CHAPTER 1 (MC)

1 What is the correct order of listing items on the balance sheet ?

A)
Liabilities, Assets, and Stockholders' Equity
B)
Assets, Liabilities, and Stockholders' Equity
C)
Stockholders' Equity, Liabilities, and Assets
D)
Assets, Stockholders' Equity, and Liabilities
Feedback: The balance sheet is modeled after the basic accounting equation of Assets
= Liabilities Stockholders' Equity ,
2 Which financial statement shows the balances of financial items at a particular
date ?
A)
balance sheet
B)
income statement
C)
statement of retained earnings
D)
statement of cash flo!s
Feedback: The balance sheet re"orts the #balances# of assets, liabilities, and
stockholders' equity as of a "articular "oint in time, !hich is the last day of the
accounting "eriod sho!n on the income statement $
$ 3 The three basic elements of the balance sheet are
A)
assets, liabilities, and contributed ca"ital$
B)
assets, liabilities, and retained earnings$
C)
assets, liabilities, and stockholders' equity$
D)
assets, liabilities, and re%enues$
Feedback: The balance sheet is modeled after the basic accounting equation of Assets
= Liabilities Stockholders' Equity $
4 What items on the balance sheet are considered to be sources for financing
economic resources (assets) &
A)
liabilities and contributed ca"ital, only
B)
liabilities only
C)
contributed ca"ital and retained earnings, only
D)
liabilities and stockholders' equity
Feedback: Economic resources 'assets( are "ro%ided by creditors 'liabilities( and
in%estors 'contributed ca"ital( and retained earnings$ Stockholders' Equity =
)ontributed )a"ital *etained Earnings ,
5 Which of the following items would be shown as part of the Stocholder!s
"#uit$ on the balance sheet ?
A)
)ash
B)
+otes ,ayable
C)
*etained Earnings
D)
Accounts *ecei%able
Feedback: )ash and Accounts *ecei%able are assets$ +otes ,ayable is a
liability $
% &ssets total '45()((() liabilities total '12()((() and contributed capital totals
'2(()(((* What is the dollar amount of retained earnings ?
A)
-./,///
B)
-00/,///
C)
-01/,///
D)
-20/,///
Feedback: The basic accounting equation is Assets = Liabilities Stockholders'
Equity$ Stockholders' Equity = )ontributed )a"ital *etained Earnings$ -34/,/// =
-21/,/// -1//,/// -5 'retained earnings($ -5 = -34/,/// 6 -21/,/// 6 -1//,///
= -20/,///,
+ ",penses represent dollar amounts of resources used b$ the entit$ to earn
re-enues* ",penses ma$ actuall$ be paid
A)
only !hen incurred$
B)
7nly before they are incurred$
C)
7nly after they are incurred$
D)
8efore, !hen, or after they are incurred$
Feedback: E9"ense can be "aid !hen they occur, before they occur 'such as
"re"aying insurance or rent( or after they occur 'such as utility and tele"hone
e9"enses( ,
. & compan$ sold '4(()((( of merchandise for cash and '12()((( of merchandise
to credit customers who will pa$ for the merchandise in a later time period* /ow
much re-enue should be reported on the income statement of the current time
period ?
A)
-1./,///
B)
-41/,///
C)
-3//,///
D)
-21/,///
Feedback: *e%enues normally are re"orted on the income statement !hen the ser%ices
or goods ha%e been sold to the customers !hether or not they ha%e been "aid for ,
0 The net income reported on the income statement for the accounting period is
reported on what other financial statement
A)
balance sheet
B)
statement of retained earnings
C)
statement of cash flo!s
D)
no other financial statement
Feedback: The net income 'or net loss( re"orted on the income statement is also
re"orted on the statement of retained earnings, since net income increases 'net loss
decreases( the beginning balance of retained earnings ,
1( The beginning balance of retained earnings was '+)5((* The di-idends paid to
stocholders! were '1)5((* The ending balance of retained earnings is '5)(((* What
was the net income or net loss for the accounting period ?
A)
net loss of -2,///
B)
net income of -2,///
C)
net loss of -1,///
D)
net income of -1,4//
Feedback: 8eginning *etained Earnings +et :ncome 'or 6 +et Loss( 6 ;i%idends =
Ending *etained Earnings$ The net loss !as -2,///$ ,roof: -<,4// 6 -2,/// 6 -2,4// =
-4,///, the ending balance of retained earnings ,
11 The statement of cash flows for a business would not include which cash flow
categor$ ?
