ACG2021 FINAL EXAM Review (CH 1-3)

What journal entry is recorded as a result of issuing stock to investors for cash? a. A credit to Cash and a debit to Retained Earnings b. A debit to Cash and a credit to Common Stock c. A debit to Common Stock and a credit to Cash d. A debit to cash and a debit to Common Stock e. A debit to Cash and a credit to Retained Earnings

b. A debit to Cash and a credit to Common Stock

What are generally accepted accounting principles? a. The guidelines used to resolve ethical dilemmas b. A set of accounting rules and practices that have authoritative support c. Usually established by the Internal Revenue Service d. Rules imposed by the Internal Revenue Service (IRS) e. Fundamental truths that can be derived from the laws of nature

b. A set of accounting rules and practices that have authoritative support

Which one of the following does not affect retained earnings? a. Renting a warehouse to store the company's inventory b. Issuing of common stock to stockholders c. Incurring a net loss d. Declaring and paying a dividend e. Recognizing revenue from a sale to a customer

b. Issuing of common stock to stockholders

Which of the following ratios measures the ability of the company to survive over a long period of time? a. Profitability ratios b. Solvency ratios c. Liquidity ratios d. Working capital e. Current ratios

b. Solvency ratios

Which financial statement is used by most corporations to compute year-end retained earnings? a. Statement of sources and uses b. Statement of stockholders' equity c. None of these d. Statement of cash flows e. Balance sheet

b. Statement of stockholders' equity

The obligation to pay for goods purchased from suppliers is called a(n) a. cost of goods sold. b. account payable. c. expense. d. account receivable. e. investing activity.

b. account payable

The effects of paying a dividend on the basic accounting equation are to a. increase assets and increase liabilities. b. decrease assets and decrease stockholders' equity. c. decrease assets and decrease liabilities. d. increase liabilities and increase stockholders' equity. e. increase assets and decrease assets by the same amount. Total assets do not change.

b. decrease assets and decrease stockholders' equity.

Payment of a dividend a. increases expenses and decreases cash. b. decreases cash and decreases retained earnings. c. decreases cash and increases stockholders' equity. d. increases retained earnings and increases expenses. e. increases cash and increases stockholders' equity.

b. decreases cash and decreases retained earnings.

On a classified balance sheet, companies usually list current assets a. with the largest dollar amounts first. b. in the order in which they are expected to be converted into cash or used by the business. c. in alphabetical order. d. in order of their age. e. in the order of acquisition.

b. in the order in which they are expected to be converted into cash or used by the business.

Debts and obligations of a business are referred to as a. expenses. b. liabilities. c. assets. d. outflows. e. equities.

b. liabilities.

The assumption that requires only those things that can be expressed in money are included in the accounting records is the a. economic entity assumption. b. monetary unit assumption. c. periodicity assumption. d. going concern assumption. e. dollar assumption.

b. monetary unit assumption.

Explanations of uncertainties and contingencies of a business, including various statistics and details too voluminous to be included in the financial statements, would be found in the company's a. auditor's report. b. notes to the financial statements. c. management analysis section. d. chart of accounts. e. trial balance.

b. notes to the financial statements.

A list of accounts and their balances at a given time is called a(n) a. posting. b. trial balance. c. journal. d. chart of accounts. e. income statement.

b. trial balance.

What is the going concern assumption?

business will not shut down anytime soon

Which two accounts follow the rules of debits and credits in relation to increases and decreases in the same manner? a. (i) Retained Earnings and (ii) Supplies b. (i) Dividends and (ii) Accumulated Depreciation c. (i) Cash and (ii) Interest Expense d. (i) Interest Expense and (ii) Accounts Payable e. (i) Common Stock and (ii) Rent Expense

c. (i) Cash and (ii) Interest Expense

A company purchased a plot of land on which it expects to build a factory in approximately five years. During the five years before construction, the land will be idle. In what classification should the land be reported? a. Property, plant, and equipment b. An intangible asset c. A long-term investment d. Land expense

c. A long-term investment

A ratio summarizes the relation between selected items. Financial statement analysis (i.e., ratio analysis) focuses on the relation between certain financial statement data, such as earnings and the number of shares of common stock (i.e., earnings per share or EPS). A ratio by itself is not particularly useful. Rather, ratios tend to be compared to standards. Which of the following is a comparison facilitated by ratios when conducting a financial statement analysis (i.e., ratio analysis)? a. Intercompany comparisons such as comparing a company's ratio to the ratio of a competitor in the same industry. b. Industry-average comparisons such as comparing a company's ratio to an industry average. c. All of these d. None of these e. Intracompany comparisons such as comparing two years' ratios for the same company.

