ACG 2021 Questions (Ch. 1-5)
36) Freight costs incurred by a seller on outgoing merchandise sold to customers are recorded as Freight Out and these costs will increase a) the operating expenses of the seller. b) the buyer's equity. c) the cost of goods sold of the seller. d) a contra-revenue account of the seller. e) the buyer's cost of inventory.
Answer: A
4) A company recorded the following cash transactions for the year: Collected $350,000 from customers. Collected $40,000 from issuing a note to a bank. Paid $20,000 to purchase office equipment. Paid $100,000 for salaries. Paid $10,000 in dividends. Paid $80,000 for rent.What was the company's net cash provided by operating activities for the year? a) $170,000 b) $270,000 c) $250,000 d) $160,000 e) $140,000
Answer: A A company's activities are divided into three categories: (1) operating activities, (2) investing activities, and (3) financing activities. Operating activities include selling products and/or services, paying suppliers (e.g., buying inventory), employees workers, rent, insurance, etc. Cash flows from operating activities are increases by collecting cash for operating activities (e.g., collecting cash from customers) and decreased by paying cash for operating activities (e.g., paying cash to employees for hours worked, paying cash to suppliers for inventory, etc.). This company's net cash provided by operating activities include (i) cash collected from customers, (ii) salaries paid for salaries, and (iii) cash paid for goods and servicesNet cash flow provided by operating activities = $350,000 - 100,000 - 80,000 = $170,000Note: Not all cash collections and/or cash payments are operating activities. Some are investing activity cash flows (e.g., paying for property, plant, and equipment, etc.) and others are financing activity cash flows (e.g., paying dividends to shareholders, collecting cash from lenders [e.g., borrowing from banks], etc.).
18) Which two accounts follow the rules of debit and credit in relation to increases and decreases in the opposite manner? A) (i) Dividends and (ii) Retained Earnings B) (i) Advertising Expense and (ii) Cash C) (i) Supplies and (ii) Salaries Expense D) (i) Salaries Expense and (ii) Dividends E) (i) Accounts Payable and (ii) Common Stock
Answer: A Assets, expenses, and dividends are increased by debits. Liabilities equities, and revenues are increased with credits. Dividends are increased with debits, and retained earnings are increased with credits.
30) The primary basis for the preparation of the financial statements is the a) adjusted trial balance. b) general journal c) trial balance. d) general trial balance. e) post-closing trial balance.
Answer: A Companies prepare an adjusted trial balance after journalizing and posting the adjusting entries and before preparing the financial statements. In fact, the financial statement are prepared using information reported on the adjusted trial balance.
38) A corporation reports the following: Sales revenue, $184,000 Ending inventory, $16,600 Beginning inventory, $17,200 Purchases, $60,400 Purchases discounts, 3,000 Purchase returns and allowances, $1,100 Freight-in, $600 Freight-out, $900 Calculate the company's cost of goods sold. a) $57,500 b) $56,600 c) $56,400 d) $62,500 e) $56,900
Answer: A Cost of goods sold equals beginning inventory plus purchases minus purchases discounts and purchases returns and allowances plus freight-in minus ending inventory. Cost of goods sold = 17,200 + 60,400 - 3,000 - 1,100 + 600 - 16,600 = 57,500.
12) The net cash inflow from operating activities is $200,000; cash received from issuing stock is $150,000; cash paid for capital expenditures is $90,000; cash paid for bonds held as an investment is $50,000; and cash paid for dividends is $20,000. How much is free cash flow? a) $90,000 b) $40,000 c) $180,000 d) $110,000
Answer: A Free cash flow is cash provided by operating activities minus cash paid for capital expenditures and dividends paid. Free cash flow = $200,000 - 90,000 - 20,000 = $90,000.
1) Which of the following is true with regards to the forms of business organization? a) Partnerships and their owners generally receive more favorable tax treatment than corporations. b) A proprietorship is a business organized as a separate legal entity owned by stockholders. c) All of these are true d) The number of corporations exceeds the combined number of proprietorships and partnerships in the United States. e) Stockholders are generally personally liable for their corporations' debts.
Answer: A Owner of sole proprietorships, partnerships, and corporations are called proprietors, partners, and stockholders, respectively. While the combined number of proprietorships and partnerships is several times the number of corporations in the U.S., corporations conduct several times the business in terms of revenues generated. Corporations incur tax at the business level and stockholder level (i.e., double taxation) while proprietorships and partnerships do not incur business level taxes (i.e., single taxation). Owners of corporations are not personally liable for the corporation's debts (i.e., stockholders have limited liability), but proprietors and partners are generally personally liable for their proprietorships' and partnerships' debts (i.e., unlimited liability).