A)
7"erating acti%ities
B)
)a"ital related financing and in%esting acti%ities
C)
Financing acti%ities
D)
:n%esting acti%ities
Feedback: The three categories are cash flo!s from o"erating acti%ities, cash flo!s
from in%esting acti%ities, and cash flo!s from financing acti%ities ,
12 Which cash flow acti-it$ is related to the ac#uisition of producti-e assets ?
A)
o"erating acti%ities
B)
in%esting acti%ities
C)
financing acti%ities
D)
ca"ital related financing acti%ities
Feedback: :n%esting acti%ities include cash flo!s related to the acquisition or sale of
"roducti%e assets,
13 Which cash flow acti-it$ is related to borrowing mone$ on a long1term basis ?
A)
o"erating acti%ities
B)
in%esting acti%ities
C)
financing acti%ities
D)
in%esting and financing acti%ities
Feedback: Financing acti%ities include cash flo!s from the recei"t or "ayment of
money to in%estors and creditors ,
14 Which cash flow acti-it$ is related to pa$ments made to suppliers of
in-entories ?
A)
o"erating acti%ities
B)
in%esting acti%ities
C)
financing acti%ities
D)
in%esting and financing acti%ities
Feedback: The acquisition of in%entories is directly related to earning income=
therefore the "ayments to su""liers of in%entories 'and su""lies( are included as
o"erating acti%ities ,
15 The ending amount reported on the statement of cash flows is also reported on
what other financial statement ?
A)
balance sheet
B)
income statement
C)
statement of retained earnings
D)
balance sheet and statement of retained earnings
Feedback: The balance of the #)ash at >ear End# re"orted on the statement of cash
flo!s should be the same as the balance of cash re"orted on the balance sheet,
1% Which of the following transactions would be considered an in-esting acti-it$
on a Statement of 2ash 3lows ?
A)
,urchased equi"ment for cash
B)
Sold stock for cash to stockholders
C)
8orro!ed -1//,/// on a long6term
note
D)
,aid -34,/// for in%entory for resale
Feedback: Sales of stock and borro!ings on long term notes are financing acti%ities$
,urchase of in%entory is an o"erating acti%ity ,
1+ Which of the following transactions would be considered an operating acti-it$
on a Statement of 2ash 3lows ?
A)
,aid a long6term note of -2//,///
B)
)ollected money from cash customers
C)
,aid cash di%idends of -13,///
D)
,urchased equi"ment for cash
1. 4otes to the financial statement pro-ide the following information e,cept5
A)
;escri"tions of the accounting rules a""lied in the
com"any's statements$
B)
Additional detail about a line on the financial
statements$
C)
+ames of the ma?ority stockholders$
D)
Additional financial disclosures about items not listed
on the statements themsel%es$
Feedback: There are three basic ty"es of notes$ The first ty"e "ro%ides descri"tions of
the accounting rules a""lied in the com"any@s statements$ The second "resents
additional detail about a line on the financial statements$ The third ty"e of note
"ro%ides additional financial disclosures about items not listed on the statements
themsel%es$ This information is found in the book on "ages 2< and 2.
10 6iabilities are listed on the balance sheet in
A)
order of their relati%e dollar siAe$
B)
order of their maturity or due date$
C)
no "articular order
D)
al"habetical order
2( The price7earnings ratio is . and the net income is '12()(((* What is the maret
(purchase) price of the compan$ ?
