Financial Accounting Exam 1

Marvin's Mechanical Repair Shop started the year with total assets of $60,000, total liabilities of $40,000, and retained earnings of $18,000. During the year, the business recorded $100,000 in auto repair revenues, $70,000 in expenses, and the company paid dividends of $15,000. The net income reported by Marvin's Mechanical Repair Shop for the year was:

$ 30,000 Rationale: $100,000 - $70,000 = $30,000

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?

$ 55,000 Rationale: Beginning cash + Cash receipts - Cash payments = Ending Cash ($52,000 + $244,000 - $241,000) = $55,000

Marvin's Mechanical Repair Shop started the year with total assets of $60,000, total liabilities of $40,000, and retained earnings of $18,000. During the year, the business recorded $100,000 in auto repair revenues, $70,000 in expenses, and the company paid dividends of $15,000.If Marvin's Mechanical Repair Shop ends the year with total assets of $80,000, and total liabilities of $35,000, what must be the amount of common stock issued during the year?

$10,000 Rationale: End of year stockholders' equity = Total assets - Total liabilities = ($80,000 - $35,000 = $45,000) End of year retained earnings = Start of year retained earnings + Net income - Dividends ($18,000 + ($100,000 - $70,000) - $15,000 = $33,000.) End of the year common stock = Year-end stockholders' equity - Year-end retained earnings = ($45,000 - $33,000 = $12,000) Start of year common stock = Start of year stockholders' equity - Start of year retained earnings = (($60,000 - $40,000) - $18,000 = $2,000) Common stock issued during the year = End of year common stock - Start of year common stock = ($12,000 - $2,000 = $10,000)

On November 30, Sydney Company had Accounts Receivable of $130,280. During the month of December, the company received total payments of $160,000 from credit customers. The Accounts Receivable on December 31 was $86,320. What was the amount of credit sales during December?

$116,040 Rationale:Beginning A/R balance + Sales on account - Cash receipts = Ending A/R balance$130,280 + X - $160,000 = $86,320X = $86,320 - $130,280 + $160,000X = $116,040

Using the table below, determine the retained earnings as of December 31, 2019. TOTALS Jan. 1, 2019 Dec. 31, 2019 Current assets. $ 10,000 $ 20,000 All other assets 300,000 300,000 Liabilities 50,000 60,000 Common stock 100,000 130,000 Retained earnings 160,000 ? Additional data: Total expenses for the year were $70,000; Dividends paid during the year were $16,000.

$130,000 Rationale: Assets - Liabilities - Common stock = Retained earnings($20,000 + $300,000) - $60,000 - $130,000 = $130,000

Susie Lane's Landscaping Company has compiled the following list of account balances of various assets, liabilities, revenues and expenses on December 31, 2019, the end of its first year of operations. Common stock $75,600 Accounts payable 15,000 Salary expense 27,000 Repairs expense 4,800 Dividends 30,000 Truck 51,000 Equipment 37,800 Notes payable 49,200 Cash 105,600 Supplies expense 9,600 Service revenue 130,800 Gasoline expense 4,800 The total assets for Susie Lane's Landscaping on December 31, 2019 are:

$194,400 Rationale: Total assets = Cash + Truck + Equipment($105,600 + $51,000 + $37,800 = $194,400)

Remi's Burritos has 6 employees who are paid $27 per hour. At December 31, 2019, each of Remi's employees had worked 18 hours which had not been paid or recorded. Prior to adjustments, the company's trial balance showed $192,825 in the wages expense account.If Remi's Burrritos makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 income statement as wage expense?

$195,741 Rationale: Wage expense = 18 hours x 6 employees x $27 = $2,916 + $192,825 = $195,741

As of December 31, 2019, the Balance Sheet of Pokagon Products, Inc. contains the following items (in random order): Accounts Payable $ 36,000 Land 270,000 Building 750,000 Notes Payable 405,000 Accounts Receivable 90,000 Cash 21,000 Retained Earnings 330,000 Common Stock 564,000 Equipment ? Determine the amount of Equipment.

