exist, but that must be recorded in the accounting records at estimated dollar amounts.

Bonds Payable

Long-term debt securities that subdivide a very large and long-term corporate debt into transferable increments of $1,000 or multiples thereof.

Inventory

Merchandise intended for resale to customers.

Accelerated Depreciation

Methods of depreciation that call for recognition of relatively large amounts of depreciation in the early years of an asset's useful life and relatively small amounts in the later years.

Natural Resources

Mines, oil fields, standing timber, and similar assets that are physically consumed and converted into inventory.

Account Numbers

Numbers assigned to accounts according to the chart of accounts.

Consistent Reporting

Once an accounting method has been chosen by a company, that method must be followed from one period to the next without change.

Creditor

One to whom money is owed.

Cost-benefit constraint

Only info with benefits of disclosure greater than costs of providing need be disclosed

Intangible assets

Patents, trademarks, copyrights, franchises, and goodwill

Industry Practice

Peculiarities of some industries and business concerns that cause variations from basic accounting theory or practice. For example, agricultural companies often report crops at fair value because it is costly to develop accurate cost figures on individual crops. Pg.63

Depreciable Assets

Physical objects with a limited life. The cost of these assets is gradually recognized as depreciation expense.

Cash Management

Planning, controlling, and accounting for cash transactions and cash balances.

Tangible Assets

Plant assets that have physical substance but that are not natural resources. Examples include land, buildings, and all types of equipment.

Control Activities

Policies and procedures that management puts in place to address the risks identified during the risk assessment process.

Conceptual Framework for Financial Reporting: Third Level: Recognition and Measurement ; "What are the 3 headings?"

Recognition, Measurement, and Disclosure Concepts 1. Assumptions 2. Principles 3. Constraints

Specific Identification

Recording as the cost of goods sold the actual costs of the specific units sold. Necessary if each unit in inventory is unique, but not if the inventory consists of homogeneous products.

What is recording?

Recording business activities requires that we keep a chronological log of transactions and events measured in dollars.

Two primary qualities that make accounting information useful for decision-making purposes.

Relevance and Faithful Representation.

Predictive value is an ingredient of this primary quality of information.

Relevance.

Prepaid expenses

Resources paid for prior to receiving the actual benefits. (Like Prepaid insurance, Prepaid Rent, Supplies) Debit Expense, Credit Asset

Net income equation

Revenues - Expenses

Under the accrual basis of accounting, revenues are reported in the accounting period when the

Service or Goods have been devlivered

Loss Contingencies

Situations involving uncertainty as to whether a loss has occurred. The uncertainty will be resolved by a future event. An example of a loss contingency is the possible loss relating to a lawsuit pending against a company. Although loss contingencies are sometimes recorded in the accounts, they are more frequently disclosed only in notes to the financial statements.

Immaterial

Something of little or no consequence. Immaterial items may be accounted for in the most convenient manner, without regard to other theoretical concepts.

S.U.T.A.

State Unemployment Tax Act.

Third Level: Recognition and Measurement

Statement of Financial Accounting Concepts No.5 - Recognition and Measurement in Financial Statements of Business Enterprise.

Statement of stockholders equity

Stockholders equity: Common stock + Retained earnings

Notes (Accompanying Financial Statements)

Supplemental disclosures that accompany financial statements. These notes provide users with various types of information considered necessary for the proper interpretation of the statements.

Describe the Fasb's Efforts to Construct a Conceptual Framework

The FASB issued seven Statements of Financial Accounting Concepts that relate to financial reporting for business enterprises. These concept statements provide the basis for the conceptual framework. They include objectives, qualitative characteristics, and elements. In addition, measurement and recognition concepts are developed. The FASB and the IASB are now working on a joint project to develop an improved common conceptual framework that provides a sound foundation for developing future accounting standards.

MACRS

The Modified Accelerated Cost Recovery System. The accelerated depreciation method permitted in federal income tax returns for assets acquired after December 31, 1986. Depreciation is based on prescribed recovery periods and depreciation rates.

Disclosure

The accounting principle of providing with financial statements any financial and other facts that are necessary for proper interpretation of those statements.

Original cost basis

The amount originally paid for a depreciable asset.

Separate Entity Concept

The business is treated as a separate entity, separated from its owners, creditors and customers.

F.O.B. Shipping Point

The buyer of goods bears the cost of transportation from the seller's location to the buyer's location. Title to the goods passes at the point of shipment, and the goods are the property of the buyer while in transit.

Bookkeeping

The clerical dimension of accounting that includes recording the routine transactions and day-to-day record keeping of an enterprise.

Articulation

The close relationship that exists among the financial statements that are prepared on the basis of the same underlying transaction information.

Debt Service

The combined cash outlays required for repayment of principal amounts borrowed and for payments of interest expense during the period.

Accountability

The condition of being held responsible for one's actions by the existence of an independent record of those actions. Establishing accountability is a major goal of accounting records and of internal control procedures.

Inventory Turnover

The cost of goods sold divided by the average amount of inventory. Indicates how many times the average inventory is sold during the course of the year.

Cost Ratio

The cost of merchandise expressed as a percentage of its retail selling price. Used in inventory estimating techniques, such as the gross profit method and the retail method.

Cost of Goods Sold

The cost to a merchandising company of the goods it has sold to its customers during the period.

Expenses

The costs of the goods and services used up in the process of obtaining revenue.

Maturity Date

The date on which a liability becomes due.

Account title

The name given to an account.

Book Value

The net amount at which an asset appears in financial statements. For depreciable assets, book value represents cost minus accumulated depreciation. Also called carrying value.

Lessor

The owner of property leased to a lessee.

Monitoring Activities

The process of evaluating the effectiveness of an organization's system of internal control over time, including both ongoing management and supervisory activities and periodic separate evaluations.

Posting

The process of transferring information from the journal to individual accounts in the ledger.

Integrity

The qualities of being complete, unbroken, unimpaired, sound, honest, and sincere.

Return of Investment

The repayment to an investor of the amount originally invested in another enterprise. (interest, dividends)

Operating Cycle

The repeating sequence of transactions by which a business generates its revenue and cash receipts from customers.

Accounting Cycle

The sequence of accounting procedures used to record, classify, and summarize accounting information. The cycle begins with the initial recording of business transactions and concludes with the preparation of formal financial statements.

Financial Statement

These statements provide a company history quantified in money terms. Financial reports that summarize the financial condition and operations of a business. 1. the balance sheet 2. income statement 3. Statement of cash flows 4. statement of owners or stockholders equity 5. note disclosures are an integral part of each financial statement.

Assets

Things company owns & uses to generate revenue

Long-Term Investments

Things expected to be held for more than one year or the operating cycle. Notes Receivable and investments, land held for future expansion bc it is not used.

What does it mean when the current ratio is lower than 1?

This means the liabilities exceed the current assets and the company may not be able to pay short term obligations effectively.

Intangible Assets

Those assets that are used in the operation of a business but that have no physical substance and are noncurrent.

Cash equivalents include money market funds, U.S. Treasury bills, and high-grade commercial paper that mature within 90 days of acquisition. True/False

True

Accrue

To grow or accumulate over time: for example, interest expense.

What is the main point for accounting?

To help users make decisions.

Time Period Principle

To provide the users of financial statements with timely information, net income is measured for relatively short accounting periods of equal length. The period of time covered by an income statement is termed the company's accounting period.

Debt-to-Equity

Total Liabilities / Total Stockholders' Equity

Factoring

Transactions in which a business either sells its accounts receivable to a financial institution (often called a factor) or borrows money by pledging its accounts receivable as collateral.

Capital Stock

Transferable units of ownership in a corporation.

A factor that might suggest that a periodic inventory system is appropriate is that all merchandise is stored at the sales site. True/False

True

A high interest coverage ratio is a sign of creditworthiness. True/False

True

Deposit slip (deposit ticket)

a bank form that lists those cash items (currency and coin) and individual checks to be deposited.

Postdated check

a check dated subsequent to (following) its date of issuance.

the percentage relationship between one financial statement item and the total that includes that item is ....

a component percentage

In balance

a condition in which the total of the debits and the total of the credits are equal in an account.

Credit balance

a condition that occurs when the total of the credits in an account is larger than the total of the debits in that account.

Debit balance

a condition that occurs when the total of the debits in an account is larger than the total of the credits in that account.

Federal Unemployment Tax Act/F.U.T.A.

a federal act imposed upon each employer for financing the administration costs of the federal and state unemployment compensation programs.

Federal Insurance Contributions Act/ F.I.C.A.

a federal act that requires most employers and employees to pay taxes to support the federal social security program.

Petty cash voucher

a form used to reflect payments from the petty cash fund.

Purchases returns and allowances

a temporary owner's equity contra purchases account utilized to record the return of merchandise to the manufacturer or supplier as the result of material defects in workmanship and/or inferior product quality.

Quarterly

a threemonth period.

The following information is available: sales $ 590,000 Net Income $ 41,000 Retained Earnings $ 65,500 Average Stockholders' equity $ 211,000 Dividends $ 9,500 What is the net income percentage? (round your answer to the nearest whole number or percent) a) 7% b) 19% c) 24% d) 31%

a) 7% net income percentage: net income / total revenue 41,000/590,0000 = .069 or 7%

Great Kids Co. began providing day care for the children of employees of a large corporation on January 15 for an agreed monthly fee of $9,000. The first payment is to be received on February 15. The adjusting entry required by Great Kids Co. on January 31 includes: a) A credit to Child Care Fees Earned of $4,500 b) A debit to Child Care Fees Receivable of $9,000 c) A debit to Unearned Child Care Revenue of $4,500 d) A debit to Fees Receivable of $9,000

a) A credit to Child Care Fees Earned of $4,500

Which of the following businesses is likely to have the shortest operating cycle? a) A food store b) A department store c) An art store d) A car store

a) A food store

Coco-Cola's famous name printed in distinctive typeface is an example of: a) A trademark b) A patent c) A copyright d) Goodwill

a) A trademark

The primary function of external auditors is to: a) Express an opinion on the fairness of the company's financial statements b) Determine the accuracy of the management reports c) Evaluate the efficiency of operations and the degree of compliance with management's policies in all departments within a large organizion d) Determine that financial statements and all special reports to management are prepared in conformity with generally accepted accounting principles

a) Express an opinion on the fairness of the company's financial statements

Which of the following is not an objective of generally accepted accounting principles? a) To minimize the amount of income taxes owed b) To ensure that both preparers and users of financial statements understand the concepts and assumptions used in presenting information within these statements c) To enhance the relevance and verifiability of information contained in financial statements d) To increase the comparability of financial statements prepared by different companies

a) To minimize the amount of income taxes owed

An NSF check returned by the bank should be entered in the depositor's accounting records by a debit to: a) accounts receivable b) an expense account c) cash d) cash over and short

a) accounts receivable

On June 1, 2018, Jensen Company acquired an 5.4% ten-month note receivable from a customer in settlement of an existing account receivable of $230,000. Interest and principal are due at maturity. Jensen's entry to record the collection of this note at maturity includes a: a) credit to interest receivable of $7,245 b) credit to interest revenue of $7,245 c) credit to interest receivable of $3,105 d) credit to notes receivable of $242,400

a) credit to interest receivable of $7,245

In estimating annual pension expense, which of the following factors would not be taken into consideration? a) current financial condition of the company b) expected rate of return to be earned on pension fund assets c) employee turnover rates d) compensation levels and estimated rate of pay increases

a) current financial condition of the company

The concept of adequate disclosure: a) demands a "good faith effort" by management b) grants users of the financial statements access to a company's account records c) does not apply to events occurring after the balance sheet d) specifies which accounting methods must be used in a company's financial statements

a) demands a "good faith effort" by management

With respect to the valuation of inventory and measurement of the cost of goods sold, the principle of consistency means that the same method should be applied: a) in successive accounting periods b) by all companies in a given industry c) to all products in the inventory d) in financial statements and income tax returns

a) in successive accounting periods

Amortizing a discount on bonds payable: a) increases interest expense b) increases periodic cash payments to bondholders c) decreases interest expense d) decreases periodic cash payments to bondholders

a) increases interest expense

The lower-of-cost-or-market rule: a) is used in conjunction with any inventory cost flow assumptions b) cannot be used if LIFO and FIFO is also used c) can be used in conjunction with LIFO, but not with FIFO d) Can only be used with specific identification

a) is used in conjunction with any inventory cost flow assumptions

F.I.C.A.

abbreviation for Federal Insurance Contributions Act.

Temporary owner's equity

accounts accounts utilized to accumulated income, expenses, and owner's withdrawals for one accounting period only.

Liability Accounts

accounts payable notes payable accrued liabilities unearned revenues

Bad debts expense

accounts receivable that are uncollectible.

Permanent accounts

accounts that accumulate information across accounting periods; all accounts reported on the balance sheet

journal entries recorded to update general ledger accounts at the end of a fiscal period are ....

adjusting entries

Unit of Measure:

all economic data must be recorded in dollars.

Contra account

an account designed to accumulate to accumulate totals to offset a related account.

Compound journal entry

an accounting entry that involves more than two accounts.

Transposition error

an amount written with the digits in incorrect order.

Certified Public Accountant

an individual possessing a college education, having practical experience in accounting and who has passed a comprehensive state examination in order to be certified to practice public accounting in that state.

Income

an inflow of assets as a result of selling a product or providing a service.

Bank statement

an itemized listing prepared by the bank of additions to the subtractions from a depositor's account.

Stop payment order

an order by a depositor requesting a bank not to pay on a check previously issued.

Resources owned by a company (such as cash, accounts receivable, vehicles) are reported on the balance sheet and are referred to as __________.

assets

Property, Plant, and Equipment:

assets that a company owns for a year or more; these amounts are usually related to an investment in the company (buildings, land, ect.)

A $1,000 bond that sells for 104 has a selling price of: a) $1,004 b) $1,040 c) $1,400 d) $1,000

b) $1,040 1000 x 1.04 = 1,040

Steps in the accounting cycle include (1) prepare financial statements, (2) post each journal entry to the appropriate ledger account (3) journalize transactions. Which of the following reflects the correct order of these steps? a) 1,2,3 b) 3,2,1 c) 2,1,3 d) 3,1,2

b) 3,2,1

The Sales Returns and Allowances account is debited when: a) merchandise is returned to a supplier b) merchandise is returned by a customer c) payment is made to a supplier within the discount period d) an account receivable is collected within the discount period

b) merchandise is returned by a customer

Which of the following is not true about post-retirement benefits? a) post-retirement costs should be recognized as expense as the workers earn the right to receive the benefits b) most corporations have fully funded their post-retirement benefits c) unfunded post-retirement costs are a non-cash expense d) a corporation's liability for post-retirement benefits is equal to the present value of estimated future payments

b) most corporations have fully funded their post-retirement benefits

Sally Smith had expenses of $800 in June which she paid in July. She reported these expenses on her June income statement. By doing this, she is following the accounting principle of: a) Revenue realization b) Adequate disclosure c) Matching d) Conservatism

c) Matching

The collection of an account receivable is recorded by a debit to Cash and a credit to Accounts Payable. If this error is not corrected: a) Total liabilities are understated b) Total assets are understated c) Total liabilities are overstated d) Owners' equity is overstated

c) Total liabilities are overstated

When an installment note is structured as a s"fully amortizing" loan with equal monthly payments (such as a traditional mortgage): a) the portion of each payment allocated to interest expense is the same each month b) the sum of the monthly payments is equal to the amount of the installment note (mortgage) c) the difference between the sum of all monthly payments and the principal amount of the note constitutes interest d) the portion of each payment allocated to repayment of principal decreases each month as the mortgage is paid off

c) the difference between the sum of all monthly payments and the principal amount of the note constitutes interest

Retained earnings is: a) the positive cash flows of a company b) the net worth of a company c) the owners' equity that has accumulated as a result of profitable operations d) equal to the total assets of a company

c) the owners' equity that has accumulated as a result of profitable operations

Asset Accounts

cash land buildings equipment supplies accounts receivable notes receivable prepaid accounts anything that generates revenue

Current Assets

cash, accounts receivable, short term investments, goods for sale, prepaid expenses.

Quick assets

cash, marketable securities, accounts and notes receivable.

Outstanding checks

checks that have been drawn and subtracted from the depositor's checkbook, but which have not yet been presented to the bank for payment.

journal entries used to prepare temporary accounts for a new fiscal period are called...

closing entries

Cash

coins, currency (paper money), checks, credit card receipts and money orders received from others, as well as money deposited in the bank.

What is communicating?

communicating business activities includes preparing accounting reports such as financial statements, which we analyze and interpret.

Assets are usually reported on the balance sheet at which amount?

cost

The balance sheet item that represents the portion of owners' equity resulting from profitable operations of the business is: a) accounts receivable b) cash c) capital stock d) retained earnings

d) retained earnings

A balance sheet: a) provides owners, investors and other interested parties with all the financial information they need to evaluate the financial strength, profitability, and future prospects of a given business entity b) shows the current market value of the owners' equity in the business at the balance sheet date c) assists creditors in evaluating the debt-paying ability of a business by showing the assets and liabilities of the business, plus the assets and liabilities of its owner(s) d) shows the assets, liabilities and owners' equity of a business entity, valued in conformity with generally accepted accounting principles

d) shows the assets, liabilities and owners' equity of a business entity, valued in conformity with generally accepted accounting principles

The amount of the present value of a future cash receipt will depend upon: a) only the length of time until the money is received b) only the amount of money to be received c) only the required rate of return d) the amount of money to be received, the length of time until the money is received, and the required rate of return

d) the amount of money to be received, the length of time until the money is received, and the required rate of return

the journal entry to close the expense accounts is....

debit income summary; credit each expense account

the journal entry to close income summary when there is a net income is....

debit income summary; credit owners capital

the journal entry to adjust prepaid insurance is .....

debit insurance expense; credit prepaid insurance

the journal entry to close the drawing account is....

debit owners capital account, credit owners drawing account

the journal entry to close income summary when there is a net loss is...

debit owners capital; credit income summary

the journal entry to close sales is ....

debit sales, credit income summary

the journal entry to adjust supplies is....

debit supplies expense; credit supplies

Deposits in transit

deposits that have been made and added to depositor's checkbook, but have not yet been listed on the bank statement.

Specific Principles

detailed rules used in reporting business transactions and events.

Cash discounts

discounts from quoted prices as an inducement for prompt payment of invoices.

E.O.M.

end of month.

Debt ratio

equal to total liabilities divided by total assets.

Compensating balances are not included in the amount of cash listed on a balance sheet true/false

false

Decision makers outside the organization base their credit decisions on weekly, or even daily, financial statements true/false

false

What is Net Loss?

excess of expenses over revenues. All expenses are included in this calculation, including the effects of income taxes.

internal accounting users

executives managers internal auditors sales staff budget analysts controllers

Operating expenses

expenses incurred in the normal operation of a business.

Other expenses

expenses incurred that are not the direct result of regular trading activities of a business.

Interpreting

explaining the significant events of developments that occur, usually taking the form of analysis and comparisons.

Dividends are an expense to a corporation and appear on the income statement true/false

false

"I was just following orders" is an acceptable defense if you commit an unethical action during an audit true/false

false

A CEO or CFO associated with fraudulent financial reporting may be fined, but not imprisoned, under the Sarbanes Oxley Act true/false

false

Accrued income

income actually earned during an accounting period but which will not be received until a future period.

Gross earnings

income before any deductions have been made.

Other income

income received that is not the direct result of regular trading activities of a business.

Income Statement

is the report that measures the success of company operations for a given period of time. (It is also often called the Statement of income or statement of earnings.) Revenues - Expenses = Net income The business and investment community uses the income statement to determine profitability, invest value, and creditworthiness. It provides investors and creditors the information that helps them predict the amounts, timing, and uncertainty of future cash flows.

the amount of net income calculated on an income statement is correct if....

it is the same as the net income shown on the worksheet

Debit memorandum

items the bank deducts from the account balance.

Fixed liabilities

liabilities that are not due and payable within one year.

Unearned Revenues is what type of account?

liability

which accounting concept applies when expenses are reported in the same fiscal period that they produce revenue?

matching expenses with revenue

Activity analysis

measures how efficiently a firm is utilizing its assets.

Liquidity analysis

measures the ability of the firm to meet its current obligations.

Age of accounts receivable

measures the average time required to collect receivables.

Age of inventory

measures the average time required to sell inventory. Calculation: 365 days divided by Inventory Turnover

Cash disbursements (cash payments)

money and money substitutes paid.

Interest

money paid for the use of money.

Calculation of Accounts Receivable Turnover

net credit sales divided by average accounts receivable.

return on assets equation

net income/average total assets

Gross margin

net sales minus the cost of goods sold.

SASB Sustainability Accounting Standards Board

nonprofit entity engaged in creating & disseminating sustainability accounting standards for companies

Long-Term Liabilities

obligations NOT due within the longer of one year or the company's operating cycle. Notes, Mortgages, Bonds Payable, and lease obligations

adjustments are analyzed and planned....

on a worksheet

Accountant

one who is concerned with the design of the system of records, the preparation of reports based upon the recorded data, and the interpretation of the reports.

Bookkeeper (information processor)

one who is involved in the process of recording financial information in a prescribed manner.

Employee

one who is under the control and direction of an employer with regard to the performance of employment.

Shareholders

owners of companies are not personally liable for corporate acts and debts.

Liabilities often have the word __________ in their account title.

payable

accounts used to accumulate information from one fiscal period to the next are _____ accounts

permanent

Profitability analysis

provides evidence concerning the earnings potential of a company and how effectively the firm is being managed.

Net Purchases

purchases minus purchases returns and allowances minus purchase discounts.

Acid test ratio (quick ratio)

quick assets divided by current liabilities.

Balance sheet comparative forms

record the balance sheet data for two or more comparable periods on the same form so that the information can be readily compared.

Income statement comparative forms

record the income statement data for two or more comparable periods of the same form so that the information can be readily compared.

Examples of external users

shareholders, lenders, directors, customers, suppliers, lawyers, brokers, and the press

after closing entries are posted, the owners capital account balance should be the same as....

shown on the balance sheet for the fiscal period

Assets minus liabilities equals __________.

stockholders' equity or owner's equity (net assets if a nonprofit)

accounts used to accumulate information until it is transferred to owners capital accounts are_____ accounts

temporary

income summary is a ....

temporary account

Depreciation expense

that portion of the original cost of a fixed asset that is assigned as an expense to the reporting period expected to benefit from its use.

the series of accounting activities included in recorded financial information for a fiscal period is called....

the accounting cycle

Capital

the amount by which the total assets exceed the total liabilities of a business; an owner's financial interest in a business. (net worth; owner's equity; proprietorship)

Term of note (time)

the period of time from the date of the note to the maturity date.

Face of note

the principal sum the maker of a note promises to pay.

Bank statement reconciliation

the process by which the depositor attempts to reconcile the bank statement balance with the checkbook balance.

Proving cash

the process of determining whether the amount of cash, both on hand and in the bank, is the same as that which is indicated in the accounting records.

Journalizing

the process of recording business transactions in a book of original entry.

Classifying

the sorting of the many business transactions in an orderly and systematic manner.

