Chapter 1 Review

A company has assets of $2,400,000, common stock of $620,000, and liabilities of $380,000. What is the company's retained earnings? **Reminder Assets = Liabilities + Equity $2,160,000 $2,640,000 $3,400,000 $1,400,000 $1,000,000

$1,400,000 Re-arranging the accounting equation to solve for equity yields the following: Equity = Assets - Liabilities Equity = $2,400,000 - 380,000Equity = $2,020,000 By definition, equity equals paid-in capital (i.e., common stock) plus retained earnings. Solving this relation for retained earnings: Retained earnings = Equity - Common stock Retained earnings = $2,020,000 - 620,000 Retained earnings = $1,400,000

A company has assets of $2,750,000, common stock of $435,000, and liabilities of $380,000. What is the company's retained earnings? Equity = Assets - Liabilities Retained earnings = Equity - Common stock $2,370,000 $815,000 $2,644,000 $1,565,000 $1,935,000

$1,935,000 Equity = $2,750,000 - 380,000 Equity = $2,370,000 Retained earnings = $2,370,000 - 435,000 Retained earnings = $1,935,000

For a given company, total assets are $160,000, current liabilities are $10,000, long-term liabilities are $40,000, common stock is $50,000, and retained earnings is $60,000. How much is total stockholders' equity? $140,000 $120,000 $110,000 $190,000 $150,000

$110,000 Stockholders' equity equals common stock plus retained earnings. Common stock of $50,000 plus retained earnings of $60,000 equals $110,000 in stockholders' equity.Assets equals liabilities plus stockholders' equity. $160,000 = $10,000 + $40,000 + X Solving for X: Stockholders' equity = $110,000

During the year, a corporation reported the following: Issued common stock, $98,000 Declared and paid dividends, $34,000 Net income, $402,000 At the end of the current year, the company's retained earnings is $2,384,000. What was its retained earnings balance at the beginning of the current year? $2,752,000. $2,654,000. $2,016,000. $2,114,000. $2,820,000.

$2,016,000. Ending retained earnings = Beginning retained earnings + Net income - Dividends Beginning retained earnings = Ending retained earnings - Net income + Dividends Beginning retained earnings = $2,384,000 - 402,000 + 34,000 = $2,016,000

A corporation had $48,000 at the beginning of the year. During the year, it had sales on account of $21,000 and cash disbursements of $25,000 during the year. At the end of the year, it had $51,000. What was the corporation's cash receipts for the year? $24,000 $12,000 $18,000 $28,000 $16,000

$28,000 The ending balance equals beginning cash minus cash disbursements plus cash receipts $51,000 = $48,000 + X - $25,000 Solve for X: Cash disbursements = $28,000.

A company's average total assets is $240,000, average total equity is $150,000, and net sales is $60,000. Its return on assets is 12%. What was the company's net income? $30,000 $28,800 $15,000 $90,000 $7,200

$28,800 Return on assets is net income divided by average total assets. Alternatively, net income equals average total assets times the return on assets. Net income = $240,000 x 12% = $28,800.

At the end of the year, a corporation has assets of $6,500 and liabilities of $2,000. How much is the company's equity at the end of the year? $2,000 $4,000 $8,500 $4,500 $1,000

$4,500 Assets = Liabilities + Equity Using the accounting equation, equity can be computed by subtracting liabilities from assets. Equity = $6,500 - 2,000 = $4,500.

A corporation had the following accounts and balances: Accounts payable$ 3,000 Accounts receivable 8,000 Buildings 25,000 Cash 10,000 Common stock 12,000 Equipment 30,000 Notes payable 6,000 Retained earnings Not given Unearned service revenue 2,000 What is the balance of the company's retained earnings account? $74,000 $60,000 $50,000 $62,000 $44,000

$50,000 Assets = liabilities + stockholders' equity Liabilities = accounts payable +notes payable + unearned revenue Stockholder's equity = common stock + retained earnings Retained earnings = stockholders' equity - common stock Assets = 8,000 + 25,000 + 10,000 + 30,000 = 73,000 Liabilities = 3,000 + 6,000 + 2,000 = 11,000 Stockholders' equity = assets - liabilities = 73,000 - 11,000 = 62,000 Retained earnings = stockholders' equity - common stock = 62,000 - 12,000 = 50,000