40) A company has the following: Sales revenue $95,000; Sales Returns and Allowances $15,000; Sales Discounts $5,000; Cost of Goods Sold $35,000; Operating Expenses $22,000; Other expenses $3,000. How much is the profit margin? a) 20% b) 16% c) 12.4% d) 34.6% e) 75%
Answer: A Profit margin = Net income divided by net sales. Net sales = Sales revenue minus sales returns and allowances minus sales discounts. Net sales = 95,000 - 15,000 - 5,000 = 75,000. Net income = Net sales - cost of goods sold - operating expenses + other revenue - other expenses. Net income = 75,000 - 35,000 - 22,000 + 0 - 3,000 = 15,000Profit margin = Net income divided by net salesProfit margin = 15,000/75,000 = 20%.
9) Which one of the following does not affect retained earnings? a) Issuing of common stock to stockholders b) Incurring a net loss c) Declaring and paying a dividend d) Recognizing revenue from a sale to a customer e) Renting a warehouse to store the company's inventory
Answer: A Retained earnings increases by net income, so it increases when revenue is recognized and it decreases when expenses are recognized, Retained earnings also decreases by dividends.
17) Which of the following two accounts are both increased with debits? a) Dividends and Accounts Receivable b) Supplies and Retained Earnings c) Insurance Expense and Notes Payable d) Interest Payable and Common Stock e) Rent Expense and Accumulated Depreciation
Answer: A The normal balance of any account is the side which increases that account. Debits increase assets, expenses, and dividends. Credits increase liabilities, equities, and revenues.
20 ) Immediately after a transaction has been recorded in the journal, it should be recorded in the a) ledger. b) bank reconciliation. c) trial balance. d) income statement. e) journal.
Answer: A The recording process does steps in a certain order. The first step is to analyze each transaction in terms of its effects on the accounts. This begins with examining a source document that provides evidence of a transaction or event that needs to be recorded. Examples of source documents include a bill or invoice, a cash register document, and a sales slip. The second step is to enter the transaction information in the journal (i.e., journalize the transaction). Third, transfer the journal information to the appropriate accounts in the ledger (i.e., post it to the ledger).
14) A company pays the coming year's one-year insurance policy. This transaction will immediately affect the a) balance sheet and cash flows statement only. b) income statement only. c) income statement, balance sheet, and retained earnings statement only. d) income statement, retained earnings statement, cash flows statement, and balance sheet. e) income statement and cash flows statement only.
Answer: A When a company pays the coming year's insurance policy, it decreases cash which affects the balance sheet and the cash flows statement. Payments of expenses that will benefit more than the current accounting period are recorded as assets called prepaids, such as prepaid insurance. This transaction is an asset exchange (i.e., cash is exchanged for prepaid insurance). There is no insurance expense until later when the policy expires.
5) During the year, a company did the following: Recognized revenues of $800,000 Incurred expenses of $570,000 Issued common stock for $50,000 Paid dividends of $40,000 Its ending retained earnings is $440,000. What was the company beginning retained earnings? a) $250,000 b) $200,000 c) $300,000 d) $240,000 e) $290,000
Answer: A Ending retained earnings = Beginning retained earnings + Net income - DividendsReplace net income with revenue - expensesEnding retained earnings = Beginning retained earnings + Revenue - Expenses - DividendsRe-arranging to solve for beginning retained earnings:Beginning retained earnings = Ending retained earnings - Revenue + Expenses + DividendsBeginning retained earnings = 440,000 - 800,000 + 570,000 + 40,000Beginning retained earnings = 250,000
39) Under what inventory system is cost of goods sold determined at the end of an accounting period? a) Periodic inventory system b) Perpetual inventory system c) All inventory systems d) Single entry inventory system e) Double entry inventory system
Answer: A Under the periodic inventory system, cost of goods sold for the period is calculated by adding purchases for the period to the beginning inventory balance and subtracting the ending inventory balance.