An accounting practice can become a "generally accepted accounting principle" through widespread use, even if the practice is not mentioned in the official pronouncements of the accounting standard-setting organizations true/false

true

An after-closing trial balance consists only of asset, liability, and owners' equity accounts true/false

true

An annual report filed with the Securities and Exchange Commission must include a section called "Management Discussion and Analysis" (MD&A) true/false

true

An unrealized holding gain on available for sale securities will increase shareholders' equity true/false

true

Assets need not always have physical characteristics as do buildings, machinery or inventory true/false

true

The Sarbanes-Oxley Act places responsibility on CEOs and CFOs of companies to certify the fairness of a company's financial statements. The Act also created the Public Company Accounting Oversight Board, which oversees the public accounting profession. true/false

true

The Securities and Exchange Commission is instrumental in the development of financial accounting standards true/false

true

The current ratio is a measure of liquidity true/false

true

Cash Basis

when revenues are recognized when cash is received and expenses are recorded when cash is paid goes against GAAP most companies follow Accrual.

information needed for journalizing the adjusting entries is obtained from the ....

work sheets adjustment columns

temporary accounts begin each new fiscal period with a ....

zero balance

Sum-of-the-Years' Digits (SYD) Depreciation

A seldom-used method of accelerated depreciation. Usually produces results that lie in between the 200 percent and 150 percent declining-balance methods.

Workers' Compensation Insurance

A state-mandated insurance program insuring workers against job-related injuries. Premiums are charged to employers as a percentage of the employees' wages and salaries. The amounts vary by state and by the employees' occupations but, in some cases, can be very substantial.

Actuary

A statistician who performs computations involving assumptions as to human life spans. One function is computing companies' liabilities for pensions and postretirement benefits.

Unrealized Holding Gain (or Loss) on Investments

A stockholders' equity account representing the difference between the cost of investments owned and their market value at the balance sheet date. In short, gains or losses on these investments that have not been "realized" through the sale of the securities.

Perpetual Inventory System

A system of accounting for merchandising transactions in which the Inventory and Cost of Goods Sold accounts are kept perpetually up-to-date.

Double entry Accounting

A system of recording every business transaction with equal dollar amounts of both debit and credit entries. As a result of this system, the accounting equation always remains in balance; in addition, the system makes possible the measurement of net income and also the use of error-detecting devices such as a trial balance.

Physical Inventory

A systematic count of all goods on hand, followed by the application of unit prices to the quantities counted and development of a dollar valuation of the ending inventory.

Audit

An examination of financial statements designed to determine their fairness in relation to generally accepted accounting principles.

Cost Flow Assumption

Assumption as to the sequence in which units are removed from inventory for the purpose of sale. Is not required to parallel the physical movement of merchandise if the units are homogeneous.

The listing of all the accounts available for use in a company's accounting system is known as the

Chart of Accounts

Examples of Source documents

Checks, Bills from suppliers, Purchase orders, Bank statements, sales tickets, Employee Earnings records

3 closing entries

Close all revenue accounts Revenue Retained earnings Close all expense accounts Retained earnings Expenses Close the dividend accounts Retained earnings Dividends

Total Equity Equation

Common Stock + Retained Earning

Entity prospective

Companies are viewed as separate and distinct from their owners ( present shareholders). The assets are viewed as assets of the company and not of the specific creditor or shareholder. Investors have claims on assets in the form of liability or equity claims and is consistent with the present business environment.

Truism in business

Company never receives greater than it gives & never gives greater than it receives

(c) Imperative for providing comparisons of a company from period to period.

Comparability (Consistency).

Four qualitative characteristics that are related to both relevance and faithful representation.

Comparability, Verifiability, Timeliness, and Understability.

Qualitative characteristic being employed when companies in the same industry are using the same accounting principles.

Comparability.

Changes in equity during the period, except those from investments by owners and distributions to owners.

Comprehensive income

Equals increase in net assets during the year, after adding distributions to owners and subtracting investments by owners.

Comprehensive income

Increases in net assets in a period from nonowner sources.

Comprehensive income

General Ledger Software

Computer software used for recording transactions, maintaining journals and ledgers, and preparing financial statements. Also includes spreadsheet capabilities for showing the effects of proposed adjusting entries or transactions on the financial statements without actually recording these entries in the accounting records.

Quality of information that confirms users' earlier expectations.

Confirmatory Value.

What will usually cause the liability account Accounts Payable to increase?

Credit

Which term is associated with "right" or "right-side"?

Credit

When a company pays a bill, the account Cash will be

Credited

Entries to revenues accounts such as Service Revenues are usually

Credits

Working Capital Equation

Current Assets - Current Liabilities

The rule of consistency is violated when a company uses one method of depreciation for financial statements and another method of depreciation for tax purposes. True/False

False

The term 'financial asset" is synonymous with the term "cash equivalent." True/False

False

U.S. Treasury bills that mature within a period of four to six months are cash equivalents. True/False

False

Wholesalers buy from retailers and sell to the general public. True/False

False

F.U.T.A.

Federal Unemployment Tax Act.

GAAP

Financial accounting is governed by concepts & rules. 1. Relevant info affects decision of user 2. Reliable info trusted by users 3. Comparable info aids in contrasting organizations

Comparability

Financial information can be linked to trends in a prior period or to industry norms.

Objective Evidence

Financial information can be proved through analyzing, measuring, or researching.

Statement of Financial Position

The financial statement showing the financial position of an enterprise by summarizing its assets, liabilities, and owners' equity at a point in time. Also called the balance sheet.

Machinery is purchased on May 15, 2018 for $50,000 with a $5,000 salvage value and a five-year life. The half-year convention is followed. What method of depreciation will give the highest amount of depreciation expense in Year 2? a) Straight-line b) Double-declining balance c) 150% declining balance d) Amount cannot be determined

b) Double-declining balance Straight line Year 22 (50,000 - 5,000)/5 = $9,000 Double-declining balance: Year 1: $50,000 x2/5 = $20,000/2 = $10,000 Year 2: $40,000 x 2/5 = $16,000 150% declining balance Year 1: $50,000 x 1.5/5 = $15,000/2 = $7,500 Year 2: $42,500 x 1.5/5 = $12,750

Temple Corporation purchased a piece of real estate, paying $400,000 cash and financing $700,000 of the purchase price with a 10-year, 15% installment note. The note calls for equal monthly payments that will result in the debt being completely repaid by the end of the tenth year. In this situation: a) The aggregate amount of the monthly payments is $700,000 b) Each monthly payment is greater than the amount of interest accruing each month c) The portion of each payment representing interest expense will increase over the 10-year period, since principal is being paid off, yet the payment amount does not decrease d) The portion of each monthly payment representing repayment of principal remains the same throughout the 10-year period

b) Each monthly payment is greater than the amount of interest accruing each month

The set of standards, assumptions, and concepts that form the "ground rules" for financial reporting in the United States is termed: a) The conceptual framework b) Generally Accepted Accounting Principles c) Statements of Financial Accounting Concepts d) American standards for certified puic accountants

b) Generally Accepted Accounting Principles

Establishing international accounting standards is the responsibility of: a) AICPA b) IASB c) SEC d) AAA

b) IASB

The general purpose financial statements prepared annually by a corporation would NOT include: a) balance sheet b) Income tax return c) Income statement d) Statement of Cash Flows

b) Income tax return

If a company uses a percentage of net sales in computing the amount of uncollectible accounts expense: a) no valuation allowance will be required b) the relationship between revenue and expenses is being stressed more than the valuation of receivables at the balance sheet c) the existing balance in the Allowance for Doubtful Accounts will be increased sufficiently to equal the probable loss indicated by the percentage of net sales computation d) any past-due accounts will be listed as a separate item in the balance sheet

b) the relationship between revenue and expenses is being stressed more than the valuation of receivables at the balance sheet

In February of each year, the Carlton Hotel holds a very popular wine tasting event. Tickets must be ordered and paid for in advance, and are typically sold out by November of the preceding year. The realization principle indicates that the revenue from these ticket sales should be recognized in the period in which the: a) order is placed b) wine tasting event is held c) payments are received d) expenses associated with the wine tasting are paid in full

b) wine tasting event is held

The December 31, 20117 worksheet for Fran's Fine Dining showed the following amounts related to the Supplies Expense account: a) $870 b) $745 c) $0 d) $125

c) $0 the purpose of the worksheet is show what the financials will look like after adjustments, but without recording them. We do not have enough information to know what has been recorded. So the only answer that makes since is $0

On September 1, 2018, Able Company purchased a building from Regal Corporation by paying $520,000 cash and issuing a one-year not payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 12% and is paid at maturity. In its December 31, 2018, balance sheet, Able correctly presented the note and interest payable as follows: Interest payable $ 19,800 Notes payable, 12% due September 1, 2019 $495,000 What is the total cash (including interest) paid for the building purchased by Able? a) $1,015,000 b) $1,054,600 c) $1,074,400 d) $1,002,600

c) $1,074,400 520,000 + 59,400 + 495,000 = 1,074,400

At the beginning of 2018, Midway Hardware has an inventory of $400,000. Because sales growth was strong during 2018, the owner wants to increase inventory on hand to $450,000 at December 31, 2018. If net sales for 2018 are expected to be $1,600,000 and the gross profit rate is expected to be 35%, compute the cost of the merchandise the owner should expect to purchase during 2018 a) $1,490,000 b) $1,040,000 c) $1,090,000 d) $1,600,000

c) $1,090,000 $1,600,000 x (1-.35) = $1,040,000 cost of goods sold $1,040,000 + 450,000 (ending inventory) - 400,000 (beginning inventory) = $1,090,000 purchases

Bartner Furniture, Inc. purchased inventory at $1,200 list price and the terms were 3/10, n/30. If Bartner paid the full invoice price on the 10th day, what amount of cash did Bartner pay to settle the account? a) $1,176 b) $1,236 c) $1,164 d) $1,200

c) $1,164 1,200 x (1 - .03) = 1,164

Before making month-end adjustments, net income of Cardinal Company was $113,500 for March. Adjusting entries are necessary for the following items: (1) depreciation for the month of March: $1,800 (2) interest income accrued to March 31, on deposits in banks: $750 (3) supplies used in march: $250 (4) fees earned in March that had been collect in advance: $2,100 After recording these adjustments, net income for March is: a) $112,200 b) $111,450 c) $114,300 d) $113,500

c) $114,300 113,500 - 1800 +750 -250 + 2100 = 114,300

Only two adjustments appear in the adjustments column of a worksheet for Wycliff Publications: one to record $830 depreciation of office equipment and the other to record the use of $590 of office supplies. If the Trial Balance column totals are $15,410, what are the totals of the Adjusted Trial Balance columns? a) $16,830 b) $15,170 c) $16,240 d) $15,650

c) $16,240 15,410 + 830 = 16,240 The decrease in office supplies cancels the increase in supplies expense

The cash account in the ledger of Clear Windows shows a balance of $15,276 at September 30. The bank statement, however, shows a balance of $16,803 at the same date. The only reconciling items consist of a bank service charge of $20, a large number of outstanding checks totaling $4,150, and a deposit in transit. What is the amount of the deposits in transit? a) $12,653 b) $2,623 c) $2,603 d) $11,126

c) $2,603 clear windows balance: 15,276 - 20 (bank service) = 15,256 banks statement: 16,803 - 4,150 - 12,653 15,256 - 12,653 = 2,603 deposits in transit

During the month of May, Henderson Company had the following transactions: (1) revenues of $60,000 were earned and received in cash (2) bank loans of $9,000 were paid off (3) equipment of $20,000 was purchased (4) expenses of $36,800 were paid (5) stockholders purchased additional shares for $22,000 A statement of cash flows for May would report net cash flows from operating activities of: a) $60,000 b) $16,200 c) $23,200 c) $20,000

c) $23,200 60,000 - 36,800 = 23,200

The basic purpose of generally accepted accounting principles is to: a) minimize the possibility of a business becoming insolvent b) provide a framework for financial reporting that is understood by both the preparers and the users of financial statements c) ensure that financial statements include the type of information that is best suited to every type of business decision d) eliminate the need for professional judgement in preparing financial statements

b) provide a framework for financial reporting that is understood by both the preparers and the users of financial statements

In relation to a bond issue, the role of the underwriter is to: a) guarantee payment to bondholders of both the periodic interest payments and the maturity value b) purchase the entire bond issue from the issuing corporation and then sell the bonds to the public c) represent the interests of the bondholders and, if necessary, to take legal action on their behalf c) maintain a subsidiary ledger of individual bondholders and mail out the periodic interest checks

b) purchase the entire bond issue from the issuing corporation and then sell the bonds to the public

The inventory turnover rate provides and indication of how quickly the average quantity of inventory on hand: a) spoils b) sells c) increases d) converts to cash

b) sells

Retained earnings appears on: a) the income statement b) the balance sheet c) the statement of cash flows d) all three of the financial statements

b) the balance sheet

A measure of a company's liquidity is: a) total assets divided by total equity b) the current ratio c) the dollar amount of liabilities that bear interest d) the dollar amount of assets used as collateral for a loan

b) the current ratio

On September 1, 2018, Able Company purchased a building from Regal Corporation by paying $520,000 cash and issuing a one-year not payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 12% and is paid at maturity. In its December 31, 2018, balance sheet, Able correctly presented the note and interest payable as follows: Interest payable $ 19,800 Notes payable, 12% due September 1, 2019 $495,000 What is the amount of interest expense Able will recognize on this note in 2019? a) $59,400 b) $19,800 c) $39,600 d) $34,650

c) $39,600 59,400 - 19,800 = 39,600

Ceramic Products, Inc reports these account balances at January 1, 2018 (shown in alphabetical order): Accounts Payable $ 28,000 Accounts Receivable $ 20,000 Buildings $153,000 Capital Stock $185,000 Cash $ 13,000 Equipment $ 20,000 Land $80,000 Notes Payable $ 24,000 Retained Earnings $ 49,000 On January 5, Ceramic Products collected $12,000 of its accounts receivable and paid $11,000 on its note payable. On January 6, 2018, total liabilities are: a) $0 b) $30,000 c) $56,000 c) $41,000

c) $41,000 $28,000 (accounts payable) + $13,000 (ending Notes payable) = $41,000

The following transactions occurred during May, the first month of operations for Hunter Products, Inc.: (1) issued 44,000 shares of capital stock to the owners of the corporation in exchange for $528,000 cash (2) purchased a piece of land for $340,000, making a $120,000 cash down payment and signing a note payable for the balance (3) Made a $54,000 cash payment on the note payable from the purchase of the land (4) Purchased equipment on credit from BBW, Inc. for $57,000 What are total of Hunter Products liabilities at the end of May? a) $223,000 b) $57,000 c) $277,000 d) $166,000

a) $223,000 liabilities: 340,000 - 120,000 - 54,000 + 57000 = 223,000

If an asset was purchased on January 1, 2015 for $106,000 with an estimated life of 4 years, what is the accumulated depreciation at December 31, 2018? a) $26,500 b) $106,000 c) $53,000 d) $79,500

a) $26,500 106,000/4 = 26,500 per year

The following transactions occurred during May, the first month of operations for Hunter Products, Inc: (1) Issued 60,000 shares of capital stock to the owners of the corporation in exchange for $720,000 cash (2) Purchased a piece of land for $500,000, making a $200,000 cash down payment and signing a note payable for the balance (3) made a $70,000 cash payment on the note payable from the purchase of land (4) purchased equipment on credit from BBW, Inc for $73,000 What are total liabilities at the end of May? a) $303,000 b) $ 73,000 c) $373,000 d) $230,000

a) $303,000 300,000 - 70,000 + 73,000 = 303,000

In which of the following situations would the largest amount be recorded as an expense of the current year? (Assume accrual basis accounting) a) $4,000 is paid in January for equipment with a useful life of four years b) $1,800 is paid in January for two-year fire insurance policy c) $1,200 cash dividends are declared and paid d) $900 is paid to an attorney for legal services rendered during the current year

a) $4,000 is paid in January for equipment with a useful life of four years

At the end of the current year, the owners' equity in Durante Co. is $360,000. During the year, the assets of the business had increased by $68,000 and the liabilities had increased by $118,000. Owners' equity at the beginning of the year must have been: a) $410,000 b) $310,000 c) $546,000 d) $174,000

a) $410,000 Assets: 68,000 - 118,000 = -50,000 Equity: 360,000+50,000 = 410,000

Cranston Instrumentation sold a depreciable asset for cash of $150,000. The original cost of the asset was $600,000. Cranston recognized a gain of $22,500 on the sale. What was the amount of accumulated depreciation on the asset at the time of the sale? a) $472,500 b) $127,500 c) $577,500 d) $495,000

a) $472,500 $600,000 - = $150,000 - 22,500; x=$472,500

At December 31, 2018 the accounting records of Braun Corporation contain the following items: accounts payable $ 14,500 Land $237,000 capital stock ? building $177,000 retained earnings $157,000 accounts receivable $ 37,000 cash ? equipment $117,000 notes payable $187,000 If capital stock is $317,000, total assets of Braun Corporation at December 31, 2018 amount to: a) $675,500 b) $912,500 c) $712,500 d) $101,500

a) $675,500 237,000 + 177,000 +37,000 + 117,000 = 568,000 assets liabilities = 14,500 + 187,000 = 201,500 equity = 317,000+157,000 = 474,000 201,500+474,000 = 675,500 568,000 + x = 675,500 x=107,500 cash 568,000 + 107,500 = 675,500 total assets

A discount on bonds payable is best described as: a) An element of future interest expense b) A bonus paid by the bondholders to the issuing corporation because of the unusually high interest rate stated in the bonds c) The present value of the future interest payments of bond interest and principal d) An amount below par that the bondholders may be called upon to make good

a) An element of future interest expense

The accounting systems of most business organizations: a) Are tailored to meet the organization's needs for accounting information and the resources available for operating the system b) Are similar in design to the journals, ledgers and worksheets illustrated in this text c) Utilize data bases, rather than ledger accounts d) Are designed by the CPA firm that performs the annual financial audit

a) Are tailored to meet the organization's needs for accounting information and the resources available for operating the system

The rules of debit and credit may be summarized as follows: a) Asset accounts are increased by debits, whereas, liabilities and owners' equity are increased by credits b) The balance of a ledger account is increased by debit entries and is decreased by credit entries c) Accounts on the left side of the balance sheet are increased by credits, whereas accounts on the right side of the balance sheet are increased by debits d) The balance of a ledger account is increased by credit entries and is decreased by debit entries

a) Asset accounts are increased by debits, whereas, liabilities and owners' equity are increased by credits

Which business organization is recognized as a separate legal entity under the law? a) Corporation b) Sole proprietorship c) Partnership d) All business organizations are separate legal entities

a) Corporation

A company issues $50 million of bonds at par on January 1, 2018. The bonds pay 10% interest sim-annually on 12/31 and 6/30 and mature in 20 years. The journal entry when the bonds are sold is: a) Debit Cash $50,000,000 Credit Bonds Payable $50,000,000 b) Debit Cash $50,000,000 Debit Interest expense $2,500,000 Credit Bonds Payable $50,000,000 Credit Interest Payable $2,500,000 c) Debit Cah $50,000,000 Debit Interest expense $5,000,000 Credit Bonds Payable $50,000,000 Credit Interest Payable $5,000,000 d) Debit Cash $50,000,000 Debit Interest expense $50,000 Credit bonds payable $50,000,000 Credit interest payable $50,000

a) Debit Cash $50,000,000 Credit Bonds Payable $50,000,000

Under the perpetual inventory system which journal entry would indicate a purchase of merchandise? a) Debit inventory and credit cash b) Debit purchases and credit cash c) Debit costs of goods sold and credit inventory d) Debit inventory and credit cost of goods sold

a) Debit inventory and credit cash

Regal Artworks Co. records purchases net of all available purchase discounts. If the company m makes payment after the discount has expired, the entry to record the payment should include a: a) Debit to Purchase Discounts Lost b) Credit to Purchase Discounts Lost c) Debit to Sales Discounts d) Credit to Sales Discounts

a) Debit to Purchase Discounts Lost

The closing entry for an expense account would consist of a: a) Debit to income summary and a credit to the expense account b) Debit to the expense account and a credit to income summary c) Credit to retained earnings and a debit to the expense account d) Credit to revenue and a debit to the expense account

a) Debit to income summary and a credit to the expense account

Financial accounting information is: a) Designed to assist investors and creditors b) Submitted to the IRS in lieu of a tax form c) Called "special-purpose" accounting information d) Not applicable to individuals

a) Designed to assist investors and creditors

Closing entries should be made: a) Every year b) Only when an entity goes out of business c) Only if there is a profit d) Only if there is a loss

a) Every year

Under accrual accounting, salaries earned by employees but not yet paid should be expensed: a) In the period in which they are earned b) In the period in which they are paid c) In the period with the higher earnings d) In the period with the lower earnings

a) In the period in which they are earned

Accelerated depreciation methods are used primarily in: a) Income tax returns b) The financial statements of small businesses c) The financial statements of publicly owned corporations d) Companies with computer-based account systems.

a) Income tax returns

A liability for deferred income taxes represents: a) Income taxes on earnings already reported in the income statement, but that will be taxed in future periods b) Income taxes already paid on earnings that have not yet been reported in the company's income statement c) Income tax obligations being disputed with the Internal Revenue Service d) Income taxes levied in prior years that are now past due

a) Income taxes on earnings already reported in the income statement, but that will be taxed in future periods

Characteristics of internal accounting information include all of the following except: a) It is audited by a CPA b) It must be timely c) It is generally oriented toward the future d) It measures efficiency and effectiveness

a) It is audited by a CPA

Which of the following payroll taxes do not stop once an employee reaches a certain level of income: a) Medicare taxes b) Social security taxes c) unemployment taxes d) Medicare, social security and unemployment taxes

a) Medicare taxes

The purpose of making closing entries is to: a) Prepare revenue and expense accounts for the recording of the next period's revenue and expenses b) Enable the accountant to transfer the balances from all permanent accounts to the Income Summary account c) Establish new balances in the balance sheet accounts d) Reduce the number of expense accounts

a) Prepare revenue and expense accounts for the recording of the next period's revenue and expenses

The body created by the Sarbanes Oxley Act and charged with oversight of the accounting profession is the: a) Public Company Accounting Oversight Board b) Auditing Standards Board c) International Accounting Standards Board d) Securities and Exchange Commission

a) Public Company Accounting Oversight Board

If the beginning inventory of the current year and the ending inventory of the past year were overstated by the same amount: a) Retained earnings at the end of the current year would be correct b) Retained earnings at the end of the current year would be overstated c) Retained earnings at the end of the current year would be understated d) Net income for the current year would be correct

a) Retained earnings at the end of the current year would be correct

The amount of net income will appear on the debit side of the Income Statement columns in a worksheet if: a) Revenue exceeds total expenses for the period b) The trial balance is out of balance c) Dividends are more than the income or loss for the period d) There is a net loss for the period

a) Revenue exceeds total expenses for the period

Each of the following transactions would be reflected in both the income statement and the statement of cash flows for the current period, except: a) The adjustment of marketable securities to their current market value b) Receipt of dividends earned on investments c) Payment of interest on bonds d) Sale of merchandise for cash

a) The adjustment of marketable securities to their current market value

Capital stock represents: a) The amount invested in the business by stockholders when shares of stock were initially issued by a corporation b) The owners' equity for a business organization as a corporation c) The owners' equity accumulated through profitable operations that have not been paid out as dividends d) The price paid by the current owners to acquire shared of stock in the corporation, regardless of whether they bought the shares directly from the corporation or from another stockholder

a) The amount invested in the business by stockholders when shares of stock were initially issued by a corporation

