ACG 2021 Quiz Questions

Earnings per share are calculated by dividing

(net income minus preferred dividends) by average common shares outstanding.

Which of the following is not an example of a source document that provides evidence of a transaction?

-A chart of accounts for the company (ANSWER) -A bank statement showing interest earned on the company's bank account -A receipt for the amount paid for office supplies -A bill or invoice received from a supplier -A sales slip recording a sale of services to a customer

Retained earnings is

-an equity account (ANSWER) -equal to cash. -equal to total assets minus total liabilities. -an asset account. -equal to revenues minus expenses. Solution:Stockholders' equity includes contributed capital (e.g., common stock) and retained earnings. Retained earnings is an equity account. It is generated from the company's net income since the company began operations minus dividends paid since it began operations. Beginning retained earnings plus net income minus dividends equals ending retained earnings.

A journal entry recorded in the journal does not show

-the accounts debited and credited. t-he amounts debited and credited. -the date of the transaction. -All of these are shown in the journal. -the balance in the accounts affected by the transaction. (ANSWER)

Which of the following is an asset?

Accounts receivable

Which financial statement is dated as of a specific point in time?

Balance Sheet

Which of the following is not considered to be an external user of accounting information?

Company officers (e.g., Company president)

In a classified balance sheet, which assets are usually listed first?

Current assets

A trial balance

Solution: A trial balance is a list of accounts with their balances at a given time. While the trial balance does prove that debits and credits are equal after posting, it does not prove the mathematical accuracy of all journalized transactions. If a journal entry is posted twice, the trial balance will still balance. A trial balance does not prove that all transactions have been recorded.

Which of the following best describes stockholders' equity?

Solution:Stockholders' equity represents claims of owners. Assets are the resources owned by the firm and liabilities are the claims of creditors against the firm's assets.

When a company purchases goods on account from a supplier it has an obligation to pay for the goods. The obligation to pay for these goods is called

accounts payable.

The annual report provided to shareholders includes an auditor's report. The auditor's report includes an opinion about the fairness of the financial statements. The party expressing that opinion is

an independent auditor who is a Certified Public Accountant

The partnership form of business organization

is not a separate legal entity and its owners are liable for its debts.

A company declares and pays a dividend to shareholders. This transaction will immediately affect the

retained earnings statement, balance sheet, and cash flows statement only.

During the current year, Keen Company issued stock for $49,000, paid dividends of $17,000, and reported net income of $201,000. What was its retained earnings balance at the beginning of the same year if its ending retained earnings is $1,292,000?

$1,108,000. Solution: Ending retained earnings = Beginning retained earnings + Net income - Dividends Beginning retained earnings = Ending retained earnings - Net income + Dividends Beginning retained earnings = $1,292,000 - 201,000 + 17,000 = $1,101,000

Vista Corporation has assets of $2,400,000, common stock of $620,000, and retained earnings of $380,000. What are the company's liabilities?

$1,400,000 Solution: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 = 620,000 + 380,000 = 1,000,000Re-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 = 2,400,000 - 1,000,000Liabilities = 1,400,000

If total liabilities decreased by $15,000 and total stockholders' equity increased by $5,000 during a period of time, then total assets must have changed by what amount and direction during that same period?

$10,000 decrease Solution:The accounting equation: Assets = Liabilities + Stockholders' EquityIf liabilities decreased by $15,000 and stockholders' equity increased by $5,000 then the right side of the accounting equation decreased by $10,000. Therefore, assets must have decreased by $10,000 to keep the accounting equation in balance [i.e., ($15,000) + $5,000 = ($10,000)].

A company began the year with $52,000 in its Common Stock account and a credit balance in Retained Earnings of $37,000. During the year, the company earned net income of $46,000 and declared and paid $4,000 of dividends. In addition, the company sold additional common stock amounting to $25,000. Based on this information, what is the ending total of stockholders' equity?

$156,000 Solution: Stockholders' equity = common stock + retained earnings Stockholders' equity = (52,000 + 25,000) + (37,000 + 46,000 - 4,000) = $156,000

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

$180,000 credit. Solution: Ending retained earnings = Beginning retained earnings + Net income - Dividends Ending 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.

At the start of the month, a corporation reported retained earnings of $163,000. During the month, it earned revenues of $44,000, incurred expenses of $21,000, borrowed $10,000 by signing a note payable, and paid dividends of $2,000. What is the balance in retained earnings at the end of the month?