A corporation had the following accounts and balances: Accounts payable $10,000 Accounts receivable 15,000 Buildings 40,000 Cash 5,000 Common stock 25,000 Equipment 30,000 Retained earnings Not given Unearned service revenue 4,000 What is the balance of the company's retained earnings account? Reminder** Assets = Accounts receivable + buildings + cash + equipment + supplies Liabilities = accounts payable + unearned revenue Stockholders' equity = assets - liabilities Retained earnings = stockholders' equity - common stock $71,000 $51,000 $59,000 $41,000 $101,000

$51,000 Assets = 15,000 + 40,000 + 5,000 + 26,000 + 4,000 = 90,000 Liabilities = 10,000 + 4,000 = 14,000 Stockholders' equity = 90,000 - 14,000 = 76,000 Retained earnings = 76,000 - 25,000 = 51,000

A company's retained earnings at the start of the year was $375,000. It compiled the following financial information as of the end of the current year: Accounts payable, $100,000 Accounts receivable, $75,000 Cash, $125,000 Common stock, $150,000 Dividends, $50,000 Equipment, $425,000 Retained earnings, Not given Salaries expense, $625,000 Service revenue, $700,000 Supplies, $25,000 What is the company's total stockholders' equity at year-end? Reminder: Ending retained earnings = Beginning retained earnings + revenues - expenses - dividends. Total stockholders' equity = Common stock + Retained earnings $550,000 $525,000 $400,000 $500,000 $600,000

$550,000 Ending retained earnings = 375,000 + 700,000 - 625,000 - 50,000 = 400,000 Total stockholders' equity = 150,000 + 400,000 = 550,000

A corporation began the year with total assets of $100,000 and stockholders' equity of $40,000. During the year, the company reported the following: Net income, $110,000 Dividends, $5,000 Total assets at the end of the year were $240,000. How much were total liabilities at the end of the year? **Reminder, Ending stockholders' equity = beginning stockholders' equity + net income - dividends. $100,000 $105,000 $110,000 $95,000 $80,000

$95,000 Ending stockholders' equity = $40,000 + 110,000 - 5,000 = $145,000. (i.e., Assets = Liabilities + Stockholders' equity) Liabilities = $240,000 - 145,000 = $95,000.

In which of the following sequences are these three financial statements usually prepared? (i) Balance sheet, (ii) statement of stockholders' equity, and (iii) income statement. (i) Income statement, (ii) balance sheet, and (iii) statement of stockholders' equity. (i) Statement of stockholders' equity, (ii) income statement, and (iii) balance sheet (i) Balance sheet, (ii) income statement and (iii) statement of stockholders' equity. (i) Income statement, (ii) statement of stockholders' equity, and (iii) balance sheet.

(i) Income statement, (ii) statement of stockholders' equity, and (iii) balance sheet. The financial statements are prepared in the following order: income statement, retained earnings statement, and balance sheet. This is because net income (from the income statement) is a required input for the statement of stockholders' equity, ending retained earnings (from the statement of stockholders' equity) is a required input for the balance sheet.

The following information is provided for a certain company (in $ millions): Net income for the current year is $390 Net income for the prior year was $350 Net sales for the current year is $4,100 Net sales for the prior year were $3,800 Total assets as of the end of the current year was $4,000 Total assets as of the end of the prior year was $3,000 What is the company's return on assets for the current year? Return on assets = Net income/Average total assets 11.4% 13.0% 9.75% 11.1% 12.7%

11.1% Return on assets = Net income/Average total assets Return on assets = $390/[($3,000 + 4,000)/2] = 0.111 or 11.1%

The following information is provided for a certain company (in $ millions): Net income for the current year is $275 Net income in the prior year was $250 Net sales for the current year is $1,500 Net sales in the prior year were $1,400 Total assets as of the end of the current year is $1,150 Total assets as of the end of the prior year is $1,050 Return on assets = Net income/Average total assets What is the company's return on assets for the current year? 24% 40% 25% 73% 16%

25% Return on assets = $275/[($1,050 + 1,150)/2] = 0.25 or 25%

Which of the following would appear on a balance sheet? Net income Interest expense Service revenue Dividends Accounts receivable

Accounts receivable The balance sheet reports all of a company's assets (e.g., cash, accounts receivable, prepaid rent, equipment, etc.), liabilities (e.g., accounts payable, notes payable, unearned revenues, etc.) ,and equities (common stock, retained earnings, etc.).

Which of the following events is not recorded in a company's accounting records? A company provides services to a customer for cash. The owner withdraws cash for personal use. A cash investment is made into the business. Equipment is purchased on account. An employee is terminated.