c. All of these

In a classified balance sheet, which assets are usually listed first? a. Intangible assets b. Property, plant, and equipment c. Current assets d. Common stock e. Long-term investments

c. Current assets

Which of the following is true with regards to the dividends account? a. It is neither a revenue nor an expense account and it normally has a credit balance. b. It is a revenue account and it normally has a credit balance. c. It is neither a revenue nor an expense account and it normally has a debit balance. d. It is an expense account and it normally has a credit balance. e. It is an expense account and it normally has a debit balance.

c. It is neither a revenue nor an expense account and it normally has a debit balance.

What type of account is unearned revenue? a. Equity b. Asset c. Liability d. Expense e. Revenue

c. Liability

Which of the following is not classified as a current asset? a. Accounts receivable b. Inventory c. Patents d. Cash e. Prepaid expenses

c. Patents

Which of the following would appear on a balance sheet? a. Dividends b. Net cash flows from operating activities c. Retained earnings d. Service revenue e. Salaries and wages expense

c. Retained earnings

Which of the following best describes stockholders' equity? a. Stockholders' equity is the difference between revenues and expenses. b. Stockholders' equity are the claims of creditors. c. Stockholders' equity are the claims of owners. d. Stockholders' equity is the cash collected from owners. e. Stockholders' equity are the economic resources of the firm.

c. Stockholders' equity are the claims of owners.

Which of the following describes that sequence in which financial statements are prepared? a. The financial statements are independent and the order they are prepared is not important. b. The balance sheet is prepared before the income statement. c. The statement of stockholders' equity is prepared before the balance sheet. d. All of these e. None of these

c. The statement of stockholders' equity is prepared before the balance sheet.

A company pays the coming year's one-year insurance policy. This transaction will immediately affect the a. income statement only. b. income statement, balance sheet, and retained earnings statement only. c. balance sheet and cash flows statement only. d. income statement, retained earnings statement, cash flows statement, and balance sheet. e. income statement and cash flows statement only.

c. balance sheet and cash flows statement only.

A company purchases office equipment in exchange for cash. This transaction will immediately affect the a. income statement and cash flows statement only. b. income statement, retained earnings statement, cash flows statement, and balance sheet. c. balance sheet and cash flows statement only. d. income statement, balance sheet, and retained earnings statement only. e. income statement only.

c. balance sheet and cash flows statement only.

The effects of receiving cash from a customer in exchange for performing services on the basic accounting equation are to a. decrease assets and decrease stockholders' equity. b. increase assets and increase liabilities. c. increase assets and increase stockholders' equity. d. increase liabilities and increase stockholders' equity. e. decrease assets and decrease liabilities.

c. increase assets and increase stockholders' equity.

A transaction that increases an unearned revenue a. decreases a liability and increases stockholders' equity. b. increases a liability and decreases stockholders' equity. c. increases an asset and increases a liability. d. increases an asset and increases a revenue. e. decreases a revenue and increases stockholders' equity.

c. increases an asset and increases a liability.

Issuing a note to a creditor a. decreases stockholders' equity and increases liabilities. b. decreases liabilities and increases assets. c. increases assets and increases liabilities. d. decreases retained earnings and increases assets. e. decreases assets and decreases liabilities.

c. increases assets and increases liabilities.

Relevant accounting information a. must be reported within the operating cycle or one year, whichever is longer. b. is immaterial c. is information that is capable of making a difference in a business decision. d. is information that has been audited. e. has been objectively determined.

c. is information that is capable of making a difference in a business decision.

