ACCT200 EXAM 1

40) Retained Earnings at the beginning and ending of the accounting period was $300 and $800, respectively. If revenues were $1,100 and dividends paid to stockholders were $200, expenses for the period must have been:

400 Explanation: Beginning retained earnings + Revenues − Expenses − Dividends = Ending retained earnings $300 + $1,100 − Expenses − $200 = $800 Expenses = $400

18) Kenyon Company experienced a transaction that had the following effect on the financial statements: Assets = Liab. + Equity Rev. − Exp. = Net Inc. Cash Flow - = - + NA NA − NA = NA NA Which transaction would have this effect?

D) Return to a supplier of merchandise purchased on account. Explanation: A purchase return would decrease assets (merchandise inventory) and decrease liabilities (accounts payable), but would not affect the income statement or the statement of cash flows.

10) Mize Company provided $45,500 of services on account, and collected $38,000 from customers during the year. The company also incurred $37,000 of expenses on account, and paid $32,400 against its payables. As a result of these events,

D) all of these answer choices are correct Explanation: $45,500 − $32,400 = $13,100 increase in assets; $37,000 − $32,400 = $4,600 increase in liabilities; $45,500 − $37,000 = $8,500 increase in equity

23) A company using the perpetual inventory method paid cash for a transportation-in cost. Which of the following choices reflects the effects of this event on the financial statements?

D. +/− = NA + NA NA − NA = NA − OA Option D. Explanation: Transportation-in is a product cost that increases one asset (merchandise inventory) and decreases another asset (cash). It does not affect the income statement, but is reported as a cash outflow for operating activities.

43) Ballard Company uses the perpetual inventory system. The company purchased $16,000 of merchandise from Andes Company under the terms 2/10, net/30. Ballard paid for the merchandise within 10 days and also paid $500 freight to obtain the goods under terms FOB shipping point. All of the merchandise purchased was sold for $30,000 cash. The amount of gross margin for this merchandise is:

13,820 Explanation: Sales $30,000 - Cost of goods sold ($16,000 × 0.98 + $500) = $13,820 Gross margin

19) On January 1, Year 2, Chavez Company had beginning balances as follows: Assets = $ 12,500 Liabilities = $ 4,500 Common Stock = $ 3,000 During Year 2, Chavez paid dividends to its stockholders of $2,000. Given that ending retained earnings was $6,000, what was Chavez's net income for the Year 2?

3,000 Explanation: On January 1, Year 2: Assets = Liabilities + Common Stock + Retained Earnings $12,500 = $4,500 + $3,000 + Retained Earnings Retained Earnings = $5,000

7) Product costs are matched against sales revenue:

D) when the merchandise is sold. Explanation: Product costs are matched against sales revenue (recognized as expenses) when merchandise is sold. The expense is called cost of goods sold.

14) If a company's total assets increased while liabilities and common stock were unchanged, then:

Revenues were greater than expenses

21) Which of the following accounts would not appear on a balance sheet?

Service Revenue

19) On April 1, Snell Company made a $50,000 sale giving the customer terms of 3/10/n30. The receivable was collected from the customer on April 8. Considering the collection of cash from the receivable, what effect will the transaction have on the company's statements?

(1,500 ) = NA + (1,500 ) (1,500 ) − NA = (1,500 ) 48,500 OA Answer: A Explanation: $50,000 × 3% = $1,500 discount. Snell Company would collect $48,500 ($50,000 - $1,500 discount). Assets (cash) would increase by $48,500, assets (accounts receivable) would decrease by $50,000, and sales revenue would decrease by $1,500, which would decrease net income and equity. The company would report a $48,500 cash inflow from operating activities.

45) Packard Company engaged in the following transactions during Year 1, its first year of operations. (Assume all transactions are cash transactions.) 1) Acquired $950 cash from the issue of common stock. 2) Borrowed $420 from a bank. 3) Earned $650 of revenues cash. 4) Paid expenses of $250. 5) Paid a $50 dividend. During Year 2, Packard engaged in the following transactions. (Assume all transactions are cash transactions.) 1) Issued an additional $325 of common stock. 2) Repaid $220 of its debt to the bank. 3) Earned revenues of $750 cash. 4) Incurred expenses of $360. 5) Paid dividends of $100. What is Packard's retained earnings account balance at the end of Year 1 before the process of closing the accounts has been undertaken?

0 Explanation: Since the closing process is not complete, the retained earnings account balance at the end of Year 1 is zero. The revenues, expenses, and dividends have not yet been transferred to the retained earnings as part of the closing process.