32) A company has the following adjusted trial balance: Cash: 800 (debit) Accounts Receivable: 500 (debit) Prepaid Rent: 100 (debit) Equipment: 6,000 (debit) Accum. Depr. (Equipment)- 2,200 (credit) Accounts Payable- 400 (credit) Unearned Service Revenue- 500 (credit) Common Stock- 1,400 (credit) Retained Earnings- 1,600 (credit) Service Revenue- 3,000 (credit) Interest Revenue- 50 (credit) Salaries and Wage expense- 950 (debit) Depreciation Expense- 500 (debit) Rent Expense- 300 (debit) Total- 9,150 After closing entries have been journalized and posted, the balance in the company's retained earnings account will be a) $9,150. b) $2,900. c) $1,900. d) $3,400. e) $1,600.
Answer: B Ending retained earnings = Beginning retained earnings + revenues - expenses - dividendsEnding retained earnings = 1,600 + 3,000 + 50 - 950 - 500 - 300 = 2,900
8) At the end of the year, a company had retained earnings of $2,840,000. During the year, the company reported the following: Issued common stock, $108,000 Declared and paid dividends, $43,000 Net income, $402,000. How much was the retained earnings balance at the beginning of the same year? a) $2,438,000 b) $2,481,000 c) $2,253,000 d) $2,154,000 e) $2,373,000
Answer: B Ending retained earnings equals beginning retained earnings plus net income minus dividends.$2,840,000 = X + $402,000 - $43,000Solve for X: Beginning retained earnings = $2,481,000.
37) Net income is $15,000, operating expenses are $20,000, and net sales total $75,000. How much is cost of goods sold? a) $55,000 b) $40,000 c) $60,000 d) $35,000 e) $15,000
Answer: B Gross profit - operating expenses = net income. Alternatively: Net income + operating expenses = gross profit. $15,000 + 20,000 = $35,000 Net sales - cost of goods sold = gross profit. Alternatively: Net sales - gross profit = cost of goods sold. $75,000 - 35,000 = $40,000.
27) A corporation purchased a one-year insurance policy on March 1 of the current year for $48,000. The insurance policy will be in effect from March 1 through February 28 of the next year. The company recorded the payment as prepaid Insurance. The company neglects to record the year-end adjusting entry at the end of the current year. As a result, the company's current year a) net income and assets will be overstated by $8,000. b) net income and assets will be overstated by $40,000. c) net income and assets will be understated by $8,000. d) net income and assets will be understated by $40,000. e) net income will not be overstated or understated.
Answer: B McMasters Corporation purchased a one-year insurance policy on March 1 of the current year for $48,000. The insurance policy will be in effect from March 1 through February 28 of the next year. The company recorded the payment as prepaid Insurance. The company neglects to record the year-end adjusting entry at the end of the current year. As a result, the company's current year
3) An income statement: a) Reports the changes in retained earnings for a specific period of time. b) Reports the revenues and expenses for a specific period of time. c) Reports the expanded accounting equation. d) Reports the changes in assets, liabilities, and stockholders equity over a period of time. e) Reports the assets, liabilities, and stockholders equity at a specific date.
Answer: B 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.
29) A company pays its employees their wages each Friday. The most recent payment occurred on Friday, December 26. The next payroll will be paid on January 2. There are three more work days in December after December 26th. Employees work 5 days a week and the company pays $30,000 per week in wages. What will be the adjusting entry to accrue wages expense at the end of December? a) A credit to Salaries and Wages Expense for $6,000 b) A debit to Salaries and Wages Expense for $18,000 c) No adjusting entry would be required. d) A debit to Salaries and Wages Expense for $6,000 e) A credit to Salaries and Wages Expense for $18,000
Answer: B Wages for three days needs to be recorded for the current year even though the employer will not pay its employees for those days until Jan. 2 of next year.Wages for three days = $30,000 x 3/5 = $18,000. Expenses increase with debits.
16) A company began the year with $75,000 in its common stock account and a credit balance in retained earnings of $24,000. During the year, the company earned net income of $35,000 and declared and paid $10,000 of dividends. In addition, the company sold additional common stock amounting to $15,000. Based on this information, what is the ending total of stockholders' equity? a) $124,000 b) $134,000 c) $139,000 d)$149,000 e) $64,000
Answer: C $139,000 = common stock + retained earnings = (75,000 + 15,000) + (24,000 + 35,000 - 10,000)
31) Which of the following correctly describes the closing process? a) Net income is transferred to the Cash account. b) Net income is transferred to the Common Stock account. c) Each revenue account and expense account is closed to a zero balance. d) Permanent accounts are closed to zero balances. e) All of these are correct.