Which of the following will cause net income to be overstated for the following year? a) The current year's ending inventory is understated b) The current year's ending inventory is overstated c) Next Year's beginning inventory is overstated d) Net year's ending inventory is understtated

a) The current year's ending inventory is understated

Which of the following is considered an adjusting entry? a) The entry to record depreciation b) The entry to pay salaries c) The entry to pay outstanding bills d) The entry to declare a dividend distribution

a) The entry to record depreciation

The book value of an asset in the plant and equipment category is: a) The undepreciated cost of the asset b) The current replacement cost of the asset c) The original cost of the asset d) The accumulated depreciation on the asset to date

a) The undepreciated cost of the asset

Which of the following is not a purpose of adjusting entries: a) To prepare the revenue and expense accounts for recording transaction of the following period b) To apportion the proper amounts of revenue and expenses to the current accounting period c) To establish the proper amounts of assets ad liabilities in the balance sheet d) To accomplish the objective of offsetting the revenue of the period with all expenses incurred in generating that revenue

a) To prepare the revenue and expense accounts for recording transaction of the following period

Posting is the process of: a) Transferring debit and credit entries from the journal into the appropriate ledger accounts b) Determining that the dollar amount of debit entries recorded in the ledger is equal to the dollar amount of credit entries c) Entering information into a computerized data base d) Preparing journal entries to describe each business transaction

a) Transferring debit and credit entries from the journal into the appropriate ledger accounts

If the inventory at the end of the current year is understated and the error is never caught, the effect is to: a) Understate income this year and overstate income next year b) Overstate income this year and understate income next year c) Understate income this year with no effect on income next year d) Overstate the cost of goods sold, but have no effect on net income

a) Understate income this year and overstate income next year

The realization principle indicates that revenue usually should be recognized and recorded in the accounting records: a) When goods are sold or services are rendered to customers b) When cash is collected from customers c) At the end of the accounting perid d) Only when the revenue can be matched by an equal dollar amount of expenses

a) When goods are sold or services are rendered to customers

Sales discounts and allowances: a) Will reduce net profit when properly recorded b) Will increase net profit when properly recorded c) Will not affect net profit d) Are always immaterial and need not be recorded

a) Will reduce net profit when properly recorded

Sue Costa, owner of a-1 cleaning services, invested an additional $75,000 in the company. Which of the following would be a part of the correct journal entry to record this transaction? a) a debit to cash account b) a debit to the equity account c) a debit to the capital stock account d) a debit to the cash revenue account

a) a debit to cash account

The sequence of accounting procedures used to record,classify, and summarize accounting information is called the: a) accounting cycle b) accounting period c) accrual accounting d) double-entry bookkeeping

a) accounting cycle

While preparing the bank reconciliation, an accountant discovered that a $426 check returned with the bank statement had been recorded erroneousy in the depositor's accounting records as $462. In preparing the bank reconciliation the appropriate action to correct this error would be to: a) add $36to the balance per the depositor's records b) add $36 to the balance per the bank statement c) deduct $36 from the balance per the bank statement d) deduct $36 from the balance per the depositor's records

a) add $36 to the balance per the depositor's records

Off balance sheet financing may involve: a) an operating lease b) a pension plan c) deferred income taxes d) a capital lease

a) an operating lease

Which of the following accounts normally contain a debit balance? a) asset b) liability c) owners' equity d) revenue

a) asset

Eton Corporation purchased land in 1998 for $190,000. In 2018, it purchased a nearly identical parcel of land for $430,000. In its 2018 balance sheet, Eton valued these two parcels of land at a combined value of $860,000. Reporting the land in this manner violated the: a) cost principle b) principle of the business entity c) objectivity principle d) going-concern assumption

a) cost principle

Characteristics of internal accounting information include all of the following except: a) it is audited by a CPA b) it must be timely c) it is generally oriented toward the future d) it measure efficiency and effectiveness

a) it is audited by a CPA

Revenues increase owners' equity because: a) revenues increase net income, which increases retained earnings b) revenues are recorded by a debit c) of the matching principle d) the conservatism principle requires revenues be recognized with an increase to owners' equity

a) revenues increase net income, which increases retained earnings

If $9,600 cash and a $31,000 note payable are given in exchange for some office machines to be used in a business: a) total assets are increased b) total liabilities are decreased c) total assets are decreased d) the owners' equity is increased

a) total assets are increased

At December 31, 2018 the accounting records of Braun Corporation contain the following items: accounts payable $ 14,500 Land $237,000 capital stock ? building $177,000 retained earnings $157,000 accounts receivable $ 37,000 cash ? equipment $117,000 notes payable $187,000 If cash at December 31, 2018 is $83,000, capital stock is: a) $255,500 b) $292,500 c) $606,500 d) $165,000

b) $292,500 237,000 + 177,000 +37,000 + 117,000 +83,000 = 651,000 assets liabilities = 14,500 + 187,000 = 201,500 retained earnings = 157,000 651,000 = 201,500 + 157,000 + x x = 292,500 capital stock

The following transactions occurred during May, the first month of operations for Hunter Products, Inc.: (1) issued 44,000 shares of capital stock to the owners of the corporation in exchange for $528,000 cash (2) purchased a piece of land for $340,000, making a $120,000 cash down payment and signing a note payable for the balance (3) Made a $54,000 cash payment on the note payable from the purchase of the land (4) Purchased equipment on credit from BBW, Inc. for $57,000 What is the balance in the cash account at the end of May? a) $528,000 b) $354,000 c) $702,000 d) $174,000

b) $354,000 528,000 - 120,000 - 54,000 = 354,000

In a periodic inventory system, the cost of goods sold is: a) Recorded as sales transactions occur b) Determined by a computation which is performed at year-end, after the taking of a complete physical inventory c) Equal to the beginning inventory, plus purchases made during the period, less sales revenue for the period d) Determined by subtracting the balance in the Gross Profit account from the amount of net sales

b) Determined by a computation which is performed at year-end, after the taking of a complete physical inventory

At December 31, 2018 the accounting records of Braun Corporation contain the following items: accounts payable $ 14,500 Land $237,000 capital stock ? building $177,000 retained earnings $157,000 accounts receivable $ 37,000 cash ? equipment $117,000 notes payable $187,000 If capital stock is $257,000, what is the December 31, 2018 cash balance? a) $84,500 b) $92,500 c) $47,500 d) $615,500

c) $47,500 assets = liabilities + equity 237,000 + 177,000 +37,000 + 117,000 = 568,000 assets liabilities = 14,500 + 187,000 = 201,500 equity = 257,000+157,000 = 414,000 201,500+414,000 = 615,500 568,000 + x = 615,500 x=47,500

The following entry appears in Galloway Paints general ledger on April 23, 2018: Inventory (debit) $26,800 Accounts Payable (credit) $20,400 Cash (credit) $6,400 Before the journal entry above, Galloway had assets of $458,000; liabilities of $234,000; and owners' equity of $224,000. Total assets immediately after the above transaction has been recorded amount to: a) $484,800 b) $437,600 c) $478,400 d) $458,000

c) $478,400 total assets: 458,000 + 26,800 - 6,400 = 478,400

Shown below is a trial balance for Cornell Products, Inc., on December 31, after adjusting entries: Cash (debit) $15,000 Accounts Receivable (debit) $12,500 Office Equipment (debit) $21,500 Accumulated Depreciation (credit) $5,500 Accounts Payable (credit) $7,500 Capital Stock (credit) $22,000 Retained Earnings (credit) -0- Dividends (debit) $7,000 Service fees earned (credit) $43,000 Salaries Expense (debit) $15,000 Advertising Expense (debit) $3,000 Depreciation Expense (debit) $4,000 total debits $78,000 total credits $78,000 The total debits in the After-Closing Trial balance will equal: a) $78,000 b) $56,000 c) $49,000 d) $35,000

c) $49,000 15,000+12,500+21,500 = 49,000

Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31: (1) a one-year bank loan of $684,000 at an annual interest rate of 10% had been obtained on December 1 (1) the company pays all employees up-to-date each Friday. Since December 31 fell on Tuesday, there was a liability to employees at December 31 for two day's pay amounting to $6,200 (3) On December 1, rent on the office building had been paid for four months. The monthly rent is $5,400 (4) depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $15,1120; no change has occurred in the account during the year (5) fees of $9,200 were earned during the month for clients who paid in advance. What amount of interest expense has accrued on the bank loan? a) $4,900 b) $5,500 c) $5,700 d) $6,300

c) $5,700 684,000 x .10 = 68,400 interest per year 68,400/12 = 5,700 per month interest

On September 1, 2018, Able Company purchased a building from Regal Corporation by paying $520,000 cash and issuing a one-year not payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 12% and is paid at maturity. In its December 31, 2018, balance sheet, Able correctly presented the note and interest payable as follows: Interest payable $ 19,800 Notes payable, 12% due September 1, 2019 $495,000 How much must Able pay Regal Corporation on September 1, 2019, when the note matures? a) $495,000 b) $514,800 c) $554,400 d) $1,015,000

c) $554,400 note payable: 495,000 x .12 = 59,400 495,000 + 59,400 = 554,400

If current assets are $110,000 and current liabilities are $50,000, working capital will be: a) 45.5% b) 2:2 c) $60,000 d) $160,000

c) $60,000 $110,000 - 50,000 = 60,000

Dorfmann Industries has an accounts receivable turnover rateof 12. Which of the following statements is not true? a) Dorfmann's accounts receivable are more liquid than those of a business whose accounts receivable turnover rate is 8 b) Dorfmann waits approximately 30 days to make collections of its credit sales (Use 365 days in a year) c) Dorfmann writes off accounts receivables as uncollectible if they are over 30 days old d) Dorfmann's net credit sales are about twelve times the amount of its average accounts receivable

c) Dorfmann writes off accounts receivables as uncollectible if they are over 30 days old

The Social Security tax paid by an employer is: a) Greater than the amount paid by the employee b) Less than the amount paid by the employee c) Equal to the amount paid by the employee d) The employer does not pay Social Security tax, only the employee pays the tax

c) Equal to the amount paid by the employee

An accounting principle must receive substantial authoritative support to qualify as generally accepted. Among the organizations and agencies that have been influential in the development of generally accepted accounting principles, which of the following has provided the most influential leadership? a) IRS b) Institute of Management Accountants c) Financial Accounting Standards Board d) New York Stock Exchange

c) Financial Accounting Standards Board

After preparing a bank reconciliation, a journal entry would be required for which of the following: a) A deposit in transit b) A check for $48 given to a supplier but not yet recorded by the company's bank c) Interest earned on the company's checking account d) A deposit made by a company with a similar name and credited to your account

c) Interest earned on the company's checking account

Which of the following is generally not true about inventory? a) Inventory consists of all goods owned and held for sale to customers b) Inventory is a non-financial asset c) Inventory must be managed on a unit-by-unit (i.e., specific identification) method d) Inventory is usually shown on the balance sheet at cost

c) Inventory must be managed on a unit-by-unit (i.e., specific identification) method

Financial accounting information is characterized by all of the following except: a) It is historical in nature b) It results from inexact and approximate measures c) It is factual, so it does not require judgment to prepare d) It is enhanced by management's explanation

c) It is factual, so it does not require judgment to prepare

In which of the following situations would an adjusting entry be made at the end of January to record an accrued expense? a) Ramona's Nursery purchased playground equipment on January 1 with an estimated useful life of six yers b) One January 25, Ramona's Nursery hired a college student to drive the minibus; the new employee is to begin work in February c) January 31 falls on a Tuesday; salaries are paid on Friday each week d) On January 31,Ramona's Nursery paid the interest owed on a note payable for January

c) January 31 falls on a Tuesday; salaries are paid on Friday each week

In comparing a perpetual inventory system with a periodic inventory system, which of the following statements is not correct? a) Most large companies use perpetual inventory systems b) A periodic system does not include an inventory subsidiary ledger c) The perpetual method is easier to apply in a manual accounting system d) Regardless of the system in use, most businesses take a physical inventory at least once a year

c) The perpetual method is easier to apply in a manual accounting system

Which of the following is not a generally accepted accounting principle relating to the valuation of assets? a) The cost principle - in general, assets are valued at cost, rather than at estimated market values b) The objectivity principle - accountants prefer to use objective, rather than subjective, information as the basis for accounting information c) The safety principle - assets are valued at no more than the value for which they are insured d) The going-concern assumption - one reason for valuing assets such as buildings and equipment at cost rather than at their current market values is the assumption that the business will use these assets rather than sell them

c) The safety principle - assets are valued at no more than the value for which they are insured

Which of the following is not a basic function of an accounting system? a) To interpret and record the effects of business transactions b) To classify the effects of similar transactions in a manner that permits determination of various totals and subtotals useful to management c) To ensure that a business organization will be managed profitably d) To summarize and communicate information to decision makers

c) To ensure that a business organization will be managed profitably

Publicly-owned companies are: a) Managed and owned by the government b) Must be not-for-profit companies c) Usually listed on a stock exchange d) Not permitted to be owned by individuals

c) Usually listed on a stock exchange

Which of the following would not be considered an adjusting entry? a) Supplies expense (debit) 400 Supplies (credit) 400 b) Depreciation expense (debit) 400 Accumulated depreciation credit 400 c) Wage expense (debit) 400 cash (credit) 400 d) insurance expense (debit) 400 prepaid insurance (credit) 400

c) Wage expense (debit) 400 cash (credit) 400

Accumulated Depreciation is: a) an asset account b) a revenue account c) a contra-asset account d) an expense account

c) a contra-asset account

A journal entry to recognize an expense could include each of the following, except: a) a debit to an expense account b) a credit to accounts payable c) a debit to a liability account d) a credit to cash

c) a debit to a liability account

Land is purchased by making a cash down payment of $40,000 and signing a note payable for the balance of $130,000. The journal entry to record this transaction in the accounting records of the purchaser includes: a) a credit to land for $40,000 b) a debit to cash for $40,000 c) a debit to land for $170,000 d) a debit to not payable for $130,000

c) a debit to land for $170,000 40,000 + 130,000 = 170,000

Using different account methods on financial statements and tax returns will create: a) no effect on the balance sheet, only the income statement b) no effect on the balance sheet or the income statement c) a deferred tax liability d) a illegal situation

c) a deferred tax liability

The bookkeeper prepared a check for $68 but accidentally recorded it as $86. When preparing the bank reconciliation, this should be corrected by: a) adding $18 to the bank balance b) subtracting $18 from the bank balance c) adding $18 to the book balance d) subtracting $18 form the book balance

c) adding $18 to the book balance

The matching principle is best demonstrated by: a) using debits to record decreases in owners' equity and credits to record increases b) the equation Assets=Liabilities + Owners' Equity c) allocating the cost of an asset to expense over the periods during which benefits are derived from the asset d) Offsetting the cash receipts of the period with the cash payments made during the period

c) allocating the cost of an asset to expense over the periods during which benefits are derived from the asset

If during the current year, liabilities of Hayden Travel decreased by $50,000 and owners' equity increased by $75,000, then: a) assets at the end of the year total $125,000 b) assets at the end of the year total $25,000 c) assets increased during the year by $25,000 d) assets decreased during the year by $125,000

c) assets increased during the year by $25,000

If a company purchases equipment on account: a) assets will increase and owners' equity will also increase b) assets will increase and owners' equity will decrease c) assets will increase and owners' equity will remain unchanged d) assets will increase and liabilities will decrease

c) assets will increase and owners' equity will remain unchanged

Which statement is true about an adjusted trial balance? a) it is prepared before adjusting entries b) revenue accounts and expense accounts should not appear on the adjusted trial balance c) balance sheet items are presented before income statement items d) accumulated depreciation should equal depreciation expense

c) balance sheet items are presented before income statement items

In a periodic inventory system, the cost of goods sold is determined as follows: a) year-end inventory, plus purchases during the year, less the inventory at the beginning of the year b) net sales, less the balance in the gross profit account c) cost of goods available for sale during the year, less the ending inventory d) a physical count is made of all items sold throughout the year, and a cost flow assumption is applied at year end

c) cost of goods available for sale during the year, less the ending inventory

Bruno's Pizza Restaurant makes full payment of $8,300 on an account payable to Stella's Cheese Co. Stella's would record this transaction with a: a) debit to accounts payable for $8,300 b) credit to cash for $8,300 c) credit to accounts receivable for $8,300 d) credit to accounts payable for $8,300

c) credit to accounts receivable for $8,300 (debit cash and credit accounts receivable)

Blue Wholesale Shirt Co. sold shirts to Pink Retail Shoppe. The owner of Pink Retail said she would pay Blue at a later date, which Blue Wholesale agreed to. Blue Wholesale Shirt Co. is considered to be a: a) borrower b) liability c) creditor d) debtor

c) creditor

The United Shipping Co. borrowed $25,000 at 12% interest on March 1, 2018. The note is to be repaid, with interest, in six months. If United Shipping makes monthly adjusting entries, which of the following is included as part of the March 31 adjusting entry? a) debit interest receivable $250 b) credit interest payable $2,500 c) debit interest expense $250 d) debit interest payable $250

c) debit interest expense $250 25,000 x .12 = 3,000 per year interest 3,000 / 12 = 250 per month interest

Amortizing a premium on bonds payable: a) increases interest expense b) increases periodic cash payments c) decreases interest expense d) decreases periodic cash payments to bondholds

c) decreases interest expense

Deferred taxes are classified as: a) only a liability b) only an asset c) either an asset or liability, depending upon the situation d) a non-operating expense

c) either an asset or liability, depending upon the situation

The Social Security tax paid by an employer is: a) greater than the amount paid by the employee b) less than the amount paid by the employee c) equal to the amount paid by the employee d) The employer does not pay Social Security tax, only the employee pays the tax

c) equal to the amount paid by the employee

Bonds, with the same face value, issued at a premium will: a) have a greater maturity value than a bond issued at a discount b) have a lesser maturity value than a bond issued at a discount c) have the same maturity value as a bond issued at a discount d) have a different maturity value than a bond issued at a discount, depending upon the interest rate and maturity date

c) have the same maturity value as a bond issued at a discount

Which of the following statements concerning materiality is true? a) generally accepted accounting principles are violated if estimates are used in end-of-period adjustments b) each year the Financial Accounting Standards Board (FASB) publishes the dollar amount considered "material" for each industry c) immaterial items should be handled in the most expedient manner, even if resulting financial statements are not completely precise d) accountants should not waste time and money in recording transactions involving small dollar amounts

c) immaterial items should be handled in the most expedient manner, even if resulting financial statements are not completely precise

During the current year, the assets of Wheatley's increased by $362,000, and the liabilities increased by $260,000. The owners' equity in the business must have: a) decreased by $102,000 b) decreased by $622,000 c) increased by $102,000 d) increased by $622,000

c) increased by $102,000 assets = liabilities + equity +362,000 = +260,000 + x x = +102,000

The accounting cycle begins with: a) posting of journal entries to ledger accounts b) formation of a business c) initial recording of business transactions d) preparation of a trial balance

c) initial recording of business transactions

Recently, Bon Appetite Cafe contracted and paid for a relatively expensive advertisement in Haute Cuisine magazine. Despite the fact that the ad will appear in Haute Cuisine three months after the end of Bon Appetite Cafe's current fiscal year, the Cafe's accountant recorded the disbursement to advertising expense. If no adjusting entry is made, how will this year's financial statements of Bon Appetite Cafe be affected? a) net income will be overstated and total assets will be understated b) net income will be overstated and total assets will be overstated c) net income will be understated and total assets will be understated d) net income will be understated and total assets will be overstated

c) net income will be understated and total assets will be understated

When the account Allowance for Doubtful Accounts is used, writing off of an uncollectible accounts receivable will: a) reduce income b) reduce an expense c) not change income or total assets d) increase total assets

c) not change income or total assets

Inventory shrinkage is not caused by: a) shoplifting b) breakage c) price reductions by competitors d) spoilage

c) price reductions by competitors

The basic purpose of audited financial statements is to: a) provide the reporting company with assurance that all assets are protected from theft or embezzlement b) prepare financial statements for companies that do not have their own accounting departments c) provide users of the financial statements with assurance that the statements are verifiable and are presented in conformity with generally accepted accounting principles d) provide both the reporting company and the users of the statements with a written guarantee that the statements are error-free

c) provide users of the financial statements with assurance that the statements are verifiable and are presented in conformity with generally accepted accounting principles

The basic purpose of bookkeeping is to: a) provide financial information about an economic entity b) develop the types of information best-suited to specific managerial decisions c) record the financial transactions of an economic entity d) determine the taxable income of individuals and business entities

c) record the financial transactions of an economic entity

Jayson Products uses a perpetual inventory system. At year-end, the Inventory account had a balance of $280,000, but a complete year-end physical inventory indicated goods on hand costing only $273,000. Jayson should: a) reduce its cost of goods sold by $7,000 b) record a $7,000 current liability c) reduce the balance in its Inventory control account and inventory subsidiary ledger by $7,000 d) reduce the balance in the inventory control account and record a current liability, both in the amount of $7,000

c) reduce the balance in its Inventory control account and inventory subsidiary ledger by $7,000 280,000 - 273,000 = 7,000

The price of the goods sold or services rendered during a given accounting period is called: a) net income b) profit c) revenue d) equity

c) revenue

Which of the following transactions would cause a change in owners' equity? a) repayment of the principal on a bank loan b) purchase of a delivery truck on credit c) sale of land on credit for a price above cost d) borrowing money from a bank

c) sale of land on credit for a price above cost

The best definition of an accounting system is: a) journals, ledgers and worksheets b) manual or computer-based records used in developing information about an entity for use by managers and also persons outside the organization c) the personnel, procedures, technology and records used by an entity to develop accounting information and communicate this information to decision makers c) the concepts, principles and standards specifying the information which should be included in financial statements, and how that information should be presented

c) the personnel, procedures, technology and records used by an entity to develop accounting information and communicate this information to decision makers

The pension expense of the current period is equal to: a) amounts paid to retired workers during the current period b) the estimated future pension benefits earned by totays workers during the current period c) the present value of the estimated future pension benefits earned by today's workers during the current period d) cash payments made during the period to the trustee of the pension plan

c) the present value of the estimated future pension benefits earned by today's workers during the current period

Double-entry accounting is characterized by which of the following? a) every transaction affects both an asset account and either a liability account or an owners' equity account b) the number of general ledger accounts with debit balances is equal to the number with credit balances c) the total dollar amount of debit entries posted to the general ledger is equal to the dollar amount of the credit entries d) the number of debit entries posted to the general ledger equals the number of credit entries

c) the total dollar amount of debit entries posted to the general ledger is equal to the dollar amount of the credit entries