A transaction decreased a company's assets by $5,000 and decreased its stockholders' equity by $5,000. This transaction could have been a(n) a. purchase of supplies for cash. b. investment of cash into the business by the stockholders. c. payment of wages to the employees. d. purchase of supplies for on account. e. purchase of office equipment for cash.

c. payment of wages to the employees.

What is the full disclosure principle?

companies must state all important information, if it is not possible to state all the important info in the financial statements, then the info should be put in the footnotes

A company began the year with total assets of $230,000 and total liabilities of $160,000. During the year, the company did the following: Recognized revenues, $400,000 Incurred expenses, $220,000 Declared and paid dividends, $40,000 Issued common stock, $10,000 What is the stockholders' equity at the end of the year? a. $190,000 b. $210,000 c. $200,000 d. $220,000 e. $230,000

d. $220,000 Solution: The basic accounting equation is: Assets = Liabilities + Stockholders' equityAt the start of the year, stockholders' equity is $70,000 (i.e., equity = assets - liabilities = 230,000 - 160,000 = 70,000).During the year equity increased by revenues, decreased by expenses, decreased by dividends, and increased by additional stock issued. Equity increased from $70,000 to $220,000 (i.e., $70,000 + 400,000 - 220,000 - 40,000 + 10,000 = 220,000).

A trial balance would only help in detecting which one of the following errors? a. For a given transaction, the account that should have been debited was credited and the account that should have been credited was debited. b. A journal entry that is posted twice. c. A trial balance would help detect all of these errors. d. An error when transferring the debit side of journal entry to the ledger occurred; it was recorded as a credit. The credit side of the transaction was recorded correctly. e. A transaction that is not journalized.

d. An error when transferring the debit side of journal entry to the ledger occurred; it was recorded as a credit. The credit side of the transaction was recorded correctly.

Which of the following statements is false? a. All of these are false. b. The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions. c. Accounting information has relevance if it would make a difference in a business decision. d. Comparability means using the same accounting principles from year to year within a company. e. Faithful representation is the quality of information that gives assurance that it is free of error.

d. Comparability means using the same accounting principles from year to year within a company.

Which of the following is an indicator of profitability? a. Debt to total assets ratio b. Current ratio c. Working capital d. Earnings per share e. All of these

d. Earnings per share

Which of the following would not appear on an income statement? a. Interest expense b. Net income c. Revenue d. Prepaid rent e. Cost of goods sold

d. Prepaid rent

Which of the following would decrease the company's current ratio? a. Issue common stock in exchange for cash. b. Selling machinery previously used in operating the business in exchange for cash. c. Buying supplies, such as office supplies, in exchange for cash. d. Using excess cash to buy long-term investments. e. Selling services to customers on account.

d. Using excess cash to buy long-term investments.

The annual report provided to shareholders includes an auditor's report. The auditor's report includes an opinion about the fairness of the financial statements. The party expressing that opinion is a. an independent auditor who is a member of the Government Auditing Accountants. b. the company's Chief Operating Officer. c. the company's internal auditor. d. an independent auditor who is a Certified Public Accountant. e. the Internal Revenue Service.

d. an independent auditor who is a Certified Public Accountant.

If a company pays for a one-year insurance policy that will expire next year, then a. assets decrease and liabilities increase. b. liabilities increase and liabilities decrease. c. assets increase and liabilities decrease. d. assets increase and assets decrease. e. assets increase and stockholders' equity increases. f. assets increase and stockholders' equity increases.

d. assets increase and assets decrease.

Retained earnings is a. equal to revenues minus expenses. b. equal to cash. c. an asset account. d. equal to the amount of net income minus dividends paid since the company began operations. e. equal to stockholders' equity.

d. equal to the amount of net income minus dividends paid since the company began operations.

A business organized as a corporation a. is disadvantaged in terms of raising funds. b. is tax advantaged compared to sole proprietorships and partnerships. c. requires that stockholders be personally liable for the debts of the business. d. is considered to be a legal entity that is separate from its owners. e. is owned by its creditors.

d. is considered to be a legal entity that is separate from its owners.