$184,000 credit Solution: Ending retained earnings = Beginning retained earnings + revenues for the current period - expenses for the current period - dividends for the current period. Ending retained earnings = $163,000 + $44,000 - 21,000 − 2,000 = $184,000 Retained earnings normally has a credit balance. This is a profitable company, so its retained earnings balance would be a credit balance. Note: signing a note increased notes payable (i.e., liabilities) and increased cash (i.e., assets); borrowing money did not affect net income or retained earnings.

The net cash inflow from operating activities is $250,000; cash received from issuing stock is $150,000; cash paid for capital expenditures is $55,000; cash paid for bonds held as an investment is $5,000; and dividends paid are $10,000. How much is free cash flow?

$185,000 Solution: Free cash flow is cash provided by operating activities minus cash paid for capital expenditures and dividends paid. Free cash flow = $250,000 - 55,000 - 10,000 = $185,000.

Hill Corporation began the year with retained earnings of $460,000. During the year, the company issued $840,000 of common stock, recorded expenses of $2,000,000, and paid dividends of $50,000. If Hill's ending retained earnings was $760,000, what was the company's revenue for the year?

$2,350,000 Solution:Beginning retained earnings + Net income - Dividends = Ending retained earningsReplace net income with revenue - expensesBeginning retained earnings + Revenue - Expenses - Dividends = Ending retained earningsRe-arranging this equation to solve for revenues:Revenue = Ending retained earnings - Beginning retained earnings + Expenses + DividendsRevenue = 760,000 - 460,000 + 2,000,000 + 50,000Revenue = 2,350,000

At the start of the month, Acme Enterprises reported a $34,000 debit balance in its cash account. During the month, Acme collected cash of $30,000 and made disbursements of $42,000. At the end of the month, the cash balance is

$22,000 debit. Solution: The ending cash balance equals the beginning cash balance plus cash receipts occurring during the period minus cash payments occurring during the period. The ending cash balance = $34,000 + 30,000 − 42,000 = $22,000.

A company started the year with $25,000 in its Common Stock account and a credit balance in Retained Earnings of $15,000. During the year, the company earned net income of $10,000 and declared and paid $1,000 of dividends. In addition, the company sold additional common stock amounting to $5,000. As a result, the amount of its retained earnings at the end of the year would be

$24,000 Solution: Ending retained earnings = Beginning Retained Earnings + Net Income - Dividends Ending retained earnings = 15,000 + 10,000 - 1,000 = $24,000

At the start of the current year, a corporation's retained earnings account had a credit balance of $282,000. During the year, the corporation earned revenues of $40,000, incurred expenses of $24,000. At the end of the year, it purchased equipment for $10,000 in exchange for a $10,000 note and it paid dividends of $4,000. What is the balance in retained earnings at the end of May?

$294,000 credit Solution:Ending retained earnings = Beginning retained earnings + Revenues - Expenses - Dividends Ending retained earnings = $282,000 + 40,000 - 24,000 - 4,000 = $294,000 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 and purchasing equipment.

A company's financial records report the following accounts and balances at the end of the year: Accounts payable$ 4,300 Accounts receivable 5,000 Cash 14,400 Common stock 5,900 Dividends 2,500 Interest expense 18,800 Notes payable 5,500 Prepaid insurance 3,000 Retained insurance 2,700 Service revenue 25,300 What would the company show as its total credits on its trial balance?

$43,700 Solution:Certain accounts normally have debit balances, including assets, expenses, and dividends. This company's accounts that have debit balances include its assets (i.e., accounts receivable, cash, prepaid insurance, accounts receivable), expenses (i.e., interest expense), and dividends. These sum to $43,700 (i.e., 5,000 + 14,400 + 2,500 + 3,000 + 18,800 = 43,700).Other accounts normally have credit balances, including liabilities, equities, and revenues. This company's accounts that have credit balances include its liabilities (i.e., accounts payable, notes payable), equities (i.e., common stock, retained earnings), and revenues (i.e., service revenue). These sum to $43,700 (i.e., 4,300 + 5,900 + 5,500 + 2,700 + 25,300 = 43,700).Note: total debits equal total credits.

A company has the following accounts and account balances at the end of its first year: Accounts payable, $1,000 Cash, $15,000 Common stock, Not given Dividends, $2,000 Expenses, $15,000 Notes payable, $4,000 Prepaid insurance, $2,000 Revenues, $20,000 What is the balance of its common stock account at the end of the first year?