A trial balance that is out of balance indicates that: a) the number of ledger accounts with debit balances is not equal to the number of accounts with credit balances b) a debit has been posted to the wrong account c) there is not an equality of debit and credit amounts in the ledger d) a journal entry has been completely omitted from the posting process

c) there is not an equality of debit and credit amounts in the ledger

Assets are considered current assets if they are cash or will usually be converted into cash: a) within a month or less b) within 3 months c) within a year or less d) within 6 months or less

c) within a year or less

Which of the following should not be classified as inventory in the balance sheet of a large automobile dealership? a) Pickup trucks offered for sale b) Used cars taken in trade and offered for sale on the company's used-car lot c) Spark plugs, oil filters, and other parts that are intended for use by the service department in repairing and servicing customers'c ars d) "Company cars" provided to specific company executives for their personal use

d) "Company cars" provided to specific company executives for their personal use

Stone Corporation has 27 employees and incurs total wages and salaries expense of $1,188,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: Workers Comp. Insurance 5% Social Sec. and Medicare (combined employee/employer) 15.3% Pension and other postretirement costs expense (paid by employer) 5% Personal income taxes withheld 10% Unemployment taxes expense 2% In addition, Stone provides group health insurance for its entire workforce. The cost of this insurance is $420 per month per employee. Employee's annual "take-home-pay' totals approximately: a) $1,069,200 b) $1,051,920 c) $ 699,678 d) $ 978,318

d) $ 978,318 payroll: 1,188,000 employee portion of Soc. Sec. 15.3/2 = 7.65 1,188,000 x .0765 = 90,882 personal income tax withheld: 1,188,000 x .10 = 118,800 1,188,000 - 90,882 - 118,800 = 978,318

VanRoy supplies reports net sales of $1,750,000, net income of $175,000 and gross profit of $300,000. The company's cost of goods sold is: a) $1,400,000 b) $ 475,000 c) $1,575,000 d) $1,450,000

d) $1,450,000 $,750,000 - 300,000 = $1,450,000

At the beginning of 2018, Wilson Stores has an inventory of $300,000. Because sales growth was strong during 2018, the owner wants to increase inventory on hand to $450,000 at December 31, 2018. If net sales for 2018 are expected to be $2,600,000, and gross profit rate is expected to be 35%, compute the cost of the merchandise the owner should expect to purchase during 2018. a) $750,000 b) $1,240,000 c) $1,690,000 d) $1,840,000

d) $1,840,000 cost ratio: (1-.35 gross profit rate) = .65 2,600,000 sales x .65 = 1,690,000 cost of goods to meet 2,600,000 sales beginning inventory: 300,000 + x - 1,690,000 = 450,000 x=1,840,000

Gourmet Shop purchased cash registers on April 1 for $12,000. If this asset has an estimated useful life of four years, what is the book value of the cash registers on May 31? a) $250 b) $3,000 c) $9,000 d) $11,500

d) $11,500 $12,000 / 48 = $250; $12,500 - (2 x 250) = $11,500

Clark Imports sold a depreciable plant asset for cash of $35,000. The accumulated depreciation amounted to $70,000, and a loss of $5,000 was recognized on the sale. Under these circumstances, the original cost of the asset must have been: a) $65,000 b) $75,000 c) $100,000 d) $110,000

d) $110,000 (x-70,000) = 5,000 + 35,000 x=$110,000

Yale Company purchased equipment having an invoice price of $21,500. The terms of sale were 2/10, n/30, and Yale paid within the discount period. In addition, Yale paid a $320 delivery charge, $350 installation charge, and $1,183 sales tax. The amount recorded as the cost of this equipment is: a) $21,070 b) $21,500 c) $21,740 d) $22,923

d) $22,923 (21,500 x .98) + 320 + 350 +1183 = $22,923

Beech Soda, Inc. uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Beginning inventory (Jan 1) quantity 18, unit cost $9, total cost $162 Purchase (Jan 11) quantity 10,unit cost $15, total cost $150 Purchase (jan 20) quantity 21, unit cost $17, total cost $357 Total quantity: 49 Total costs: $669 On January 14, Beech Soda, Inc. sold 23 units of this product. The other 26 units remained in inventory at January 31. Assuming that Beech Soda uses average cost flow assumption, the cost of goods sold to be recorded at January 14 is: a) $289.71 b) $314.02 c) $669 d) $255.30

d) $255.30 (162 + 150)/23 = 255.30

Beech Soda, Inc. uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Beginning inventory (Jan 1) quantity 18, unit cost $9, total cost $162 Purchase (Jan 11) quantity 10,unit cost $15, total cost $150 Purchase (jan 20) quantity 21, unit cost $17, total cost $357 Total quantity: 49 Total costs: $669 On January 14, Beech Soda, Inc. sold 23 units of this product. The other 26 units remained in inventory at January 31. Assuming that Beech Soda uses LIFO cost flow assumption, the cost of goods sold to be recorded at January 14 is: a) $669 b) $237 c) $435 d) $267

d) $267 10 x 15 = 150 13 x 9 = 117 150 + 117 = 267

At December 31, 2018 the accounting records of Braun Corporation contain the following items: accounts payable $ 14,500 Land $237,000 capital stock ? building $177,000 retained earnings $157,000 accounts receivable $ 37,000 cash ? equipment $117,000 notes payable $187,000 If cash at December 31, 2018 is $23,000, total owners equity is: a) $157,000 b) $358,500 c) $591,000 d) $389,500

d) $389,500 237,000 + 177,000 +37,000 + 117,000 +23,000 = 591,000 assets liabilities = 14,500 + 187,000 = 201,500 591,000 = 201,500 + x x = 389,500 owners equity I dont know why retained earnings is not added on this one. But correct answer according to the test was $389,500

Beech Soda, Inc. uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Beginning inventory (Jan 1) quantity 18, unit cost $9, total cost $162 Purchase (Jan 11) quantity 10,unit cost $15, total cost $150 Purchase (jan 20) quantity 21, unit cost $17, total cost $357 Total quantity: 49 Total costs: $669 On January 14, Beech Soda, Inc. sold 23 units of this product. The other 26 units remained in inventory at January 31. Assuming that Beech Soda uses LIFO cost flow assumption, the 26 units of this product in inventory at January 31 have a total cost of: a) $422 b) $413 c) $432 d) $402

d) $402 21 x 17 = 357 5 x 9 = 45

At December 31, 2018 the accounting records of Braun Corporation contain the following items: accounts payable $ 14,500 Land $237,000 capital stock ? building $177,000 retained earnings $157,000 accounts receivable $ 37,000 cash ? equipment $117,000 notes payable $187,000 If cash at December 31, 2018 is $63,000, total assets is: a) $594,000 b) $788,000 c) $645,500 d) $631,000

d) $631,000 237,000 + 177,000 +37,000 + 117,000 +63,000 = 631,000 assets

Swordfish co. earned $69,000 in 2018 and expects to receive 2/3 of the amount in 2019 and the remainder in 2020. How much revenue should Swordfish Co report in 2018? a) $0 b) $23,000 c) $46,000 d) $69,000

d) $69,000 revenue is recorded in the month it is earned

Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance at March 31 before adjustments is as follows: Cash (debit) $ 10,980 Accounts receivable (debit) $9,680 Supplies (debit) $1,360 Prepaid Insurnance (debit) $3,360 Equipment (debit) $29,400 Accumulated Depreciation: equipment (credit) $11,760 Unearned service revenue (credit) $6,800 Capital stock (credit) $5,500 Retained earnings (credit) $23,700 Dividends (debit) $1,620 Service Revenue Eared (credit) $18,790 Salaries Expense (debit) $8,100 Utilities expense (debit) $ 450 Rent expense (debit) $1,600 total debits $66,550 and total credits $ 66,550 Employees are owed $810 for services since the last payday in March, to be paid the first week in April. The amount to be reported in the March income statement for salaries expense is: a) $8,100 b) $ 810 c) $7,290 d) $8,910

d) $8,910 Salaries reported $8,100 + salaries expense owned for the month $810 = 8,910

Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance at March 31 before adjustments is as follows: Cash (debit) $ 10,980 Accounts receivable (debit) $9,680 Supplies (debit) $1,360 Prepaid Insurnance (debit) $3,360 Equipment (debit) $29,400 Accumulated Depreciation: equipment (credit) $11,760 Unearned service revenue (credit) $6,800 Capital stock (credit) $5,500 Retained earnings (credit) $23,700 Dividends (debit) $1,620 Service Revenue Eared (credit) $18,790 Salaries Expense (debit) $8,100 Utilities expense (debit) $ 450 Rent expense (debit) $1,600 total debits $66,550 and total credits $ 66,550 At March 31, the amount of supplies on hand is $550. What amount is reported in the March income statement for supplies expense? a) $1,360 b) $0 c) $550 d) $810

d) $810 Supplies purchased (asset account) 1,360 - 550 (supplies on hand) = 810 supply expense

Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance of March 31 before adjustments is as follows: Cash (debit) $ 11,040 accts receivable (debit) 9,740 supplies (debit) 1,420 prepaid insurance (debit) 3,040 equipment (debit) 25,800 accumulated dep. equipment (credit) $10,320 unearned service revenue (credit) 7,100 Capital stock (credit) 5,800 retained earnings (credit) 24,000 dividends (debit) 1,680 service revenue earned (credit) 16,310 salaries expense (debit) 8,400 utilities expense (debit) 510 rent expense (debit) 1,900 debit/credit total $63,530 At March 31, the amount of supplies on hand is $580. What amount is reported in the March income statement of supplies expense? a) $1,420 b) $0 c) $580 d) $840

d) $840 1,420 - 580 = 840

Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance of March 31 before adjustments is as follows: Cash (debit) $ 11,040 accts receivable (debit) 9,740 supplies (debit) 1,420 prepaid insurance (debit) 3,040 equipment (debit) 25,800 accumulated dep. equipment (credit) $10,320 unearned service revenue (credit) 7,100 Capital stock (credit) 5,800 retained earnings (credit) 24,000 dividends (debit) 1,680 service revenue earned (credit) 16,310 salaries expense (debit) 8,400 utilities expense (debit) 510 rent expense (debit) 1,900 debit/credit total $63,530 Employees are owed $870 for services since the last payday in March, to be paid the first week in April. The amount to be reported in the March income statement for salaries expense is: a) $8,400 b) $870 c) $7,530 d) $9,270

d) $9,270 8,400 + 870 = 9,270

The Music House issues a contract to a new recording artist to produce a number of albums over the next five years at $1 million per album. This situation is an example of: a) A contingent liability that should be recorded in the accounting records b) A contingent liability requiring footnote disclosure c) An estimated liability since the number of albums to be produced is not yet determine d) A commitment that, i f material, may be disclosed in a footnote

d) A commitment that, i f material, may be disclosed in a footnote

Which of the following companies would be most likely to use a periodic inventory system? a) IBM b) First Bank of New York c) Sears d) A newspaper stand

d) A newspaper stand

Which of the following is not considered a basic type of adjusting entry? a) An entry to convert a liability to a revenue b) An entry to accrue unpaid expenses c) An entry to convert an asset to an expense d) An entry to convert an asset to a liability

d) An entry to convert an asset to a liability

If the trial balance has a higher debit balance than credit balance, it signifies: a) Assets are more than liabilities b) A profit c) A loss d) An error has been made

d) An error has been made

A revenue transaction may result in all of the following except: a) An increase in assets b) An increase in owners' equity c) A positive cash flow in either the past, present, or future d) An increase in liabilities

d) An increase in liabilities

The balance of an unearned revenue account: a) Appears in the balance sheet as a component of owners' equity b) Appears in the income statement along with other revenue accounts c) Appears in a separate section of the income statement for revenue not yet earned d) Appears in the liability section of the balance sheet

d) Appears in the liability section of the balance sheet

Anthony loaned $2,000 to Cleopatra for one year at 10% interest, all due at maturity. He insisted the terms of the transaction be formalized in a promissory note. In this situation: a) The maturity value of the note is $2,000 b) Anthony is considered the maker of the note and records the note as an asset in his accounting records c) Anthony is considered the maker of the note and records the note as a liability in his accounting records d) Cleopatra is considered the maker of the note and records the note as a liability in her accounting records

d) Cleopatra is considered the maker of the note and records the note as a liability in her accounting records

Kent Company has used the same inventory method for many years. This is an example of which principle? a) Matching b) Realization c) Cost d) Consistency

d) Consistency

In preparing a bank reconciliation, a service charge shown on the bank statement should be: a) Added to the balance per the bank statement b) Deducted from the balance per the bank statement c) Added to the balance per the depositor's records d) Deducted from the balance per the depositor's records

d) Deducted from the balance per the depositor's records

Which of the following accounts will be closed to Income Summary? a) Prepaid Expenses b) Unearned Revenue c) Dividends d) Depreciation Expense

d) Depreciation Expense

The concept of adequate disclosure requires a company to inform financial statement users of each of the following, except: a) The accounting methods in use b) The due dates of major liabilities c) Destruction of a large portion of the company's inventory on January 20, three weeks after the balance sheet date, but prior to issuance of the financial statements d) Income projections for the next five years based upon anticipated market share of a new product; the new product was introduced a few days before the balance sheet date

d) Income projections for the next five years based upon anticipated market share of a new product; the new product was introduced a few days before the balance sheet date

Audits of financial statements are performed by: a) The controller of the reporting company b) The Financial Accounting Standards Board (FASB) c) The management of the reporting company d) Independent certified public accountants (CPAs)

d) Independent certified public accountants (CPAs)

Joe Costello handles cash receipts from customers and also has responsibility for issuing credit memoranda, writing off uncollectible accounts, and maintaining the accounts receivable records. When customers pay their accounts, Costello occasionally issues a credit memorandum and steals the cash received from the customer. This fraud should come to light if an employee other than Costello: a) Reconciles the bank statement to the account records b) Reconciles the accounts receivable subsidiary ledger to the accounts receivable controlling account c) Investigates weekly all accounts written off as uncollectible d) Reconciles credit memoranda for sales returns to returned merchandise accepted by the receiving department

d) Reconciles credit memoranda for sales returns to returned merchandise accepted by the receiving department

The fair value accounting adjustment: a) Affects both the balance sheet and the current period income statement b) Is not made when the current market value of investments in marketable securities is higher than original cost c) May result in either a gain or a loss to be reported in the current period income statement d) Represents a departure from the cost principle

d) Represents a departure from the cost principle

The statement of retained earnings is based upon which of the following relationships? a) Retained Earnings - Net Income - Dividends b) Retained Earnings - Net Income + Dividends c) Retained Earnigs + Net Income + Dividends d) Retained Earnings + Net Income - Dividends

d) Retained Earnings + Net Income - Dividends

Which of the following statements about a periodic inventory system is not correct? a) These systems are used primarily by small businesses with manual accounting systems b) The system does not include an up-to-date inventory ledger c) The balance in the inventory account remains unchanged until the end of the period d) The Cost of Goods Sold account is updated as sales transactions occur

d) The Cost of Goods Sold account is updated as sales transactions occur

Goods in transit between the buyer and the seller belong to: a) The seller b) The buyer c) The freight company d) The answer depends upon whether the goods were shipped F.O.B. shipping point or F.O.B. destination

d) The answer depends upon whether the goods were shipped F.O.B. shipping point or F.O.B. destination

Harris Corporation's inventory of a particular product includes 200 units purchased at a per-unit cost of $50, and another 100 units purchased at a unit cost of $60. If Harris sells 10 units of this product, the cost of goods sold will be: a) $500 b) $550 c) $660 d) The answer will depend upon the inventory cost flow assumption in use

d) The answer will depend upon the inventory cost flow assumption in use

Effective internal control over accounts receivable ensures all of the following except: a) All shipments of goods during the period are recorded b) The sale transaction is recorded for the correct dollar amount c) That cash collections from customers are promptly depositd d) The availability of adequate cash for conducting business operations

d) The availability of adequate cash for conducting business operations

When comparing the units-of-output method of depreciation with straight-line depreciation: a) The depreciation expense in the first year will always be greater under units-of-output method b) The depreciation expense in the first year will always be less under units-of-output method c) The depreciation expense in the first year will always be the same under both methods d) The depreciation expense in the first year may be greater than,equal to,or less under the units-of-output method

d) The depreciation expense in the first year may be greater than,equal to,or less under the units-of-output method

When a bank reconciliation has been satisfactorily completed, the only related entries to be made in the depositor's records are: a) To correct errors made by the bank in recording the dollar amounts of cash transactions during the period b) To reconcile items that explain the difference between the balance per the books and the balance per the bank statement c) To record outstanding checks and bank service charges d) To record items that explain the difference between the balance per the accounting records and the adjusted cash balance

d) To record items that explain the difference between the balance per the accounting records and the adjusted cash balance

Accounts receivable are classified as current assets: a) Only if convertible into cash within 60 days or sooner b) Only if the allowance method is used to estimate the uncollectible accounts c) Only if convertible into cash within one year d) Whenever the accounts receivable arise from "normal" sales of merchandise to customers, regardless of the credit terms

d) Whenever the accounts receivable arise from "normal" sales of merchandise to customers, regardless of the credit terms

In order for a company's accounting records to be up-to-date and accurate after a bank reconciliation has been completed, journal entries should be made for any service charges by the bank and for deposits in transit. true/false

false

In order to maximize sales and profits, effective internal control over receivables ensures that credit is extended to all customers who request credit true/false

false

Increases in owners' equity are recorded by credits; increases in assets and in liabilities are recorded by debits true/false

false

Liabilities are usually listed in order of magnitude, from smallest dollar amount to largest dollar amount true/false

false

Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford true/false

false

Management accounting refers to the preparation and use of accounting information designed to meet the needs of decision makers outside the business organization true/false

false

Managerial accounting information is designed primarily to assist investors and creditors in deciding how to allocate scarce resources true/false

false

Materiality is determined by the Financial Accounting Standards Board true/false

false

One of the major steps in achieving internal control over accounts receivable is that the Billing Department reviews the sales order, the customer's credit file, and decides whether and how much credit should be extended true/false

false

Publicly owned companies must file their audited financial statements and detailed supporting schedules with the Financial Accounting Standards Board true/false

false

Real accounts can only be closed at the end of the year with a single compound entry true/false

false

Recording depreciation expense is an example of an adjusting entry to accrue unpaid expenses resulting from expenses being incurred before cash is paid true/false

false

Return on investment is the same as return of investment true/false

false

Since the Accumulated Depreciation account has a credit balance, it is reported on the liability side of the balance sheet along with other accounts that have a credit balance true/false

false

The Allowance for Doubtful Accounts should be listed on the balance sheet as a current liability true/false

false

The American Institute of Certified Public Accountants has the legal authority over publicly held corporations to enforce compliance with generally accepted accounting principles true/false

false

The CPA examination is administered by the General Accounting Office of the U.S. Government true/false

false

The Cash account is usually affected by adjusting entries true/false

false

The Code of Ethics of the AICPA calls for a commitment to ethical behavior but not at the sacrifice of personal advantage true/false

false

The Financial Accounting Standards Board (fASB) maintains and periodically updates a well-defined list of disclosure items that companies must include in their annual reports. true/false

false

The IRS tax return is one of the primary financial statements true/false

false

The Public Company Accounting Oversight Board is responsible for creating and promoting International Financial Reporting Standards true/false

false

The accrual basis of accounting recognizes expenses only when they are paid true/false

false

The adjusted trial balance may be used in place of the income statement true/false

false

The adjusting entry to record estimated income taxes in a profitable period consists of a debit to Income Tax Payable and a credit to Income Tax Expense true/false

false

The amount of FICA tax and Medicare tax withheld from an employee is used to pay the employer's percentage of the tax and is mailed to the government quarterly. True/False

false

The annual financial statements of large corporations such as Microsoft or PepsiCo need not be audited by independent certified public accounts, since these firms maintain large accounting departments as part of their organizations true/false

false

The balance in the Retained Earnings account that appears on the adjusted trial balance is the same as the balance of the Retained Earnings account that is reported on the balance sheet true/false

false

The balance shown on a bank statement is always less than the month-end balance of a company's cash account in the general ledger. True/false

false

The collection of an account receivable will cause total assets to decrease true/false

false

The concept of applying the accounting treatment that results in the lowest, most conservative, estimate of net income for the period is called the matching principle true/false

false

The content of management accounting reports needs to be presented in conformity with generally accepted account principles true/false

false

The current ratio equals current assets plus current liabilities true/false

false

The current ratio is a measure of short-term debt paying ability true/false

false

The direct write-off method is more conservative than the allowance method for valuation of receivables true/false

false

The failure to record an adjusting entry for depreciation would cause assets to be overstated and net income to be understated true/false

false

The first step in a bank reconciliation is to update the depositor's accounting records for any deposits in transit. True/false

false

The income statement, statement of retained earnings, and the balance can all be prepared directly from the Management's Discussion and Anaylsis true/false

false

The income summary account appears on the statement of retained earnings true/false

false

The major outgrowth from business failures and allegations of fraudulent financial reporting during the 1990s was the passage of the Securities and Exchange Act true/false

false

The maker of a note is the party to whom payment is to be made true/false

false

The net income percentage can be measured by dividing net income by total assets true/false

false

The payment of a liability causes an increase in owners' equity true/false

false

The purchase of an asset, such as office equipment, for cash will cause owners' equity to decrease true/false

false

The purpose of accrual accounting is to measure the amounts of cash received and paid during the period true/false

false

The realization principle underlies the account practices of depreciating plant assets and amortizing the cost of unexpired insurance policies true/false

false

The return on equity ratio equals net income divided by common stock true/false

false

The sale of additional shares of capital stock will cause retained earnings to increase true/false

false

The statement of cash flows provides a link between two balance sheets by sowing how net income (or loss) has changed owners' equity from one balance sheet date to the next true/false

false

The statement of financial position and the income statement are one and the same true/false

false

The tailoring of an accounting report to meet the needs of a specific decision maker is more characteristic of financial accounting reports than of management account reports true/false

false

Today, the most authoritative source of generally accepted accounting principles is the American Accounting Association true/false

false

Total assets plus total liabilities must equal total owners' equity true/false

false

Unearned revenue is a liability and should be reported on the income statement true/false

false

When a business borrows money from a bank, the immediate effect is an increase in total assets and a decrease in liabilities or owners' equity true/false

false

When a company received cash in advance and is obligated to provide a service or a product in the future, the entry would be a debit to a revenue account and a credit to a liability account true/false

false

When doing a bank reconciliation, an NSF check will reduce the banks balance true/false

false

When interest is collected, it is debited to the Interest Revenue account and credited to the Notes Receivable account true/false

false

When making a general journal entry, there can only be one debit and one credit true/false

false

When recording a journal entry, asset accounts are shown first, followed by liabilities, and finally owners' equity accounts true/false

false

Working capital equals current assets divided by current liabilities true/false

false

Obligations (amounts owed) are reported on the balance sheet and are referred to as __________.

liabillites

What is Total Assets?

refers to the total amount of assets owned by a person or entity. Typical categories in which these assets may be found include: Cash Marketable securities Accounts receivable Prepaid expenses Inventory Fixed assets Intangible assets Goodwill Other assets

statement of owner equity

reports how equity changes over the reporting period from net income (or loss) and from any owner investments or withdrawals over time period

Federal income tax withholding

the amount that an employer must withhold from an employee's pay for income tax purposes.