A)
-2,4//,///
B)
-24/,///
C)
-BC/,///
D)
-.//,///
Feedback: ,riceDEarnings ',DE( *atio = Earket ,riceD+et :ncome The Earket
'"urchase( "rice = ,DE *atio 9 +et :ncome The market '"urchase( "rice of the
com"any is -BC/,/// '. 9 -21/,///(,
22 &n audit report can be prepared and issued b$
A)
management$
B)
a certified "ublic accountant '),A($
C)
an internal auditor$
D)
the chief e9ecuti%e officer ')E7($
Feedback: The "rimary "ur"ose of an audit is to determine and ensure that the
financial re"orts re"resent !hat they claim to and conform to FAA,,
23 The primar$ purpose of an audit (e,amination) of the financial reports of a
compan$ is to
A)
unco%er fraud$
B)
determine !ho is guilty of mal"ractice$
C)
determine !hether the financial re"orts conform
to FAA,$
D)
e9amine e%ery document and transaction to
%erify it !as accurately re"orted$
Feedback: The "rimary "ur"ose of an audit is to determine and ensure that the
financial re"orts re"resent !hat the claim to and conform to FAA, $
CHAPTER 1 ( TorF)
1 & balance sheet is used to report the acti-ities in-ol-ing assets) liabilities) and
stocholders! e#uit$ o-er a specific time period *
A)
True
B)
False
Feedback: The balance sheet is used to re"ort the balances of assets, liabilities, and
stockholder's equity at the end of a s"ecific time "eriod 'at a "oint in time( ,
2 The income statement is used to report the results of operations o-er a specific
time period *
A)
True
B)
False
Feedback: The income statement is used to re"ort the results of o"erations 're%enues
and e9"enses( o%er a s"ecific time "eriod, !hich is called the accounting "eriod ,
3 The statement of retained earnings is used to report the changes in retained
earnings attributed to net income (or net loss) and di-idends
A)
True
B)
False
Feedback: The format for the statement of retained earnings is: 8eginning *etained
Earnings +et :ncome 6 ;i%idends = Ending *etained Earnings$ The ending retained
earnings balance in the statement of retained earnings must agree !ith the balance of
retained earnings listed on the balance sheet,
4 The statement of cash flows is used to report the inflows and outflows of cash
during an accounting period in the categories of operating) in-esting) and
financing acti-ities*
A)
True
B)
False
Feedback: The "ur"ose of the statement of cash flo!s is to re"ort: 8eginning )ash
8alance D6 )ash Flo!s from 7"erating Acti%ities D6 )ash Flo!s from :n%esting
Acti%ities D6 )ash Flo!s from Financing Acti%ities = Ending )ash 8alance$ The
ending cash balance sho!n on the statement of cash flo!s must agree !ith the cash
balance listed on the balance sheet,
5 The four basic financial statements are onl$ prepared for annual accounting
periods*
A)
True
B)
False
Feedback: The statements may be "re"ared for one6month, three6month, or annual
time "eriods$ :t is not unusual for com"anies to "re"are the financial statements on a
quarterly basis,
% The heading of e-er$ financial statement must include who) what) and when *
A)
True
B)
False
Feedback: E%ery financial statement heading includes the name of the entity '!ho(,
the title of the statement '!hat( and the time "eriod co%ered or ending '!hen( $
+ The format of the balance sheet reflects the basic accounting e#uation *
A)
True
B)
False
Feedback: The balance sheet re"orts the balances of assets, liabilities, and
stockholders' equity$ The basic accounting equation is: Assets = Liabilities
Stockholders' Equity$ :n both cases, the total dollar amount of the assets is equal to the
total dollar amount of the liabilities "lus stockholders' equity ,
. The income statement is a report of the basic financial position of the entit$ *
A)
True
B)
False
Feedback: The balance sheet is a re"ort of the basic financial "osition of the entity$
The basic financial "osition is defined as the economic resources that the com"any
o!ns and the sources of financing for those sources ,
0 The estimated maret -alue of the resources (assets) that the compan$
owns is reported on the balance sheet *
A)
True
B)
False
Feedback: The balance sheet re"orts the cost to acquire the resources of the
business, and does not generally sho! the amounts for !hich the assets could
currently be sold $
1( 6iabilities are a source of economic resources *
A)
True
B)
False
Feedback: Liabilities are the com"any's debts or obligations incurred in acquiring
economic resources 'assets(,
11 Stocholders! e#uit$ is a source of economic resources*
A)
True
B)
False
Feedback: Stockholders' equity re"resents the amount of cash and or assets "ro%ided
by stockholders to acquire economic resources 'assets(,
12 8nl$ re-enues that ha-e been recei-ed in the form of cash are reported on the
income statement*
A)
True
B)
False
Feedback: *e%enues normally are re"orted for goods or ser%ices that ha%e been sold
to customers !hether or not they ha%e been "aid for
13 &ll e,penses reported on the income statement in-ol-e an outflow of cash during
the time period co-ered b$ the statement
A)
True
B)
False
Feedback: E9"enses re"orted in one time "eriod may actually ha%e been "aid for in
another time "eriod, either a "re%ious time "eriod or a subsequent time "eriod$
E9"enses may be "aid as they occur, may be "aid in ad%ance 'such as insurance(, or
may be "aid after they occur 'such as utilities(,
14 9f total e,penses e,ceed total re-enues) a net loss is reported for the accounting
period*
A)
True
B)
False
Feedback: Ghen re%enues e9ceed e9"enses, a net income is re"orted$ Ghen e9"enses
e9ceed re%enues, a net loss is re"orted,
15 4et income (or net loss) appears on the income statement and the statement of
retained earnings*
A)
True
B)
False
Feedback: +et income 'or net loss( a""ears on the income statement and the statement
of retained earnings$ +et income 'or net loss( defines the relationshi" bet!een the t!o
statements,
1% The statement of retained earnings is of primar$ importance to creditors but of
little importance to in-estors*
A)
True
B)
False
Feedback: )reditors ha%e an interest in the relationshi" of income to di%idends in
terms of ho! the com"any's di%idend "olicy affects its ability to re"ay debt$ :n%estors
ha%e an interest in the relationshi" of income to di%idends in terms of ho! the
com"any's di%idend "olicy affects the com"any's ability to rein%est a sufficient
"ortion of earnings to su""ort future gro!th and "ro%ide an adequate return to
stockholders,
1+ The statement of cash flows co-ers a specific period of time$
A)
True
B)
False
Feedback: Like the income statement and the statement of retained earnings, the
statement of cash flo!s co%ers a s"ecific "eriod of time,
1. 2ash flows related to the ac#uisition of producti-e assets are called financing
acti-ities .
