Accounting Midterm Ch. 1-4

A company purchased a new truck at a cost of $42,000 on July 1. The truck is estimated to have a useful life of 6 years and a salvage value of $3,000. The company uses the straight-line method of depreciation. How much depreciation expense will be recorded for the truck during the first year ended December 31?

$3,250 ($42,000-$3,000)/6= $6500 --> Yearly $6500/12= monthly cost x 6 = $3,250

Unearned revenue is reported in the financial statements as:

A liability on the balance sheet

A ledger is:

A record containing all accounts and their balances used by a company

Source documents:

Are the sources of accounting information

Photometer Company paid off $30,000 of its accounts payable in cash. What would be the effects of this transaction on the accounting equation?

Assets, $30,000 decrease; liabilities $30,000 decrease; equity, no effect.

The accounting assumption that requires every business to be accounted for separately from other business entities, including its owner or owners is known as the:

Business entity assumption

T or F: Withdrawals by the owner are a business expense

False

Net income:

Is the excess of revenues over expenses.

T or F: Debits increase asset and expense accounts

True

T or F: Revenues are increases in equity from a company's earning activities

True

T or F: The income statement displays revenues earned and expenses incurred over a specified period of time due to earnings activities

True

A company had no office supplies available at the beginning of the year. During the year, the company purchased $250 worth of office supplies. On December 31, $75 worth of office supplies remained. How much should the company report as office supplies expense for the year?

$175

On June 30 of the current year, the assets and liabilities of Phoenix, Inc. are as follows: Cash $20,500; Accounts Receivable $7,250; Supplies $650; Equipment $12,000; Accounts Payable $9,300. What is the amount of owner's equity as of June 30 of the current year?

$31,100

If assets are $99,000 and liabilities are $32,000, then equity equals:

$67,000

How would the accounting equation of Boston Company be affected by the billing of a client for $10,000 of consulting work completed?

+$10,000 accounts receivable, +$10,000 revenue

Which of the following statements is TRUE: -The SEC enforces the accounting rules, GAAP are the accounting rules, and FASB sets the accounting rules -The SEC sets the accounting rules, GAAP sets the accounting rules, and FASB are the accounting rules -The IASB are the accounting rules, the SEC sets the accounting rules, and IFRS enforces the accounting rules.

-The SEC enforces the accounting rules, GAAP are the accounting rules, and FASB sets the accounting rules

Of the following errors, which by itself will cause the trial balance to be out of balance? -A $200 cash salary payment posted as a $200 debit to Cash and a $200 credit to Salaries Expense -A $100 cash receipt from a customer in payment of his account posted as a $100 debit to Cash and a $10 credit to Accounts Receivable -A $75 cash receipt from a customer in payment of his account posted as a $75 debit to Cash and a $75 credit to Cash

A $100 cash receipt from a customer in payment of his account posted as a $100 debit to Cash and a $10 credit to Accounts Receivable

A credit is used to record:

A decrease in an asset account

The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues is:

Accrual basis accounting

Adjusting entries:

Affect both income statement and balance sheet accounts

The accounting process begins with:

Analysis of business transactions and source documents

Resources that are expected to yield future benefits are:

Assets

The income statement reports all of the following EXCEPT: -Revenues earned by a business -Expenses incurred by a business -Assets owned by a business -Net income or loss earned by a business -The time period over which the earnings occurred

Assets owned by a business

Prepaid expenses are:

Assets that represent prepayments of future expenses

If a company paid $38,000 of its accounts payable in cash, what was the effect on the assets, liabilities, and equity?

Assets would decrease $38,000, liabilities would decrease $38,000, and equity would not change.

If the liabilities of a company increased $74,000 during a period of time and equity in the company decreased $19,000 during the same period, what was the effect on the assets?

Assets would have increased $55,000

If a company mistakenly forgot to record depreciation on office equipment at the end of an accounting period, the financial statements prepared at that time would show:

Assets, net income, and equity overstated

The system of preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid is called:

Cash basis accounting

A list of all accounts and the identification number assigned to each account used by a company is called a:

Chart of accounts

The owner of Lakeland Consulting withdraws $500 cash for personal use. What effect does this have on Lakeland's accounting equation?

Decrease in assets and decrease in owner's equity

The owner of Lakeland Consulting withdraws $500 cash for personal use. What effect does this have on Lakeland's accounting equation?

Decrease in assets and decrease in owner's equity.

The private group that currently has the authority to establish generally accepted accounting principles in the United States is the:

FASB

Liabilities are the owner's claim on assets.

False

T or F: A balance sheet covers a period of time such as a month or year.

False

T or F: A contra account is an account linked with another account; it is added to that account to show the proper amount for the item recorded in the associated account

False

T or F: A net loss occurs when revenues exceed expenses.

False

T or F: According to the cost principle, it is preferable for managers to report an estimate of an asset's value

False

T or F: Accounts are normally decrease by debits

False

T or F: Adjusting entries are made after the preparation of financial statements

False

T or F: An adjusting entry often includes an entry to Cash

False

T or F: Asset accounts normally have credit balances and revenue accounts normally have debit balances.

False

T or F: Credit always increase account balances

False

T or F: Each adjusting entry can only affect a balance sheet account

False

T or F: Ending capital reported on the statement of owner's equity is calculated by adding owner investments and net losses and subtracting net incomes and withdrawals

False

T or F: Hamilton Industries has liabilities of $105 million and total assets of $350 million. Its debt ratio is 40.0%

False

T or F: If a company is highly leveraged, this means that it has relatively low risk of not being able to repay its debt.