An employee is terminated. All of these events are transactions that affect the company's financial statements with one exception. Termination of an employee is not a recordable event in the accounting records. In the future, the company will have a lower salaries expense, but terminating one or more employees is not an event recorded among a company's accounts.

Which of the following financial statements is concerned with the company at a point in time? Balance sheet Statement of stockholders' equity All of these Statement of cash flows Income statement

Balance sheet The balance sheet reports a company's assets, liabilities, and equities at a specific point in time such as of the end of a year. In contrast, the other financial statements (e.g., income statement, etc.) report certain financial results for a period of time such as a year.

Which of the following is an example of an internal user of accounting information? A. All of these B. A company's customers who use its accounting information to evaluate whether the company will continue to honor product warranties. C. A company's stockholders who use its accounting information to decide whether to buy more shares or sell the shares they own. D. A company's managers who use its accounting information to plan, organize, and run a business. E. A company's creditors, such as banks, that use its accounting information to evaluate the risk of lending money to the company. F. None of these

C. A company's stockholders who use its accounting information to decide whether to buy more shares or sell the shares they own. Users of a company's accounting information include internal users and external users. Examples of internal users include the company's employees (e.g., management, human resource personnel, marketing personnel, and finance personnel). Examples of external users include the company's investors (i.e., owners), creditors, taxing authorities, customers, labor unions, and regulatory authorities.

Retained earnings is decreased by contributions from owners. cash payments for assets. revenues. expenses. cash payments.

Expenses Retained earnings is net income that a company retains in the business. It includes net income since the inception of the business—not just the current year's net income. Retained earnings is increased by net income (which is increased by revenues and decreased by expenses) and decreased by distributions to owners (such as dividends). The costs that a firm incurs when operating its business (i.e., its expenses) cause retained earnings to decrease.

What type of account or account classification is accounts payable? Revenue Asset Equity Liability Expense

Liability Accounts payable is a liability. When a company purchases assets on account, it promises to pay the supplier in the near future. Accounts payable are usually paid within 30 days.

On April 1, a company hires a new employee who will start to work a week later. The employee will be paid on the last day of each month. Should a journal entry be recorded on April 1? Why or why not? Yes, the company is now obligated to pay the employee, thus that event must be recorded. No, the financial position of the company has been changed, but cash has not yet been paid. None of these Yes, failure to record the event would cause the financial statements to be misleading. No, hiring an employee is an important event; however it is not an economic event that should be recorded.

No, hiring an employee is an important event; however it is not an economic event that should be recorded. Paying the employees a wage decreases cash (i.e., decreases assets) and increases wages expense and an increase in expenses decreases retained earnings which is an equity account. How-ever, merely hiring an employee indicates that the employee has not yet performed any services for the company and has eared no wage. Certain events, such as hiring an employee, are not transactions.

Which of the following best defines accounting? The system of electronic collection, organization, and communication of valuation information. The procedures for collecting information about the production of merchandise and services for sale to customers. The interconnected network of financial information used to track the cash flows of a business organization. The processing system and regulatory rules for determining the fair market value of a business organization. The information system that identifies, records, and communicates the economic events of an organization to interested users.

The information system that identifies, records, and communicates the economic events of an organization to interested users. Accounting is the information system that identifies, measures, and communicates economic information to permit informed judgements and decisions by the users of the information

The cost of assets consumed or services used is also known as

an expense Expenses are the cost of assets consumed or services used in the process of generating revenues. Common examples of expenses include wage expense, depreciation expense, interest expense, marketing expense, etc. These are incurred by business when they generate (or attempt to generate) revenues.

A company provided consulting services and collected $500 for the services provided. As a result of this transaction assets and equity increased by $500. assets and equity decreased by $500. liabilities decreased and equity increased by $500 assets and liabilities decreased by $500. equity remained unchanged.

assets and equity increased by $500. 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.

If a company pays for a one-year insurance policy that will expire next year, then

assets increase and assets decrease

If a company borrows money from a bank, then

assets increase and liabilities increase. Issuing a note means that the company is borrowing money and signing a note payable as evidence of the loan. When a company borrows money by issuing a note, it receives cash but it also creates an obligation or a liability. This, assets increase because cash increases, and liabilities increase because notes payable increases.

If a company receives cash from a customer before performing services for the customer, then

assets increase and liabilities increase. Receiving cash from a customer before the company provides the merchandise or performs services being sold to the customer creates an obligation or a liability to the company. We call this liability "unearned revenue." Liabilities increase and assets (i.e., cash) increase.