The portion of the annual report that presents management's views on the company's ability to fund operations and expansion is the a. investor analysis report. b. auditor's report. c. notes to the financial statements. d. management discussion and analysis. e. chief executive's officer's reconciliation.

d. management discussion and analysis.

The assumption the life of a business can be divided into artificial time periods for financial reporting purposes is known as the a. going concern assumption. b. economic entity assumption. c. monetary unit assumption. d. periodicity assumption. e. integrity assumption.

d. periodicity assumption.

A company declares and pays a dividend to shareholders. This transaction will immediately affect the a. income statement, retained earnings statement, and cash flows statement only. b. income statement and cash flows statement only. c. Income statement, balance sheet and cash flows statement only. d. retained earnings statement, balance sheet, and cash flows statement only. e. balance sheet and cash flows statement only

d. retained earnings statement, balance sheet, and cash flows statement only.

Long-term creditors are usually most interested in evaluating a. profitability. b. comparability. c. liquidity. d. solvency. e. consistency.

d. solvency.

To prepare financial statements, you must understand the sequence in which amounts are determined and how each statement impacts the next. All of the following are interrelationships that are important to understand when preparing financial statements except a. the net income from the income statement is used in the retained earnings statement. b. the ending retained earnings from the retained earnings statement is used in the stockholders' equity section of the balance sheet. c. the cash on the balance sheet should be equal to the cash at the end of the period on the statement of cash flows. d. the total expenses on the income statement should be equal to the cash payments for operating activities on the statement of cash flows. e. All of these are correct interrelationships.

d. the total expenses on the income statement should be equal to the cash payments for operating activities on the statement of cash flows.

In what order are current assets listed on a classified balance sheet? a. By longevity b. Alphabetically c. By importance d. By their size measured in dollars e. By liquidity

e. By liquidity

Which statement about users of accounting information is correct? a. Management is considered an external user. b. Regulatory authorities are considered internal users. c. Labor unions are considered internal users. d. Taxing authorities are considered internal users. e. Creditors are considered external users.

e. Creditors are considered external users.

Which of the following best identifies a company's ability to pay its obligations that will become due within the next year or operating cycle. a. Net income for this year b. Total liabilities divided by total equity c. Short-term liabilities divided long-term liabilities d. Projected net income for next year e. Current assets divided by current liabilities

e. Current assets divided by current liabilities

Which of the following is false with regards to the double-entry system of recording transactions? a. None of these are false. b. Each transaction is recorded with an equal dollar amount of debits and credits. c. Each transaction affects the balances of at least two different accounts. d. All of these are false. e. Each transaction affects at least one income statement account and at least one balance sheet account.

e. Each transaction affects at least one income statement account and at least one balance sheet account.

What group is considered to be the primary accounting standard-setting body in the United States? a. American Institute of Certificed Public Accountants b. Public Company Accounting Oversight Board (PCAOB) c. Securities and Exchange Commission d. International Accounting Standards Board e. Financial Accounting Standards Board

e. Financial Accounting Standards Board

A company's journal make several significant contributions to the recording process. Which of the following is not one of the journal's contributions? a. It discloses the complete effect of a transaction in one place. b. It helps prevent errors because debits and credits can be readily compared. c. It provides a chronological record of transactions. d. All of these are true with regards to the journal. e. It reports the balance in each of the accounts.

e. It reports the balance in each of the accounts.

Which of the following is considered property, plant, and equipment on a classified balance sheet? a. Depreciation b. Copyrights c. Accounts receivable d. Investments in another company's stock e. Land

e. Land

Posting a. involves transferring all debits and credits on a journal page to the trial balance. b. is the last step of the accounting cycle. c. is accomplished by examining ledger accounts and seeing which ones need adjusting. d. should be performed in account number order. e. accumulates the effects of journalized transactions in the individual accounts.

e. accumulates the effects of journalized transactions in the individual accounts.