General Principles

the basic assumptions, concepts, and guidelines for preparing financial statements.

Ethics

the beliefs that distinguish right from wrong.

Data entry (recording)

the committing of a business transaction and the events surrounding such into writing.

after adjusting entries are posted, the supplies account balance will be equal to....

the cost of the supplies on hand at the end of the fiscal period

Net loss

the difference between gross profit and expenses when expenses are larger.

What is the Account Balance?

the difference between the increases and decreases in an account

Account balance

the difference between the total debits and the total credits in an account.

Transaction analysis

the effect of business activities on the accounting elements.

Principal

the face value of a promissory note upon which interest is computed.

Business papers (source documents)

the first record of a business transaction, such as check stubs, receipts, sales invoices, purchase invoices, cash register tapes, etc.

Overdraft

the issuance of a check without sufficient funds in the account when it is presented for payment.

Depreciation

the loss in value of a fixed asset due to wear and tear and the passage of time; or, a method of matching the cost of a fixed asset against the revenues that the fixed asset will help produce during its useful life.

A business entity is regarded as separate from the personal activities of its owners whether it is a sole proprietorship, a partnership, or a corporation true/false

true

All liability accounts normally have a credit balance true/false

true

Articulation between the financial statements means that they relate closely to each other on the basis of the same underlying transaction information true/false

true

Avalon Company paid $4,400 cash for an insurance policy providing three years protection against fire loss. This transaction could properly be recorded by a $4,400 debit to unexpired insurance and a $4,400 credit to cash true/false

true

Career opportunities in accounting exist in public accounting, management accounting, governmental accounting, and accounting education true/false

true

Closing entries do not affect the cash account true/false

true

Decreases to owners' equity accounts are recorded using debits true/false

true

Dividend revenue and interest revenue are reported in the income statement as a component of a company's net income. true/false

true

Effective internal control over receivables is designed to ensure that customers' payments are promptly deposited true/false

true

Every adjusting entry involves the recognition of either revenue or an expense true/false

true

Every transaction that affects an income statement account also affects a balance sheet account true/false

true

External users of accounting information have a financial interest in an entity but are not involved with the day-to-day operations of the enterprise true/false

true

Factoring allows a business to obtain immediate cash instead of waiting to collect the account receivable true/false

true

Financial accounting standards issued by the FASB are considered generally accepted accounting principles true/false

true

If the maker of a not defaults, an entry is made to debit Accounts Receivable and credit Notes Receivable true/false

true

Immaterial items may be accounted for in the most convenient manner, without regard to other theoretical concepts true/false

true

In a business organized as a corporation, it is not necessary to list the equity of each stockholder on the balance sheet true/false

true

In its simplest form an account has only three elements; a title, a left side (called debit) and a right side (called credit) true/false

true

In the bank reconciliation, every adjustment to the balance per depositors records requires a journal entry true/false

true

Industries with relatively high accounts receivable turnover rates include restaurants and hotels true/false

true

Interim financial statements usually report on a period of time less than one year true/false

true

Internal control will aid in achieving accurate accounting for cash transactions. True/false

true

Investors are individuals and other enterprises that have provided equity to the reporting enterprise true/false

true

It is not unusual for an entity to report a significant increase in cash from operating activities, but a decrease in the total amount of cash true/false

true

Ledger accounts are updated through a process called posting true/false

true

Management accounting information is oriented toward the future while financial accounting information is historical in nature true/false

true

One of the purposes of adjusting entries is to convert assets to expenses true/false

true

One purpose of generally accepted accounting principles is to make accounting information prepared by different companies more comparable true/false

true

Prepaid expenses are assets that should appear on the balance sheet true/false

true

Public accounting is the segment of the profession where professionals offer audit, tax, and consulting services to clients true/false

true

Return on equity is a commonly used measure of a company's profitability true/false

true

Revenues increase owners' equity and are, therefore, recorded by crediting the revenues account true/false

true

Service charges are an example of a transaction that appears in the bank statement but which may not yet have been recorded by the company. True/false

true

T0 "write-off" an account receivable is to reduce the balance of customer's account to zero true/false

true

The Allowance for Doubtful Accounts is a contra-asset account and appears on the balance sheet true/false

true

The Code of Ethics of the AICPA calls for members in public practice to be independent in fact and appearance when providing auditing services true/false

true

The Dividends account is closed directly to retained earnings at year-end true/false

true

The accounting equation may be stated as "assets minus liabilities equals owners' equity." true/false

true

The adjusted trial balance contains income statment accounts and balance sheet accounts, while the after-closing trial balance will only have balance sheet accounts true/false

true

The balance sheet shows assets, liabilities, and equity, as an extension of the accounting equation true/false

true

The credit side of an account is the right side, while the debit side is the left side true/false

true

The entity principle states that the affairs of the owners are not part of the financial operations of a business entity and should be separated true/false

true

The going concern principle assumes that the business will continue indefinitely true/false

true

The higher a company's accounts receivable turnover rate, the more liquid the company's receivables true/false

true

The income statement approach used to estimate uncollectible receivables uses a percentage of net sales without considering the current balance in the Allowance account. true/false

true

The left-hand side of an account is used for recording debits and the right-hand side for recording credits true/false

true

The lower the accounts receivable turnover rate, the longer a company must wait to collect from its credit customers true/false

true

The matching principle refers to the relationship between revenues and expenses true/false

true

The owner of a sole proprietorship is personally liable for the debts of the business, whereas the stockholders of a corporation are not personally liable for the debts of the business true/false

true

The period of time over which the cost of an asset is allocated to depreciation expense is called its useful life true/false

true

The practice of showing assets on the balance sheet at their cost, rather than at their current market value is explained, in part, by the fact that cost is supported by objective evidence that can be verified by independent experts true/false

true

The purpose of the after-closing trial balance is to give assurance that the accounts are in balance and ready for the new accounting period true/false

true

The report form o f the balance sheet lists liabilities and owners' equity below assets true/false

true

Total assets must always equal total liabilities plus total owners' equity true/false

true

Unpaid expenses may be included as an expense on the income statement true/false

true

Wages are an expense to the employer when earned, rather than when paid true/false

true

When a company uses the double-entry method, the total dollar amount of debits recorded must equal the total dollar amount of credits recorded, but the number of debit and credit entries may differ true/false

true

When an Allowance for Doubtful Accounts is used, accounts receivable are valued in the balance sheet at their estimated net realizable value true/false

true

Window dressing occurs when management attempts to make a company look financially stronger than it actually is true/false

true

assuring that financial statements contain all information necessary to understand a business financial condition is an application of the accounting concept adequate disclosure

true

If a company purchases equipment by issuing a not payable, its total assets will not change true/false

false

If a company purchases equipment with cash, its total assets will increase true/false

false

Payments of pensions and other benefits to retired workers are recognized as expense in the period payment is made. True/false

False

Physical deterioration refers to the process of an asset becoming outdated as a result of the availability of improved, more efficient assets. True/False

False

Sarbanes-Oxley Act

A landmark piece of securities law, designed to improve the effectiveness of corporate financial reporting through enhanced accountability of auditors, audit committees, and management.

Subsidiary Ledger

A ledger containing separate accounts for each of the items making up the balance of a control account in the general ledger. The total of the account balances in a subsidiary ledger are equal to the balance in the general ledger control account.

Purchase Discounts Lost is shown as a reduction of costs of goods sold in the income statement. True/False

False

Restricted cash may be available to meet the normal operating needs of a company. True/False

False

Sales returns and allowances is an expense account, and on the income statement it is added to cost of goods sold True/False

False

Since payment is due within one year, the current portion of long-term debt should be reported separately in the long-term liabilities section of the balance sheet. True/False

False

Deferred Income Taxes

A liability account to pay income taxes that have been postponed to a future year's income tax return. In some cases, this account can also be an asset account representing income taxes to be saved in a future year's income tax return.

Sinking funds make bond issue less attractive to the investor. Ture/false

False

Stockholders typically prepare the financial statements of publicly owned companies true/false

False

Adjusted Trial Balance

A schedule indicating the balances in ledger accounts after end-of-period adjusting entries have been posted. The amounts shown in the adjusted trial balance are carried directly into financial statements. a trial balance taken after adjusting entries have been recorded.

Amortization Table

A schedule that indicates how installment payments are allocated between interest expense and repayments of principal.

Manual Accounting System

An accounting system whereby transactions are recorded by hand.

The retail inventory method requires a company to state inventory on the year-end balance sheet at its retail value. True/False

False

Periodic Inventory System

An alternative to the perpetual inventory system. It eliminates the need for recording the cost of goods sold as sales occur. However, the amounts of inventory and the cost of goods sold are not known until a complete physical inventory is taken at year-end.

Debit

An amount entered on the left side of a ledger account. A debit is used to record an increase in an asset or a decrease in a liability or in owners' equity.

Credit

An amount entered on the right side of a ledger account. A credit is used to record a decrease in an asset or an increase in a liability or in owners' equity.

Bank Reconciliation

An analysis that explains the difference between the balance of cash shown in the bank statement and the balance of cash shown in the depositor's records.

Sum-of-the-years' digits is a decelerated method of depreciation which produces less depreciation expense in the early years of the asset's life and more expense in the later years. True/False

False

Off-Balance Sheet Financing

An arrangement in which the use of resources is financed without the obligation for future payments appearing as a liability in the balance sheet. An operating lease is a common example of off-balance sheet financing.

The future value will always be less than the present value. True/False

False

Going Concern Assumption

An assumption by accountants that a business will operate in the foreseeable future unless specific evidence suggests that this is not a reasonable assumption.

The gross profit method can be used for both interim and year-end financial reporting. True/False

False

If a depreciable asset's market value increases during the year, no depreciation expense should be recorded true/false

false

4 Rules of debits & credits

1. Debit amount received; credit amount given up 2. Debuts on left; credits on the right 3. In each transactions; list debits first (good) & credits last (bad) 4. Total debits = total credits

Assumptions

1. Economic entity 2. Going concern 3. Monetary Unity 4. Periodicity

Stable-Dollar Assumption

An assumption by accountants that the monetary unit used in the preparation of financial statements is stable over time or changes at a sufficiently slow rate that the resulting impact on financial statements does not distort the information.

The journal entry to record depreciation expense consists of a debit to the asset being depreciated and a credit to Accumulated Depreciation. True/False

False

GAAP

"Generally accepted" an authoritative accounting rule-making body has established a principle of reporting in a given area or that over time a given practice has been accepted as appropriated because of its universal applications.

Conceptual Framework for Financial Reporting: Third Level: The "_____ "

"How" implementation

Describe the Impact That Constraints Have On Reporting Accounting Information (The constraints and their impact are as follows. (2)

(2) Industry practices: Follow the general practices in the company's industry, which sometimes requires departure from basic theory.

Explain the Application of the Basic Principles of Accounting (3)

(3) Expense recognition principle: As a general rule, companies recognize expenses when the service or the product actually makes its contribution to revenue (commonly referred to as matching).

Explain the Application of the Basic Principles of Accounting (4)

(4) Full disclosure principle: Companies generally provide information that is of sufficient importance to influence the judgment and decisions of an informed user.

Average accounts receivable

(Beginning accounts receivable + Ending accounts receivable) divided by 2.

Note Average inventory

(Beginning inventory + Ending inventory) divided by 2

Double-Declining Depreciation

(Cost - Accumulated Depreciation) X (2/Life)

Depreciation Expense Equation

(Cost - Residual Value) / Useful lifetime

Earnings per Share Formula

(Net Income (-) Preference Dividends) / Weighted Average of Ordinary Shares Outstanding = Earnings per Share Example: ($350,000 - 50,000) / 100,000 = $ 3 Earnings per Share

Times Interest Earned

(Net Income + Tax Expense + Interest Expense) / Interest Expense

Internal Revenue Service (IRS)

A government organization that handles millions of income tax returns filed by individuals and businesses and performs audit functions to verify the data contained in those returns.

If the account Cash Over and Short has a debit balance, it is reported in the balance sheet as a current asset. True/false

false

equity equation

+owner's capital -owner withdrawals +revenues -expenses

Equity Accounts

+owners capital -owners withdrawal +revenues -expenses (Common Stock, Dividends, Revenues, Expenses)

Decision-Usefulness

1. Company's ability to generate net cash inflows 2. Management's ability to protect and enhances the capital provides' investments. Information that is useful for making decisions This helps investors assess the amounts, timing, and uncertainty of prospective cash inflows from dividends or interest, proceeds form the sales, redemption, or maturity of securities or loans. Investors are interested in assessing?

Qualitative Characteristics: Fundamental Qualities: Faithful representation are...

1. Completeness 2. Neutrality 3. Free from error

Conceptual Framework for Financial Reporting: Constraints

1. Cost 2. Industry practice

Accounting Cycle (10 steps)

1.) Analyze transactions 2.) Journalize 3.) Post 4.) Prepare unadjusted trial balance 5.) Adjust 6.) Prepare adjusted trial balance 7.) Prepare statement 8.) Close 9.) Prepare post-closing trial balance 10.) Reverse

Steps to Recording Closing Entries

1.) Close Credit balance in Revenue accounts to income summary 2.) Close debit balances in expense accounts to income summary. 3.) Close income summary account o retained earnings 4.)Close Dividends to retained earnings.

What two things affect how many accounts a company needs?

1.) Company's size 2.) Diversity of operations

Analyzing Transactions

1.) Identify the transaction and any source documents 2.) Analyze the transactions using the accounting equation 3.)Record the transaction in journal entry form applying double-entry accounting. 4.) Post the entry.

What are the four types of Financial statements?

1.) Income Statement 2.) Statement of retained earnings 3.) Balance Sheet 4.) Statement of Cash Flows

Three steps for preparing the trial balance.

1.) List each account title and its amount in the trial balance. 2.) Compute the total of debit balances and the total of credit balances 3.) Verify total debit balances equal total credit balances.

preparing Finanacia Statements From an adjusted Trial Balance

1.) Prepare income statement using revenue and expense accounts from trial balance. 2.)Prepare statement of retained earnings using retained earnings and dividends from trial balance: and pull net income from step 1. 3.) Prepare balance sheet using asset and liability account from trial balance; and pull updated retained earnings balance from step 2. 4.) Prepare statement of cash flows from changes in cash flows for the period.

Four types of Adjustment entries

1.)Prepaid (Deferred) Expenses 2.)Unearned(deferred) Revenues 3.)Accrued Expenses 4.) Accrued Revenues

Two goals of Post-closing Trial Balances

1.)Total debits equal Total credits for permanent accounts 2.) All Temporary accounts have zero balance.

Convertible Bond

A bond that may be exchanged (at the bondholder's option) for a specified number of shares of the company's capital stock.

Transaction

A business activity that changes assets, liabilities, or owner's equity.

Proprietorship

A business owned by one person.

SEC Securities and Exchange Commission

A governmental organization that has the legal power to establish accounting principles and financial reporting requirements for publicly held companies in the United States.

Financing Activities

A category in the statement of cash flows that reflects the results of debt and equity financing transactions.

Investing Activities

A category in the statement of cash flows that reflects the results of purchases and sales of assets, such as land, buildings, and equipment.

Comparable Store Sales

A comparison of sales figures at established stores with existing "track records." (Also called same-store sales).

Accumulated Depreciation

A contra-asset account shown as a deduction from the related asset account in the balance sheet. Depreciation taken throughout the useful life of an asset is accumulated in this account.

NSF

A customer's check that was deposited but returned because of a lack of funds (Not Sufficient Funds) in the account on which the check was drawn.

Contra-Revenue Account

A debit balance account that is offset against revenue in the income statement. Examples include Sales Discounts and Sales Returns and Allowances.

Loss

A decrease in owners' equity resulting from any transaction other than an expense or a distribution to the owners. The most common example is the sale of an asset at a price below book value.

Units-of-Output

A depreciation method in which cost (minus residual value) is divided by the estimated units of lifetime output. The unit depreciation cost is multiplied by the actual units of output each year to compute the annual depreciation expense.

Dividends

A distribution of resources by a corporation to its stockholders. The resource most often distributed is cash.

GAO Government Accountability Office

A federal government agency that audits many other agencies of the federal government and other organizations that do business with the federal government and reports its findings to Congress.

Pension Fund

A fund managed by an independent trustee into which an employer-company makes periodic payments. The fund is used to make pension payments to retired employees.

Control Account

A general ledger account that summarizes the content of a specific subsidiary ledger.

Sales Per Square Foot of Selling Space

A measure of efficient use of available space.

Direct Write-Off Method

A method of accounting for uncollectible receivables in which no expense is recognized until individual accounts are determined to be worthless. At that point the account receivable is written off, with an offsetting debit to uncollectible accounts expense. Fails to match revenue and related expenses and is used primarily for tax accounting.

Last-In, First-Out (LIFO) Method,

A method of computing the cost of goods sold by using the prices paid for the most recently acquired units. Ending inventory is valued on the basis of prices paid for the units first acquired.

Retail Method

A method of estimating the cost of goods sold and ending inventory. Similar to the gross profit method, except that the cost ratio is based on the current cost-to-retail price relationships rather than on those of the prior year.

Gross Profit Method

A method of estimating the cost of the ending inventory based on the assumption that the rate of gross profit remains approximately the same from year to year. Used for interim valuations and for estimating losses.

Lower-Of-Cost-Or-Market (LCM) Rule

A method of inventory pricing in which goods are valued at the lower of original cost or replacement cost (market).

Average-Cost Method

A method of valuing all units in inventory at the same average per-unit cost, which is recomputed after every purchase.

Moving Average Method

A method of valuing all units of inventory at the same average per-unit cost, recalculating this cost after each purchase. This method is used in a perpetual inventory system.

Compensating Balance

A minimum average balance that a bank may require a borrower to leave on deposit in a non-interest-bearing account.

Worksheet

A multicolumn schedule showing the relationships among the current account balances (a trial balance), proposed or actual adjusting entries or transactions, and the financial statements that would result if these adjusting entries or transactions were recorded. Used both at the end of the accounting period as an aid to preparing financial statements and for planning purposes.

Negative Cash Flows

A payment of cash that reduces the enterprise's cash balance.

Line of Credit

A prearranged borrowing agreement in which a bank stands ready to advance the borrower without delay any amount up to a specified credit limit. Once used, a line of credit becomes a liability. The unused portion of the line represents the ability to borrow cash without delay.

FASB Financial Accounting Standards Board

A private-sector organization that is responsible for determining generally accepted accounting principles in the United States.

Internal Control

A process designed to provide reasonable assurance that the organization produces reliable financial reports, complies with applicable laws and regulations, and conducts its operations in an efficient and effective manner.

AAA American Accounting Association

A professional accounting organization consisting primarily of accounting educators that is dedicated to improving accounting education, research, and practice.

AICPA American Institute of CPAs

A professional accounting organization of certified public accountants that engages in a variety of professional activities, including establishing auditing standards for private companies, conducting research, and preparing and grading the CPA exam.

IMA Institute of Management Accountants

A professional accounting organization that intends to influence the concepts and ethical practice of management accounting and financial management.

IIA Institute of Internal Auditors

A professional accounting organization that is dedicated to the promotion and development of the practice of internal auditing.

Certified Internal Auditor

A professional designation issued by the Institute of Internal Auditors signifying expertise in internal auditing.

PCAOB Public Company Accounting Oversight Board

A quasi-governmental body charged with oversight of the public accounting profession. The PCAOB sets auditing standards for audits of publicly traded companies.

Accounts Receivable Turnover Rate

A ratio used to measure the liquidity of accounts receivable and the reasonableness of the accounts receivable balance. Computed by dividing net sales by average receivables.

Account

A record summarizing all the information pertaining to a single item in the accounting equation.

Write-Down (of an Asset)

A reduction in the carrying amount of an asset because it has become obsolete or its usefulness has otherwise been impaired. Involves a credit to the appropriate asset account, with an offsetting debit to a loss account.

Sale on Account

A sale for which cash will be received at a later date.

COSO Committee of Sponsoring Organizations of the Treadway Commission

A voluntary private-sector organization dedicated to improving the quality of financial reporting through enterprise risk management, effective internal control, and fraud deterrence.

Measurement/cost principle

Accounting info based on actual cost. -if cash is given for a service, cost is measured by cash paid -if other is exchanged (car traded for truck), cost is measured as cash value of what is given up or received This ensure reliability, verifiability

Full Disclosure Principle

Accounting principle that dictates that in deciding what information to report, companies follow the general practice of providing information that is of sufficient importance to influence the judgment and decisions of an informed user. It recognizes that the nature and amount of information included in financial reports reflects a series of judgmental trade-offs between sufficient detail that makes a difference to users, sufficient condensation to make the information understandable, and the costs and benefits of providing the information. Pg.62

Expense Recognition Principle

Accounting principle that dictates that the recognition of expenses is related to net changes in assets and earning revenues, that is, "let the expense follow the revenues." Pg.61

Economic Entity Assumption

An assumption that economic activity can be identified with a particular unit of accountability, by keeping an enterprise's economic activity separate and distinct from that of its owners and any other business unit. The entity assumption refers to economic, rather than legal, entities. Pg.56

The market value of a convertible bond tends to move inversely to the market value of an equivalent number of shares of common stock. True/False

False

Fixed-Percentage-of-Declining-Balance Depreciation

An accelerated method of depreciation in which the rate is a multiple of the straight-line rate and is applied each year to the undepreciated cost of the asset. The most commonly used rate is double the straight-line rate.

Historical Cost Principle

An accepted accounting principle that companies account for and report most assets and liabilities on the basis of acquisition price. Historical cost is verifiable and neutral and therefore contributes to reliability. Pg.58

Contra-Asset Account

An account with a credit balance that is offset against or deducted from an asset account to produce the proper balance sheet amount for the asset.

Cost Constraint (cost-benefit relationship)

An accounting constraint that requires that the costs of providing financial information be weighed against the benefits that can be derived from using it. The constraint applies to informational requirements established by standard-setting bodies and governmental agencies as well as to companies reporting financial information. Pg.63

Special Journal

An accounting record or device designed for recording large numbers of a particular type of transaction quickly and efficiently. A business may use many different kinds of special journals.

Ledger

An accounting system includes a separate record for each item that appears in the financial statements. Collectively, these records are referred to as a company's ledger. Individually, these records are often referred to as ledger accounts.

Computerized Accounting

An accounting system that records transactions using a computer and accounting software.

Revenue

An increase in owner's equity resulting from the operation of a business.

Gain

An increase in owners' equity resulting from a transaction other than earning revenue or investment by the owners. The most common example is the sale of an asset at a price above book value.

Net income

An increase in owners' equity resulting from profitable operations. Also, the excess of revenue earned over the related expenses for a given period.

Inflation

An increase in the general price level, resulting in a decline in the purchasing power of the monetary unit.

Underwriter

An investment banking firm that handles the sale of a corporation's stocks or bonds to the public.

The principle of consistency prohibits a company from changing an inventory valuation method once one is selected. True/False

False

Fundamental Accounting Equation

Assets = Liabilities + Owner's Equity

Balance Sheet

Assets = Liabilities + Stockholders equity The financial statement showing the financial position of an enterprise by summarizing its assets, liabilities, and owners' equity at a point in time. Also called the statement of financial position.

