Intermediate Acc Quiz 4

A net loss occurs when A. Expenses are greater than revenue B. Revenue is greater than expenses C. Cash inflow is less than the cash outflow D. Cash outflow is less than the cash inflow

A

What does negative retained earnings indicate? A. The company has lost some or all of the owner's investment. B. The company experienced a large cash outflow during the year. C. The company's liabilities are greater than its assets. D. The company's common stock is negative.

A

Which of the following shows how borrowing cash from creditors will affect a company's financial statements? Balance sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Rev. − Exp. = Net Inc. A. + = + + NA NA − NA = NA +FA B. + = + + NA NA − + = − +FA C. + = + + NA NA − NA = NA +IA D. + = NA + + + − NA = + +FA A. Option A B. Option B C. Option C D. Option D

A Borrowing cash from creditors is an asset source transaction. It causes assets (cash) and liabilities (notes payable) to increase. Since the company did not engage in operations to generate earnings or pay expenses, there is no effect on the income statement. Since the cash inflow is from creditors, it is a financing activity.

Which of the following shows how paying cash to purchase land will affect a company's financial statements? Balance sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Rev. − Exp. = Net Inc. A. NA = NA + NA NA − NA = NA −IA B. NA = NA + NA NA − NA = NA −FA C. NA = NA + NA NA − + = − −OA D. − = − + NA NA − NA = NA −FA A. Option A B. Option B C. Option C D. Option D

A Paying cash to purchase land is an asset exchange transaction. It causes one asset (cash) to decrease and another asset (land) to increase. The amount of total assets is not affected. Since the company did not engage in operations to generate earnings or pay expenses, there is no effect on the income statement. Since the cash outflow occurred to acquire a long-term asset, it is an investing activity.

Which of the following are shown on the Balance Sheet? a. Total assets b. Land c. Common Stock d. Net Change in Cash e. Revenue f. Notes Payable g. Stockholders' Equity h. Total Liabilities and Stockholders' Equity i. Expenses j. Net Income k. Ending cash balance l. Beginning cash balance m. Dividends A. a, b, c, f, g, h, k B. e, i, j C. a, b, c, f, g, h, k, m D. a, g, h

A The Balance Sheet lists a company's Assets, Liabilities and Stockholders' Equity. From the information given, land, cash, total assets, common stock, notes payable, stockholders' equity, and total liabilities and stockholders' equity would be listed on the Balance Sheet.

Knopp Company experienced an event that had the following effects on its financial statements. Which of the following events would have caused these effects? Balance sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Rev. − Exp. = Net Inc. + NA + + NA + +OA A. Earned cash revenue B. Borrowed money C. Purchased land with cash D. Issued stock for cash

A The effects shown in the statements model are consistent with earning cash revenue. Cash revenue causes assets (cash) and equity (retained earnings) to increase. Since the company engaged in operations to generate revenue, there is an effect on the income statement. Specifically, revenue and net income increase. Since the cash inflow is from customers, it is an operating activity. Among other reasons, the other answers are wrong because borrowing money, issuing common stock, and buying land would have no effect on the income statement.

Which of the following shows how incurring cash expenses will affect a company's financial statements? Balance sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Rev. − Exp. = Net Inc. A. − = NA + + NA − + = − −OA B. − = NA + − NA − + = − −OA C. − = NA + − NA − + = + −OA D. − = NA + − NA − + = − −FA A. Option A B. Option B C. Option C D. Option D

B A cash payment for expenses is an asset use transaction. It causes assets (cash) and equity (retained earnings) to decrease. Since the company incurred expenses to generate revenue, there is an effect on the income statement. Specifically, expenses increase and net income decreases. Since the cash outflow is for expenses, it is an operating activity.

At the time of liquidation, Owens Company reported assets of $260,000, liabilities of $180,000, common stock of $90,000 and retained earnings of ($10,000). What amount of Fairchild's assets are the shareholders entitled to receive? A. $70,000 B. $80,000 C. $90,000 D. $160,000

B Creditors receive first priority in asset distribution during a business liquidation. Therefore, creditors would collect the $180,000 owed to them, leaving the shareholders with the remaining $80,000

Durango Company started Year 2 with beginning balances of $1,000 cash, $500 note payable, and $400 common stock. During the year, Durango generated $400 of cash revenue and $300 of cash expenses. Durango also purchased land for $900 cash. If the note payable is due on January 1, Year 3, was it a good idea to purchase the land? A. Yes, because the company was profitable in Year 2. B. No, because the company will not have enough cash to pay off the note. C. Yes, because the company can combine its ending balances from common stock and retained earnings to pay off the note. D. No, because the company does not have enough retained earnings at the end of Year 2.

