Fundamentals of Accounting (U of U)

External users of financial information... need detailed records of the business to make informed decisions. are primarily responsible for the preparation of financial statements. rely on the financial statements to help make informed decisions. rely on management to tell them whether the company is a good investment.

rely on the financial statements to help make informed decisions.

A company that sells merchandise to customers should normally recognize revenue only after the cash is collected. revenue and the related expenses in the period the revenue earned, whether payment is received or not. both revenue and expenses in the period following sale. expenses in the period the merchandise is sold and revenue in the following period.

revenue and the related expenses in the period the revenue earned, whether payment is received or not.

Which of the following invests funds into a business and is considered an owner? stockholders creditors bankers lenders

stockholders

Which one of the following is not an external user of financial statements? Internal Revenue Service creditors stockholders the Company's President

the Company's President

Eli Company Eli Company sells novelty items and offers terms of 1/10, n/30 to credit customers. One customer, Faulkner, Inc., purchased 100 Sweet-16 party decor packs with a list price of $20 each on March 5, 2019. Refer to the information provided for Eli Company. If the customer pays the invoice on March 31, 2013, how much sales discount will Eli Company recognize? $ -0- $ 20 $200 $600

$ -0-

Eli Company Eli Company sells novelty items and offers terms of 1/10, n/30 to credit customers. One customer, Faulkner, Inc., purchased 100 Sweet-16 party decor packs with a list price of $20 each on March 5, 2019. Refer to the information provided for Eli Company. If the customer pays the amount of the invoice for its purchase on March 14, 2019, how much cash will Eli Company receive? $1,400 $1,800 $1,980 $2,000

$1980 Rationale: ($20 x 100 packs) - 1%($20 x 100) = $1,980

A company purchased a patent for $100,000 at the beginning of the current year which it believes has an expected useful life of 5 years. Fortunately, the patent has a legal life of 20 years. How much amortization expense should be recorded in the current year? $0 $5,000 $20,000 $100,000

$20,000 Rationale: $100,000 / 5 = $20,000

On January 1, 2019, a company reported assets of $1,000,000 and liabilities of $600,000. During 2019, assets decreased by $100,000 and Stockholders' Equity decreased $200,000. What is the amount of liabilities at December 31, 2019? $200,000 $500,000 $600,000 $700,000

$700,000

Parlato Corp. has an inventory turnover rate of 8 times. Calculate the company's average days to sell inventory. 1,200 150 120 45.625

45.625 Rationale: 365 / 8 = 45.625

Which one of the following is a correct fundamental accounting equation? Assets + Liabilities = Stockholders' Equity Assets + Retained Earnings = Stockholders' Equity Assets + Stockholders' Equity = Liabilities Assets = Liabilities + Stockholders' Equity

Assets = Liabilities + Stockholders' Equity

Three common categories of long-term assets are: 1) property, plant, and equipment, 2) long-term investments, and 3) intangibles. True False

True

Which of the following best describes the term "current assets"? The amount of total profits earned by a business since it began operations plus all other resources. The amount of claim that the owners have in the business in the current year. Assets expected to be converted into cash within one year or one operating cycle, whichever is longer. The cumulative profits earned by a business less any dividends distributed in the current period.

Assets expected to be converted into cash within one year or one operating cycle, whichever is longer.

Which one of the following financial statements reports an entity's financial position at a specific date? Balance Sheet Statement of Retained Earnings Income Statement Both the Income Statement and the Balance Sheet

Balance sheet

Flag Financial uses straight-line depreciation for its equipment with an estimated useful life of 10 years and zero residual value. The CEO points out that the equipment will last much shorter than 10 years, perhaps 5 years. What is the impact on earnings per share and net income of depreciating equipment over 5 years rather than 10 years? Both earnings per share and net income will decrease. Both earnings per share and net income will increase. Earnings per share will decrease and net income will increase. Earnings per share will increase and net income will decrease.

Both earnings per share and net income will decrease.

Which one of the following is an internal user of financial information? company management governments creditors investors

Company Managament

Which one of the following is not a proper method of recognizing assets as expenses in a particular accounting period? Customers' account balances in accounts receivable are assigned to expense in the period in which each customer pays. Prepaid insurance is assigned to expense as the insurance expires. A building is depreciated and its cost is assigned to the current and future accounting periods in which the building is expected to be used. Merchandise inventory is assigned to cost of goods sold in the period the goods are sold.

Customers' account balances in accounts receivable are assigned to expense in the period in which each customer pays.

What should a company do to improve its accounts receivable turnover rate? Lower its selling prices. Increase its sales force. Give customers credit terms of 2/10, n/30 rather than 1/10, n/30. Reduce the number of employees working in the credit department.