$204,000 Rationale: $1,131,000 $1,335,000 Difference $204,000

Competitive Landscaping Company has compiled the following list of account balances of various assets, liabilities, revenues and expenses on December 31, 2019, the end of its first year of operations. Common stock $25,200 Accounts payable 5,000 Salary expense 9,000 Repairs expense 1,600 Dividends 10,000 Truck 17,000 Equipment 12,600 Notes payable 16,400 Cash 35,200 Supplies expense 3,200 Service revenue 43,600 Gasoline expense 1,600 The total liabilities for Competitive Landscaping on December 31, 2019 are:

$21,400 Rationale:Total liabilities = Accounts payable + Notes payable($5,000 + $16,400 = $21,400)

A company paid employee wages of $24,000 for the month. What would the effect of this transaction on the current month's accounting equation?

$24,000 decrease in Assets; No effect on Liabilities; $24,000 decrease in Stockholders' Equity Rationale: Wage expense 24,000 Cash 24,000

A company received $33,000 cash in exchange for 200 shares of the company's common stock. What would the effect of this transaction on the current year's accounting equation?

$33,000 increase in Assets; No effect on Liabilities; $33,000 increase in Stockholders' Equity Rationale: Cash 33,000 Common stock 33,000

Which of the following is a permanent account?

Accounts Receivable Rationale: Permanent accounts are accounts presented on the balance sheet. Revenues, dividend, and expenses are presented on the income statement.

A company provides services to clients during the period that are neither paid for, nor billed to the clients. What must the company do?

Accrue revenue by making an adjusting entry at the end of the period Rationale: Services earned but not yet billed or collected require an accrual to recognize the revenue and the account receivable at the end of the period. The bill does not have to be sent prior to year end and there is no liability at year end since money is owed to the company.

During the current accounting period, Montana Ridge Company paid $2,000 for advertising services in advance of receiving them. Prepaid Advertising was debited and Cash was credited for $2,000. At the end of the accounting period, three-fourths of the services paid for had yet to be received.The proper adjusting entry is:

Advertising Expense 500 Prepaid Advertising 500 Rationale: Transfer 1/4 x $2,000 = $500 from Prepaid Advertising to Advertising Expense

An economic event that requires accounting recognition defines:

An accounting transaction Rationale: An accounting transaction is an economic event that must be recorded in the company's accounting records.

Which of the following is the correct order of the steps in the accounting cycle?

Analyze, record, adjust, report, and close Rationale: The steps in the cycle are to first analyze the transaction, the record it, then make any necessary adjustments, report the results, and finally to close the temporary accounts to ready them for the next period's activity.

As supplies and PPE assets on the balance sheet are consumed, they are reflected:

As an expense on the income statement Rationale: As assets are consumed (used up), their cost is transferred into the income statement as an expense.

Debits to which accounts result in an increased balance?

Assets and expenses Rationale: The normal balance of an account is the side on which increases are recorded. Assets, dividend, and expense accounts normally have debit balances.

What are the economics resources of a business that can be expressed in monetary and how are they reported?

Assets on the balance sheet Rationale: Assets are economic resources of a business that can be represented in monetary terms and that represent a probable future economic benefit to a business.

The accounting equation for Giraffe Enterprises is as follows: Assets = Liabilities + Stockholders' Equity $1,080,000 = $540,000 + $540,000 If the company now receives a payment of $90,000 on account from a customer, the accounting equation will change to:

Assets=Liabilities+Stockholders' Equity $1,080,000 = $540,000 + $540,000 Rationale: Accounts cancel out

The double-entry system of debits and credits means that:

At least two entries, a debit and a credit, must be made for each transaction. Rationale: The accounting equation always remains in balance and at least two elements of the equation are always affected.

How are the balance sheet and the statement of cash flows linked?

By the cash balance Rationale: The balance sheet and the statement of cash flows are linked by the cash balance. The statement of cash flows shows the inflows and outflows of cash during the period. The ending cash balance is disclosed on the balance sheet.

