BCOR 2110 Financial accounting Test 2
Trial Balance
A list of accounts and their balances at a given time.
Chart of Accounts
A list of all the accounts used by a company.
Generally Accepted Accounting Principles (GAAP)
A set of accounting standards that has substantial authoritative support and which guide accounting professionals.
Management Discussion & Analysis section of a company's annual report presents managements views about the company's
Ability to fund operations and expansion Ability to pay near-term obligations Results of its operations
Which of the following is not a current asset:
Accounts receivable
Identify if term is an asset, liability, stockholders' equity, revenue, or expense item.
Accounts receivable- Asset Interest expense- Expense Notes payable- Liability Prepaid insurance- Assets Service revenue- Revenue Accounts payable- Liability Sales revenue- Revenue Cash- Asset Retained earnings- Equity Inventory- Asset Salaries expense- Expense Cost of goods sold- Expense
The trial balance:
All of the above
Account
An accounting record of increases and decreases in specific assets, liabilities, and stockholders' equity items.
Full Disclosure Principle
Ensures that all relevant financial information is reported
source document
Evidence that a transaction has taken place.
Financial accounting focuses on which type of user?
External
A revenue account is closed with a credit to the revenue account and a debit to Income Summary.
False
Accumulated Depreciation is a liability account and has a credit normal account balance.
False
Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.
False
An account consists of only two parts: (1) a left or debit side and (2) a right or credit side.
False
If total assets are increased, there must be a corresponding increase in liabilities or a decrease in stockholders' equity.
False
Information in the notes to the financial statements has to be quantifiable (numeric).
False
Investing activities involve collecting the necessary funds to support the business.
False
It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year or the normal operating
False
One way of stating the accounting equation is Assets + Liabilities = Stockholders' Equity.
False
Revenue increases stockholders' equity and should be recorded whenever cash is received from customers.
False
Solvency ratios measure the ability of a company to survive over a short period of time.
False
The accounting cycle begins with the journalizing of the transactions.
False
The advantage of accounting information is that it provides exact and completely reliable measures.
False
The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.
False
The current ratio is computed as current liabilities divided by current assets.
False
The current ratio takes into account the composition of current assets.
False
The dividends account is a subdivision of the retained earnings account and appears as an expense on the income statement.
False
The normal balance of all accounts is a debit.
False
The primary accounting standard-setting body in the United States is the Securities and Exchange Commission.
False
Under the double-entry system, revenues must always equal expenses.
False
All business activities can be classified as:
Financing Investing Operating
The accounting rules that U.S. companies must follow are called:
Generally Accepted Accounting Principles
Revenue Account
Has a credit normal balance
Which financial statement provides users the best information to answer "are the company's operations profitable?"
Income statement
Historical Cost Principle
Indicates that fair value changes subsequent to purchase are not recorded in the accounts.
Economic Entity Assumption
Indicates that personal and business recordkeeping should be separately maintained
Faithful Representation
Information that is complete, neutral, and free from error.
Going concern assumption
Is the rationale for why plant assets are not reported at liquidation value
Debit
Left side of an account.
The current ratio is a measure of a comapny's
Liquidity
Which of the following is the best definition of an internal user of accounting information?
Managers who use accounting information to plan, organize, and run a business.
Liquidity ratios-
Measure short-term ability to pay debts
Solvency ratios-
Measures long-term ability to survive
Free Cash Flow
Net cash provided by operating activities after adjusting for capital expenditures and cash dividends paid.
Current Liabilities
Obligations that a company expects to pay within the next year or operating cycle, whichever is longer.
Is the statement an Accrued or prepaid ?
Office supplies on hand that will be used in the next period.- Prepaid Expense Interest expense incurred; not yet paid. - Accured Expense A revenue for which performance obligation is satisfied; not yet collected or recorded. - Accured Revenue A revenue not yet recognized; collected in advance. - Unearned Revenues An expense incurred; not yet paid or recorded. - Accured Expense Rent not yet collected; performance obligation already satisfied. - Accured Revenues Subscription revenue collected; not yet recognized. - Unearned Revenues An expense not yet incurred; paid in advance. - Prepaid Expenses
The Sarbanes-Oxley Act of 2002 was enacted in order to:
Reduce unethical business behavior
Matching Principle
Requires recognition of expenses in the same period as related revenues
Periodicity Assumption
Separates financial information into time periods for reporting purposes
Journal
Shows the debit and credit effects of specific transactions.
Verification of a business transaction is best obtained from:
Source documents
Which financial statement provides users the best information to answer "What is the company's policy towards dividends and growth?"
Statement of Retained Earnings
Which of the following financial statements cover a period of time? (Select all that apply)
Statement of Retained Earnings Income statement Statement of Cash Flows Balance Sheet
Which of the following statements is not true regarding the Sarbanes-Oxley Act (SOX)?
The Act calls for decreased independence of outside auditors reviewing corporate financial statements.
Financial Accounting Standards Board (FASB)
The primary accounting standard-setting body in the United States.
Relevance
The quality of information that indicates the information makes a difference in a decision.
Verifiable
The quality of information that occurs when independent observers, using the same methods, obtain similar results.
Normal Account Balance
The side which increases an account.
The header of a financial statement must include:
Time frame of the financial statement
Posting
Transferring journal entries to ledger accounts. Accumulates the effects of journalized transactions in the individual accounts.
A decrease in a liability account is recorded by a debit.
True
A trial balance does not prove that all transactions have been recorded or that the ledger is correct.
True
Accounting communicates financial information about a business to both internal and external users.