A company receives cash in advance from customers. This transaction will immediately affect the income statement and cash flows statement only. income statement, retained earnings statement, cash flows statement, and balance sheet. income statement only. income statement, balance sheet, and retained earnings statement only. balance sheet and cash flows statement only.

balance sheet and cash flows statement only. When collecting cash in advance from customers, the company receives cash (which increases its assets) and increases its liabilities (the liability account is called unearned revenues). Thus, assets increase and liabilities increase by the same amount. Collecting cash also affects the cash flows statement. This transaction does not affect income statement accounts (e.g., revenues and expenses). It also does not affect retained earnings or the retained earnings statement.

The effects of paying a dividend on the basic accounting equation are to

decrease assets and decrease stockholders' equity. Basic accounting equation: Assets = Liabilities + Stockholders' Equity Paying a dividend decreases cash (i.e., decreases assets) and decreases retained earnings which is an equity account. Thus, asset decrease and equity decreases.

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

increases an asset and increases a liability. Unearned revenue is a liability account used to report the services and/or merchandise owed to customers as a result of customers having paid in advance. Increasing unearned revenue increases liabilities. The liability is created by the customer's advance payment, so cash increases (i.e., assets increase). The company will not earn the revenue until later when it provides the services and/or merchandise to the customer.

Paying for a one-year insurance policy that will expire next year

increases assets and decreases assets. Paying for a one-year insurance policy reduces the company's cash so assets decrease. In exchange for the cash, the company receives insurance coverage that will benefit the company for the next 12 months, and that coverage is an asset. So, assets increase and decrease by equal amounts, and liabilities and stockholders' equity are not affected.

The economic entity assumption states that economic events

of every entity can be separately identified and accounted for. The economic entity assumption states that every economic entity can be separately identified and accounted for. In order to assess a company's performance and financial position accurately, it is important not to blur or combine company transactions with non-company transactions (such as transactions not involving the company but involving an owner's personal transactions, another company's transactions, etc.).

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

periodicity assumption. To develop accounting standards, the FASB relies on some key assumptions. These include the monetary unit assumption, economic entity assumption, periodicity assumption, and the going concern assumption.

An income statement:

reports the revenues and expenses for a specific period of time. The income statement reports all of the revenues and expenses for a given period of time, such as a year. Net income equals revenues minus expenses. Net income results when revenues exceed expenses. A net loss results when expenses exceed revenues.

The statement of stockholders' equity does not report dividends paid during the year. the ending retained earning balance. the retained earnings beginning balance. revenues and expenses for the year. the name of the company.

revenues and expenses for the year. The statement of stockholders' equity reports the company's beginning retained earnings, net income, dividends, and ending retained earnings. While it shows net income, it does not show the details used to compute net income. The statement of stockholders' equity does not show revenues or expenses; revenue and expenses are reported on the income statement.

Net income will result during a time period when

revenues exceed expenses When a company earns more revenue than the related costs, it will report net income during a time period.

If a transaction affected two accounts and total liabilities decreased by $4,000, then: total stockholders' equity must have decreased by $4,000. total assets must have increased by $4,000 or stockholders' equity must have decreased by $4,000. total assets must have decreased by $4,000. total assets must have decreased by $4,000 or total stockholders' equity must have increased by $4,000. total assets and total stockholders' equity each must have increased by $2,000.

total assets must have decreased by $4,000 or total stockholders' equity must have increased by $4,000. The accounting equation: Assets = Liabilities + EquityThe accounting equation must always be in balance. Every transaction has two effects on the accounting equation. If total liabilities decreased by $4,000 and the transaction affected only two accounts, then either (i) total assets decreased by $4,000 or (ii) total equity increased by $4,000.

If a transaction affected two accounts and total equity increased by $4,000, then total liabilities must have increased by $4,000. total assets and total liabilities each must have decreased by $2,000. total assets must have decreased by $4,000 or total liabilities must have increased by $4,000. total assets must have increased by $4,000. total assets must have increased by $4,000 or total liabilities must have decreased by $4,000.

total assets must have increased by $4,000 or total liabilities must have decreased by $4,000. The accounting equation: Assets = Liabilities + EquityThe accounting equation must always be in balance. Every transaction has two effects on the accounting equation. If total equity increased by $4,000 and the transaction affected only two accounts, then either (i) total assets increased by $4,000 or (ii) total liabilities decreased by $4,000.