Accounting exam study
(1.5) The obligations that an entity must pay in money or services at some time in the future because of past transactions or events are called? A) Liabilities B) Expenses C) Stockholders' equity D) Cost principle
Answer: A Liabilities are the obligations or debts that a business must pay in cash or goods and services at some future time as a consequence of past transactions or events.
(1.6) In which of the following would an opinion regarding the fair presentation of financial statements appear? A) Auditor's report B) Form 10-K C) Management Discussion and Analysis D) Notes to the Financial Statements
Answer: A The auditor's report would include information regarding the fair presentation of financial statements.
What role does financial accounting play in the allocation of society's financial resources?
Financial accounting provides financial information to investors and creditors who need to make decisions about where to allocate their resources. Financial statements express the economic activity of business entities in monetary terms and report on the entities' profitability, financial strength, and cash flow. Financial statements that present the results of economic activity fairly and completely should contribute significantly to the best possible allocation decisions by investors and creditors.
Is it possible for an accounting transaction to only affect the left side of the accounting equation and still leave the equation in balance? If so, provide an example.
It is possible for a transaction to only impact the left side of the basic accounting equation. An example is the collection of accounts receivable, which increases Cash (debits Cash) and decreases Accounts Receivable (credits Accounts Receivable).
(1.1) Match the following organizational attributes with the organizational form. More than one organizational form may be associated with a given attribute. a) unlimited liability b) full control c) business income combined with owner(s) income for income tax purposes d) relatively more difficult to establish e) easier to raise funds
a) Sole proprietorship and partnership b) Sole proprietorship c) Sole proprietorship and partnership d) Corporation e) Corporation
(1.4) Establish the correct sequence of steps in the accounting measurement process. a) record in a systematic fashion b) identify relevant economic activity c) quantify economic activity
b. Identify c. Quantify a. Record
Explain how it is possible for a trial balance to be in balance but still be in error.
A trial balance may be in balance but still in error because of recording errors in the ledger accounts. For example, a cash sale in the amount of $1,000 may have been erroneously entered in the ledger as an increase of $100 in cash and sales. The trial balance would still balance because the entered debit and credit were of the same amount.
Define accounting. What is the basic purpose of accounting?
Accounting is the process of measuring the economic activity of an enterprise in monetary terms and communicating the results to interested parties. The basic purpose of accounting is to provide financial information that is useful in making economic decisions.
(2.2) Which of the following decreases stockholders' equity? A) Purchasing equipment for cash B) Paying monthly rent in cash C) Issuing shares of stock D) Paying cash to settle an account payable
Answer: B Paying monthly rent (rent expense) decreases stockholders' equity. All of the other transactions do not.
(2.4) Which of the following accounts normally has a debit balance? A) Accounts Payable B) Common Stock C) Dividends D) Service Fees Earned
Answer: C Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances. So, dividends would have a normal debit balance.
What is the accounting equation? Define assets, liabilities, and stockholder's equity.
The accounting equation is Assets = Liabilities + Stockholders' Equity. Assets are the economic resources of an enterprise that can be expressed in monetary terms. Liabilities are the obligations, or debts, that an enterprise must pay in cash or services at some time in the future because of past transactions or events. Stockholders' equity is the interest of the owners in the assets of the enterprise and is represented as the difference between the enterprise's assets and liabilities.
What is the distinction between financial accounting and managerial accounting?
The major goal of Financial Accounting is the preparation of a balance sheet, a statement of stockholders' equity, a statement of cash flows, and an income statement. These statements must be prepared in accordance with a well defined set of conventions and rules called generally-accepted accounting principles. Managerial Accounting provides the data necessary for management to plan and control the operations of a business and to make decisions. No rigid conventions or rules govern managerial accounting; any analytical approach or mode of accounting may be employed in this area.
What are the three principal business activities and how do they differ?
The three types of business activities are operating activities, investing activities, and financing activities. Operating activities are the day-to-day business transactions of an enterprise. Investing activities are those events in which the firm acquires the needed infrastructure to support the day-to-day operations. Financing activities are those debt or equity transactions that generate the needed funds to acquire the needed infrastructure of an enterprise.