Give customers credit terms of 2/10, n/30 rather than 1/10, n/30.

Accrued revenue is recognized when cash is received. True False

False

Current assets include all of the following: cash, inventory, equipment, supplies, and accounts receivable. True False

False

The ending cash balance is shown on the Balance Sheet and the Statement of Retained Earnings. True False

False

Cambridge Cleaners started business on January 1, 2019, and immediately purchased $5,000 of supplies to use in the business. At the end of the month, 30 percent of the supplies remains unpaid and 20% are still on hand. What amounts should appear as an expense on the financial statements for January? ​ Income Statement Statement of Cash Flows $5,000 $5,000 $5,000 $3,500 $4,000 $1,500 $4,000 $3,500

IS: $4,000 SCF: $3,500

Which of the following statements is false regarding the reason that inventory costs are recorded as expenses when sold rather than when incurred? It gives the user's of the company's financial statements a clearer picture of profitability. It helps the company achieve a better matching of expenses with related revenues. It gives the company's accounting personnel more time to record inventory transactions. Inventory is an asset at the time it is acquired.

It gives the company's accounting personnel more time to record inventory transactions.

Which statement presents financial information not based on accrual accounting? Balance Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings

Statement of Cash Flows

Dividend payments appear on the Statement of Retained Earnings. True False

True

Which of the following is not considered to be a cash equivalent? corporate commercial paper due in 60 days after purchase U.S. Treasury bills with an original maturity of six months a money market account with a stock brokerage firm a certificate of deposit with a term of 75 days when acquired

U.S. Treasury bills with an original maturity of six months

An insurance company received advance payments from clients during 2019 of $12,000. At December 31, 2019, $10,000 of the advance payments still had not been earned. After the adjustments are recorded and posted at December 31, 2019, what will the balances be in the Unearned Insurance Revenue and Insurance Revenue accounts? ​ Unearned Insurance Revenue Insurance Revenue $10,000 $10,000 $0 $12,000 $2,000 $10,000 $10,000 $2,000

UIR: $10,000 IR: $2,000

Which financial statement would you refer to in order to determine how much resources (assets) the company owned? Balance Sheet Statement of Retained Earnings Income Statement Statement of Cash Flows

balance sheet

You are a potential creditor and are concerned that a particular company you are ready to give a loan to might have too much debt. Which financial statement would provide you information needed in order to evaluate your concern? Balance Sheet Income Statement Statement of Retained Earnings Statement of Public Accounting

balance sheet

Goodwill can be recorded as an asset when a(n) business has above normal profitability compared to other businesses in its industry. business can determine that it has created customer goodwill and name recognition. offer is received to purchase the business at a price in excess of the value of the assets. business is purchased and payment is made in excess of the value of the net assets.

business is purchased and payment is made in excess of the value of the net assets.

Which one of the following would never be considered a cash equivalent? U.S. Treasury bills corporate commercial paper money market funds common stock issued by a corporation

common stock issued by a corporation

Which of the following is not a form of a business entity? sole proprietorship partnership cooperative corporation

cooperative

The amount recognized on the balance sheet as the cost of inventory will ultimately be recognized as sales revenue. cost of goods sold. operating expenses. administrative expenses.

cost of goods sold

Which of the following accounts would most likely appear on the income statement of a merchandise company, but not on the income statement of a service company? cost of goods sold selling expenses administrative expenses income tax expense

cost of goods sold

What is the name for a person who lends funds to a business entity and expects repayment with interest? creditor owner proprietor stockholder

creditor

Which one of the following is not one of the three business activities? financing operating investing measuring

measuring

How should intangible assets be disclosed on the balance sheet? as a reduction of stockholders' equity at cost in the current assets section at the estimated market value at the balance sheet date net of the costs already amortized

net of the costs already amortized

The inventory turnover ratio is defined as cost of goods sold divided by average inventory. True False

true

The income statement summarizes the assets, liabilities and stockholders' equity for a period of time. True False

False

The owners of a sole proprietorship, partnership and corporations have limited liability. True False

False

Businesses engage in which of the following three main activity categories? Financing, Investing, Operating Cash, Credit, Noncash Financing, Credit, Operating Financing, Management, Operating

Financing, Investing, Operating

Which financial statement would you analyze to assess a firm's operating performance for the past year? Balance Sheet Statement of Retained Earnings Income Statement Statement of Public Accounting

Income statement

Which of the following situations violates the matching principle during 2019 for a real estate company that pays its agents on commission? Sales commissions are charged to expense in 2019 on all sales made in 2019 even though some of the commissions have not been paid. Insurance expense is recognized for the total cost of a 1-year policy purchased in July 2019. Wages expense is recognized in 2019 even though payday is not until sometime in 2020. Sales commissions paid in 2019 for 2020 commissions are recorded as prepaid expenses for 2019.