Answer: C Because revenue, expenses, and dividends relate only to a given accounting period, these accounts are considered temporary accounts. At the end of the accounting period, companies close the temporary account balances to zero. Revenue accounts and expense accounts are transferred to the Income Summary account which is closed to the Retained Earnings account. In this manner, net income is transferred to the Retained Earnings account through the closing process. The dividends account is transferred directly to Retained Earnings.
34) A company uses a perpetual inventory system. On December 10, the company bought inventory for $3,000. It is the only item of inventory it owns. On December 29, it sells the inventory for $5,500 on account with terms 2/10 n/30. The company's customer pays for the inventory on January 3. Which of the following is recorded by the company on December 29? a) Debit sales revenue for $5,500 b) No entry will be made. c) Credit inventory for $3,000 d) Credit inventory for $5,500 e) Debit accounts receivable for $3,000
Answer: C In a perpetual inventory system, companies record increases to inventory when they buy it and when customers return it, and they record decreases to inventory when they sell it. On the date of sale, it debits accounts receivable for $5,500 and credits sales revenue for $5,500. It would also debit cost of goods sold for $3,000 and credit inventory for $3,000.
28) During the adjusting process two transactions were neglected or omitted. The first is for unearned rent revenue of which $450 was earned during the period, the second was for accrued interest payable of which $275 is owed for the period. As a result of these omissions a) expenses are overstated by $725. b) revenue is overstated by $725. c) liabilities are overstated by $175. d) These omissions would not affect the financial statements; the financial statements will be correct. e) net income is overstated by $175.
Answer: C Omitting the year-end adjusting entry for unearned revenue and revenue fails to reduce unearned revenue and it fails to increase revenue. Liabilities are overstated by $450 and revenue is understated by $450.Omitting the year-end adjusting entry for accrued interest payable fails to increase interest payable and it fails to increase interest expense. Liabilities are understated by $275 and interest expense is understated by $275.The net effect of these two omissions include the following:Liabilities are overstated by $175 (i.e., 450 - 275 = 175).Revenue is understated by $450Expenses are understated by $275Net income is understated by $175Assets are not affected by these omissions.
24) The following is information is from a certain corporation's financial records for the current fiscal year. Cash received from customers- $230,000 Revenue earned- $255,000 Cash paid for wages- $110,000 Wage expense incurred- $115,000 Cash paid during the current year for computers that will be used for 3 years- $30,000 Depreciation expense- $10,000 Proceeds from issuing debt- $30,000 Interest incurred on debt- $3,000 Cash paid for supplies- $4,000 Supplies expense incurred- $2,000 What is the company's net income for the current year using the accrual basis of accounting? a) $135,000 b) $130,000 c) $125,000 d) $115,000 e) $186,000
Answer: C The accrual-basis of accounting recognizes revenues when the performance obligation is satisfied regardless of when the customer pays and it records expenses when they are incurred regardless of when they are paid. Net income using the accrual basis = Revenue earned - expenses incurred. Net income using the accrual basis = $255,000 - 115,000 - 10,000 - 3,000 - 2,000 = $125,000
13) The accounting concept that suggests assets should be reported at the price received to sell the asset and liabilities should be reported at the amount required to settle the liability is known as the a) historical cost principle. b) periodicity assumption. c) fair value principle. d) economic entity assumption. e) monetary unit assumption.
Answer: C The fair value principle indicates that assets and liabilities should be reported at their fair values. The fair value of an asset is the price received to sell the asset. The fair value of a liability is the amount needed to settle or pay the liability.
26) The year-end trial balance for Garnet & Gold Corporation appears as follows: Cash- Debit $300 Accounts Receivable- Debit $500 Prepaid Insurance- Debit $60 Supplies- Debit $140 Equipment- Debit $4,000 Accum. Deprec. (Equipment)- Credit $800 Unearned Revenues- Credit $300 Common Stock- Credit $1,000 Retained Earnings- Credit $1,400 Service Revenue- Credit $3,000 Salaries&Wage Expense- Debit $1,000 Rent Expense- Debit $500 Both Credit and Debit have balance of $6,500. If the company has not yet recorded its performance of $200 of services to a customer who had paid in advance, the company should record an adjusting entry that a) debits Unearned Revenue for $100 and credits Service Revenue for $100. b) debits Service Revenue for $200 and credits Cash for $200. c) debits Unearned Revenue for $200 and credits Service Revenue for $200. d) debits Unearned Revenue for $100 and credits Cash for $100. e) debits Service Revenue for $100 and credits Unearned Revenue for $100.