$9,000 Solution:The basic accounting equation (i.e., Assets = Liabilities + Equity) must stay in balance. The accounting equation can be expanded as follows:Assets = Liabilities + Common stock + Retained earningsWilson's assets include cash and prepaid insurance (i.e., 15,000 + 2,000 = 17,000).Wilson's liabilities include accounts payable and notes payable (i.e., 1,000 + 4,000 = 5,000).This is Wilson Company's first year. Its retained earnings at the start of the first year is zero. Retained earnings increases y net income and it decreases by dividends.Wilson's retained earnings at the end of the first year equals retained earnings at the start of the current year plus current-year net income minus current year dividends (i.e., 0 + 20,000 - 15,000 - 2,000 = 3,000).Assets = liabilities + retained earnings + common stockCommon stock = Assets - liabilities - retained earnings Common stock = 17,000 - 5,000 - 3,000 Common stock = 9,000

A trial balance would only help in detecting which one of the following errors?

-A trial balance would help detect all of these errors. -A transaction that is not journalized. -For a given transaction, the account that should have been debited was credited and the account that should have been credited was debited. -An error when transferring the debit side of journal entry to the ledger occurred; it was recorded as a credit. The credit side of the transaction was recorded correctly. (ANSWER) -A journal entry that is posted twice.

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

-Accounts payable -Retained earnings -Service revenue (ANSWER) -Cash -Equipment

Which of the following is not classified as a current asset?

-Accounts receivable -Patents (ANSWER) -Prepaid expenses -Cash -Inventory

Which of the following would not be reported among property, plant, and equipment on a classified balance sheet?

-Accumulated depreciation -Land -Cash (ANSWER) -Equipment -Delivery vehicles

An account is a part of a company's financial information system and is described by all except which one of the following?

-An account consists of three parts with one part being the account's title. -The credit side is the right side of the account's T-account. -An account has a debit and credit side. -The debit side is the left side of the account's T-account. -An account is a source document. (ANSWER)

Which of the following is not an asset?

-Inventory -Cash -Accounts payable (ANSWER) -Land -Supplies Solution:Assets are the resources owned by a company. They are property. Examples include cash, accounts receivable, equipment, etc. Accounts payable is a liability.

Which of the following would not appear on a retained earnings statement?

-Service revenue (ANSWER) -The beginning retained earnings balance -Net income -The ending retained earnings balance -Dividends

The heading or title on the income statement identifies all of the following except

-the type of financial statement. -the name of the company -all of these appear in the heading or title. -the time period covered by the statement. -the independent auditor who reviewed the statement (ANSWER)

Jackson Company recorded the following cash transactions for the year: Paid $150,000 for salaries. Paid $45,000 to purchase office equipment. Paid $10,000 in dividends. Collected $275,000 from customers.What is the company's net cash from operating activities for the year?

125,000 Solution:Business activities include financing activities, investing activities, and operating activities. After a company obtains financing from owners and creditors and after the company has invested in property, plant, and equipment, the company is ready for day-to-day operating activities. Examples of operating activities include buying and selling inventory, paying employees' wages, and other activities (e.g., paying for marketing).This company's net cash from its operating activities equals cash collected from customers minus payments for employee salaries (i.e., 275,000 - 150,000 = 125,000). Buying equipment is an investment activity. Paying a dividend is a financing activity.

During the year, Langston Company recorded revenues of $800,000, recorded expenses of $620,000, issued an additional $90,000 of common stock, and paid dividends of $60,000. Its ending retained earnings is 500,000. What was the company beginning retained earnings?

380,000 Solution: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 = 500,000 - 800,000 + 620,000 + 60,000Beginning retained earnings = 380,000

The financial records for Harold Corporation included the following information: Accounts receivable, $60,000 Accounts payable, $25,000 Cash, $15,000 Common stock, $5,000 Dividends, $10,000 Insurance expense, $10,000 Sales revenue, $90,000 Salaries and wages expense, $25,000Based on this information, how much was its net income?

55,000 Solution:Net income equals the revenues earned during the year minus the expenses incurred during the year. Use the balances of the revenue and expense accounts to measure revenues and expenses.Net income = Revenue - expensesNet income = $90,000 - 25,000 - 10,000 = $55,000

Martha's Maid Service began the year with total assets of $100,000 and stockholders' equity of $40,000. During the year the company earned $110,000 in net income and paid $5,000 in dividends. Total assets at the end of the year were $240,000. How much are total liabilities at the end of the year?