The distinguishing feature of a permanent account is that any balance in the account at the end of an accounting period is:

Carried forward to the next accounting period Rationale: Permanent accounts are accounts presented on the balance sheet. The distinguishing feature of a permanent account is that any balance in the account at the end of an accounting period is carried forward to the next accounting period.

Which of the following is a temporary account?

Cash Dividends Rationale: Temporary accounts are accounts used to gather information for a particular accounting period. Dividends are a temporary subdivision of stockholders' equity.

A series of journal entries at the end of the accounting period to remove the balances from the temporary accounts so that they can accumulate data for the following accounting period are called:

Closing entries Rationale: An account that is closed is said to be closed to the account that receives the offsetting debit or credit. Thus, a closing entry simply transfers the balance of one account to another account. Because closing journal entries bring temporary account balances to zero, the temporary accounts are ready to start accumulating data for the next accounting period.

Which of the following journal entries will record the payment of a $2,550 accounts payable originally incurred for Office Supplies?

Debit Accounts Payable; credit Cash Rationale:The original entry was: Office supplies 2,550 Accounts payable 2,550 The entry to record the payment of cash reduces the liability and reduces cash. Accounts payable 2,550 Cash 2,550

A company bills customers for services rendered on account. Which of the following is one part of recording this transaction?

Debit Accounts Receivable Rationale: The journal entry includes a debit to Accounts Receivable and a credit to Service Revenue.

When invoices are sent to customers billing them for services that have been performed, the correct transaction analysis is:

Debit Accounts Receivable and credit Service Fees Earned Rationale: Service Fees Earned is credited because the work (services) has been performed and the revenue is earned. Accounts Receivable is debited because the customer has not paid for the services performed yet, but will pay sometime in the future.

As of the beginning of 2019, the Logistics Company had equipment totaling $1,800,000 which was depreciated at $150,000 per year.If Let's Move makes the appropriate adjusting entry at year end, which of the following is one part of the journal entry that will be made?

Debit Depreciation Expense for $150,000 Rationale: The entry will debit Depreciation Expense for $150,000 and credit Accumulated Depreciation for the same amount.

Hannibal Company provided consulting service to a client on January 1, and billed them for $90,000. On February 1, the client made cash payment of $48,000 and signed a note for $42,000 to settle the account. What is Hannibal Company's journal entry on February 1?

Debit: Cash 48,000 Notes Receivable 42,000 Credit: Accounts Receivable 90,000 Rationale:January entry to record consulting revenue earned and billed to client: Accounts Receivable 90,000 Consulting Revenue 90,000 February entry to record settlement of the account receivable: Cash 48,000 Notes Receivable 42,000 Accounts Receivable (Credit) 90,000

Sage Corporation has the following normal account balances in its general ledger at the end of a period: Sales revenue $1,800,000 Advertising expense 270,000 Which of the following gives the correct entry required to close only the accounts above?

Debit: Sales Revenue 1,800,000 Credit: Advertising Expense 270,000 Retained Earnings 1,530,000 Rationale: The closing process requires that revenue accounts are debited and retained earnings are credited for the amount equal to the revenue balance. The closing process also requires that expense accounts are credited and retained earnings debited for an amount equal to the expense balance. The net amount of retained earnings credited in this problem is equal to $1,530,000 (or $1,800,000 - $270,000), since revenues are greater than expenses.

Recording the collection of accounts receivable from customers involves:

Debiting Cash and crediting Accounts Receivable Rationale: Cash is debited because a cash payment has been received. Accounts Receivable is credited to reflect a reduction (settlement) of the amount owed by customers for services (work) already provided (performed) to (for) them.

Recording a stock issuance in exchange for cash involves:

Debiting Cash and crediting Common Stock Rationale: Cash is debited because a cash payment has been received. Common stock is credited to reflect an increase in the amount of common stock outstanding, due to the issuance of common stock.