Answer: C The trial balance lists the company's accounts and their balances on a particular date before adjusting entries have been recorded. This company's trial balance shows that Unearned Revenue has a $300 balance. However, this balance does not include the effects of services performed to customers who prepaid for services. Unearned Revenues is overstated. The adjusting entry decreases Unearned Revenues and increases Service Revenue by $200. The ending balance of Unearned Revenue will become $100. Debit the Unearned Revenue account by $200 and credit the Service Revenue account by $200.
21) A chart of accounts for a business firm a) is a forecast of what is expected to occur in terms of account balances. b) indicates the amount of profit or loss for the period. c) is a graph. d) lists the accounts in the ledger. e) shows the balance of each account in thel ledger.
Answer: D A chart of accounts is a list of all of the accounts used by a company. It includes no information about the account balances.
23) A trial balance will balance even if a) the account that should be debited was credited and the account that should be credited was credited.. b) a $1,000 cash payment for supplies was debited to the Supplies account for $1,000 and credited to the Cash account for $100. c) both accounts affected by a $1,000 transaction were debited. d) a $1,000 journal entry was posted twice. e) None of these
Answer: D A trial balance lists accounts and their balances at a given point in time. A purpose of the trial balance is to confirm that the total of the debit balances equals the total of the credit balances. However, a trial balance has limits. A trial balance helps uncover certain errors, such as recording a different amount debited than the amount credited, omitting part of a journal entry or recording the entire journal entry using only debits (or using only credits). A trial balance does not prove that all transactions have been recorded nor does it proves that transactions have been recorded correctly. For example, a trial balance will confirm that total debit balances equal total credit balances even if a transaction were recorded twice or if it was not recorded even once. Both total debits and total credits would be wrong by the same amount. Another error not uncovered by a trial balance is recording a transaction in the wrong accounts.
19) At the start of the current year, a corporation's retained earnings account had a credit balance of $280,000. During the year, the corporation had a net loss of $60,000 and paid dividends to the stockholders of $40,000. It also borrowed $8,000 by issuing a note. At December 31, the balance in retained earnings is a) $320,000 credit. b) $240,000 credit. c) $220,000 debit. d) $180,000 credit. e) $280,000 debit.
Answer: D Ending retained earnings = Beginning retained earnings + Net income - DividendsEnding retained earnings = $280,000 - 60,000 - 40,000 = $180,000. Retained earnings is an equity account; it normally has a credit balance. Certain transactions do not affect retained earnings, such as borrowing money by issuing a note.
15) Powell Company provided consulting services and collected $500 for the services provided. As a result of this transaction a) assets and liabilities decreased by $500. b) liabilities decreased and equity increased by $500 c) equity remained unchanged. d) assets and equity increased by $500. e) assets and equity decreased by $500.
Answer: D 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.
7) A company has assets of $2,750,000, common stock of $435,000, and retained earnings of $380,000. It has liabilities of a) $815,000. b) $2,370,000. c) $1,565,000. d) $1,935,000. e) $2,644,000.
Answer: D The basic accounting equation is: Assets = Liabilities + EquityThis equation must always balance, meaning total assets must equal total liabilities plus total stockholders' equity.Equity equals paid-in capital (i.e., common stock) plus retained earnings.Equity = 435,000 + 380,000 = 815,000Re-arranging the accounting equation to solve for liabilities yields the following:Liabilities = Assets - EquityFill-in assets and equity into the accounting equation and solve for liabilities.Liabilities = Assets - Equity = 2,750,000 - 815,000Liabilities = 1,935,000
33) A company recorded the following events involving a recent purchase of inventory: Received goods for $25,000, terms 2/10, n/30. Returned $800 of the shipment for credit. Paid $200 freight on the shipment. Paid the invoice within the discount period.The company uses the perpetual inventory system. As a result of these events, the company's inventory a) increased by $24,116. b) increased by $25,206. c) increased by $24,500. d) increased by $23,916. e) increased by $25,000.
Answer: D The company uses the perpetual inventory system. Every transaction that increases or decreases inventory (e.g., purchases, sales, returns, etc.) immediately increases or decreases the company's inventory account. The cost of inventory includes its invoice price minus (i) inventory returned to the seller, (ii) allowances granted by the seller, and (iii) discounts taken by the seller. Also, the cost of shipping increases the cost of the inventory when the buy pays the shipping and uses the perpetual inventory system. The company's inventory changed as follows: [($25,000 - 800) x 98%] + $200 = $23,916.