95,000 First, determine the ending balance of stockholders' equity.Ending stockholders' equity = beginning stockholders' equity + net income - dividends.Ending stockholders' equity = $40,000 + 110,000 - 5,000 = $145,000. Second, determine total liabilities.(i.e., Assets = Liabilities + Stockholders' equity)Liabilities = $240,000 - 145,000 = $95,000.

In the annual report, where would a financial statement reader find out if the company's financial statements give a fair depiction of its financial position and operating results?

Auditor's report

An accountant has debited an asset account for $900 and credited a liability account for $1,200. There is one missing part of the transaction. Which of the following can be the missing part of the transaction?

Debit a different asset account for $300. The basic accounting equation is assets equal liabilities plus equity. It must stay in balance meaning total assets must equal total liabilities plus total stockholders' equity, and this relation must be maintained in every transaction. If a transaction debited assets by $900 then assets increased by $900. If that same transaction also credited a liability account by $1,200 then it increased liabilities by $1,200. The missing part of the transaction must cause assets to equal liabilities plus equity. Acceptable options include (1) increasing (i.e., debiting) a different asset account for $300, (2) decreasing (i.e., debiting) a different liability for $300, and (3) decreasing (i.e., debiting) an equity account for $300.

During its first year, a corporation earned revenues of $135,000 and incurred expenses of $87,000. The corporation also paid cash dividends of $10,000 and purchased $25,000 of equipment in exchange for cash during the first year. What is the balance in the company's retained earnings account at the end of its first year?

Ending retained earnings = Beginning retained earnings + net income - dividends. Ending retained earnings = $0 + $135,000 - $87,000 - $10,000 = $38,000. Retained earnings normally has a credit balance; it occurs when revenues exceed expenses and dividends.

What organization issues the majority of generally accepted accounting standards in the United States?

Financial Accounting Standards Board

Which of the is true with regards to the retained earnings account?

It is an equity account and it normally has a credit balance. Solution: The normal balance of any account is the side which increases that account. Debits increase assets, expenses, and dividends. The normal balance of assets, expenses, and dividends is a debit balance. Credits increase liabilities, equities, and revenues. The normal balance of liabilities, equities, and revenues is a credit balance. Retained earnings is an equity account.

Which of these step occurs earliest in the recording process?

Journalize the transaction Solution: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).

On April1, 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 made on March 6? Why or why not?

No, hiring an employee is an important event; however it is not an economic event that should be recorded. Solution: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 is not a principal type of business activity?

Ordering

Which of the following statements concerning internal and external users of accounting information is not correct?

Regulatory authorities are considered internal users.

Which of the following is required as a result of the Sarbanes-Oxley Act (SOX) passed into law in 2002?

SOX increased independent auditors' independence.

Which of the following events is not recorded in a company's accounting records?

Solution: All of these events are transactions that affect the company's financial statements with one exception. A discussion with a customer that describes the services offered by a company is not a recordable event in the company's accounting records. Future revenues may be affected if the customer purchases services from the company, but that revenue will be recorded in the future as they occur.

Clawson Corporation has current assets of $3,750,000 and current liabilities of $2,050,000. If Clawson Corporation pays $500,000 of its accounts payable what will the new current ratio be?

Solution: Current ratio equals current assets divided by current liabilities. Accounts payable is a current liability. Paying accounts payable reduces cash (i.e., current assets) and reduces accounts payable (i.e., current liabilities). Current ratio = ($3,750,000 − $500,000) ÷ ($2,050,000 − $500,000) Current ratio = 2.0967 (i.e., 2.10 to 1 or 2.10:1)

Based on the following data, what is the current ratio? Accounts payable................................ $ 64,000 Accounts receivable........................... 114,000 Accumulated depreciation.............. 160,000 Cash...................................................... 60,000 Equipment......................................... 1,500,000 Inventory.............................................. 138,000 Long-term investments..................... 160,000 Notes payable (due in 3 months)...... 56,000 Notes payable (due in 2 years)......... 200,000 Patents................................................ 100,000 Prepaid insurance................................. 2,000 Short-term investments...................... 80,000