Recording the borrowing of money for which a note is signed involves:

Debiting Cash and crediting Notes Payable Rationale: Cash is debited because cash payment has been received as a result of borrowing money. Notes Payable is credited to reflect an increase in liabilities, due to the borrowing of money.

Recording the payment of dividends to shareholders involves:

Debiting Dividends and crediting Cash Rationale: Dividends are debited to reflect the cost of paying dividends. Cash is credited to reflect a decrease in cash, due to the payment of dividends.

Which of the following would be reported on a statement of retained earnings?

Dividends Rationale: Dividends are a return of capital to stockholders and are reported on the statement of retained earnings. Cash is disclosed on the balance sheet. Total expenses is an income statement amount. Financing cash flow is found on the statement of cash flows.

Which of the following is a correct statement of the accounting equation in economic terms?

Economic resources = creditor financing + owner financing Rationale: The accounting equation is assets = liabilities + stockholders' equity.Another way of viewing this equation is Economic resources = Creditor Financing + Owner Financing

The area of accounting dealing with the preparation of financial statements showing a business's results of operations, financial position, and cash flow is referred to as:

Financial accounting Rationale: The process of accumulating and reporting accounting information that details a business's results of operations, cash flows, and financial position is referred to as financial accounting.

Which of the following is the name of the annual report which all publically traded companies in the United States must file with the Securities and Exchange Commission?

Form 10-K Rationale: A publicly traded companies in the United States must file an annual report called a Form 10-K with the Securities and Exchange Commission.

Which of the following assumptions that underlies the preparation of financial statements assumes that companies will continue their operations over time?

Going concern Rationale: Under the going concern assumption, companies are assumed to have continuity in that they can be expected to continue in operations over time.

Generally accepted accounting principles are:

Guides to action that apply primarily to the process of financial accounting Rationale: Financial statement users who rely on accounting data expect that all companies will follow the same standards and procedures when preparing their statements. These standards and procedures are called generally accepted accounting principles. Generally accepted accounting principles apply to the general-purpose financial statements prepared primarily for parties outside of an organization.

Which of the four basic financial statements would contain a line item for expenses?

Income statement Rationale: The income statement reports on the revenues less the expenses over a reporting period. Expenses only appear on the income statement.

Cash collected on accounts receivable would produce what effect on the balance sheet?

Increase assets and decrease assets Rationale: Cash collected on accounts receivable produces an increase in cash and a decrease in accounts receivable, both asset accounts. There is no impact on profit and on equity.

Lumos Consulting performed consulting services during June on account, and collections for these services were not received until August. What effect did performing these services have on the accounting equation during June?

Increase in assets and increase in stockholder's equity Rationale: Consulting services revenue XXX Accounts receivable XXX

Huntley Company paid $52,800 for a four-year insurance policy on September 1 and recorded the $52,800 as a debit to Prepaid Insurance and a credit to Cash.What adjusting entry should Huntley make on December 31, the end of the accounting period (no previous adjustment has been made)?

Insurance Expense 4,400 Prepaid Insurance 4,400 Rationale: Transfer 4/48 x $52,800 = $4,400 from Prepaid Insurance to Insurance Expense

Art Company calculates that interest of $1,800 has accrued at December 31 on outstanding notes payable.How should Art record this on December 31?

Interest Expense 1,800 Interest Payable 1,800 Rationale: Interest expense for the month of December must be recognized as expense. A liability (payable) must be recorded since the amount has not yet been paid.

Runner Company calculates it has earned (but not yet collected or recorded) interest of $3,150 at December 31 on outstanding notes receivable.How should Runner record this on December 31?

Interest Receivable 3,150 Interest Income 3,150 Rationale: Interest income for the month of December must be recognized. An asset (receivable) must be recorded since the amount has not yet been received.

The accounting entity:

Is a fundamental concept in accounting, May be a sole proprietorship, a partnership, or a corporation, Is an economic unit with identifiable boundaries for which financial information is accumulated and reported, and Maintains a record of activities separate from the economic and personal activities of its owners. Rationale: The accounting entity, a fundamental concept in accounting, is an economic unit with identifiable boundaries for which financial information is accumulated and reported. An entity may be a sole proprietorship, a partnership, or a corporation. In accumulating financial information, we maintain a record of activities separate from the economic and personal activities of its owners.