(1.2) Classify each activity as financing, investing, or operating a) repay a loan from a bank b) sell merchandise from a storefront operation c) dispose of an old delivery truck d) pay rent on a company warehouse e) repurchase shares of stock from stockholders f) pay utilities
a) Financing b) Operating c) Investing d) Operating e) Financing f) Operating
(2.5) The Cash T-account of Rainbow, Inc. has a beginning balance of $52,000. During the year, $244,000 was debited and $241,000 was credited to the account. What is the ending balance of cash? A) $55,000 B) $37,000 C) ($ 5,000) D) Cannot be determined from the information given
Answer: A Beginning cash + Cash receipts - Cash payments = Ending Cash ($52,000 + $244,000 - $241,000) = $55,000
(1.5) Which of the following is NOT true of the general journal? A) It is a record of original entry B) It reflects the entire effect of a transaction in one place C) It receives postings of dollar amounts from the general ledger D) It shows transactions recorded in chronological order
Answer: C After an accounting transaction is journalized in the general journal, the debits and credits of each journal entry are immediately transferred (posted) to the general ledger, not vice versa.
(2.2) Which of the following will properly record the payment of a two-year insurance policy? A) Increase assets and increase retained earnings B) Increase liabilities and decrease retained earnings C) Increase and decrease assets D) Decrease assets and decrease liabilities
Answer: C Prepaid insurance in increased and cash is decreased, both of which are assets.
(1.1) Which of the following forms of business organizations exists as a legal entity for tax purposes? A) A sole proprietorship B) A partnership C) A corporation D) A labor union
Answer: C A corporation is a form of business organization that exists as a legal entity, subject to taxes, that issues shares of stock to its owners or shareholders in exchange for cash or other resources.
Determine the missing amount in each of the following cases: a) Assets = $175,000, Liabilities = $62,000 b) Liabilities = $47,000, Stockholders' equity = $31,000 c) Assets = $115,000, Stockholders' equity = $49,000
Assets = $78,000 Liabilities = $66,000 Stockholders' Equity = $113,000
(2.1) Which of the following is the correct order of the five steps in the accounting cycle? A) analyze, adjust, record, report, close B) analyze, record, adjust, report, close C) analyze, record, adjust, close, report D) analyze, report, adjust, record, close
b. Analyze; record; adjust; report; close
(1.5) Use the basic accounting equation to answer the following: a) Perkins Company has total assets of $150,000 and total liabilities of $90,000. How much is the company's total stockholders' equity? b) Gassol Company has total liabilities of $170,000 and total stockholders' equity of $95,000. How much total assets does the company have? c) If Brown Company's total assets increased by $35,000 during the year, and its total liabilities decreased during the same year by $5,000, what was the change in the company's total stockholder's equity?
a. $60,000 b. $265,000 c. $40,000 increase
(2.4) Indicate for each of the following accounts whether the normal balance is a debit or credit: a) accounts receivable b) accounts payable c) dividends d) wage expense e) inventory f) interest income g) retained earnings
a. Debit b. Credit c. Debit d. Debit e. Debit f. Credit g. Credit
What is the T-account and how is it useful?
A T-account is a general ledger account that has the shape of the letter T. A T-account is used to accumulate debit and credit entries to any of a company's various accounts.
Describe the nature and purpose of a general journal.
A general journal is a book of original entry that may be used for the initial recording of any type of business transaction. It contains space for dates and for accounts to be debited and credited, columns for the amounts of the debits and credits, and a posting reference column for numbers of the accounts that are posted.
(1.6) A trial balance can be described as: A) A list of general ledger account titles and balances at a certain date B) A grouping of the accounts used by an organization to prepare its basic financial statements C) A record on which are recorded the increases and decreases of a particular financial statement component, such as cash D) One of the basic financial statements of an organization
Answer: A The trial balance is a listing of all accounts from, the general ledger with their respective debit or credit balance. A trial balance is prepared at the end of an accounting period after all transactions have been recorded.
(1.5) Which one of the following is NOT true regarding retained earnings? A) Retained earnings represent earned capital, which is earned by the company, reinvested in the business, and not distributed to its stockholders. B) Retained earnings are increased when there is net income and when the company pays dividends to its shareholders C) Retained earnings are increased when there is net income or decrease when there is net loss and a company pays dividends to its shareholders. D) Retained earnings are presented on the statement of stockholders' equity.
Answer: B
(1.5) Which of the four statements is created first and why? A) Statement of stockholders' equity, because ending balance in common stock and retained earnings are need to prepare the stockholders' equity section on balance sheet. B) Income statement, because net income (loss) is needed to determine the ending balance in retained earnings on the statement of stockholders' equity. C) Balance sheet, because cash balance is needed to determine the ending cash balance on the statement of cash flows. D) Statement of cash flows, because ending cash balance is needed to determine the cash balance on balance sheet.
Answer: B Ending retained earnings is calculated as beginning retained earnings plus net income (or minus net loss) and minus dividends.