Insurance expense is recognized for the total cost of a 1-year policy purchased in July 2019.

Which one of the following groups is considered an internal user of financial statements? A supplier considering selling to the company on credit. The labor union representing employees of a company that is involved in labor negotiations The financial analysts for a brokerage firm who are preparing recommendations for the firm's brokers on companies in a certain industry Managers of the company that supervise production workers.

Managers of the company that supervise production workers.

When is revenue from the sale of merchandise normally recognized? On the date the sale is made. On the date the customer pays for the merchandise. Either on the date on which the sale occurs, or the date on which the customer pays. When the merchandise is sold, if sold for cash, or when payment is received, if sold on credit.

On the date the sale is made.

Which one of the following is an example of a deferred revenue? Sales are made to customers on credit. Revenue has been earned but not yet recorded. Payments are received prior to providing the services to customers. Cash sales are made to customers.

Payments are received prior to providing the services to customers.

On October 1, 2019, a company paid $9,000 rent in advance. The rent per month is $1,000. Assuming the company's accounting period ends on December 31, 2019, what will be reported on the financial statements? Prepaid Rent of $6,000 on its balance sheet at December 31, 2019 Prepaid Rent of $9,000 on its balance sheet at December 31, 2019 Rent Expense of $9,000 on its 2019 income statement Rent Revenue of $6,000 on its 2019 income statement

Prepaid Rent of $6,000 on its balance sheet at December 31, 2019

Canterbury Cycles sells Harleys and pays each salesperson a commission of $800 for each cycle sold. During the month of December, a salesperson sold 3 cycles. The company pays commissions on the 5th day of the month following the sale. Which of the following statements is true? The salesperson will recognize commission revenue earned in the amount of $2,400 in December. The company will recognize commission expense in the amount of $2,400 in December. The salesperson will recognize commission expense in the amount of $2,400 in January. The salesperson will recognize revenue in the same month that the cycle dealer recognizes expense.

The company will recognize commission expense in the amount of $2,400 in December.

Bennett Motors is facing the following business decisions. Which decision will least likely require financial information? A local bank is reviewing the company's loan application. The company is attempting to sell its stock to the public. The labor union representing the company's employees is negotiating a pay raise as part of a new labor agreement. The company's management is deciding whether to detail its vehicles today or tomorrow.

The company's management is deciding whether to detail its vehicles today or tomorrow.

Which of the following best describes the term "expenses"? The cost of assets used in the investing activities of a business. The amount of interest or claim that the owners have in the business. The future economic resources of a business entity. The cost of assets used in the operations of a business.

The cost of assets used in the operations of a business.

Coffski, Inc. sold merchandise to a customer on credit. The invoice amount was $1,000; the invoice date was June 10th; credit terms were 1/10, n/30. Which of the following statements is true? The customer can take a 10% discount if the invoice is paid by June 30th. The customer should pay $1,000 if the invoice is paid on July 9th. The customer must pay a $10 penalty if payment is made after July 9th. The customer must pay $1,010 if payment is made after June 20th.

The customer should pay $1,000 if the invoice is paid on July 9th.

The Allowance for Doubtful Accounts represents: Bad debt losses incurred in the current period The amount of uncollected accounts written off to date The difference between total sales made on credit and the amount collected from those credit sales The difference between the recorded value of accounts receivable and the net realizable value of accounts receivable

The difference between the recorded value of accounts receivable and the net realizable value of accounts receivable

How are cash equivalents reported or disclosed in the financial statements? They are included with cash as a current asset on the balance sheet. They are only reported on the statement of cash flows. They are only disclosed in the notes to the financial statements. They are included with short-term investments as a current asset on the balance sheet.

They are included with cash as a current asset on the balance sheet.

Which of the following concepts is important to accrual accounting? Time period, because accrual accounting divides earnings into time periods. Market basis, because inflation is a big factor in the environment. Cash basis, because if cash is not received, revenue is not accrued. Entity concept, because personal transactions must be separated from business transactions.

Time period, because accrual accounting divides earnings into time periods.

What is the primary objective of financial reporting? To help investors make credit decisions. To help management assess cash flows. To protect users from fraudulent financial information. To provide useful information for decision making.

To provide useful information for decision making.