31) Nelson Company experienced the following transactions during Year 1, its first year in operation. 1. Issued $12,000 of common stock to stockholders. 2. Provided $4,600 of services on account. 3. Paid $3,200 cash for operating expenses. 4. Collected $3,800 of cash from accounts receivable. 5. Paid a $200 cash dividend to stockholders. The amount of retained earnings appearing on Nelson Company's December 31, Year 1 balance sheet is:

1200 Explanation: $13,200 Assets − $12,000 Common Stock = $1,200 Retained Earnings or $1,400 Net income − $200 Dividends = $1,200 Retained Earnings

30) The year-end financial statements of Calloway Company contained the following elements and corresponding amounts: Assets = $50,000; Liabilities = ?; Common Stock = $15,000; Revenue = $22,000; Dividends = $1,500; Beginning Retained Earnings = $3,500; Ending Retained Earnings = $7,500.

16,500 Explanation: Beginning retained earnings + Revenue − Expenses − Dividends = Ending retained earnings $3,500 + $22,000 − Expenses − $1,500 = $7,500 Expenses = $16,500

11) Stosch Company's balance sheet reported assets of $40,000, liabilities of $15,000 and common stock of $12,000 as of December 31, Year 1. If Retained Earnings on the balance sheet as of December 31, Year 2, amount to $18,000 and Stosch paid a $14,000 dividend during Year 2, then the amount of net income for Year 2 was which of the following?

19,000 Explanation: If assets on December 31, Year 1 totaled $40,000, total claims (including liabilities, common stock, and retained earnings) on that date must have also been $40,000. If liabilities were $15,000 and common stock was $12,000, retained earnings on December 31, Year 1 must have been $13,000. At the end of Year 2, the company reported $18,000 in retained earnings, a $5,000 increase. During Year 2, Stosch paid a $14,000 cash dividend, which reduced retained earnings. Therefore, Year 2 net income must have been $5,000 greater than the dividend paid. $14,000 + $5,000 = $19,000.

49) Assume the perpetual inventory method is used. 1) Green Company purchased merchandise inventory that cost $64,000 under terms of 2/10, n/30 and FOB shipping point. 2) The company paid freight cost of $2,400 to have the merchandise delivered. 3) Payment was made to the supplier within 10 days. 4) All of the merchandise was sold to customers for $94,000 cash and delivered under terms FOB shipping point with freight cost amounting to $1,600. The gross margin from these transactions of Green Company is:

28,880 Explanation: $94,000 Sales - [($64,000 × 0.98) + $2,400] Cost of goods sold = $28,880 Gross margin

22) At the end of Year 2, retained earnings for the Baker Company was $3,500. Revenue earned by the company in Year 2 was $1,500, expenses paid during the period were $800, and dividends paid during the period were $500. Based on this information alone, retained earnings at the beginning of Year 2 was:

3,300 Explanation: Beginning Retained Earnings + Revenue − Expenses − Dividends = Ending Retained Earnings Beginning Retained Earnings + $1,500 − $800 − $500 = $3,500 Beginning Retained Earnings = $3,300

34) Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $42,000 of common stock for cash. 2) The company paid cash to purchase $26,400 of inventory. 3) The company sold inventory that cost $16,000 for $30,600 cash. 4) Operating expenses incurred and paid during the year, $14,000. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $35,200 of inventory. 2) The company sold inventory that cost $32,800 for $57,000 cash. 3) Operating expenses incurred and paid during the year, $18,000. Note: Sanchez uses the perpetual inventory system. The amount of retained earnings at December 31, Year 2 is:

6,800 Explanation: Year 1 Net Income: $30,600 - $16,000 - $14,000 = $600 Year 2 Net Income: $57,000 - $32,800 - $18,000 = $6,200 Beginning Retained Earnings $600 + $6,200 = $6,800 Ending Retained Earnings

59) Gomez Co. had beginning inventory of $2,400 and ending inventory of $1,200. The cost of goods sold was $9,600. Based on this information, Gomez Co. must have purchased inventory amounting to:

8,400 Explanation: $2,400 Beginning inventory + Purchases - $1,200 Ending inventory = $9,600 Cost of goods sold Purchases = $9,600 - $2,400 + $1,200 = $8,400

16) Galaxy Company sold merchandise costing $1,700 for $2,600 cash. The merchandise was later returned by the customer for a refund. If the perpetual inventory method is used, what effect will the sales return have on the accounting equation?