(2.3) Account titles are commonly grouped into what five categories in the chart of accounts? A) Current assets, Current liabilities, Noncurrent assets, Noncurrent liabilities, Stockholders' equity B) Assets, Liabilities, Equity, Revenue, Expenses C) Common stock, Additional paid-in capital, Treasury stock, Retained earnings, Accumulated other comprehensive income or loss D) Cash, Marketable securities, Accounts payable, Long-term debt, Common stock
Answer: B In the chart of accounts, account titles are commonly grouped into the five categories of: Assets, Liabilities, Equity, Revenues, and Expenses.
(1.5) Which of the following is a correct statement of the accounting equation in economic terms? A) Economic resources = operating assets + financial assets B) Economic resources = creditors claim on resources + owners claim on resources C) Economic resources = creditors claim on resources - owners claim on resources D) Creditors claim on resources = investing + operating
Answer: B The accounting equation is assets = liabilities + stockholders' equity. Another way of viewing this equation is Economic resources = creditors claim on resources + owners claim on resources
(2.4) In a double-entry accounting system: A) All accounts have normal debit balances B) A debit entry is recorded on the left side of an account C) Liabilities, common stock, and expense accounts all have normal credit balances D) A credit entry records a decrease in an account
Answer: B The terms debit and credit are used to refer to the left side and the right side, respectively, of an account.
(1.5) Which of the following is correct? A) Ownership is an essential test for an asset. B) An example of an asset is notes payable. C) The key characteristic of an asset is that it represents a probable future economic benefit owned or controlled by the entity. D) Liabilities represent the interest of the owners in the assets of an entity.
Answer: C Assets refer to the economic resources of a business that can be expressed in monetary terms. Assets take many forms. The key characteristic of any asset is that it represents a probable future economic benefit to a business.
(2.1) The first two steps of the accounting cycle, in proper sequence, are: A) Record transactions in a journal and prepare a trial balance. B) Analyze transactions from source documents and post journal entries to general ledger accounts. C) Analyze transactions from source documents and record transactions in a journal. D) Record transactions in a journal and post journal entries to general ledger accounts.
Answer: C There are five major steps in the accounting cycle. In order, they are: 1) Analyze - analyze transactions for source documents, 2) Record - journalize transactions and prepare unadjusted trail balance, 3) Adjust - journalize adjusting entries and prepare adjusted trial balance, 4) Report - prepare financial statements, and 5) Close - journalize closing entries and prepare post-closing trial balance.
(1.5) The increases to a company's resources that result when goods or services are provided to customers are called? A) Assets B) Liabilities C) Expenses D) Revenues
Answer: D Sales revenues are increases to a company's resources that result when goods or services are provided to customers. The amount of sales revenue earned is measured by the value of the assets received in exchange for good and services delivered.
(1.5) Stockholders' equity: A) Is equal to assets minus liabilities B) Represents the interest of the owners in the assets of an entity C) Is equal to the net assets of an entity D) All of the above
Answer: D Stockholders' equity refers to the ownership (stockholder) claims on the assets of the business. Stockholders' equity represents a residual claim on the business's assets, that is, it is a claim on the assets of a business that remain after all the liabilities to creditors have been satisfied (net assets).
(1.4) The communication activity of the accounting process must: A) Identify the relevant economic activities of a business B) Record the resulting measures in a systematic manner C) Quantify the economic activities of a business D) Prepare financial reports and help interpret financial results to meet users' needs
Answer: D The communication activity of the accounting process provides useful financial reports to users and provides various techniques, such as formatting of reports, charts and graphs, and ratios, to users to help them interpret the content of the reports.
(1.2) A company incurred $60,000 (to be paid next year) for the current year's advertising activities. What would the effect of this transaction on the current year's accounting equation? A) No effect on Assets; $60,000 decrease in Liabilities; $60,000 increase in Stockholders' Equity B) $60,000 increase in Assets; $60,000 increase in Liabilities; No effect on Stockholders' Equity C) $60,000 increase in Assets; No effect on Liabilities; $60,000 increase in Stockholders' Equity D) No effect on Assets; $60,000 increase in Liabilities; $60,000 decrease in Stockholders' Equity
Answer: D Advertising expense 60,000 Advertising expense payable 60,000
What are the generally accepted accounting principles and what organization has primary responsibility for their formulation in the US?
Generally-accepted accounting principles (GAAP) are standards that accountants have developed to guide the accumulation of financial accounting data and the preparation of financial statements. Many principles have evolved over time and have become entrenched through general acceptance. Although the SEC has the power to set the accounting principles, the agency has largely delegated that principle-setting responsibility. The primary non-governmental body whose pronouncements are authoritative concerning such principles is the Financial Accounting Standards Board (FASB).