Stockholders' equity:

Is equal to assets minus liabilities, Represents the interest of the owners in the assets of an entity, and Is equal to the net assets of an entity Rationale: 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).

Which of the following is one effect of a purchase of $600 of supplies on credit?

It would increase liabilities by $600 Rationale: The purchase on credit creates an account payable. It would increase liabilities by $600. In addition, the supplies account in the asset section of the balance sheet would also increase.

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:

Liabilities Rationale: 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.

Which of the following is a permanent account category?

Liabilities Rationale: Permanent accounts are accounts presented on the balance sheet. Revenues, dividend, and expenses are presented on the income statement.

Which of the following accounts normally has a credit balance?

Notes Payable Rationale: Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances. Notes payable is a liability account, so the normal balance would be a credit balance.

The Green Grape Company's Office Supplies account had a beginning balance of $16,000. During the month, purchases of office supplies totaling $4,000 were debited to the Office Supplies account.If $6,000 worth of office supplies is still on hand at month-end, what is the proper adjusting entry?

Office Supplies Expense 14,000 Office Supplies 14,000 Rationale: Transfer $16,000 + $4,000 - $6,000 = $14,000 from Office Supplies to Office Supplies Expense

What categories of cash flows are presented in a statement of cash flows?

Operating, investing, and financing Rationale: The statement of cash flows groups cash flows into the three business activities of operating, investing, and financing.

A balance sheet:

Presents a firm's assets, liabilities, and stockholders' equity as of a given date Rationale: A balance sheet presents a firm's assets, liabilities, and stockholders' equity on a given date. The income statement reports the results of operations for a business of a given time period, usually a quarter or a year. The income statement lists the revenues and expenses of the business. A statement of stockholders' equity reports on the events causing a change in stockholders' equity during a period. A statement of cash flows reports cash inflows and outflows during a period.

Which of the following increases stockholders' equity?

Providing services to clients with payment received immediately Rationale: Providing services to clients (service revenue) increases stockholders' equity. All of the other transactions do not.

Which of the following activities is an example of an investing activity?

Purchasing a delivery truck Rationale: Purchasing a delivery truck is an example of an investing activity.

Which of the following does not affect stockholders' equity?

Purchasing equipment with payment due in 30 days Rationale: The purchase of equipment (asset) with a payment due in 30 days (liability) does not affect stockholders' equity. All of the other transactions do.

Which of the following activities is an example of a financing activity?

Receiving a loan from a bank Rationale: Receiving a loan from a bank is an example of a financing activity.

Sue Baker received $5,000 from a tenant on December 1 for five months' rent of an office. This rent was for December, January, February, March, and April.If Sue debited Cash and credited Unearned Rental Income for $5,000 on December 1, what necessary adjustment would be made on December 31?

Rental Income 4,000 Unearned Rental Income 4,000 Rationale: Transfer 1/5 x $5,000 = $1,000 from Unearned Rental Income to Rental Income

An income statement:

Reports the results of operations for a period Rationale: The income statement reports the results of operations for a business of a given time period, usually a quarter or a year. The income statement lists the revenues and expenses of the business. A statement of stockholders' equity reports on the events causing a change in stockholders' equity during a period. A balance sheet presents a firm's assets, liabilities, and stockholders' equity on a given date. A statement of cash flows reports cash inflows and outflows during a period.

The increases to a company's resources that result when goods or services are provided to customers are called:

Revenues Rationale: 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.

Which of the following is not presented in a statement of stockholders' equity?

Revenues Rationale: The statement of stockholders' equity reports the events causing an increase or decrease in a business's stockholders' equity during a given time period, including both changes in a company's common stock and changes in retained earnings. Retained earnings is increased when operations produce net income and reduced when operations produce a net loss or dividends are paid. Net income, dividends, and stockholders' equity at the beginning of the year are reported on the statement, but not revenues.