Solution:Current ratio = current assets/current liabilitiesCurrent assets = cash and assets expected to be converted into cash or consumed in one year or operating cycle, whichever is longer.Current assets = Cash + Accounts receivable + inventory + short-term investments + prepaid insuranceCurrent assets = 60,000 + 114,000 + 138,000 + 80,000 + 2,000 = 394,000Current liabilities = liabilities to be paid in one year or operating cycle, whichever is longer.Current liabilities = Accounts payable + Notes payable (short-term)Current liabilities = 64,000 + 56,000 = 120,000Current ratio = 394,000/120,000 = 3.28

Riverview Inc. reports the following balances and amounts Accounts payable, $35,000 Cash provided by operations, 90,000 Accounts receivable, 37,500 Net income, 36,000 Average common shares, 20,000 Salaries and wages payable, 8,000 Average current liabilities, 110,000 Stockholders' equity, 240,000 Average total assets, 600,000 Current assets, 300,000 Average total liabilities, 320,000 Current liabilities, 120,000 Dividends paid to preferred shareholders, 10,000Determine its earnings per share?

Solution:Earnings per share equals net income earned on each share of common stock. Earnings per share equals net income minus preferred dividends divided by the average number of shares outstanding. This company has no preferred dividends.Earnings per share = ($36,000 - 10,000)/20,000 shares = $1.30/share.

Which financial statement is used by most corporations to compute year-end retained earnings?

Statement of stockholders' equity

A company began the year with $86,000 in its Common Stock account and a credit balance in Retained Earnings of $35,000. During the year, the company earned net income of $50,000 and declared and paid $12,000 of dividends. In addition, the company sold additional common stock amounting to $32,000. Based on this information, what is the ending total of stockholders' equity?

Stockholders' equity = common stock + retained earnings Stockholders' equity = (86,000 + 32,000) + (35,000 + 50,000 - 12,000) = $191,000

Which of the following did not result from the Sarbanes-Oxley Act (SOX)?

Tax rates on corporations increased.

What section of a cash flows statement shows the amount of cash received from shareholders in exchange for issuing additional shares of its stock to its shareholders?

The financing section Solution:The cash flows statement has three sections: (i) operating, (ii) investing, and (iii) financing. Cash collected from shareholders in exchange for additional shares of stock is a financing activity.

Which of the following best defines accounting?

The information system that identifies, measures, and communicates economic information to permit informed judgements and decisions by the users of the information.

Which of the following would not appear on an income statement?

Unearned revenue

A trial balance will balance even if

a $1,000 journal entry was posted twice.

On July 7, Shore Enterprises received cash $1,400 for services rendered. The journal entry to record this transaction on Shore Enterprise's books will include

a debit to Cash of $1,400. Solution: Receiving cash for services rendered results in an increase in cash and an increase in revenue. Debit cash for $1,400 and credit revenue for $1,400.

A trial balance is

a listing of the ledger accounts and balances.

Evans Company purchased stocks of Stone Corporation. Evans Company expects to hold the Stone Corporation stock for more than one year. On its classified balance sheet, Evans Company should report the Stone Corporation stock as

a long-term investment

Norman Company had a transaction that increased its assets by $5,000 and increased its liabilities by $5,000. This transaction could have been a(n)

a note payable issued to a creditor in exchange for a loan. The basic accounting equation is Assets = Liabilities + Equity; it must always balance. A $5,000 increase in assets combined with a $5,000 increase in liabilities keeps the accounting equation in balance. Issuing a note payable (i.e., borrowing money) increases assets (i.e., cash) and increases liabilities (i.e., notes payable).

The right to receive money in the future is called a(n)

account receivable.

A company paying cash to its suppliers for inventory to be sold to its customers is an example of

an operating activity

Resources owned by a business are referred to as

assets

An investment by the stockholders in a company increases the company's

assets and stockholders' equity. A cash investment from stockholders indicates that assets increased (i.e., cash increased) and stockholders' equity increased (i.e., common stock increased).

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

assets increase and liabilities increase.

The segment of the annual report that presents an opinion regarding the fairness of the presentation of the financial position and results of operations is/are the

auditor's opinion

When a company performs a service but has not yet received payment, it

debits Accounts Receivable and credits Service Revenue. Solution:When a company performs a service it recognize revenue so it credits the revenue account. If the company has not yet received payment, the customer owes the company so the company increases its accounts receivable. Increase assets, such as accounts receivable, by debiting them.

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

decrease assets and decrease stockholders' equity Solution: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.