B Management has mismanaged the assets. On January 1, Year 3 there is not enough cash to pay off the note. There is $200 in cash and there is a $500 note due.

Which of the following are shown on the Income Statement? a. Total assets b. Land c. Common Stock d. Net Change in Cash e. Revenue f. Notes Payable g. Stockholders' Equity h. Total Liabilities and Stockholders' Equity i. Expenses j. Net Income k. Ending cash balance l. Beginning cash balance m. Dividends A. a, b, c, f, g, h, k B. e, i, j C. d, e, i, j, m D. e, i, j, m

B The Income Statement lists a company's Revenue, Expenses and Net Income for the period.

Ending cash balance is shown on which of the following financial statements? A. Balance Sheet B. Balance Sheet and Statement of Cash Flows C. Statement of Cash Flows D. Income Statement and Statement of Changes in Stockholders' Equity

B The ending cash balance is listed on the Statement of Cash Flows and Cash listed on the Balance Sheet is the balance as of the end of the year.

Watt Company was established in January, Year 1. During Year 1 the company experienced the following events. Collected $6,000 cash from the issue of common stock. Borrowed $3,000 cash from the state bank. Earned $4,000 of cash revenue. Paid $2,000 cash expenses. The company was liquidated at the end of Year 1. Based on this information A. the stockholders would receive $6,000. B. the stockholders would receive $8,000. C. the creditor (the bank) would receive $2,000. D. the creditor (the bank) would receive $6,000.

B The stockholders reap the reward of a profitable business and suffer the consequences of losses incurred. In this case the business earned $2,000 ($4,000 Revenue − $2,000 Expenses). As a result, the stockholders would receive $8,000 in the liquidation ($6,000 original investment + $2,000 retained earnings).

What is the process of dividing up assets and allocating them to resource providers (creditors and investors)? A. Equity distribution B. Stock repayment C. Liquidation D. Utilization

C

Which of the following shows how recognizing cash revenue will affect a company's financial statements? Balance sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Rev. − Exp. = Net Inc. A. + = NA + + NA − NA = NA NA B. + = NA + + + − NA = + NA C. + = NA + + + - NA = + +OA D. + = NA + + + − NA = + +IA A. Option A B. Option B C. Option C D. Option D

C Cash generated through earnings is an asset source transaction. It causes assets (cash) and equity (retained earnings) to increase. Since the company engaged in operations to generate revenue, there is an effect on the income statement. Specifically, revenue and net income increase. Since the cash inflow is from customers, it is an operating activity.

Which of the following shows how acquiring cash from the issue of common stock will affect a company's financial statements? Balance sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Rev. − Exp. = Net Inc. A. + = NA + + NA − NA = NA NA B. + = NA + + NA − NA = NA +IA C. + = NA + + NA − NA = NA +FA D. + = NA + + + − NA = + +FA A. Option A B. Option B C. Option C D. Option D

C Collecting cash from the issue of common stock is an asset source transaction. It causes assets (cash) and equity (common stock) to increase. Since the company did not engage in operations to generate earnings or pay expenses, there is no effect on the income statement. Since the cash inflow is from investors, it is a financing activity.

Emerald Company was established in January, Year 1. During Year 1 the company experienced the following events. Collected $50,000 cash from the issue of common stock Borrowed $45,000 cash from the state bank Earned $120,000 of cash revenue Paid $180,000 cash expenses The company was liquidated at the end of Year 1. Based on this information A. the stockholders would receive $50,000. B. the stockholders would receive $110,000. C. the creditor (the bank) would receive $35,000. D. the creditor (the bank) would receive $45,000.