When the auditor is satisfied that the financial statements provide a fair representation of the company's financial position and results of operation in accordance with generally accepted accounting principles, the auditor will express a. a qualified opinion. b. a certified opinion. c. an adverse opinion. d. a disclaimer of opinion. e. an unqualified opinion.

e. an unqualified opinion.

Generally Accepted Accounting Principles (GAAP) a. have eliminated all errors in accounting. b. are accounting rules formulated by the Internal Revenue Service. c. are sound in theory but rarely used in real life. d. are the rules used to evaluate the performance of auditing firms. e. are accounting rules that are recognized as a general guide for financial reporting.

e. are accounting rules that are recognized as a general guide for financial reporting.

If services are performed in exchange for cash, then the service provider's a. assets and equity will decrease. b. assets and liabilities will decrease. c. assets and liabilities will increase. d. assets will both increase and decrease by the same amount. Total assets will not change e. assets and equity will increase.

e. assets and equity will increase. Performing services for cash indicates that assets increased (i.e., cash increased) and revenue increased. Revenue is recognized when it is earned. Increasing revenue increases net income and retained earnings. Retained earnings is a stockholders' equity account, so stockholders' equity increases when revenue is earned.

The purchase of an asset, such as supplies, on account a. increases the purchaser's assets and stockholders' equity. b. decreases the purchaser's assets and increases liabilities. c. increases the purchaser's assets and decreases stockholders' equity d. leaves the purchaser's total assets unchanged. e. increases the purchaser's assets and liabilities.

e. increases the purchaser's assets and liabilities.

A short-term creditor is primarily interested in the __________ of the borrower. a. consistency b. comparability c. solvency d. profitability e. liquidity

e. liquidity

In recording an accounting transaction in a double-entry system a. there must always be an account on one side of the accounting equation increased and an account on the other side of the accounting equation increased. b. all of these. c. there must be more than two accounts affected by a transaction. d. the number of accounts debited must equal the number of accounts credited. e. the dollar amount of the debits must equal the dollar amount of the credits.

e. the dollar amount of the debits must equal the dollar amount of the credits.

Higher current ratios mean the company is more ________ (i.e., better able to pay is short-term liabilities), and lower current ratios mean the company is less ________.

liquid, liquid

The current ratio measures __________.

liquidity

What is the economic entity assumption?

no personal transactions are charged to the business

Which of the following would not be reported among property, plant, and equipment on a classified balance sheet? a. Inventory b. Land c. Equipment d. Buildings e. Accumulated depreciation

a. Inventory

The financial statement that summarizes the changes in retained earnings for a specific period of time is the a. statement of stockholders' equity b. income statement. c. balance sheet. d. trial balance. e. statement of cash flows.

a. statement of stockholders' equity

Which of the following would increase a company's current ratio? a. Negotiate with a creditor to reclassify a note payable in 3 months into a note payable due in 2 years. b. Pay a dividend to shareholders. c. Use cash to buy new equipment. d. Collect outstanding accounts receivable. e. None of these

a. Negotiate with a creditor to reclassify a note payable in 3 months into a note payable due in 2 years.

A trial balance will balance even if a. a $1,000 journal entry was posted twice. b. the account that should be debited was credited and the account that should be credited was credited.. c. None of these d. both accounts affected by a $1,000 transaction were debited. e. a $1,000 cash payment for supplies was debited to the Supplies account for $1,000 and credited to the Cash account for $100.

a. a $1,000 journal entry was posted twice.

Faithful representation means that information accurately depicts what really happened. Characteristics associated with faithfully representative accounting information include being a. complete, neutral, and free from error. b. material and predictive. c. relevant, verifiable, and predictable. d. confirmatory, explanatory, and valuable. e. verifiable and material.

a. complete, neutral, and free from error.

Solvency refers to...

a company's ability to survive over a long period of time.

Which of these measures is an evaluation of a company's ability to pay current liabilities? a. Both the current ratio and working capital b. Earnings per share c. Current ratio d. Working capital e. Both earnings per share and current ratio

a. Both the current ratio and working capital

Which of the following is an expense? a. Cost of goods sold b. Dividends c. Wages payable d. Accounts receivable e. All of these

a. Cost of goods sold