A) Total assets and total equity decrease by $900. Explanation: The sales return will increase assets (inventory) and decrease cost of goods sold, which will increase equity, by $1,700 each. It will also decrease assets (cash) and decrease sales revenue, which will decrease equity, by $2,600 each. The net effect is a decrease in total assets and total equity of $900.

1) Bledsoe Company received $17,000 cash from the issue of stock on January 1, Year 1. During Year 1, Bledsoe earned $8,500 of revenue on account. The company collected $6,000 cash from accounts receivable and paid $5,400 cash for operating expenses. Based on this information alone, during Year 1,

A) Total assets increased by $20,100. Explanation: $17,000 (cash) + $8,500 (accounts receivable) + $6,000 (cash) − $6,000 (accounts receivable) − $5,400 (cash) = $20,100 increase

69) Which of the following could represent the effects of an asset exchange transaction on a company's financial statements?

An asset exchange transaction increases one asset and decreases another, so it does not affect total assets, liabilities or equity. It does not affect the income statement, and can be reported as a cash inflow or outflow on the statement of cash flow as either an operating or an investing activity.

38) During Year 2, Chico Company earned $1,950 of cash revenue, paid $1,600 of cash expenses, and paid a $150 cash dividend to its owners. Based on this information alone, which of the following is not correct?

D) Cash inflow from operating activities was $200. Explanation: Revenue minus expenses equal net income ($1,950 − $1,600 = $350). Total assets increased by $200 ($1,950 − $1,600 − $150). Cash from operating activities increased by $350 ($1,950 − $1,600). Cash from financing activities decreased by $150.

50) Assume the perpetual inventory method is used. 1) Green Company purchased merchandise inventory that cost $64,000 under terms of 2/10, n/30 and FOB shipping point. 2) The company paid freight cost of $2,400 to have the merchandise delivered. 3) Payment was made to the supplier within 10 days. 4) All of the merchandise was sold to customers for $94,000 cash and delivered under terms FOB shipping point with freight cost amounting to $1,600 paid by Green company. As a result of the above transactions of Green Company, the net cash flow from operating activities was:

B) $27,280 inflow. Explanation: Inflow from sale $94,000 - Outflow for payment of inventory purchase ($64,000 × 0.98) - Outflow for transportation-in $2,400 - Outflow for transportation-out $1,600 = $27,280 inflow

13) Jack's Snow Removal Company received a cash advance of $6,000 on December 1, Year 1 to provide services during the months of December, January, and February. The year-end adjustment on December 31, Year 1, to recognize the partial expiration of the contract will

B) increase equity by $2,000 Explanation: The year-end adjustment to recognize one month's work on the three-month contract results in a $2,000 decrease in liabilities (unearned revenue) and an increase in equity (retained earnings due to recognizing revenue).

16) Sheldon Company began Year 1 with $1,200 in its supplies account. During the year, the company purchased $3,400 of supplies on account. The company paid $3,000 on accounts payable by year end. At the end of Year 1, Sheldon counted $1,400 of supplies on hand. Sheldon's financial statements for Year 1 would show:

C) $1,400 of supplies; $3,200 of supplies expense Explanation: $1,400 of supplies on hand is the supplies asset on the balance sheet; $1,200 beginning balance + $3,400 of supplies purchased − $1,400 ending balance = $3,200 supplies expense

11) Which of the following events would not require an end-of-year adjusting entry?

C) Providing services on account

50) Earning revenue on account would be classified as a/an?

C) asset source transaction. Explanation: This transaction increases assets (accounts receivable) and increases equity (revenue increases retained earnings), and is therefore classified as an asset source transaction.

27) The following accounts and balances were drawn from the records of Carolina Company on December 31, Year 1: Cash $ 4,000 Accounts receivable $ 3,400 Dividends $ 2,000 Common stock $ 3,900 Land $ 3,200 Revenue $ 3,200 Accounts payable $ 1,800 Expense $ 2,200 The amount of Carolina's retained earnings after closing on December 31, Year 1 was:

D) $4,900. Explanation: Assets ($4,000 + $3,400 + $3,200) = Liabilities ($1,800) + Common Stock ($3,900) + Retained Earnings Retained Earnings = $10,600 − $5,700 = $4,900

4) Which of the following transactions does not involve an accrual?

D) Recording the pre-payment of two years' worth of insurance.

70) Which of the following represents effects of an asset use transaction on a company's financial statements?

Explanation: An asset use transaction decreases assets and decreases either liabilities (in the case of repaying debt) or equity (in the case of paying dividends or expenses). It may or may not increase expenses and decrease net income. If the asset that decreased is cash, it will be reported as an outflow for financing or operating activities on the statement of cash flows.