ACCT 301 Exam 1 10/9

Examples of Expense Accounts

-Cost of goods sold -Depreciation -Interest -Rent -Salaries and wages -Taxes

Gains and Losses can result from

-Sale of investments or plant assets, -Settlement of liabilities, -Write-offs of assets.

Examples of Revenue Accounts

-Sales -Fee -Interest -Dividend -Rent

Examples of Change in Accounting Estimates

-Useful lives and salvage values of depreciable assets -Allowance for uncollectible receivables -Inventory obsolescence

A journal entry recorded by a company for a payment received from a customer on account will include which of the following?

Credit to Accounts Receivable

Which of the following journal entries is appropriate when a company receives payment in advance for goods or services?

Debit cash and credit a liability account or a revenue account.

Which of the following is NOT included in the calculation of free cash flow? a) dividends b) net cash provided by operating activities c) average total liabilities d) capital expenditures

c) average total liabilities

Preparing the statement of cash flows involves all of the following except determining the a. cash provided by operations. b. cash provided by or used in investing and financing activities. c. change in cash during the period. d. cash collections from customers during the period.

d

Which of the following accounts is classified as a short-term liability? a) most pension obligations b) long-term liabilities that mature within the operating cycle and will be paid from a sinking fund. c) obligations payable at some date beyond the operating cycle. d) income taxes payable.

d) income taxes payable

A contingency that is reported in the notes to the financial statements is best exemplified by

estimated loss from an ongoing lawsuit

In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be classified as a(n) a. operating activity. b. financing activity. c. extraordinary activity. d. investing activity.

financing activities

Butler Resources currently has $700 million in assets. Of these assets, $450 million are in cash or can be readily converted to cash. This is an example of

high liquidity

Where are liabilities placed on the balance sheet if a company plans to use the report form?

in the middle of the page

Revenues are characterized by cash

inflows as a result of a company's central operations.

revenue test

its reported revenues are 10% or more of the combined revenues of all the company's operating segments

Which of the following is the current cash debt coverage often used to assess?

liquidity

Assuming all other entries on its adjusted trial balance and income statement remain constant, as a firm's cost of goods sold decreases, its

net income and retained earnings will both increase.

An accrued expense can best be described as an amount

not paid and currently matched with earnings.

A prepaid expense can best be described as an amount

paid and not currently matched with earnings.

Which of the following is an example of an accrued liability?

property taxes incurred during the year, to be paid in the first quarter of the subsequent year

The statement of cash flows helps users to evaluate financial flexibility. Financial flexibility is

the firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities

The accounting equation (A = L + SE) must remain in balance

throughout each step in the accounting cycle.

T/F? Free cash flow is a more sophisticated way to examine a company's financial flexibility.

true

As a corporation increases the percentage of its net income that it retains in the business, it __________ the percentage of its net income that it pays out in the form of stockholder dividends.

Decreases

Losses

Decreases in equity (net assets) from peripheral or incidental transactions.

operating profit (loss) test

split profit and losses up

Jane is creating a balance sheet for Tim's Toys. According to her calculations, Tim's has current assets of $25,000 and property, plant, and equipment of $45,000. However, Jane's supervisor reminds her that these numbers fail to account for $1,200 in accumulated depreciation on the company's equipment. With this information in mind, Jane should calculate that Tim's Toys' total assets are equal to

$68,800.

What's included in Comprehensive Income?

-All revenue and gains, expenses and losses reported in net income -All gains and losses that bypass net income but affect stockholders' equity

Format of the Income Statement

-Format referred to as multiple-step income statement. -Separates operating transactions from nonoperating transactions. -Matches costs and expenses with related revenues. -Highlights certain components of income that analysts use assessing financial performance.

Common for companies to present some or all of the following sections and totals within the income statement.