True
All publicly traded U.S. companies must provide their stockholders with an annual report each year.
True
An adjusting entry always involves a balance sheet account and an income statement ac-count.
True
An auditor is an accounting professional who conducts an independent examination of the accounting data presented by a company.
True
An increase in an asset is recorded by a debit.
True
Assets are resources owned by a business and provide future services or benefits to the business.
True
Economic events that require recording in the financial statements are called accounting transactions.
True
Financing activities for corporations include borrowing money and selling shares of their own stock.
True
Generally accepted accounting principles are rules and practices that are recognized as a general guide for financial reporting purposes.
True
If a revenue account is credited, the revenue account is increased.
True
Operating activities are the types of activities the company performs to generate profits.
True
Stockholders' equity is divided into two parts: common stock and retained earnings
True
The accounting information needs and questions of external users vary considerably.
True
The balance sheet reports assets and claims to those assets at a specific point in time.
True
The debt to assets ratio measures the percentage of assets financed by creditors.
True
The only accounts that are closed are temporary accounts.
True
The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash
True
Unearned Service Revenue is classified as a liability on the balance sheet.
True
Unearned revenue is a prepayment that requires an adjusting entry when services are per-formed.
True
Without an adjusting entry for accrued interest expense, liabilities and interest expense are understated, and net income and stockholders' equity are overstated.
True
What is the primary criterion by which accounting information can be judged?
Usefulness for decision making
Materiality
Whether an item is large enough to likely influence the decision of an investor or creditor. Requires that accounting standards be followed for all items of significant size
The first step in the recording process is to
analyze the transaction in terms of its effect on the accounts.
The usual sequence of steps in the transaction recording process is
analyze, journalize, post to the ledger.
The operating cycle of a company is the average time that is required to go from cash to
cash in producing revenues.
A business organized as a separate legal entity is a
corporation
A current asset is
expected to be converted to cash or used in the business within one year or one operating cycle, whichever is longer.
The common characteristic possessed by all assets is
future economic benefit.
On a classified balance sheet, companies usually list current assets
in the order in which they are expected to be converted into cash.
Debits:
increase assets and decrease liabilities
Lion Company purchased equipment for $45,000, paying cash of $5,000 and signing a note payable for the balance due. This transaction
increases assets and liabilities.
An advantage of the corporate form of business is that
its ownership is easily transferable via the sale of shares of stock.
Accounts that normally have credit balance are:
liabilities, equity, and revenue
The Unearned Service Revenue account is classified as a(n)
liability
Under GAAP, the expense recognition principle:
matches expenses with revenues in the period when those revenues are earned
If the retained earnings account increases from the beginning of the year to the end of the year, then
net income is greater than dividends.
Which of the following is not an example of an external user?
none of the above
Stockholders' equity can be described as claims of
owners on total assets.
A law firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause:
revenues to be understated
The right side of the T account is called:
the credit side
The left side of the T account is called:
the debit side
Which financial statement provides users the best information to answer "Does the company rely primarily on debt or equity to finance its assets?"
Balance sheet
Which of the following financial statements is prepared as of a specific date
Balance sheet
The revenue recognition principle dictates that revenue should be recognized in the account-ing records:
when the performance obligation is satisfied.
A current liability is a liability that is repaid
within the operating cycle or one year, whichever is longer
Credits:
Decrease assets and increase liabilities
Which of the following examples shows the correct flow through an accounting information system:
Analyze transaction; record in journal; post to ledger; prepare trial balance
Which of the following correctly expresses the "Accounting equation"?
Assets = Liabilities + Equity
Monetary unit assumption
Assumes that the dollar is the "measuring stick" used to report financial performance
The report of independent accountants (auditors report) in the company's annual report
Assures the user that the financial statements are materially correct
Which of the following external groups uses accounting information to determine whether the company can pay its obligations?
Creditors
Cash and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle are called
Current Assets
Which of the following would not be classified as a long-term liability?
Current maturities of long-term debt
Adjusting entries are made to ensure that:
-expenses are recognized in the period in which they are incurred. -revenues are recorded in the period in which the performance obligation is satisfied. -balance sheet and income statement accounts have correct balances at the end of an accounting period.
A deferral (prepayment) occurs when:
Cash us received for a revenue item before the revenue is earned by the business
The listing of the accounts contained in the company's general ledger is called:
Chart of accounts
Cost Constraint
Constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.
Solvency
The ability of a company to pay interest as it comes due and to repay the balance of a debt due at its maturity.
Liquidity
The ability of a company to pay obligations that are expected to become due within the next year or operating cycle.
Securities and Exchange Commission (SEC)
The agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.
Operating Cycle
The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash.
Working Capital
The difference between the amounts of current assets and current liabilities.
What is the periodicity assumption?
The economic life of a business can be divided into artificial time periods
Ledger
The entire group of accounts maintained by a company.
When a service has been performed but no cash has been received, which of the following statements is true?
The entry includes a debit to accounts receivable.
Which of the following is the most appropriate definition of accounting?
The information system that identifies, records, and communicates the economic events of an organization to interested users.
External users want answers to all of the following questions except:
Will the company be able to afford employee pay raises this year?
A trial balance will not balance if
a $50 cash dividend is debited to dividends for $500 and credited to cash for $50.
The journal is:
a chronological record of the company's transactions
Which of the following is not an example of a source document that provides evidence of a transaction?
a trial balance
Accounts that normally have debit balances are:
assets, dividends, and expenses
Expenses are recognized when:
they contribute to the production of revenue.
Expenses are incurred
to generate revenues.