A)
True
B)
False
Feedback: )ash flo!s related to the acquisition 'or sale( of "roducti%e assets are
called investing activities$ Financing activities are cash flo!s related to the recei"t or
"ayment of money to creditors 'e9ce"t for su""liers( and in%estors,
10 The total amount of cash outflow used to pa$ suppliers and emplo$ees is shown
as an operating acti-it$ on the statement of cash flows
A)
True
B)
False
Feedback: Operating activities are cash flo!s that are directly related to earning
income,
2( The statement of cash flows is of little interest to in-estors *
A)
True
B)
False
Feedback: The #)ash Flo!s From 7"erating Acti%ities# section of the statement of
cash flo!s indicates the com"any's ability to generate cash from sales to meet its
current cash needs, such as meeting debt obligations, e9"anding the com"any, and
"ro%iding di%idends,
21 Supplemental information without which the financial statements cannot be
full$ understood is pro-ided b$ footnotes to the statements
A)
True
B)
False
Feedback: Footnotes 'or notes( to the financial statement are often used to e9"lain
items or changes in items that may be misinter"reted !ithout further e9"lanation or
rationale,
22 3inancial statements of other companies pro-ide useful information to
purchasing managers*
A)
True
B)
False
Feedback: ,urchasing managers 'buyers( analyAe the financial statements of su""liers
to determine !hether they ha%e the resources to meet the "urchase demands of the
buyer,
23 3inancial statements of a customer pro-ide useful information to credit
managers*
A)
True
B)
False
Feedback: A credit manager uses the customer's financial re"orts to determine if the
customer has the resources necessary to meet debt obligations,
24 3inancial statements of a compan$ pro-ide useful information for its human
resource managers*
A)
True
B)
False
Feedback: Human resource managers deal !ith contract negotiations and structuring
"ay rates$ The human resource manager needs a clear understanding of the com"any's
ability to meet current and future "ayroll obligations$
25 The price7earnings ratio is determined b$ di-iding net income b$ the maret
price*
A)
True
B)
False
Feedback: ,riceDEarnings *atio = Earket ,riceD+et :ncome$ The "riceDearnings ratio
indicates the amount of net income relati%e to its market "rice$ As an e9am"le, if the
,DE ratio is 23 and the net income is -2//,///, the market "rice for the com"any is
-2,3//,/// '-2//,/// 9 23($
2% 9f the maret price is '1)5(()((( and the :7" ratio is 12) the net income for the
accounting period was '125)(((*
A)
True
B)
False
Feedback: ,riceDEarnings *atio = Earket ,riceD+et :ncome$ -2,4//,///D-214,/// =
21$
2+ The measurement rules used to de-elop the information in financial statements
are called generall$ accepted accounting procedures*
A)
True
B)
False
Feedback: The measurement rules used to de%elo" the information in financial
statements are called generally accepted accounting principles, or FAA,$
20 ;enerall$ accepted accounting principles (;&&:) are standardi<ed among the
-arious countries of the world*
A)
True
B)
False
Feedback: The accounting "rinci"les 'and "ractices( %ary among countries, and are
influenced by the "olitical, cultural, and economic history of each "articular country$
3( =anagement prepares the audit report
A)
True
B)
False
Feedback: Eanagers "re"are a report of management in the annual re"ort$ The report
of management usually describes the successes of the com"any and its future "lans,
and may include the ste"s taken to ensure the accuracy of the financial statements it
"resents to the auditor$ The auditor "re"ares an audit report, in !hich the auditor
describes the auditor's o"inion of the fairness of the financial statements and the
e%idence gathered to su""ort the o"inion$ Auditors must be independent and their
o"inions must be free from management biases$
31 &n audit report can onl$ be issued b$ a certified public accountant (2:&)*
A)
True
B)
False
Feedback: 7nly a licensed ),A can issue an audit re"ort$ An accountant may be
licensed as a certified "ublic accountant only on com"letion of requirements s"ecified
by each state$
32 & misleading financial statement is alwa$s clear e-idence of fraud*
A)
True
B)
False
Feedback: Inintentional, as !ell as intentional, o""ortunities e9ist for "re"aring
misleading financial statements$ An audit is the best "rotection against either one
going undetected and uncorrected$