-Operating section -Nonoperating section -Income tax -Discontinued operations -Noncontrolling interest -Earnings per share

Companies are required to report unusual and infrequent items as part of net income so users can better determine the long-run earning power of the company

-Unusual gains and losses. -Discontinued operations. -Noncontrolling interest. -Earnings per share

Making and collecting loans and disposing of property, plant, and equipment are a. operating activities. b. investing activities. c. financing activities. d. liquidity activities.

investing activities

When reviewing her adjusted trial balance for February, Cathy calculates that her cupcake shop had total expenses of $8,250 and total revenues of $14,657. Given this information, Cathy's income statement should show a

net income of $6,407.

Harrington Textiles reports on their balance sheet the fact that they use the FIFO method of inventory pricing. This is an example of a

significant accounting policy.

Murray Securities purchased $10 million in stocks of 12 different companies. The details of the stocks, including the company name, purchase price, expected return, and length of time the company plans to hold the stocks, would most likely be disclosed in a(n)

supporting schedule

The difference between the accounting process and the accounting cycle is

the accounting process represents the steps taken to accomplish the accounting cycle.

A trial balance prepared at year end showed Puccinelli Co.'s debit total exceeding the credit total by $6,300. This discrepancy could have been caused by

the balance of $700 in the Equipment account being entered as a debit of $7,000.

Which of the following items is reflected on the balance sheet but not on the adjusted trial balance?

the ending retained earnings balance

During 2010 the DLD Company had a net income of $50,000. In addition, selected accounts showed the following changes: Accounts Receivable $3,000 increase Accounts Payable 1,000 increase Building 4,000 decrease Depreciation Expense 1,500 increase Bonds Payable 8,000 increase What was the amount of cash provided by operating activities? a. $49,500 b. $50,000 c. $51,500 d. $59,500

a

In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for a. operating activities. b. borrowing activities. c. lending activities. d. financing activities.

a

In preparing a statement of cash flows, which of the following transactions would be considered an investing activity? a. Sale of equipment at book value b. Sale of merchandise on credit c. Declaration of a cash dividend d. Issuance of bonds payable at a discount

a

Cole Pharmaceuticals has been sued for damages as the result of accidental deaths caused by a newly released drug. The lawsuit has already cost them $1.6 million, and they expect additional related lawsuits to cost them $7.4 million. Therefore, Cole restricted $5 million in cash to partially cover the costs of the lawsuits. Cole would likely disclose the relationship between the restricted cash and the lawsuit liabilities with a

cross-reference

If common stock was issued to acquire an $8,000 machine, how would the transaction appear on the statement of cash flows? a. It would depend on whether you are using the direct or the indirect method. b. It would be a positive $8,000 in the financing section and a negative $8,000 in the investing section. c. It would be a negative $8,000 in the financing section and a positive $8,000 in the investing section. d. It would not appear on the statement of cash flows but rather on a schedule of noncash investing and financing activities.

d

In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from a. lending activities. b. operating activities. c. investing activities. d. financing activities.

d

T/F? If significant financing and investing activities do not affect cash flow, then they do not have to be reported in the statement of cash flows.

False

How do you calculate Net Income?

Income from Operations + Gains - Interest Expense - Losses

Gains

Increases in equity (net assets) from peripheral or incidental transactions.

Revenues

Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity's ongoing

Which of the following is the denominator when determining the current cash debt coverage ratio?

average current liabilities

What is one difference between a trading security and a held-to-maturity security?

An equity security can be classified as a trading security but not as a held-to-maturity security.

In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents) should be classified as cash outflows for a. operating activities. b. investing activities. c. financing activities. d. lending activities.

b

Harding Corporation reports the following information: Net income $500,000 Depreciation expense 140,000 Increase in accounts receivable 60,000 Harding should report cash provided by operating activities of a. $300,000. b. $420,000. c. $580,000. d. $700,000.

c

On its balance sheet, Jersey Jackets lists a $12,000 allowance for doubtful accounts. On its balance sheet, Carolina Coats lists a $10,000 allowance for doubtful accounts. Assuming all other entries on the assets portion of their balance sheets are identical, which of the following statements is accurate?

Jersey Jackets' total assets amount is less than Carolina Coats.