If a company does not record employees' wages until it pays them, the effects of paying employees' wages on the basic accounting equation are to

decrease assets and decrease stockholders' equity. If a company does not record employees' wages until it pays them, then the company had not previously recorded salaries and wages payable. 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. Thus, assets decrease and equity decreases.

A certain company records wages only when it pays them. Recording the payment of wages

decreases assets and decreases stockholders' equity. Solution:When employees earn wages, the company incurs wage expense. Since the company records wages (i.e., wage expense) when it pays employees their wages, this transaction reduces assets (e.g., it reduces cash) and it reduces stockholders' equity (i.e., it increases wage expense which reduces retained earnings and stockholders' equity).

Payment of a dividend

decreases cash and decreases retained earnings. Solution: Payment of dividends reduces cash and increases dividends. Dividends is a temporary account that will be closed at the end of the period (such as a year) and closing it will cause retained earnings to decrease.

Paying an expense when it is incurred

decreases stockholders' equity and assets. Paying indicates that assets decreased (i.e., cash was paid so it decreased). Expenses are the cost of assets consumed or services used in the process of generating revenues. Examples of expenses include rent expense, insurance expense, cost of goods sold, and interest expense. Expenses reduce net income, and they reduce retained earnings. Retained earnings is a stockholders' equity account so expenses reduce stockholders' equity.

Retained earnings is decreased by

expenses Solution: 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.

The sole proprietorship form of business organization

generally receives favorable tax treatment relative to a corporation

The concept that a business has a reasonable expectation of remaining in business for the foreseeable future is called the

going concern assumption

A company pays the current month's rent. This transaction will immediately affect the

income statement, retained earnings statement, cash flows statement, and balance sheet. Solution:When a company pays the current month's rent, it decreases cash which affects the balance sheet and the cash flows statement. It also records rent expense which affects the income statement. Since it affects net income, it indirectly affects retained earnings and the retained earnings statement.

The effects of stockholders investing cash in exchange for additional shares of stock on the basic accounting equation are to

increase assets and increase stockholders' equity. Solution:Basic accounting equation: Assets = Liabilities + Stockholders' EquityA purchase of equipment for cash is recorded as an increase in equipment (which is an asset) and a decrease in cash (which is an asset). Thus, an asset exchange occurs with one asset increasing and another decreasing.

If a previously unrecorded expense is recorded when it is paid with cash recording the the transaction will

increase expenses and decrease assets. Solution: When an expense is paid with cash, cash (i.e., assets) will be decreased and expenses will be increased. Increasing expenses will reduce net income which reduces retained earnings. Liabilities will not be affected. For example, when a company pays a previously unrecorded insurance bill, it will decrease cash and increase its "insurance expense."

A transaction that increases an unearned revenue

increases an asset and increases a liability. Solution: 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. Solution: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.

Immediately after transaction information has been recorded in the journal, it should be recorded in the

ledger.

The portion of the annual report that presents management's views on the company's ability to fund operations and expansion is the

management discussion and analysis

The procedure of transferring journal entries to the ledger accounts is called

posting Solution:Companies journalize transactions. Each journal entry summarizes a certain transaction or adjusting entry. Next, companies post the journal entries to the ledger. The procedure of transferring journal entry amounts to the ledger accounts is called posting. Posting is a required step in the recording process. If it is not done, the ledger's account balances will not be correct.

The statement of stockholders' equity

reports the amounts of changes in retained earnings for a specific period of time such as a year. Solution:The balance sheet reports the assets, liabilities, and stockholders' equity at a specific date. The income statement reports revenues minus expenses (i.e., net income), and the retained earnings statement summarizes the changes in retained earnings for a specific period of time.

Long-term creditors are usually most interested in evaluating

solvency

The financial statement that summarizes the changes in retained earnings for a specific period of time is the

statement of stockholders' equity Solution:Companies report the changes in their retained earnings on the statement of stockholders' equity.

A journal entry recorded in the journal does not show

the balance in the accounts affected by the transaction. Solution:Transactions are recorded in chronological order in journals. This step occurs before transferring the amounts to the ledger. Journals have the following features: 1. Journals discloses the complete effect of each transaction in one place. 2. Journals provide a chronological record of transactions. 3. Journals help prevent errors because debits and credits can be readily compared. Journals do not display T-accounts, but ledgers do display T-accounts to help track the balance of each account.

In terms of financial accounting, the word "debit" means

the left side of an account.

If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates

the mathematical equality of the accounting equation.

Information is ____________ if independent observers, using the same methods obtain similar results.

verifiable