Some accounting students believe that debits are good and credits are bad. Explain why this is not an accurate way to think about debits and credits.
Since debits increase asset accounts but decrease liability accounts, it is possible to understand why some students erroneously think "debits are good but credits are bad." Credits may also be good, however, because they can represent an increase in stockholders' equity when a sales transaction occurs. Thus, credits are not necessarily always bad. In fact, debit simply refers to the left side of an account while credit refers to the right side.
Explain the terms general ledger and trial balance. What are the primary reasons for preparing a trial balance?
The general ledger is the grouping of accounts that are used to prepare a firm's financial statements. The trial balance is a list of the accounts in the general ledger with their respective debit or credit balances. It is prepared at the end of a period to ensure that the sum of debit balances equals the sum of credit balances. This procedure may reveal the existence of certain errors. It is also useful in preparing financial statements.
How is the normal side of an account determined?
The normal side of any account is always the side on which increases are recorded. Assets and expenses have normal debit balances. Liabilities, revenues, and stockholders' equity accounts (owner's capital accounts in a sole proprietorship and in partnerships, and common stock and retained earnings accounts in a corporation) have normal credit balances.
What is the purpose of an income statement? The statement of stockholders' equity? The balance sheet? The statement of cash flows?
The purpose of an income statement is to report the results of operations for a period. It does this by listing a firm's revenues and expenses for the period. The purpose of a statement of stockholders' equity is to report the events causing a change in stockholders' equity for a period. These events include owner investments and dividends and the earning of net income or net loss. The purpose of a balance sheet is to present a firm's assets, liabilities, and stockholders' equity on a given date. The purpose of a statement of cash flows is to report information about cash inflows and cash outflows during a period of time. The cash flows are grouped into three categories: operating activities, investing activities, and financing activities.
What does the term debit mean? What does the term credit mean?
The term debit refers to the left side of an account. The term credit refers to the right side of an account.
(1.6) Identify where the following items will appear in a company's annual report: management's discussion and analysis, notes to the financial statements, or the auditor's report, or indicate that the item is not disclosed. a) a comment that the financial statements appear to be fairly presented b) a discussion about new competition likely to occur next year c) a quantitative summary of notes payable appearing on the balance sheet d) the "secret" ingredients in the company's special sauce
a. Auditor's report b. MD&A c. Notes to financial statements d. Not disclosed
(1.5) Identify the financial statement (or statements) in which each of the following items would appear: income statement (IS), statement of stockholders' equity (SSE), balance sheet (BS), or statement of cash flows (SCF) a) assets b) revenues c) cash flow from investing activities d) stockholders' equity e) expenses f) net change in cash g) net income h) liabilities
a. BS b. IS c. SCF d. BS, SSE e. IS f. SCF g. IS, SSE h. BS
(1.4) Identify whether the following statements are true or false: a) U.S. GAAP is universally accepted in all countries in the world b) U.S. GAAP is established by the IASB c) once established, U.S. GAAP is rarely, if ever, modified d) the international counterpart to the FASB is the IASB
a. False b. False c. False d. True
(1.3) Identify the type of accounting associated with each type of report: Managerial, Financial, Tax, or some combination as needed. a) budget for internal use by management b) tax return for state income taxes c) audited financial statements d) special reports for regulators of a public utility
a. Managerial b. Tax c. Financial d. Combination as needed
(1.2) Identify each of the following activities as operating, investing, or financing: a) payment of employee salaries b) repayment of a loan c) issuance of common stock d) purchase of equipment to manufacture a company's products e) sale of merchandise inventory f) investment of excess cash in the shares of another company
a. Operating b. Financing c. Financing d. Investing e. Operating f. Investing
(1.2) Match the following activities with the type of activity: operating, investing, financing. a) day-to-day business activities b) purchase of land for a new warehouse c) sale of merchandise inventory d) obtain a new bank loan e) payment of dividends f) invest excess cash g) purchase office supplies h) sell old equipment that is no longer needed
a. Operating b. Investing c. Operating d. Financing e. Financing f. Investing g. Operating h. Investing
(1.1) Match the following forms of business organization with the set of attributes that best describes that form of business: sole proprietorship, partnership, or corporation. a) shared control, unlimited liability, tax advantages, increased skill and resources b) best for raising large amounts of funds, double taxation, limited liability, easiest to transfer ownership interests c) sole ownership, easiest to establish, tax advantages, unlimited liability
a. Partnership b. Corporation c. Sole proprietorship