Purchased a 1-year insurance policy on June 1 for $1,080 cash. Adjust end of year

June is included 7/12 x 1080

How do you calculate Income from Operations?

Sales Revenue - Cost of Goods Sold - Sales & Administrative expenses

Paid $6,450 on August 31 for 5 months' rent in advance. Adjust for Dec

5 months in advance( ignore August) 4/5 x 6450

Comprehensive Income

All changes in equity during a period except those resulting from investments by owners and distribution to owners

Holden Company purchased 150 acres of land on the outer edge of a growing city. Holden expects the value of this land to appreciate by 500% over the next three years. How would you expect Holden to report the value of this land on their balance sheet?

At historical cost.

Where are financing and investing activities reported when they do not impact cash?

At the bottom of the statement of cash flows.

Which of the following describes a similarity between an income statement and a statement of cash flows?

Both statements summarize activities that took place during an accounting period.

Maxwell Foods purchased raw materials from a local farm and also redeemed bonds that they issued eight years ago. How do these transactions compare when reported in the statement of cash flows?

Both transactions result in cash outflow, but the purchase of raw materials is an operating activity and the redemption of bonds is a financing activity.

Which of the following events will appear in the cash flows from financing activities section of the statement of cash flows? a. Cash purchases of equipment. b. Cash purchases of bonds issued by another company. c. Cash received as repayment for funds loaned. d. Cash purchase of treasury stock.

Cash purchase of treasury stock

Which of the following is often necessary even if original calculations were made in good faith? -Changes in retained earnings -Changes in accounting estimates -Changes in accounting practices -Changes in net income

Changes in accounting estimates

Which of the following is not included in comprehensive income? -Dividend revenue -Losses on disposal of assets -Investments by owners -Unrealized holding gains

Investments by owners

Which of the following limitations result because income measurement involves judgment? -It may not be possible to compare net income directly between different companies. -Net income cannot be used to predict future cash flows. -Net income does not reflect the company's actual cash flow for a period of time. You got it wrong : -Net income does not reflect income that cannot be reliably measured.

It may not be possible to compare net income directly between different companies.

How do you calculate Comprehensive Income?

Net Income + Unrealized Gains/Losses

How do you calculate Retained Earnings?

Net Income - Dividends

Expenses are defined as:

Outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations.

Expenses

Outflows or other using-up of assets or incurrences of liabilities that constitute the entity's ongoing major or central operations

Which of the following statements best describes the purpose of closing entries?

They reduce the balances of revenue and expense accounts to zero so that the accounts can be used to accumulate the revenues and expenses of the next period.

If expenses are greater than revenues, the Income Summary account will be closed by a debit to

Retained Earnings and a credit to Income Summary.

Which of the following best describes the difference between the financial statements for a merchandising company compared to those for a service company?

The merchandising company's statements must account for gross profit on sales, while the service company's statements do not.

What is another name for the one statement approach?

The statement of comprehensive income

Which of the following best describes the difference in the accounting cycle performed by a merchandising company compared to the accounting cycle performed by a service company?

There is no difference in the way the accounting cycle is performed by the merchandising company and the service company.

Which of the following is a characteristic of nominal accounts?

They are periodically closed by companies.

Why do companies sometimes use earnings management?

To beat Wall Street's expectations so that the value of the company's stock increases.

You are filling out Azalea Industries' balance sheet for the month that recently ended. You have just finished compiling the liabilities and stockholders' equity section of the sheet, which shows a total value of $87,000. In order for Azalea's balance sheet to actually balance, which portion of the sheet must also show a total value of $87,000?

Total assets section.

Changes in a firm's income statement ______ have an effect on the firm's retained earnings statement.

Usually

Which of the following events would not be recorded as part of the accounting cycle?

a 10% increase in the size of the workforce

Henry Hardware had the same net sales amount in both September and October. However, the company's cost of goods sold was $5,000 higher in September than in October, and its total administrative expenses were $7,250 higher in October than in September. Assuming all other aspects of the firm's income statement are the same for both months, we can conclude that Henry's net income in September was

$2,250 higher than its net income in October.