C The stockholders reap the reward of a profitable business and suffer the consequences of losses incurred. In this case the business incurred a $60,000 loss ($120,000 Revenue − $180,000 Expenses). As a result, the stockholders would receive zero. The $60,000 loss would more than wipe out their $50,000 investment. Indeed, even the creditor would suffer a $10,000 loss. At the end of the Year 1 there would only be $35,000 cash left in the business ($50,000 from investors + $45,000 from the bank, $120,000 from revenue − $180,000 of expenses). While creditors have first priority in a business liquation, they cannot receive assets that the business does not have. In this case, even though the creditors put $45,000 in the business, they would only receive $35,000 back. While creditors get first claim on assets, they are still at risk of losing some or all of the assets loaned to a business. First claim increases security but it does not eliminate risk.

Which of the financial statements are required by the generally accepted accounting principles (GAAP) A. Income Statement B. Statement of Changes in Stockholders' Equity Statement of Cash Flows C. Balance Sheet D. All of these financial statements are required by GAAP

D

Which of the following shows how paying a cash dividend will affect a company's financial statements? Balance sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Rev. − Exp. = Net Inc. A. − = NA + + NA − + = − −OA B. − = NA + − NA − + = − −OA C. + = NA + + NA − NA = NA −FA D. − = NA + − NA − NA = NA −FA A. Option A B. Option B C. Option C D. Option D

D A cash payment for dividends is an asset use transaction. It causes assets (cash) and equity (retained earnings) to decrease. Since the company is transferring wealth (cash) to its owners, there is no effect on the income statement. Since the cash is transferred to the investors, it is a financing activity.

Net income appears on which of the following financial statements? A. Balance Sheet B. Balance Sheet and Statement of Changes in Stockholders' Equity C. Income Statement D. Income Statement and Statement of Changes in Stockholders' Equity

D Net income is shown on the Income Statement. It is also shown as an addition to Retained Earnings on the Statement of Changes in Stockholders' Equity.

Which of the following shows how paying cash to reduce long-term liabilities will affect a company's financial statements? Balance sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Rev. − Exp. = Net Inc. A. + = − + NA NA − NA = NA −FA B. − = − + NA NA − NA = NA −IA C. − = − + NA NA − + = − −FA D. − = − + NA NA − NA = NA −FA A. Option A B. Option B C. Option C D. Option D

D Paying cash to reduce obligations to creditors is an asset use transaction. It causes assets (cash) and liabilities (notes payable) to decrease. Since the company did not engage in operations to generate earnings or pay expenses, there is no effect on the income statement. Since the cash outflow is to reduce long-term debt, it is a financing activity.

Which of the following financial statements is prepared as of a specific date? A. Income Statement B. Statement of Changes in Stockholders' Equity C. Statement of Cash Flows D. Balance Sheet

D The Balance Sheet is prepared as of a specific date. The other three financial statements show what happened over a period.

How many financial statements does a company prepare each accounting period? A. One B. Two C. Three D. Four E. Five

D The Balance Sheet, Income Statement, Statement of Changes in Stockholders' Equity and the Statement of Cash Flows are prepared each accounting period.

Watt Company experienced an event that had the following effects on its financial statements. Which of the following events would have caused these effects? Balance sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Rev. − Exp. = Net Inc. − − NA NA NA NA −FA A. Earned cash revenue B. Borrowed money C. Purchased land with cash D. Repaid long-term debt

D The effects shown in the statements model are consistent with paying cash to reduce long-term debt. Paying off long-term debt causes assets (cash) and liabilities (notes payable) to decrease. Since the company did not engage in operations to generate earnings or pay expenses, there is no effect on the income statement. Since the cash outflow is to reduce long-term debt, it is a financing activity. Among other reasons, the other answers are wrong because borrowing money and earning cash revenue would cause assets to increase. Further, purchasing land with cash would have no effect on total assets.

The stockholders of a business have a priority claim to its assets in the event of liquidation. This statement is: True False

False This is false. Creditors have priority over stockholders in the event of a company's liquidation.

A company can have a negative balance in retained earnings. This statement is: A. True B. False

True A company can have a positive or negative ending balance in retained earnings.

The balance of accounts reported on the Balance Sheet carry forward from one period to the next. This statement is: True False

True The ending account balances for Year 1 become the beginning account balances for Year 2 for accounts on the Balance Sheet.