False

T or F: In accrual accounting, accrued revenues are recorded as liabilities

False

T or F: Internal users include lenders, shareholders, brokers and managers.

False

T or F: Internal users include lenders, shareholders, brokers, and managers.

False

T or F: Land and buildings are generally recorded in the same ledger account

False

T or F: Owner's Investments are increases in equity from a company's earnings activities.

False

T or F: Recording expenses early overstates current-period income; recording expenses late understates current period income

False

T or F: The accounting equation implies that: Assets + Liabilities = Equity

False

T or F: The accounting equation implies that: Assets + Liabilities = Equity.

False

T or F: The accrual basis of accounting recognizes expenses when cash is paid

False

T or F: The balance sheet shows a company's net income or loss due to earnings activities over a period of time.

False

T or F: The income statement shows the financial position of a business on a specific date

False

T or F: Transactions are first recorded in the ledger

False

The rule that requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold, unless evidence shows that it will not continue, is the:

Going-concern assumption

The financial statement that reports whether the business earned a profit and also lists the revenues and expenses is called the:

Income statement

The adjusting entry to record an accrued expense is:

Increase an expense; increase a liability

If the liabilities of a business increased $75,000 during a period of time and the owner's equity in the business decreased $30,000 during the same period, the assets of the business must have

Increased $45,000

Creditors' claims on the assets of a company are called:

Liabilities

The area of accounting aimed at serving the decision making needs of internal users is:

Managerial accounting

Which of the following accounting principles prescribes that a company record its expenses incurred to generate the revenue reported? -Going-concern assumption -Matching principle -Cost principle -Business entity assumption -Consideration assumption

Matching principle

An adjusting entry could be made for each of the following except: -Prepaid expenses -Depreciation -Owner withdrawals -Unearned revenues -Accrued revenues

Owner withdrawals

All of the following statements regarding profit margin are true EXCEPT: -Profit margin reflects the percent of profit in each dollar of revenue -Profit margin is also called return on sales -Profit margin can be used to compare a firm's performance to its competitors -Profit margin is not a useful measure of a company's operating results

Profit margin is not a useful measure of a company's operating results

External users of accounting information include all of the following EXCEPT: -Shareholders -Customers -Purchasing managers -Government regulators -Creditors

Purchasing Managers

Two accounting principles that are relied on in the adjusting process are:

Revenue recognition and matching

Which of the following statements is incorrect? -Higher financial leverage involves higher risk -Risk is higher if a company has more liabilities -Risk is higher if a company has higher assets -The debt ratio is one measure of financial risk -Lower financial leverage involves lower risk

Risk is higher if a company has higher assets

The financial statement that identifies where a company's cash came from and where it went during the period is the:

Statement of cash flows

Double-entry accounting is an accounting system:

That records the effects of transactions and other events in at least two accounts with equal debits and credits

Revenues are:

The increase in equity from a company's earning activities

Which of the following statements is incorrect? -The normal balance of accounts receivable is a debit -The normal balance of owner's withdrawals is a debit -The normal balance of unearned revenues is a credit -The normal balance of an expense account is a credit -The normal balance of the owner's capital account is a credit

The normal balance of an expense account is a credit

The account used to record the transfers of assets from a business to its owner is:

The owner's withdrawals account

The credit purchase of a delivery truck for $4,700 was posted to Delivery Trucks as a $4,700 debit and to Accounts Payable as a $4,700 debit. What effect would this error have on the trial balance?

The total of the Debit column of the trial balance will exceed the total of the Credit column by $9,400

The basic financial statements include all of the following except: -Balance sheet -Income statement -Statement of owner's equity -Statement of cash flows -Trial balance

Trial balance

Items such as sales tickets, bank statements, checks, and purchase orders are source documents

True

T or F: A company's month-end adjusting entry for Insurance Expense is $1,000. If this entry is not made then expenses are understated by $1,000 and net income is overstated by $1,000

True

T or F: Adjusting entries result in a better matching of revenues and expenses for the period

True

T or F: Adjustments are necessary to bring an asset or liability account to its proper amount and also update a related expense or revenue account

True

T or F: Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries Payable are both understated

True

T or F: Generally accepted accounting principles are the basic assumptions, concepts, and guidelines for preparing financial statements.

True

T or F: Generally, the ordering of accounts in a trial balance typically follows their identification number from the chart of accounts, that is, assets first, then liabilities, then owner's capital and withdrawals, followed by revenues and expenses.

True

T or F: If a company reporting on a calendar year basis paid $18,000 cash on January 1 for one year of rent in advance and adjusting entries are made at the end of each month, the balance of Prepaid Rent as of December 1 should be $1,500

True

T or F: Managerial accounting is the area of accounting that provides internal reports to assist the decision making needs of internal users

True

T or F: Net income for a period will be overstated if accrued salaries are not recorded at the end of the accounting period

True

T or F: Source documents provide evidence of business transactions and are the basis for accounting entries

True

T or F: The Financial Accounting Standards Board is the private group that sets both broad and specific accounting principles.

True

T or F: The balance sheet is based on the accounting equation

True

T or F: The business entity assumption means that a business is accounted for separately from other business entities, including its owner or owners.

True

T or F: The cash basis of accounting commonly results in financial statements that are less comparable from period to period that the accrual basis of accounting

True

T or F: The four basic financial statements include the balance sheet, income statement, statement of owners equity, and statement of cash flows

True

T or F: The income statement displays revenues earned and expenses incurred over a specific period of time due to earnings activities.

True

T or F: The income statement displays revenues earned and expenses incurred over a specified period of time due to earning activities.

True

T or F: The primary objective of financial accounting is to provide general purpose financial statements to help external users analyze and interpret an organization's activities

True