Change in Accounting Estimates

Accounted for in the period of change or the period of and the future periods if the change affects both

Identifiable asset

Arises from a contractual or legal right, or if it is separable.

Which of the following accounts will contain a zero balance after the post-closing trial balance is completed?

Dividends

Unusual

High degree of abnormality and of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the company, taking into account the environment in which it operates.

Which of the following is not a principal purpose of an unadjusted trial balance?

It proves that debits and credits were properly entered in the ledger accounts.

Which of the following is true of the nonoperating section of a multi-step income statement? -It contains subsections regarding federal and state taxes. -It contains four main subsections. -It reports the results of the company's principal operations. -It reports the results of auxiliary activities of the company.

It reports the results of auxiliary activities of the company.

Bauer Securities decided to purchase a 15% non-controlling interest in a small private company that produces software necessary to run their specialized analytical programs. Because the company is private, the market value of the stocks is not consistent. When this information is disclosed on Bauer's financial statements, the fair value of the stocks should be considered a ________ fair value measure.

Level 3 Level 3 is the most subjective measure of fair value for financial instruments. Because the company is privately owned, no public market information is available and the value of the stock will have to be estimated based on the company's own financial information. This makes the fair value measurement a Level 3 measure

Last month, Shiloh Shoes had net sales of $40,000. If the firm's cost of goods sold was $28,000, then

Shiloh's gross profit on sales was $12,000.

Spartan Sporting Goods' adjusted trial balance for the year shows retained earnings of $550,000 and dividends of $15,000. If you want to complete Spartan's statement of retained earnings for the year, what other information will you need?

Spartan's net income, as reported on its income statement.

Caitlyn is working on some free cash flow calculations, but she is missing one component. She has capital expenditures, dividends, and the free cash flow, but she is missing the net cash provided by operating activities. Can she determine this with the information she has?

Yes, she can add the capital expenditures and the dividends to the free cash flow in order to determine the net cash provided by operating activities.

Ransdell Corporation has determined that it has $15,000 in uncollectible accounts to record during this accounting period. Where will these bad debts be reflected in Ransdell's financial statements?

They will be reflected on Ransdell's income statement.

Owens Industries is trying to increase its profile in the community. As part of this effort, Owens sponsors a Little League baseball team. The cost of sponsorship is $850. How should Owens record this transaction in order to maintain a balanced accounting equation (A = L + SE)?

They should credit $850 to assets and debit $850 to stockholders' equity.

Which of the following is not a principal purpose of an unadjusted trial balance?

Which of the following is not a principal purpose of an unadjusted trial balance?

According to their balance sheets, both Widgets Inc. and Sprockets Inc. have total assets of $1.2 million. However, Widgets has total liabilities of $350,000, while Sprockets has total liabilities of $500,000. Assuming both firms' balance sheets correctly balance, which of the following statements is accurate?

Widgets' total stockholders' equity is greater than Sprockets.

Similar to many retail stores, Wallace Shoe Stores has an account to record Sales Revenue. As part of this account, they have a related account that records the company's Sales Returns and Allowances, which decreases the value of the Sales Revenue account. The Sales Returns and Allowances account would be considered a(n) ________ account

contra

The balance sheet format that lists the assets on the left side of the page and the liabilities and stockholders' equity on the right side is the

account form

Which of the following is used to show a direct relationship between an asset and a liability on the balance sheet?

cross reference

In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive assets should generally be classified as cash inflows from a. operating activities. b. financing activities. c. investing activities. d. selling activities.

c

In preparing a statement of cash flows, cash flows from operating activities a. are always equal to accrual accounting income. b. are calculated as the difference between revenues and expenses. c. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash. d. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash.

c

Sauder Corporation reports the following information: Net income $250,000 Depreciation expense 70,000 Increase in accounts receivable 30,000 Sauder should report cash provided by operating activities of a. $150,000. b. $210,000. c. $290,000. d. $350,000.

c