Withdrawls

Assets taken out of business from owner's personal use.

Collateral

Assets that have been pledged to secure specific liabilities. Creditors with secured claims can foreclose on (seize title to) these assets if the borrower defaults.

Accounting Equation

Assets= Liabilities + Common stock - Dividends + Revenues - Expenses

Cost of Goods Available for Sale

Beginning Inventory + Net Purchase = Total inventory cost

Retained Earning Equation

Beginning Retained Earning + Net Income -Dividends =

Ending retained earnings

Beginning retained earnings + Net income - Dividends =Ending retained earnings

Postretirement Benefits

Benefits that will be paid to retired workers. The present value of the future benefits earned by workers during the current period is an expense of the period. If not fully funded, this expense results in a liability for unfunded postretirement benefits. (For many companies, these liabilities have become very large.)

Junk Bonds

Bonds payable that involve a greater than normal risk of default and, therefore, must pay higher than normal rates of interest in order to be attractive to investors.

Conceptual Framework for Financial Reporting: Second Level: ____ and ____

Bridge between levels 1 and 3

What is Identifying?

Business activities requires that we select relevant transactions and events.

Entries made in the general journal after preparing a bank reconciliation are called closing entries. True/false

False

Financial assets describe not just cash, but all assets that are easily and directly convertible into known amounts of cash, except marketable securities. True/False

False

If a long-term debt is to be paid off in monthly installments over a five-year period, the entire principal should be classified as a long-term debt. True/False

False

If the terms of a sale are F.O.B. shipping point, the sale should not be recorded until the goods are delivered to the buyer. True/False

False

In a periodic inventory system, a complete physical inventory must be taken at year-end in order to compute the amount of purchases made during the year. True/False

False

In a periodic inventory system, the Inventory and Cost of Goods Sold accounts are kept up-to-date throughout the accounting period. True/False

False

In a perpetual inventory system, when merchandise is purchased, it is debited to an account called Purchases. True/False

False

In preparing monthly bills to be sent to individual credit customers, the billing department will use the accounts payable subsidiary ledger, rather than the general ledger. True/False

False

Inventory is a relatively liquid asset and usually appears above Accounts Receivable on the balance sheet. True/False

False

Junk bonds are attractive to investors because they carry a high rate of interest and are convertible into a specified number of shares of capital stock. True/False

False

Just as there are depreciation methods to calculate the decline in market value of assets, there are appreciation methods to record the increase in market value of assets. True/False

False

Net pay equals gross pay minus withholding tax minus worker's compensation. True/False

False

W4 form

Employees' Withholding Allowance Certificate.

Adjusting Entries

Entries made at the end of the accounting period for the purpose of recognizing revenue and expenses that are not properly measured as a result of journalizing transactions as they occur.

Plant Assets

Equipment, Machinery, buildings, and land that is used to produce or sell products and services.

Residual interest in the net assets of the enterprise.

Equity

Current Liabilities

Existing obligations that are expected to be satisfied with a company's current assets within a relatively short period of time. Accounts, Notes, Wages, Interest, and Taxes payable, and unearned Revenue

Revenue Expenditures

Expenditures that will benefit only the current accounting period.

Under the accrual basis of accounting, expenses are reported in the accounting period when the

Expense matches the Revenues or is used up

What decreases Equity?

Expenses, owner's withdrawals, and dividends

Monetary Unit Assumption

Express transactions and events in money units.

A coal mine is regarded as an underground inventory of coal and is recorded as a current asset, Underground Coal Inventory, in the balance sheet. True/False

False

A commitment, such as a contract to pay a baseball player $5,000,000 a year for five years, should be listed as a long-term liability. True/False

False

A liability that is known to exist but the precise dollar amount is not known is called a possible liability. True/False

False

A line of credit creates a liability for the borrower when it is granted by the bank. True/False

False

A loss contingency is recorded in the accounting records when it is probable that a loss has been incurred and the amount of the loss is known. True/False

False

Accounts payable are often subdivided into the categories of trade accounts payable and notes payable. True/False

False

Amortization expense increases net income and reduces cash flows from investing activities True/False

False

An advantage of the average-cost method of accounting for inventory is that the inventory is valued in the balance sheet at current replacement costs. True/False

False

An amortization table for a note payable shows decreasing amounts of interest and an increasing amount of unpaid balance each period. True/False

False

An oil reserve is depreciated because of physical deterioration or obsolescence. True/False

False

Because of the consistency principle, inventory should never be written down below cost True/False

False

Bonds secured by a pledge of specific assets are called debenture bonds. True/False

False

Book value represents the cost of an asset that has already been allocated to expense. True/False

False

Convertible bonds can be exchanged for common stock at the option of the company. True/False

False

Current liabilities are obligations that must be repaid within the shorter of one year or the operating cycle. True/false

False

Dividends paid by a corporation to its stockholders are tax deductible by the corporation, but interest paid on bonds is not tax deductible. True/false

False

During periods of inflation, the FIFO cost flow assumption will yield a higher cost of goods sold than LIFO. True/False

False

The unpaid balance column on an amortization table for a note payable shows the amount the debtor could pay to settle the liability at a particular point in time. True/false

True

Fair Value Hierarchy

ILLUSTRATION 2.4

Conceptual Framework for Financial Reporting

ILLUSTRATION 2.7

The withholding of taxes from an employee's pay is recorded as a liability to the company. True/false

True

What happens to Liabilities and Equity(Common Stock, Revenues) in Double Entry Accounting?

If something is debited it DECREASES If something is credited it INCREASES

What happens to Assets, Dividends, and Expenses in double entry accounting?

If something is debited it INCREASES If something is credited it DECREASES

There is a tax advantage for a company to issue bonds in lieu of stocks. True/False

True

To "capitalize" an expenditure means to charge it to an asset account. True/False

True

Proprietary perspective

Is perspective that financial reporting should be focused only on the needs of the shareholder.

When bonds are issued at a discount, the borrower must pay more at maturity than the amount originally received. True/False

True

An item is not recorded because its effect on income would not change a decision.

Materiality.

Capital allocations

It promotes productivity, encourages inovation, and provide an efficient and liquid market for buying and selling securities and obtaining in granting credit. Unreliable and irrelevant information leads to poor capital allocation , which adversely affects the securities markets.

Closing Entries

Journal entries made at the end of the period for the purpose of closing temporary accounts (revenue, expense, and dividends accounts) and transferring balances to the Retained Earnings account.

Shrinkage Losses

Losses of inventory resulting from theft, spoilage, or breakage.

Window Dressing

Measures taken by management specifically intended to make a business look as strong as possible in its balance sheet, income statement, and statement of cash flows.

Price Earning Ratio (P/E)

Market Price per Share / Earning per Share (EPS)

Revenues - expenses =__________.

Net Income

Return on Equity (ROE)

Net Income / Average Equity

Gross Profit Equation

Net sales revenue minus the cost of goods sold.

Ignores the economic consequences of a standard or rule.

Neutrality.

Revenue Recognition Principle

One of the basic principles of accounting, which dictates that companies recognize revenue when it is realized or realizable and when it is earned-that is, when assets are salable or interchangeable in an active market at readily determinable prices without significant additional cost and when the company substantially accomplishes what it must do to be entitled to the benefits represented by the revenues. Generally, recognition at the time of sale provides a uniform and reasonable test. Pg.63

Interest Coverage Ratio

Operating income divided by interest expense. Indicates the number of times that the company was able to earn the amount of its interest charges.

Fraud Triangle

Opportunity: a person must envision a way to commit fraud with a low risk of getting caught. Rationalization: being able to justify the actions. Financial pressure.

Accounting records

Organized summaries of a business's financial activities.

When bonds are sold by one investor to another, they sell at market price plus accrued interest since the last payment date. True/False

True

Present Value of a Lump Sum

Present Value = Future Value X PV Factor

Present Value of an Annuity

Present Value of Annuity = Payment X PVA Factor

Interest Expense Equation

Principal X Rate X Time

GAAP

Principles that provide the framework for determining what information is to be included in financial statements and how that information is to be prepared and presented.

Conceptual Framework for Financial Reporting: First Level: Objective is

Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in their capacity as capital providers.

Financial Accounting

Providing information about the financial resources, obligations, and activities of an economic entity that is intended for use primarily by external decision makers-investors and creditors.

Management Accounting

Providing information that is intended primarily for use by internal management in decision making required to run the business.

When interest rates rise, the price of a given bond issue will fall. True/false

True

Increases assets through sale of product.

Revenue

Arises from income statement activities that constitute the entity's ongoing major or central operations.

Revenue and Expenses

Accrued Revenues

Revenues earned in a period that are both unrecorded and not yet received. (Debit Asset, Credit Revenue)

What increases Equity?

Revenues, owner's contributions, and issuances of common stock

Special Purpose Entities (SPEs)

SPEs are separate entities established by corporations to accomplish specific purposes. SPEs are often used to borrow money and then transfer it to the sponsoring corporation as an off-balance sheet financing arrangement.

If costs of goods sold is $560,000 and its gross profit rate is 20%, what is the gross profit? a) $140,000 b) $70,000 c) $120.000 d) $112,000

a) $140,000 cost of goods (1-.20) = .80 cost of goods: 560,000/.8 = 700,000 gross profit: 700,000 x .2 = 140,000

If the allowance method is used, the recovery of an account receivable previously written-off results in a gain being recorded on the income statement. true/false

false

Payroll Taxes

Taxes levied on an employer based on the amount of wages and salaries being paid to employees during the period. They include the employer's share of Social Security and Medicare taxes, unemployment taxes, and (though not called a "tax") workers' compensation premiums.

If the note receivable bears interest, the amount debited to Notes Receivable is for the maturity amount of the note true/false

false

If the number of debit entries in an account is greater than the number of credit entries, the account will have a debit balance true/false

false

In general, the longer an account receivable is outstanding, the greater the likelihood it will be collected true/false

false

Accrued Liabilities

The liability to pay an expense that has accrued during the period. Also called accrued expenses.

Describe the Usefulness of a Conceptual Framework

The accounting profession needs a conceptual framework to (1) build on and relate to an established body of concepts and objectives, (2) provide a framework for solving new and emerging practical problems, (3) increase financial statement users' understanding of and confidence in financial reporting, and (4) enhance comparability among companies' financial statements.

Goodwill

The amount of expected future earnings of a business in excess of the earnings normally realized in the industry. Recorded when a business entity is purchased at a price in excess of the fair value of its net identifiable assets less liabilities.

Present Value

The amount of money that an informed investor would pay today for the right to receive the future amount, based on a specific rate of return required by the investor.

Fair Value Accounting

The balance sheet valuation standard applied to investments in marketable securities. Involves adjusting the securities to market value at each balance sheet date. (Represents an exception to the cost principle.)

Net Realizable Value

The balance sheet valuation standard applied to receivables. Equal to the gross amount of accounts and notes receivable, less an estimate of the portion that may prove to be uncollectible.

Define the Basic Elements of Financial Statements

The basic elements of financial statements are (1) assets, (2) liabilities, (3) equity, (4) investments by owners, (5) distributions to owners, (6) comprehensive income, (7) revenues, (8) expenses, (9) gains, and (10) losses. We define these ten elements on.

Owner's Equity

The excess of assets over liabilities. The amount of the owners' investment in the business, plus profits from successful operations that have been retained in the business.

Faithful Representation

The financial information provided matches the actual activities of the company; it is factual.

Relevance:

The financial information you will provide will make a difference in a decision.

Control Environment

The foundation for all the other elements of internal control, setting the overall tone for the organization.

Cash Flow Prospects

The likelihood that an enterprise will be able to provide an investor with both a return on the investor's investment and the return of that investment.

Adequate Disclosure

The generally accepted accounting principle of providing with financial statements any information that users need to interpret those statements properly.

Matching Principle

The generally accepted accounting principle that determines when expenses should be recorded in the accounting records. The revenue earned during an accounting period is matched (offset) with the expenses incurred in generating that revenue.

Realization Principle

The generally accepted accounting principle that determines when revenue should be recorded in the accounting records. Revenue is realized when services are rendered to customers or when goods sold are delivered to customers.

IASB International Accounting Standards Board

The group responsible for creating and promoting International Financial Reporting Standards (IFRS).

Inventory Shrinkage

The loss of merchandise through such causes as shoplifting, breakage, and spoilage.

Understand the Objective of Financial Reporting

The objective of general-purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments, and providing or settling loans and other forms of credit. Information that is decision-useful to capital providers may also be helpful to other users of financial reporting who are not capital providers.

Information and Communication

The organization's process for capturing operational, financial, and compliance-related information necessary to run the business, and communicating that information downstream (from management to employees), upstream (from employees to management), and across the organization.

Identify the Qualitative Characteristics of Accounting Information

The overriding criterion by which accounting choices can be judged is decision-usefulness—that is, providing information that is most useful for decision-making. Relevance and faithful representation are the two fundamental qualities that make information decision-useful. Relevant information makes a difference in a decision by having predictive or confirmatory value and is material. Faithful representation is characterized by completeness, neutrality, and being free from error. Enhancing qualities of useful information are (1) comparability, (2) verifiability, (3) timeliness, and (4) understandability.

Stockholders equity

The owners' equity of an enterprise organized as a corporation.

Useful Life

The period of time that a depreciable asset is expected to be useful to the business. This is the period over which the cost of the asset is allocated to depreciation expense.

Accounting System

The personnel, procedures, technology, and records used by an organization to develop accounting information and communicate that information to decision makers. American Accounting Association (AAA) (p. 21) A professional accounting organization consisting primarily of accounting educators that is dedicated to improving accounting education, research, and practice.

Lessee

The tenant, user, or renter of leased property.

The amounts that a business withholds as taxes from an employee's earnings: a) represent payroll taxes expense to the employer b) are deposited in an interest-bearing account until the employee is terminated c) represent miscellaneous revenue to the employer d) represent current liabilities to the employer

d) represent current liabilities to the employer

Half-Year Convention

The practice of taking six months' depreciation in the year of acquisition and in the year of disposition, rather than computing depreciation for partial periods to the nearest month. This method is widely used and is acceptable for both income tax reporting and financial reports, as long as it is applied to all assets of a particular type acquired during the year.

Taking a Physical Inventory

The procedure of counting all merchandise on hand and determining its cost.

Aging the Accounts Receivable

The process of classifying accounts receivable by age groups such as current, 1 to 30 days past due, 31 to 60 days past due, etc. A step in estimating the uncollectible portion of the accounts receivable.

Equity

The shareholder's residual interest in the assets of a business after deducting liabilities. (Owner's claim)

General Journal

The simplest type of journal, it has only two money columns—one for credits and one for debits. This journal may be used for all types of transactions, which are later posted to the appropriate ledger accounts.

Accounting Period

The span of time covered by an income statement. One year is the accounting period for much financial reporting, but financial statements are also prepared by companies for each quarter of the year and for each month.

Income Summary

The summary account in the ledger to which revenue and expense accounts are closed at the end of the period. The balance (credit balance for a net income, debit balance for a net loss) is transferred to the Retained Earnings account.

Amortization

The systematic write-off to expense of the cost of an intangible asset over the periods of its economic usefulness.

Net Identifiable Assets

The total of all assets minus liabilities.

Conservatism

The traditional accounting practice of resolving uncertainty by choosing the solution that leads to the lower (more conservative) amount of income being recognized in the current accounting period. This concept is designed to avoid overstatement of financial strength or earnings.

Leverage

The use of borrowed money to finance business operations.

Business ethics

The use of ethics in making business decisions

Sales returns and allowances

a temporary owner's equity contra sales account used to record credit given to a customer for shortages or damaged goods.

Cost Principle

The widely used principle of accounting for assets at their original cost to the current owner.

Impairment Loss

The write-down of a long-lived asset for the difference between its carrying amount less its fair value.

Sales discounts

a temporary owner's equity contra sales account used to record discounts given to customers as an incentive for prompt payment.

T-Account

a tool used to understand the effects of one or more transactions that represent a ledger account.

Calendar year

a twelvemonth period beginning January 1st and concluding on December 31st.

Supplies

a type of asset that will be consumed as it is used. (Examples: embalming supplies and office supplies)

The contra-revenue accounts, Sales Returns and Allowances and Sales Discounts, should be closed by crediting these accounts and debiting Income Summary for each account. True/False

True

The erroneous recording of a revenue expenditure as a capital expenditure will cause an overstatement of net income for the period. True/False

True

The most common types of payroll deductions are taxes, insurance premiums, employee savings, and union dues. True/False

True

The quick ratio is a more stringent measure of solvency than the current measure. True/False

True

The term "plant assets" refers to long-lived assets acquired for use in business operations, rather than for resale to customers. True/False

True

The terms "sales discount," "purchase discount,", and "cash discount" all refer to the same discount. True/False

True

The underwriter guarantees the issuing corporation a specific price for the entire bond issue and sells the bonds to the investing public at a higher price. True/False

True

A line of credit is an advance agreement by a bank to lend a company any amount of money up to a specified limit. True/False

True

A pension fund is an independent entity managed by a bank or insurance company. True/false

True

Any business that sells numerous units of identical products may determine its cost of goods sold using a cost flow assumption, rather than the specific identification method. True/False

True

Assume ending inventory is overstated at the end of Year 1 and correctly stated at the end of Year 2. Owners' equity will be correctly stated at the end of Year 2. True/False

True

Bonds payable are a means of dividing a very large, long-term liability amount many creditors, some of whom may participate in the loan only for a short period of time. True/False

True

Cash equivalents are the most liquid of all assets. True/false

True

Charging an expenditure directly to an expense account is based on the assumption that the benefits of that expenditure have been used up in the current period. True/False

True

Loss contingencies stem from past events. True/False

True

Regardless of the number of special journals used, every business needs a general ledger. True/False

True

The account Discount on Bonds Payable actually represents interest expense and will be amortized over the life of the bond. True/False

True

Post-Closing Trial Balance

a work paper prepared after all temporary owner's equity accounts have been closed and all permanent accounts have been balanced and ruled, proving the equality of the debits and credits.

Purchase order

a written order by a buyer for merchandise or other property specified in the purchase requisition.

Promissory note

a written promise made by a person or business to pay a certain sum of money to another person or business at a specified time in the future.

How is a journal started?

Where business transactions are recorded in chronological order recorded by date of occurrence.

Notes receivable

a written promise of a customer to pay the business a sum of money at a future date.

Notes payable

a written promise to pay a creditor a certain amount in the future.

What time period do must company's work with?

a year interval

Units of Production

[(Cost - Residual Value) / Useful Lifetime Units Production] X Actual Usage in the Year

Business Entity Assumption

a business is accounted for separately from other business entities, including its owner.

Sole Proprietorship

a business owned by one person classified as a separate entity for accounting not separate legal entity.

Partnership

a business owned by two or more people called partners which are joint liable for tax and other obligations. Not legally separate from its owners.

Dishonored check

a check not paid by the bank when properly presented.

Cancelled check

a check which has been paid by the bank and returned to the drawer for recordkeeping.

Allowance for bad debts (allowance for doubtful accounts)

a contraasset account utilized to accumulate totals against accounts receivable.

Wage

a form of compensation usually for skilled and unskilled labor, expressed in terms of hours, weeks or pieces completed.

Check stub

a form on which information is recorded by the drawer of a check concerning the check drawn; a source document.

Purchase requisition

a form used to request the responsible person or department to purchase merchandise or other property.

Statement of net worth (statement of owner's equity)

a formal financial statement which summarizes all of the changes in owner's equity during a specified period of time.

Petty cash fund

a fund of currency and coin established for the payment of small amounts of money.

What does a higher ratio with debt ratio mean?

a higher ratio indicates that there is greater probability a company will not be able to pay its debts in the future.

Accounting

a language of business employed to communicate financial information based upon analyzing, recording, classification, summarization, reporting, and interpretation of financial data.

Unadjusted Trial Balance

a list of accounts and balances prepared BEFORE adjustmenst are recorded.

Chart of Accounts

a list of all the account titles and the account numbers assigned to them.

Mortgage payable

a longterm liability; a written promise that pledges real property as security for payment of a debt.

Straight-Line Depreciation

a method in which the depreciable cost basis (original cost basis less salvage value) of an asset is apportioned equally over its estimated useful life expressed in terms of month or years.

Banker's method

a method of computing interest based on the assumption that there are 360 days in a year.

Disbursement

a payment.

Fiscal period

a period of time covered by an income statement.

Checks

a piece of commercial paper drawn on funds in a bank account and payable on demand.

Profit Margin

a ratio that measures the company's net income to net sales. Net income divided by Net sales

General Ledger

a record containing all accounts used by a company.

Statement of account

a report sent to each customer, usually at the end of the month, which indicates the status of his or her account.

Drawing account (owner withdrawals)

a separate owner's equity account in which withdrawals of cash or other assets by the owner for personal use are recorded.

Purchase invoice

a source document prepared by the seller listing the items shipped, their cost and the method of shipment (from the buyer's viewpoint).

Sales invoice

a source document prepared by the seller that lists the items shipped, their cost and the method of shipment (from the seller's viewpoint).

Invoice

a source document showing quantity, description, prices of items, total amount of purchase and the terms of payment.

Credit memorandum

a source document that grants credit to a buyer for purchase return or purchase allowance; items the bank adds to the account balance.

Cash short and over

a special ledger account that is used to keep track of unexplained shortages or overages of cash.

Discount period

a specific number of days during which a discount is available if the account is paid.

Purchases discounts

a temporary owner's equity contra purchases account used to record discounts taken on inventory purchases; the amount of any discounts granted by suppliers to encourage prompt payment of their invoices.

Time Period Assumption

an organizations activities can be divided into specific time periods such as a month, a three month quarter, a six month interval, or a year.

What is Adjusted Trail Balance?

an unadjusted trial balance to which adjusting entries have been added.

Independent contractor

any person who agrees to perform a service for a fee and who is not subject to the control of those for whom the service is performed.

What's listed in an adjusted trail balance?

are listed in order of thier account number or in balance sheet starting with assets, liabilities, and equity accounts and ending with income and expense accounts.