Which one of the following is not an external user of financial information?

Senior company management Rationale: Decision makers outside the company include stockholders, creditors, and tax agencies such as the Internal Revenue Service.

Which of the following is correct?

Some liabilities may involve the performance of services. Rationale: 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. Liabilities refer to creditor claims on a business's resources (assets). An asset take many forms, it must not have a physical existence. The key characteristic of any asset is that it represents a probably future economic benefit to a business. Wages payable is an example of a liability, but accounts receivable is an example of an asset.

The revenue recognition principle:

States that sales revenue should be recorded when services are performed or goods are sold. Rationale: The revenue recognition principle states that sales revenue should be recorded when services are performed or goods are sold. The revenue recognition principle requires two conditions to exist before sales revenue is recorded on the income statement: (1) the revenue must be earned and (2) it must be realized or realizable.

Assuming no other changes except a decrease in assets of $100,000, increase in liabilities of $20,000, and expenses of $120,000, by how much did stockholders' equity increase or decrease and what were revenues for the period?

Stockholders' equity decreased $120,000; revenues were $0 Rationale:Change in Assets = Change in Liabilities + Change in Stockholders' equity[(100,000) = $20,000 + X][(120,000) = X = decrease in Stockholder's equity]Change in Stockholder's equity = Revenues - Expenses[($120,000) = X - $120,000][($120,000) + $120,000 = $0 = X = Revenues]

Which one of the following is not a key linkage among the four primary financial statements?

The expenses in the income statement link to the total liability balance. Rationale: The expenses in the income statement are not linked to the total liability balance. An unpaid expense might at one point in time be listed as a liability; however, the total of liabilities and expenses is rarely the same.

The term debit refers to:

The left side of an account Rationale: The terms debit and credit are used to refer to the left side and the right side, respectively, of an account.

A trial balance that balances is useful because it indicates with certainty that:

Total debits in the general ledger equal total credits. Rationale: The trial balance serves as an interim check on whether the sum of the debit balances and the sum of the credit balances from the general ledger accounts are equal. If the totals are not equal, it would indicate the presence of some type of recording error. The trial balance also shows all general ledger account balances in one location, which facilitates the preparation of financial statements. The trial balance, however, is not a financial statement.

The normal balance of an account is:

The side on which increases are recorded Rationale: The normal balance of an account is the side on which increases are recorded. This is because increases in an account are usually greater than, or equal to, the decreases to an account.

Which one of the following is not a reason for which adjusting entries are made?

To close the income statement accounts and prepare them for the following year's activity Rationale: Adjusting entries are made for all the reasons above except to close out the accounts. Answer A describes closing entries.

The distinguishing feature of a temporary account is that any balance in the account at the end of an accounting period is:

Transferred to a permanent stockholders' equity account Rationale: At the end of the accounting period, temporary account balances are transferred to Retained Earnings, which is a permanent stockholders' equity account.

Which one of the following is not a quality of relevant accounting information?

Understandability Rationale: Accounting information is relevant when it is timely, predictive about future performance (predictive value) and evaluative about decisions made by investors and creditors in the past (confirmatory value). Accounting information can still be relevant, even though it may not be understandable to all users.

Early in the accounting period, Ms. Client paid $3,000 for services in advance of receiving them; Cash was debited and Unearned Service Fees was credited for $3,000. At the end of the accounting period, two-thirds of the services paid for had yet to be performed.The proper adjusting entry is:

Unearned Service Fees 1,000 Service Fees Earned 1,000 Rationale: Transfer 1/3 x $3,000 = $1,000 from Unearned Service Fees to Service Fees Earned

Assume December 31 is a Wednesday. Rite Weld Company's wages are paid every Friday, and the weekly payroll (for five days) amounts to $6,000.To record the correct amount of expense for December, Rite Weld makes the following entry on December 31:

Wages Expense 3,600 Wages Payable 3,600 Rationale: Accrue 3/5 x $6,000 = $3,600 of Wages Expense