22) The primary purpose of the trial balance is to a) make sure a journal entry is not posted twice. b) record year-end adjusting entries. c) transfer journal entries to the ledger accounts. d) disclose the complete effect of a transaction in one place. e) prove the equality of the debit and credit amounts after posting.
Answer: E A trial balance lists accounts and their balances at a given point in time. Accounts are listed in the same order that they appear in the ledger, including assets, liabilities, equities, dividends, revenues, and expenses. Account balances appear in either of two columns. The left-side column reports the debit balances and the right side column reports the credit balance. A company prepares a trial balance at the end of the accounting period and before it prepares its financial statements. A purpose of the trial balance is to confirm that the total of the debit balances equals the total of the credit balances. However, a trial balance has limits. A trial balance does not prove that all transactions have been recorded nor does it proves that transactions have been recorded correctly. For example, a trial balance will confirm that total debit balances equal total credit balances even if a transaction were recorded twice or more. Both total debits and total credits would be wrong by the same amount.
2) Which of the following is an equity account? a) Cash b) Accounts payable c) Unearned revenue d) Revenue e) Retained earnings
Answer: E Accounts are categorized into the following categories: assets, liabilities, equities, revenues, expenses, and dividends. Equities include paid-in capital accounts (e.g., common stock) and retained earnings.
35) The invoice that a company delivered to its customer for goods purchased by the customer includes 2/10, n/30. The 2/10, n/30 means a) the customer can have a 2% discount if the bill is paid in fewer than 10 days of the invoice date but no discount is offered if paid on the tenth day after the invoice date. b) the customer can have a 10% discount if the bill is paid within two days of the invoice date. c) the customer must pay the bill within 10 days of the invoice date. d) the customer can return up to 2% of the merchandise up to 10 days of the invoice date and the no returns thereafter. e) the customer can have a 2% discount if the bill is paid on or before the 10th day after the invoice date.
Answer: E Companies often offer customers cash discounts for prompt payment. An example of terms offered by some companies is 2/10, n/30. The 2/10 refers to a 2 percent discount is payment is made within 10 days of the invoice date. The n/30 indicates that the net amount (i.e., the invoice amount) is due 30 days after the invoice date.
11) A company has current assets of $1,800,000 and total assets of 410,000,000. It has current liabilities of $750,000 and total liabilities of $6,000,000. If it issues $100,000 of common stock what will its current ratio be? (rounded) a) 2.45 b) 2.95 c) 2.33 d) 2.27 e) 2.53
Answer: E Current ratio = current assets divided by current liabilities.Issuing common stock to shareholders increases the corporation's cash (i.e., current assets) and increases its stockholders' equity. It does not affect current liabilities.Current ratio = (1,800,000 + 100,000)/750,000Current ratio = 2.5333 (i.e., 2.5333 to 1)
10) Working capital is calculated by taking a) current liabilities plus assets. b) current assets times current liabilities. c) current assets divided by current liabilities. d) current liabilities divided by current assets. e) current assets minus current liabilities.
Answer: E Liquidity refers to a company's short-term ability to pay its maturing obligations and to meet unexpected needs for cash. Examples of measures of liquidity include the current ratio and working capital. Working capital is computed as current assets minus current liabilities.
25) On August 1, a company purchased equipment for $8,000. The equipment's estimated salvage value is $500. The machine will be depreciated using straight-line depreciation and a five year life. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be a a) $625 debit to Depreciation Expense and a $625 credit to Cash. b) $1,500 debit to Depreciation Expense and a $1,500 credit to Accumulated Depreciation. c) $625 debit to Depreciation Expense and a $625 credit to Equipment. d) $1,500 debit to Depreciation Expense and a $1,500 credit to Equipment. e) $625 debit to Depreciation Expense and a $625 credit to Accumulated Depreciation.
Answer: E Straight-line annual depreciation per year = (Cost - Salvage value)/Life = (8,000 - 500)/5 = $1,500 per yearThe correct adjusting entry to record depreciation for 5 months (i.e., August 1 through December 31) is $1,500 per year x 5/12 = $625.The year-end adjusting entry to record depreciation includes a debit to Depreciation Expense and a credit to Accumulated Depreciation.
6) An annual report includes all of the following except a) notes to the financial statements. b) a management discussion and analysis section. c) an income statement. d) an auditor's report. e) a listing of all of the stockholders.
Answer: E The annual report does not include a listing of all of the stockholders. This information changes daily when stock is trading on public exchanges.