The following transactions occurred during May, the first month of operations for Hunter Products, Inc: (1) Issued 60,000 shares of capital stock to the owners of the corporation in exchange for $720,000 cash (2) Purchased a piece of land for $500,000, making a $200,000 cash down payment and signing a note payable for the balance (3) made a $70,000 cash payment on the note payable from the purchase of land (4) purchased equipment on credit from BBW, Inc for $73,000 What are total assets at the end of May? a) $1,093,000 b) $ 950,000 c) $1,023,000 d) $1,096,000

assets: land 500,000 equipments: 73,000 cash: 720,000 - 200,000 - 70,000 = 1,023,000

Stone Corporation has 27 employees and incurs total wages and salaries expense of $1,188,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: Workers Comp. Insurance 5% Social Sec. and Medicare (combined employee/employer) 15.3% Pension and other postretirement costs expense (paid by employer) 5% Personal income taxes withheld 10% Unemployment taxes expense 2% In addition, Stone provides group health insurance for its entire workforce. The cost of this insurance is $420 per month per employee. The company's annual payroll-related expenses amount to approximately: a) $1,188,000 b) $1,557,522 c) $1,676,322 d) $1,449,360

b) $1,557,522 payroll: 1,188,000 W/C: 1,188,000 x .05 = 59,400 employers portion of SS and Medicare: 15.3/2 = 7.65 1,188,000 * .0765 = 90,882 postretirement: 1,188,000 x .05 = 59,400 Unemployment: 1,188,000 x .02 - 23,760 Health Insurance: 420 x 27 x 12 = 136,080 1,188,000 + 59,400 + 90,882 + 59,400 +23,760 + 136,080 = 1,557,552

If an asset was purchased on January 1, 2015 for $140,000 with an estimated life of 5 years, what is the accumulated depreciation at December 31, 2018? a) $28,000 b) $112,000 c) $56,000 d) $84,000

b) $112,000 140,000/5 = 28.000 per year 28,000 x 4 = 112,000

Shown below is a trial balance for Cornell Products, Inc., on December 31, after adjusting entries: Cash (debit) $15,000 Accounts Receivable (debit) $12,500 Office Equipment (debit) $21,500 Accumulated Depreciation (credit) $5,500 Accounts Payable (credit) $7,500 Capital Stock (credit) $22,000 Retained Earnings (credit) -0- Dividends (debit) $7,000 Service fees earned (credit) $43,000 Salaries Expense (debit) $15,000 Advertising Expense (debit) $3,000 Depreciation Expense (debit) $4,000 total debits $78,000 total credits $78,000 After closing the accounts, Retained Earnings at December 31 equals: a) zero b) $14,000 c) $43,000 d) $21,000

b) $14,000

Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance of March 31 before adjustments is as follows: Cash (debit) $ 11,040 accts receivable (debit) 9,740 supplies (debit) 1,420 prepaid insurance (debit) 3,040 equipment (debit) 25,800 accumulated dep. equipment (credit) $10,320 unearned service revenue (credit) 7,100 Capital stock (credit) 5,800 retained earnings (credit) 24,000 dividends (debit) 1,680 service revenue earned (credit) 16,310 salaries expense (debit) 8,400 utilities expense (debit) 510 rent expense (debit) 1,900 debit/credit total $63,530 The equipment had an estimated useful life of five years. Compute the book value of the equipment at March 31, after the prope March adjustment is recorded a) $10,750 b) $15,050 c) $25,370 d) $10,320

b) $15,050 The trial balance is before adjustments depreciation: 25,800/12=5,160 per year 5,160/12 = 430 per month the accumulated depreciation is for prior years. Since they do adjustments each month, add 1 month of depreciation onto the balance 10,320 + 430 = 10,750 25,800 - 10,750 = 15,050

The cash account in the ledger of Clear Windows shows a balance of $15,276 at September 30. The bank statement, however, shows a balance of $16,803 at the same date. The only reconciling items consist of a bank service charge of $20, a large number of outstanding checks totaling $4,150, and a deposit in transit. What is the adjusted cash balance in the September 30 bank reconciliation? a) $16,783 b) $15,256 c) $12,653 d) $11,126

b) $15,256

Only two adjustments appear in the adjustments column of a worksheet for Winona Mfg; one to record $8,000 depreciation of factory equipment, and the other to record the use of $1,500 of prepaid insurance. If the Trial Balance column total are $145,380, what are the totals of the Adjusted Trial Balance Columns? a) $145,380 b) $153,380 c) $152,880 d) $154,880

b) $153,380 $145,380 + 8,000 = $153,380

Indirect Oil Co reports these account balances at December 31, 2017 Accounts Payable $ 55,000 Land $100,000 Notes Payable $130,000 Equipment $ 80,000 Cash $ 40,000 Accounts Receivable $ 50,000 Buildings $120,000 Capital Stock $170,000 Retained Earnings $ 35,000 On January 2, 208, Indirect Oil collect $25,000 of its accounts receivable and paid $20,000 of its accounts payable. On January 3, 2018 total liabilities are: a) $185,000 b) $165,000 c) $150,000 d) $ 70,000

b) $165,000 $35,000 (ending accounts payable) + $130,000 (notes payable) = $165,000

Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance at March 31 before adjustments is as follows: Cash (debit) $ 10,980 Accounts receivable (debit) $9,680 Supplies (debit) $1,360 Prepaid Insurnance (debit) $3,360 Equipment (debit) $29,400 Accumulated Depreciation: equipment (credit) $11,760 Unearned service revenue (credit) $6,800 Capital stock (credit) $5,500 Retained earnings (credit) $23,700 Dividends (debit) $1,620 Service Revenue Eared (credit) $18,790 Salaries Expense (debit) $8,100 Utilities expense (debit) $ 450 Rent expense (debit) $1,600 total debits $66,550 and total credits $ 66,550 The equipment had an estimated useful life of five years. Compute the book value of the equipment at March 31, after the proper March adjustment is recorded. a) $12,250 b) $17,150 c) $28,910 d) $11,760

b) $17,150 29,400/5 = 5,880/year 5,880/12 = 490 29400 - 11,760 -490 = 17,150

Omega Company adjust its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries to December 31: (1) a one-year bank loan of $774,000 at an annual interest rate of 12% had been obtained on December 1 (2) The company pays all employees up-to-date each friday. Since December 31 fell on Tuesday, there was a liability to employees at December 31 for two day's pay amounting to $7,700 (3) On December 1, rent on the office building had been paid for four months. The monthly rent is $6,900 (4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office equipment account is $12,600; no change has occurred in the account during the year (5) fees of $10,700 were earned during the month for clients who had paid in advance By what amount will the book value of the office equipment decline after the appropriate December adjustment is recorded? a) $2,100 b) $175 c) $0 d) $1,925

b) $175 12,600/6 = 2,100 depreciation per yr 2,100/12 = 175 per month

At the beginning of 2018, England Dresses has an inventory of $140,000. However, management wants to reduce the amount of inventory on hand to $80,000 at December 31. If net sales for 2018 are fore cast at $400,000 and the gross profit rate is expected to be 40%, compute the cost of the merchandise which management should expect to purchase during 2018. (Hint: First compute the expected cost of goods sold.) a) $240,000 b) $180,000 c) $320,000 d) $220,000

b) $180,000 Cost of goods sold = 60 x 400,000 = 240,000 Goods available = 80,000 + 240,000 = 320,000 Purchases = 320,000 - 140,000 = 180,000

Shown below is a trial balance for Cornell Products, Inc., on December 31, after adjusting entries: Cash (debit) $15,000 Accounts Receivable (debit) $12,500 Office Equipment (debit) $21,500 Accumulated Depreciation (credit) $5,500 Accounts Payable (credit) $7,500 Capital Stock (credit) $22,000 Retained Earnings (credit) -0- Dividends (debit) $7,000 Service fees earned (credit) $43,000 Salaries Expense (debit) $15,000 Advertising Expense (debit) $3,000 Depreciation Expense (debit) $4,000 total debits $78,000 total credits $78,000 Net income for the period equals: a) $14,000 b) $21,000 c) $43,000 d) $22,000

b) $21,000 Service fees earned: 43,000 - 15,000 (salaries expense) - 3,000 (advertising expense) - 4,000 (depreciation expense) = 21,000

Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance of March 31 before adjustments is as follows: Cash (debit) $ 11,040 accts receivable (debit) 9,740 supplies (debit) 1,420 prepaid insurance (debit) 3,040 equipment (debit) 25,800 accumulated dep. equipment (credit) $10,320 unearned service revenue (credit) 7,100 Capital stock (credit) 5,800 retained earnings (credit) 24,000 dividends (debit) 1,680 service revenue earned (credit) 16,310 salaries expense (debit) 8,400 utilities expense (debit) 510 rent expense (debit) 1,900 debit/credit total $63,530 According to service contracts, $4,930 of the unearned service revenue has been earned in March. The amount of service revenue earned to be reported in March income statement is: a) $16,310 b) $21,240 c) $11,380 d) $20,510

b) $21,240 16,310 + 4930 = 21,240

If total assets equal $345,000 and total owners' equity equal $120,000 then total liabilities must equal: a) $465,000 b) $225,000 c) $120,000 d) cannot be determined from the information given

b) $225,000 assets = liabilities + equity 345,000 = x + 120,000 225,000 = x

Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance at March 31 before adjustments is as follows: Cash (debit) $ 10,980 Accounts receivable (debit) $9,680 Supplies (debit) $1,360 Prepaid Insurnance (debit) $3,360 Equipment (debit) $29,400 Accumulated Depreciation: equipment (credit) $11,760 Unearned service revenue (credit) $6,800 Capital stock (credit) $5,500 Retained earnings (credit) $23,700 Dividends (debit) $1,620 Service Revenue Eared (credit) $18,790 Salaries Expense (debit) $8,100 Utilities expense (debit) $ 450 Rent expense (debit) $1,600 total debits $66,550 and total credits $ 66,550 according to service contracts, $4,870 of the Unearned Service Revenue has been earned in March. The amount of Service Revenue Earned to be reported in the March income statements is: a) $18,790 b) $23,660 c) $13,920 d) $22,840

b) $23,660 service revenue reported: 18,790 + 4,870 revenue earned from unearned revenue account = 23,660

Beech Soda, Inc. uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Beginning inventory (Jan 1) quantity 18, unit cost $9, total cost $162 Purchase (Jan 11) quantity 10,unit cost $15, total cost $150 Purchase (jan 20) quantity 21, unit cost $17, total cost $357 Total quantity: 49 Total costs: $669 On January 14, Beech Soda, Inc. sold 23 units of this product. The other 26 units remained in inventory at January 31. Assuming that Beech Soda uses FIFO cost flow assumption, the cost of goods sold to be recorded at January 14 is: a) $267 b) $237 c) $435 d) $669

b) $237 18 x 9 = 162 5 x 15 = 75 162 + 75 = 237

Garden World uses the retail method to estimate its monthly cost of goods sold and month-end inventory. At May 31, the accounting records indicate the cost of goods available for sale during the month (beginning inventory plus purchases) total $540,000. These goods had been priced for resale at $900,000. Sales in May totaled $480,000. The estimated inventory at May 31 is: a) $540,000 b) $252,000 c) $420,000 d) $288,000

b) $252,000 (900,000 - 480,000) x (540,000/900,000) = 252,000

During the current year, the assets sof Quality Stairs increased by $175.000 and liabilities decreased by $15,000. If the owners' equity in the business is $475,000 at the end of the year, the owners' equity at the beginning of the year must have been: a) $335,000 b) $285,000 c) $665,000 d) $615,000

b) $285,000 assets = liabilities + equity assets increased 175,000 liabilities decreased -15,000 end of yr equity 475,000 475,000 -175,000 -15,000 = 285,000

Taylor, Inc had accounts receivable of $420,000 and an allowance for doubtful accounts of $25,500 just before writing off as worthless an accounts receivable from Burton Company of $1,150. The net realizable value of the accounts receivable before and after the write-off were: a) $394,500 before and $393,350 after b) $394,500 before and $394,500 after c) $420,000 before and $418,850 after c) $445,500 before and $444,350 after

b) $394,500 before and $394,500 after 420,000 - 25,500 = 394,500 the write off would not effect the net realizable value. The write off decreases amounts receivable and decreases the allowance by the same amount, therefore the beginning net realizable value and the ending net realizable value are still the same.

Beech Soda, Inc. uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Beginning inventory (Jan 1) quantity 18, unit cost $9, total cost $162 Purchase (Jan 11) quantity 10,unit cost $15, total cost $150 Purchase (jan 20) quantity 21, unit cost $17, total cost $357 Total quantity: 49 Total costs: $669 On January 14, Beech Soda, Inc. sold 23 units of this product. The other 26 units remained in inventory at January 31. Assuming that Beech Soda uses FIFO cost flow assumption, the 26 units of this product in inventory at January 31 have a total cost of: a) $402 b) $432 c) $413 d) $269

b) $432 21 x 17 = 357 5 x 15 = 75 357 + 75 = 432

During the month of January, Sundown Corporation had sales of $300,000 and a cost of goods available for sale of $600,000. The company consistently earns a gross profit rate of 45%. Using the gross profit method, the estimated inventory at January 31 amounts to: a) $135,000 b) $435,000 c) $165,000 d) $465,000

b) $435,000 $600,000 - (300,00 x (100%-45%)) = $435,000

The following transactions occurred during May, the first month of operations for Hunter Products, Inc: (1) Issued 60,000 shares of capital stock to the owners of the corporation in exchange for $720,000 cash (2) Purchased a piece of land for $500,000, making a $200,000 cash down payment and signing a note payable for the balance (3) made a $70,000 cash payment on the note payable from the purchase of land (4) purchased equipment on credit from BBW, Inc for $73,000 What is the balance in the Cash account at the end of May? a) $720,000 b) $450,000 c) $990,000 d) $270,000

b) $450,000 720,000 - 200,000 - 70,000 = 450,000

On November 1 of the current year, Garcia Company borrowed $50,000 by issuing a 9%, six-month note payable, all due at maturity date. Interest expense on this not to be recognized during the current year amounts to: a) $500 b) $750 c) $1,500 d) $4,500

b) $750 $50,000 x .09 x (2/12) = $750

Colonial uses the retail method to estimate its monthly cost of goods sold and month-end inventory. At August 31, the accounting records indicate the cost of goods available for sale during the month (beginning inventory plus purchases) totaled $270,000. These goods had been priced for resale at $675,000. Sales in August totaled $450,000. The estimated inventory at August 31 is: a) $48,000 b) $90,000 c) $120,000 d) $270,000

b) $90,000 ($675000 - 450,000) x ($270,000 / 675,000) = $90,000

The following information is available: Sales $600,000 Net Income $ 30,000 Retained Earnings $ 60,000 Average stockholders equity $ 200,000 Dividends $ 10,000 What is the return on equity) (round your answer to the nearest whole number) a) 5% b) 15% c) 20% d) 25%

b) 15% return on equity: net income/average stockholders equity 30,000/200,000 = 15%

Which of the following credit terms is the most advantageous to the purchaser of merchandise? a) 1/10, n/30 b) 5/10, n/60 c) 2/10, n/30 d) 5/10, n/20

b) 5/10, n/60

In the fixed-percentage-of-declining-depreciation method, the book value of the asset is multiplied by: a) An increasing depreciation rate b) A constant depreciation rate c) A decreasing depreciation rate d) A rate that changes each year but is determined from a table

b) A constant depreciation rate

When a depreciable asset is sold at a price equal to its book value, a journal entry would include: a) A credit to the asset account for its book value b) A debit to accumulated depreciation c) A credit to accumulated depreciation d) A credit to cash

b) A debit to accumulated depreciation

All of the following statements are true of an income statement except: a) The period of time covered by an income statement is the company's accounting period b) A fiscal year is any accounting period less than 12 months in length c) The length of a company's accounting period may vary d) Every business prepares an annual income statement

b) A fiscal year is any accounting period less than 12 months in length

An asset that costs $28,800 and has accumulated depreciation of $6,000 is sold for $21,600. What amount of gain or loss will be recognized when the asset is sold? a) A gain of $1,200 b) A loss of $1,200 c) A gain of $7,200 d) A loss of $7,200

b) A loss of $1,200 ($28,800 - 6,000) - 21,600 = $1,200 loss

Which organization best serves the professional needs of a CPA a) FASB b) AICPA c) SEC d) AAA

b) AICPA

Closing entries never involve posting a credit to the: a) Income Summary Account b) Accumulated Depreciation Account c) Dividends account c) Depreciation expense account

b) Accumulated Depreciation Account

At the start of the current year, Minuteman Corporation had a credit balance in the Allowance for Doubtful Accounts of $1,800. During the year a monthly provision of 2% of sales was made for uncollectible accounts. Sales for the year were $600,000, and $5,600 of accounts receivable were written off as worthless. No recoveries of accounts previously written off were made during the year. The year-end financial statements should show: a) Uncollectible accounts expense of $13,800 b) Allowance for Doubtful Accounts with a credit balance of $8,200 c) Allowance for Doubtful Accounts with a credit balance of $6,400 d) Uncollectible accounts expense of $5,600

b) Allowance for Doubtful Accounts with a credit balance of $8,200 $1,800 + ($600,000 .02) - $5,600 = $8,200

Prepaid expenses appear: a) As an expense on the income statement b) As an asset on the balance sheet c) As a liability on the balance sheet d) As a reduction to retained earnings

b) As an asset on the balance sheet

The basic measure of the amount of leverage being applied within the capital structure of an organization is the: a) Interest coverage ratio b) Debt ratio c) Return on assets d) Return on equity

b) Debt ratio

Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of common stock: a) The amount paid by the corporation to redeem bonds at maturity date is deductible in computing income subject to corporate income tax b) Interest payments are deductible in determining income subject to corporate income tax; dividends are not deductible c) A corporation must pay tax on the sales price of stock issued, but is not taxed on the amount received when bonds are issued d) Both interest and dividends paid are deductible in computing taxable income, but since interest must be paid annually, the corporation usually gets a larger tax deduction over the life of the bonds payable

b) Interest payments are deductible in determining income subject to corporate income tax; dividends are not deductible

When prices are increasing, which inventory method will produce the highest cost of goods sold? a) FIFO b) LIFO c) average cost d) cost of goods sold will be the same under these methods

b) LIFO

The sales Returns and Allowances account is debited when: a) Merchandise is returned to a supplier b) Merchandise is returned by a customer c) Payment is made to a supplier within the discount period d) An account receivable is collected within the discount period

b) Merchandise is returned by a customer

An adjusting entry involving recognition of accrued revenue is necessary at the end of March in which of the following situations? a) Midwood Consultants received payment in February for consulting services rendered in March b) Midwood Consultants bean working for a client on March 15; bills will be sent monthly beginning April 15 c) Midwood Consultants made payment in January for office rent for the first three months of the year d) On March 31, a major customer paid his bill for consulting job completed in February

b) Midwood Consultants bean working for a client on March 15; bills will be sent monthly beginning April 15

Tuna Co. purchased a building in 2018 for $650,000 and debited an asset called "Buildings" for the entire amount. The company never depreciated the building although it had a useful life of 15 years. At the end of 2018, this action will cause: a) Net income to be understated b) Net income to be overstated c) Net income will not be affected d) Total assets will be understated

b) Net income to be overstated

Which account will not appear on an After-Closing Trial Balance? a) Dividends b) Prepaid Expenses c) Unearned Revenue d) Retained Earnings, at the end of period

b) Prepaid Expenses

Which of the following is the primary objective of an income statement? a) Providing managers with detailed information about where the enterprise stands at a specific date b) Providing users outside the business organization with information about the company's operating results for a period of time c) Reporting to the Internal Revenue Service the company's taxable income d) Indicating to investors in a particular company the current market values of their investments

b) Providing users outside the business organization with information about the company's operating results for a period of time

A transaction caused a $60,000 increase in both total assets and total liabilities. This transaction could have been which of the following? a) Purchase for office equipment for $60,000 cash b) Purchase of office equipment for $120,000, paying $60,000 cash and issuing a note payable for the balance c) Repayment of a $60,000 bank loan d) Investment of $60,000 cash in the business by the owner

b) Purchase of office equipment for $120,000, paying $60,000 cash and issuing a note payable for the balance

According to the Sarbanes-Oxley Act, CEOs and CFOs must certify to the accuracy of their company's financial statements: a) Monthly and Quarterly b) Quarterly and Annually c) Monthly and Annually d) CEOs and CFOs are not required to certify to the company's financial statement; only CPAs do

b) Quarterly and Annually

When determining the uncollectible accounts expense in computing taxable income, income tax regulations: a) Require the allowance method b) Require the direct write-off method c) Require the income statement approach d) Require the same method be used for both tax and financial statement purposes

b) Require the direct write-off method

Which of the following transactions will appear in the bank statement but generally not have been recorded by the depositor? a) Outstanding checks b) Service charges c) Deposits in transit d) Accounts receivable

b) Service charges

Retained earnings appears on: a) The income statement b) The balance sheet c) The statement of cash flows d) All three of the financial statemetns

b) The balance sheet

The gain on the disposal of equipment is recognized when: a) The book value of the equipment is greater than the value received b) The book value of the equipment is less than the value received c) A salvage value exists d) A gain should no be recognized on the disposal of an asset

b) The book value of the equipment is less than the value received

Short-term creditors are likely to view a higher-than-average inventory turnover rate as indicating that: a) A company is in financial difficulty b) The company is able to sell its inventory quickly c) The company probably has an excessive amount of inventory d) The company has a longer-than-average operating cycle

b) The company is able to sell its inventory quickly

Net income is: a) The excess of debits over credits b) The increase in owners' equity resulting from the profitable operations of the business c) The excess of liabilities over assets d) The increase in assets of a company duing a year

b) The increase in owners' equity resulting from the profitable operations of the business

The journal entry to record a particular business transaction includes a credit to a liability account. This transaction is mot likely also to inclure: a) Issuance of new capital stock b) The purchase of an asset on account c) A cash payment d) A credit to accounts receivable

b) The purchase of an asset on account

Which account appears on the After-Closing Trial Balance? a) Service Revenue b) Unearned Revenue c) Dividends d) Retained Earnings, Beginning of Year

b) Unearned Revenue

Under accrual accounting, fees received in advance from customers should be shown as being earned: a) When cash is collected b) When services are performed or goods delivered c) When tax rates are low d) When tax rates are high

b) When services are performed or goods delivered

Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance at March 31 before adjustments is as follows: Cash (debit) $ 10,980 Accounts receivable (debit) $9,680 Supplies (debit) $1,360 Prepaid Insurnance (debit) $3,360 Equipment (debit) $29,400 Accumulated Depreciation: equipment (credit) $11,760 Unearned service revenue (credit) $6,800 Capital stock (credit) $5,500 Retained earnings (credit) $23,700 Dividends (debit) $1,620 Service Revenue Eared (credit) $18,790 Salaries Expense (debit) $8,100 Utilities expense (debit) $ 450 Rent expense (debit) $1,600 total debits $66,550 and total credits $ 66,550 On March 1, Hoffman paid in advance for four months' insurance. The necessary adjusting entry at March 31 includes which of the following? a) a credit to Prepaid Insurance for $2,520 b) a credit to Prepaid Insurance for $840 c) a debit to Prepaid insurance for $2,250 c) a debit to Prepaid insurance for $840

b) a credit to Prepaid Insurance for $840

Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance of March 31 before adjustments is as follows: Cash (debit) $ 11,040 accts receivable (debit) 9,740 supplies (debit) 1,420 prepaid insurance (debit) 3,040 equipment (debit) 25,800 accumulated dep. equipment (credit) $10,320 unearned service revenue (credit) 7,100 Capital stock (credit) 5,800 retained earnings (credit) 24,000 dividends (debit) 1,680 service revenue earned (credit) 16,310 salaries expense (debit) 8,400 utilities expense (debit) 510 rent expense (debit) 1,900 debit/credit total $63,530 On March 1, Hoffman paid in advance for four months' insurance. The necessary adjusting entry at March 31 includes which of the following? a) a credit to prepaid insurance for $2,280 b) a credit to prepaid insurance for $760 c) a debit to prepaid insurance for $2,280 d) a debit to prepaid insurance for $760

b) a credit to prepaid insurance for $760 3,040 / 4 = 760 per month

Each of these categories of assets is normally shown in the balance sheet at current value, except: a) inventories b) accounts receivable c) short-term investments in marketable securities d) cash

b) accounts receivable

At the beginning of the year, Robert Company's Allowance for Doubtful Accounts had a $3,200 credit balance. During January, a provision of 2% of sales was made for uncollectible accounts expense. During January, sales totaled $350,000, and $2,900 of accounts receivable were written off as worthless. No recoveries of accounts previously written off were made during the month. Robert's financial statements for January show: a) allowance for doubtful accounts with a credit balance of $10,200 b) allowance for doubtful accounts with a credit balance of $7,300 c) uncollectible accounts expense of $9,900 d) uncollectible accounts expense of $4,100

b) allowance for doubtful accounts with a credit balance of $7,300 3200 + (350,000 x.02) - 2,900 = 7,300