A cost can be an asset or expense depending on whether or not the future economic benefits have expired. True False

True

Creditors use accounting information to evaluate whether to loan money to a company. True False

True

Current liabilities are typically listed in the order in which they will be paid. True False

True

For a merchandising company, the cost of goods sold is subtracted from net sales to arrive at gross profit. True False

True

Money market accounts with original maturities of less than 90 days are cash equivalents. True False

True

Most companies use the accrual basis of accounting because it is required under generally accepted accounting principles. True False

True

Net loss reduces a company's retained earnings balance. True False

True

One primary purpose of a classified balance sheet is to help users evaluate the working capital of a company. True False

True

Stockholders equity is composed of contributed capital and retained earnings. True False

True

The Statement of Cash Flows shows cash inflows and cash outflows for a period of time. True False

True

The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts receivable. True False

True

The classifications in the balance sheet are to help users determine how a company obtained its resources. True False

True

The expense recognition principle requires that expenses be recorded and reported in the same period as the revenue that it helped to generate. True False

True

The higher the accounts receivable turnover the better because it indicates that the company is more quickly collecting cash (through sales). True False

True

The inventory turnover ratio is a measure of how many times during a period a company sells off its inventory. True False

True

The purpose of financial reporting is to provide economic information to investors, creditors, and other financial statement users. True False

True

The three main business activities are financing, operating, and investing. True False

True

Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those debts actually occur. True False

True

When an expense is incurred prior to the payment of cash for that expense, an adjustment that increases an expense account and increases a liability is prepared. True False

True

A local tennis club sells season memberships for $1,000 each. During January 2019, 50 season memberships were sold. As of March 31, 2019, only $25,000 of season membership fees had been collected from customers. The tennis season runs for 6 months starting April 01, 2019. Which one of the following is an amount reported on the Balance Sheet dated March 31, 2019? Unearned tennis membership revenue of $25,000. Unearned tennis membership revenue of $50,000. Accounts Receivable $50,000. Tennis membership revenue of $25,000.

Unearned tennis membership revenue of $25,000.

Under accrual accounting when is revenue recognized? When cash is received, and expenses when cash is paid When cash is received, and expenses when the costs are incurred. When earned, and expenses when incurred. When earned, and expenses when cash is paid.

When earned, and expenses when incurred.

Each of the following items is considered a cash equivalent except a 30-day certificate of deposit. 60-day corporate commercial paper. a 75-day U.S. Treasury bill. a 180-day note issued by a local government.

a 180-day note issued by a local government.

Which of the following is not included in Cash and Cash Equivalents on a company's balance sheet? a savings account at the bank a checking account at the bank a bank certificate of deposit for one year petty cash

a bank certificate of deposit for one year

Which of the following accounts would not be reported in the Property, Plant, and Equipment section of a balance sheet? accumulated depreciation--buildings buildings depreciation expense--buildings land

depreciation expense--buildings

Generally accepted accounting principles (GAAP) require that research and development costs to develop a new product be capitalized in the patents account. expensed in the period incurred. capitalized in the research and development costs account. amortized over the expected economic life of the new product.

expensed in the period incurred.

What is the name of the branch of accounting concerned with providing outside decision makers with information to assess the amounts, timing and uncertainties of the company's future cash flows? financial accounting auditing managerial accounting bookkeeping

financial accounting

Expenses should be matched against revenue before the earnings process is complete. only after cash is collected from the customer. in the same period as the revenue that they helped generate. after payment has been made for any costs related to the revenue.

in the same period as the revenue that they helped generate.

Which statement summarizes the results of the company's operations? Statement of Cash Flows Statement of Retained Earnings Balance Sheet Income Statement

income statement

"Revenues" are best described as... decreases in assets resulting from the sale of goods or services. increases in assets resulting from the sale of products or services. assets used or consumed in the sale of products or services. an increase in the financing activities.

increases in assets resulting from the sale of products or services.

Operating assets with no physical properties are called current assets. intangible assets. plant assets. property, plant, and equipment.

intangible assets

Current accounting standards indicate that the costs of intangible assets with an indefinite life, such as goodwill, should not be amortized, but should be reviewed annually for impairment. be reported on the statement of retained earnings in the year in which acquired. be amortized over a reasonable period of time not to exceed 40 years. be debited to an expense account entirely in the year in which acquired.

not be amortized, but should be reviewed annually for impairment.

The accounting life of intangible assets is determined by their legal lives. their useful lives. their legal lives or useful lives, whichever is shorter. the tax life mandated by the IRS.

their legal lives or useful lives, whichever is shorter.

Parlato Corp. has an inventory turnover rate of 8 times. If its cost of goods sold is $150,000, then the company will report sales of $1,200,000. will report gross margin of $1,200,000. will have average inventory of $18,750. sells its inventory 1,200 times per year.

will have average inventory of $18,750. Rationale: $150,000 / 8 = $18,750