The present value of an amount is: a) always greater than the future value b) always less than the future value c) always equal to the future value d) greater than, less than, or equal to the future value depending upon interest rates and the time period involved

b) always less than the future value

When a corporation has a right to redeem bonds in advance of the maturity date, the bond is considered a: a) convertible bond b) callable bond c) junk bond d) debenture bond

b) callable bond

Preparing a journal entry in proper form involves all the following except: a) listing all accounts debited before any credits b) computing the balances in accounts involved in the transaction c) indicating the date of the transaction d) providing a brief written explanation of the transaction

b) computing the balances in accounts involved in the transaction

A measure of a company's liquidity is: a) total assets divided by total equity b) current ratio c) the dollar amount of liabilities that bear interest d) the dollar amount of assets used as collateral for a loan

b) current ratio

When preparing a bank reconciliation, an NSF check will: a) increase the balance per depositor's records b) decrease the balance per depositor's records c) increase the balance per the bank statemtn d) decrease the balance per the bank statement

b) decrease the balance per depositor's records

The specific identification method is more appropriate than a cost flow assumption method: a) for a large inventory of identical low-priced items b) if each item in the inventory is unique c) if purchase costs are rising d) if purchase costs are falling

b) if each item in the inventory is unique

The accrual of interest on a note payable will: a) reduce total liabilities b) increase total liabilities c) have no effect upon total liabilities d) will have not effect upon the income statement but will affect the balance sheet

b) increase total liabilities

Sinking funds usually appear on the balance sheet as: a) current assets b) long-term investments c) current liabilities d) appropriation of retained earnings

b) long-term investments

As of January 31, Princess Company owes $500 to Butler Co. for equipment rented during January. If no adjustment is made for this item at January 31, how will princess's financial statements be affected? a) cash will be overstated at January 31 b) net income for January will be overstated c) owners' equity will be understated d) the financial statements will be accurate since the $500 does not have to be paid yet

b) net income for January will be overstated

The CPA firm auditing Capri Corporation found that net income had been overstated. Which of the following could be the cause? a) failure to take advantage of purchase discounts by paying within the discount period b) overstatement of inventory at year-end c) use of the last-in, first-out (LIFO) method of valuing inventory in a period of rising prices d) failure to record payment of an account payable to a supplier on the last day of the year

b) overstatement of inventory at year-end

The following entry appears in Galloway Paints general ledger on April 23, 2018: Inventory (debit) $26,800 Accounts Payable (credit) $20,400 Cash (credit) $6,400 This transaction involves: a) Galloway's collection of $6,400 on an account payable b) payment of $6,400 cash by Galloway c) a $26,800 overall increase in Galloways assets d) sale of inventory by galloway for $26,800

b) payment of $6,400 cash by Galloway

The principle that states revenue should be recognized at the time goods are sold or services rendered is called: a) adequate disclosure b) conservatism c) matching d) revenue realization

d) revenue realization

Omega Company adjust its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries to December 31: (1) a one-year bank loan of $774,000 at an annual interest rate of 12% had been obtained on December 1 (2) The company pays all employees up-to-date each friday. Since December 31 fell on Tuesday, there was a liability to employees at December 31 for two day's pay amounting to $7,700 (3) On December 1, rent on the office building had been paid for four months. The monthly rent is $6,900 (4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office equipment account is $12,600; not change has occurred in the account during the year (5) fees of $10,700 were earned during the month for clients who had paid in advance What amount of interest expense has accrued on the bank loan? a) $6,940 b) $7,540 c) $7,740 c) $8,340

c) $7,740 774,000 x .12= 92,880 per year interest 92,880/12 = 7,740 per month

The following transactions occurred during May, the first month of operations for Hunter Products, Inc.: (1) issued 44,000 shares of capital stock to the owners of the corporation in exchange for $528,000 cash (2) purchased a piece of land for $340,000, making a $120,000 cash down payment and signing a note payable for the balance (3) Made a $54,000 cash payment on the note payable from the purchase of the land (4) Purchased equipment on credit from BBW, Inc. for $57,000 What are total assets of Hunter Products at the end of May? a) $805,000 b) $694,000 c) $751,000 d) $808,000

c) $751,000 assets 528,000 - 120,000 - 54,000 = 354,000 cash 354,000 + 340,000 (land) + 57,000 (equipment) = 751,000 assets

Sanford Corporation borrowed $90,000 by issuing a 12%, six-month note payable, all due at the maturity date. After one month, the company's total liability for this loan amounts to: a) $90,000 b) $90,450 c) $90,900 d) $91,800

c) $90,900 $90,000 + (90,000 x 12% x 1/12) = $90,900

A debit balance in the income summary account indicates: a) An error was made b) A net profit c) A net loss c) The closing process is incomplete

c) A net loss

The write-down of inventory: a) Only affects the balance sheet and not the income statement b) Only affects the income statement and not the balance sheet c) Affects both the income statement and the balance sheet d) Affects neither the income statement nor the balance sheet

c) Affects both the income statement and the balance sheet

When a company sell bonds between interest dates they will pay which of the following at the first interest payment date? a) An amount less than the stated interest rate times the principal b) An amount more than the stated interest rate times the principal c) An amount equal to the stated interest rate times the principal d) The company may skip the first interest payment date since the appropriate time has not passed

c) An amount equal to the stated interest rate times the principal

If a transaction causes an asset account to decrease, which of the following related effects may occur? a) An increase of equal a mount in an owners' equity account b) An increase in a liability account c) An increase of equal amount in another asset account d) An increase in the combined total of liabilities and owners' equity

c) An increase of equal amount in another asset account

The accountant for Perfect Paitning forgot the following two adjustments at the end of 2018: (a) The entry to record depreciation: $3,000 (b) The entry to record the portion of fees received in advance, which have now been earned; $3,000. As a result of these two omissions: a) Net income for Perfect Painting for 2018 is overstated b) Net income for Perfect Painting for 2018 is understated c) Assets of Perfect Painting are overstated at December 31, 2018 d) Liabilities of Perfect Painting are understated at December 31, 2018

c) Assets of Perfect Painting are overstated at December 31, 2018

Which of the following situations is impossible? a) Book value is greater than residual value b) Book value is equal to the residual value c) Book value is less than residual value d) Book value is less than the original cost

c) Book value is less than residual value

The reason that both expenses and dividends are recorded by debit entries is that: a) All dividend and expense transactions involve offsetting credit entries to the cash account b) Both expenses and dividends are offset against revenues in the income statement c) Both expenses and dividends reduce owners' equity d) The statement is untrue - expenses are recorded by debits, but dividends are recorded by credits to the owners' equity account

c) Both expenses and dividends reduce owners' equity

Which of the following inventory valuation methods is only an estimate of actual costs? a) Only the retail method b) Only the gross profit method c) Both retail and gross profit methods are only estimations d) Neither the retail nor the gross profit methods are estimations

c) Both retail and gross profit methods are only estimations

If Hot Bagel Co. estimates depreciation on an automobile to be $578 for the year, the company should make the following adjusting entry: a) debit accumulated depreciation $578 and credit Depreciation expense $578 b) Debit depreciation expense $578 and credit automobile expense $578 c) Debit depreciation expense $578 and credit accumulated depreciation $578 d) Debit automobile $578 and credit depreciation expense $578

c) Debit depreciation expense $578 and credit accumulated depreciation $578

Deegan Industries has an accounts receivable turnover rate of 8. Which of the following statements is not true? a) Deegan's accounts receivable are more liquid than those of a business whose accounts receivable turnover rate is 5 b) Deegan wais approximately 46 days to make collections of its credit sales (Use 365 days in a year) c) Deegan writes off accounts receivables as uncollectible if they are over 45 days old d) Deegan's net credit sales are about eight times the amount of its average accounts receivables

c) Deegan writes off accounts receivables as uncollectible if they are over 45 days old

The gain or loss on the disposal of a depreciable asset reported in financial statements often differs from that reported for income tax purposes. The principal reason for the difference is: a) The cost of the asset is different for financial reporting and income tax purposes b) The sales price of the asset is different for financial reporting and income tax purposes c) Different depreciation methods have been used in financial statements and in income tax returns d) The company has made an error because the same amount of gain or loss should appear in the income tax return as in the financial statement

c) Different depreciation methods have been used in financial statements and in income tax returns

On November 1, 2018, Master's Co. borrows $500,000 from its bank for five years at an annual interest rate of 10%. According to the terms of the loan, the principal amount will not be due for five years. Interest accrues monthly on the first day of each month, beginning November 1, 2018. With respect to this borrowing, Master's December 31, 2018 balance sheet included only a long-term note payable of $500,000. As a result: a) The December 31 ,2018 financial statements are accurately presented b) Liabilities are understated by $12,500 accrued interest payable c) Liabilities are understated by $8,333 accrued interest payable d) Liabilities are understated by $4,167 accrued interest payable

c) Liabilities are understated by $8,333 accrued interest payable $500,000 x 10% x (2/12) = $8,333 Interest has accrued for two months: November and December

Owners' equity in a business decreases as a result of which of the following? a) Investments of cash by the owners b) Profits from operating the busienss c) Losses from unprofitable operation of the business d) Repaying a loan to a commercial bank

c) Losses from unprofitable operation of the business

An advocate of just-in-time inventory system would advocate: a) Maintaining a large inventory selection for customers b) Leaving extra time in order to make inventory deadlines c) Maintaining a small inventory supply d) LIFO over FIFO

c) Maintaining a small inventory supply

Which of the following accounting principles is concerned with offsetting revenue with the expenses incurred in producing that revenue? a) Realization principle b) Materiality c) Matching d) Depreciation

c) Matching

Which of the following items would cause cash per the bank statement to be larger than the balance of cash shown in the accounting records? a) Bank service charges b) Deposits in transit c) Outstanding Checks d) NSF check from one of the depositor's customers

c) Outstanding Checks

Deerpark Corporation recently borrowed $70,000 cash from its bank. Which of the following was unaffected by this transaction? a) Assets b) Liabilities c) Owners' equity d) Cash

c) Owners' equity

Efficient management of cash includes which of the following concepts? a) Pay each bill as soon as the invoice received b) Deposit all cash receipts and make all cash disbursements at the end of each week c) Prepare a controllisting of cash receipts at the time and place the money is received d) Pay suppliers in cash out of cash sales receipts before depositing them in the bank

c) Prepare a controllisting of cash receipts at the time and place the money is received

The price of the goods sold or services rendered during a given accounting period is called: a) Net income b) Profit c) Revenue d) Equity

c) Revenue

At the end of October, Flagship Marina received a bill for fuel used in October. Payment is not due until November 30. This transaction: a) Should not be recorded in the accounting records until November b) Causes a decrease in assets and in owners' equity in November, when the bill is paid c) Should be recorded as an expense of October, regardless of the payment date d) Is recorded as a liability in October, but is not considered an expense until paid

c) Should be recorded as an expense of October, regardless of the payment date

Which of the following payroll costs are shared equally by the employer and the employee? a) State unemployment taxes b) Workers' compensation c) Social security d) Federal unemployment taxes

c) Social security

In which of these inventory approaches is it important to determine the actual cost of a particular inventory item being sold in order to determine cost of goods sold? a) LIFO b) FIFO c) Specific identification d) Average Cost

c) Specific identification

To arrive at net sales: a) Add sales discounts to sales b) Subtract the cost of goods sold from the sales price c) Subtract sales returns and sales discounts from sales d) Subtract accounts receivable from sales

c) Subtract sales returns and sales discounts from sales

The credit term 2/10, n/30 means: a) That after 10 days 2% interest is charged b) That there is a 10% discount if payment is received within 30 days c) That there is a 2% discount if payment is received within 10 days, otherwise, full payment is due within 30 days d) There is a 10%discount if paid immediately and 2% if paid within 30 days

c) That there is a 2% discount if payment is received within 10 days, otherwise, full payment is due within 30 days

The Sarbanes-Oxley act of 2002 created: a) The Security and Exchange Commission b) The Financial Accounting Standards Board c) The Public Company Accounting Oversight Board d) The Income Tax Return Overview Board

c) The Public Company Accounting Oversight Board

Effective internal control includes all of the following steps except: a) The customer order department prepares a sales order upon receipt of an order b) The billing department compares what was shipped with what was ordered and prepares and mails a sales invoice c) The accounting department receives the checks and the mail room listing of checks received and prepares the daily bank deposit d) The accounting department reconciles the bank statement with accounting records

c) The accounting department receives the checks and the mail room listing of checks received and prepares the daily bank deposit

A balance sheet is designed to show: a) How much a business is worth b) The profitability of the business during the current year c) The assets, liabilities and owners' equity of a business as of a particular date d) The cost of replacing the assets and paying off the liabilities at December 31

c) The assets, liabilities and owners' equity of a business as of a particular date

Which of the following is not a characteristic of an estimated liability? a) The liability is known to exist b) The precise dollar amount cannot be determined until a later date c) The liability should not be recorded in the accounting records until future events have determined the exact amount d) The liability stems from past transactions

c) The liability should not be recorded in the accounting records until future events have determined the exact amount

Which of the following decision makers is least likely to be among the users of management accounting reports developed by Sears Roebuck and Co.? a) The chief executive officer of Sears b) The manager of the Automotive Department in a Sears' store c) The manager of a mutual fund considering investing in Sears' common stock d) Internal auditors within the Sears organization

c) The manager of a mutual fund considering investing in Sears' common stock

Wilbur Company purchased $10,000 of equipment on January 20, 2017. Wilbur uses straight-line method to depreciate the equipment. The equipment has a 5-year useful life with no salvage value. Which of the following statements is correct? a) Wilbur will record a cash inflow from operating activities of $2,000 in its 2018 financial statements b) Wilbur will record a cash outflow from operating activities of $2,000 in its 2018 financial statements c) Wilbur will record a cash outflow from investing activities of $2,000 in its 2018 financial statements d) Wilbur will record no cash outflows related to this asset on its 2018 statement of cash flows

d) Wilbur will record no cash outflows related to this asset on its 2018 statement of cash flows

From an accounting viewpoint,when is a business considered as an entity separate from its owner(s)? a) only when organized as a sole proprietorship b) only when organized as a partnership c) only when organized as a corporation d) a business is always considered as an accounting entity separate from the activities of the owner(s)

d) a business is always considered as an accounting entity separate from the activities of the owner(s)

Green Systems sold and delivered modems to Blue Computers for $660,000 to be paid by Blue in three equal installments over the next three months. The journal entry made by Blue Computers to record the last of the three installment payments will include: a) a debit of $220,000 to modem expense b) a debit of $220,000 to accounts receivable c) a debit of $220,000 to cash d) a debit of $220,000 to accounts payable

d) a debit of $220,000 to accounts payable 660,000/3 = 220,000

Which of the following items on a bank reconciliation would have been known to the depositor before the bank statement arrived? a) bank service charges b) an NSF check c) a credit for interest earned d) a deposit in transit

d) a deposit in transit

The essential point of a double-entry system of accounting is that every transaction: a) affects accounts on both sides of the balance sheet b) is recorded in both the journal and the ledger c) increases one ledger account and decreases another d) affects two or more ledger accounts and is recorded by an equal dollar amount of debits and credits

d) affects two or more ledger accounts and is recorded by an equal dollar amount of debits and credits

Which of the following is NOT considered an end-of-period adjusting entry? a) the entry to record the portion of unexpired insurance which has become expense during the period b) an entry to record revenue that has been earned but has not yet been billed to custions c) the entry to record depreciation expense d) an entry to record repayment of a bank loan and to recognize related interest expense

d) an entry to record repayment of a bank loan and to recognize related interest expense

Assets that have been pledged as security for a loan: a) are reported as liabilities on the balance sheet b) must be sold when the loan matures c) become the property of the lende until the loan is paid in full d) are disclosed in the notes to the financial statements

d) are disclosed in the notes to the financial statements

Adjusting entries: a) are generally made daily b) assign revenues to the period in which they are received c) generally fall into one of two categories d) are needed whenever revenue transactions affect more than one period

d) are needed whenever revenue transactions affect more than one period

On June 1, 2018, Jensen Company acquired an 5.4% ten-month note receivable from a customer in settlement of an existing account receivable of $230,000. Interest and principal are due at maturity. The proper adjusting entry at December 31, 2018, with regard to this note receivable includes a: a) debit to cash of $7,245 b) debit to notes receivable of $12,420 c) credit to interest revenue of $12,420 d) debit to interest receivable of $7,245

d) debit to interest receivable of $7,245 230,000 * .054= 12,420 12,420 / 12 = 1,035 ,1,035 x 7 = 7,245 (counting June is 7 months of interest)

When preparing a bank reconciliation, outstanding checks will: a) increase the balance per depositor's records b) decrease the balance per depositor's records c) increase the balance per the bank statement d) decrease the balance per the bank statement

d) decrease the balance per the bank statement

Generally accepted accounting principles are the "ground rules" used in the preparation of: a) income tax returns b) all accounting reports c) reports to federal and state regulatory agencies d) financial statements

d) financial statements

The term "junk bonds" describes bonds with: a) low interest rates b) indefinite maturity dates c) low maturity values d) high risk

d) high risk

Preparation of interim financial statements: a) makes the preparation of year-end financial statements unnecessary b) requires the journalizing and posting of adjusting entries c) requires the journalizing and posting of closing entries d) is done monthly or quarterly or in-between the year-end financial statements

d) is done monthly or quarterly or in-between the year-end financial statements

The interest coverage ratio: a) is computed by dividing total liabilities by annual interest expense b) is computed by dividing liquid assets by annual required interest payment c) indicates the percentage of total assets that are financed with borrowed money d) measures the number of times the annual interest expense could be covered by annual income from operations

d) measures the number of times the annual interest expense could be covered by annual income from operations

The need for familiarity with accounting concepts is: a) limited to those planning a career in accounting b) limited to those planning to pursue the CPA credential c) universal for each and every career path d) necessary for anyone entering the world of business

d) necessary for anyone entering the world of business

Hicksville's Department Store uses a perpetual inventory system at year-end, the balance in the Inventory control account is $1,200,000. Assuming that the inventory records have been maintained properly, a year-end physical inventory: a) is unnecessary b) is needed to establish the ending inventory, a s the $1,200,000 balance in the inventory control account represents the beginning inventory c) probably will indicate more than $1,200,000 in merchandise on hand d) probably will indicate less than $1,200,000 in merchandise on hand

d) probably will indicate less than $1,200,000 in merchandise on hand

If a bond is callable, the call price is usually lower than the face value of the bond. True/false

false

A balance sheet: a) provides owners, investors, and other interested parties with all the financial information they need to evaluate the financial strength, profitability, and future prospects of a given business entity b) shows the current market value of the owners' equity in the business at the balance sheet date c) assists creditors in evaluating the debt-paying ability of a business by showing the assets and liabilities of the business, plus the assets and liabilities of its owner (s) d) shows the assets, liabilities, and owners' equity of a business entity, valued in conformity with generally accepted accounting principles

d) shows the assets, liabilities, and owners' equity of a business entity, valued in conformity with generally accepted accounting principles

The measures used by an organization to provide reasonable assurance that the organization produces reliable financial reports, complies with applicable laws and regulations, and conducts its operations in an efficient and effective manner are collectively referred to as: a) Generally accepted accounting principles b) financial accounting standards c) securities and exchange regulations d) the internal control structure

d) the internal control structure

A promissory note: a) is a conditional promise in writing to pay on demand or at a future date a definite sum of money b) is recorded by the maker by crediting note receivable c) is signed by the person promising to pay the note, called the payee d) will be recorded on both the books of the payee and the maker

d) will be recorded on both the books of the payee and the maker

Statement of Retained Earnings

explains changes in equity from net income(or loss) and from any dividends over a period of time.

Income statement commonsize statements/percentage method

express the major items in the Income Statement as a percent of Net Sales and compare with previous fiscal periods.

Balance sheet common size statements/percentage method

express the major items in the balance sheet as a percent of the total assets and compare with previous fiscal Periods.

A business that is profitable and liquid will have more accounts with credit balances than with debit balances true/false

false

A current asset must be capable of being converted into cash within a relatively short period of time, usually less than five years true/false

false

A net profit results from having more revenues than liabilities true/false

false

A revenue account is closed by debiting Income Summary and crediting Service Revenue true/false

false

A statement of cash flows depicts the way profits have changed during a designated period true/false

false

A statement of cash flows reports revenue and expense activities for a specific time period such as one month or one year true/false

false

A trial balance includes only the balance sheet accounts; income statement accounts are not included on a trial balance true/false

false

A trial balance that balances provides proof that all transactions were correctly journalized and posted to the ledger true/false

false

Accountants refer to the period of time from October 1 - December 31 as "busy season." true/false

false

Adjusting entries are only required when errors are made true/false

false

Adjusting entries are usually made on a daily basis true/false

false

An account receivable that arose from normal sales activity has a 16-month credit term. This receivable will be classified as a noncurrent asset. true/false

false

An adjusting entry to recognize revenue that has been earned but not yet billed or collected will cause an increase in total liabilities true/false

false

An example of good internal control over cash is to have the person responsible for physically handling all cash perform the bank statement reconciliations. True/false

false

An expenditure that benefits year one but is paid for in year two should not be recorded until year two true/false

false

An increase in a liability is recorded by a credit; an increase in owners' equity by a debit true/false

false

An unrealized holding loss on available-for-sale securities will reduce net income true/false

false

Any business event that might affect the future profitability of a business should be reported in its balance sheet true/false

false

At year-end, all equity accounts must be closed true/false

false

Charges for depositing NSF checks are an example of a transaction that has been recorded by the depositor but may not have been recorded by the bank True/false

false

Companies need not disclose information that may have a damaging effect on the business, such as product liability lawsuits true/false

false

Deposits in transit would not appear on a company's bank reconciliation but would appear on the company's bank statement. True/false

false

Depreciation expense on equipment is considered a cash expense since the company must pay cash for the equipment true/false

false

Dividends declared are an expense and reduce net income true/false

false

Earning revenue increases owners' equity and expenses reduces owners' equity, therefore, revenues are recorded with debit entries and expenses are recorded with credit entries true/false

false

IFRS 1 requires that management and auditors should depart from compliance with GAAP if it is necessary to achieve a fair presentation when reporting financial results true/false

false