34 9n cases of fraud) onl$ the managers of the compan$ committing fraud are held
responsible*
A)
True
B)
False
Feedback: The inde"endent ),A may be held liable for losses suffered by those !ho
relied on the statements the ),A e9amined 'audited( and u"on !hich the ),A issued a
fa%orable audit re"ort$
CHAPTER 1 (Q)
1 >riefl$ describe the purpose of the balance sheet and the elements reported on the
balance sheet
Feedback: The balance sheet is a re"ort of the financial "osition of the firm$ :t is used
to re"ort the balances of the elements of assets, liabilities, and stockholders' equity$
The balance sheet is modeled after the accounting equation of Assets = Liabilities
Stockholders' Equity$
2 >riefl$ describe the purpose of the income statement and the elements reported
on the income statement*
Feedback: The income statement is a re"ort of all re%enues earned and e9"enses
incurred during the accounting "eriod$ :t is used to re"ort the elements of re%enues,
e9"enses, and net income$ :t is based on the equation of *e%enues 6 E9"enses = +et
:ncome$
3 >riefl$ describe the purpose of the statement of retained earnings and the
elements reported on the statement*
Feedback: The statement of retained earnings is used to re"ort the changes in retained
earnings due to the elements of net income 'or net loss( and di%idends$ The equation
for the statement of retained earnings is 8eginning *etained Earning +et :ncome 6
;i%idends = Ending *etained Earnings.
4 >riefl$ describe the purpose of the statement of cash flows and the elements
reported on the statement
Feedback: The statement of cash flo!s is used to re"ort the changes that occurred in
cash during the accounting "eriod$ The changes are described and sho!n on the
statement as the elements of cash flo!s from o"erating acti%ities, in%esting acti%ities,
and financing acti%ities$ 7"erating acti%ities are directly related to earning income$
:n%esting acti%ities are related to acquiring or selling "roducti%e assets, or acquiring
and selling in%estments in other com"anies$ Financing acti%ities are related to
financing the business by borro!ing and re"aying money, selling and re"urchasing
stock, and "aying di%idends.
5 ?escribe the relationships that e,ist between the four financial statements *
Feedback: The income statement is generally "re"ared first$ The net income or net
loss re"orted on the income statement is also re"orted on the statement of retained
earnings$ The ending balance of retained earnings, !hich accounts for the changes in
retained earnings due to net income or net loss and di%idends, is re"orted on the
balance sheet as "art of stockholders' equity$ The #)ash at End of ,eriod# re"orted on
the statement of cash flo!s is equal to the amount of cash re"orted on the balance
sheet$
% ?escribe how the purchase price for a compan$ might be determined) and gi-e an
e,ample$
Feedback: Ising the ,riceDEarnings *atio, the "urchase "rice for a com"any can be
a""ro9imated$ The ,riceDEarnings *atio = Earket ,riceD+et :ncome$ The
"riceDearnings ratio multi"lied times the net income for the "eriod determines the
market 'or "urchase( "rice of a com"any$ For e9am"le, if the ,DE ratio is 21 and the
net income for the "eriod is -2//,///, the market 'or "urchase( "rice of the com"any
is -2,1//,/// '21 9 -2//,///($
+ >riefl$ describe the purpose of an audit*
Feed8ack: An audit is an e9amination by a ),A of the financial re"orts to ensure that
they re"resent !hat they claim and that they conform !ith generally acce"ted
accounting "rinci"les.
CHAPTER 2 (MC)
1 The ma@or ob@ecti-e of financial reporting is to pro-ide
A)
essential information to internal users of financial re"orts$
B)
useful economic information about the business to hel" e9ternal
"arties make sound financial decisions$
C)
information to internal users about the cash "osition of the business$
D)
information to the :*S and the Securities E9change )ommission
'SE)($
Feedback: The ma?or ob?ecti%e of financial re"orting is to "ro%ide useful economic
information about the business to hel" e9ternal "arties make sound financial
decisions$ The e9ternal "arties include in%estors, creditors, and e9"erts !ho "ro%ide
financial ad%ice$
2 ;erman companies prepare their financial reports in terms of euros whereas
Aapanese companies report results in $en* This practice is an e,ample of the5
A)
Historical cost "rinci"le
B)
Eateriality constraint
C)
Full disclosure "rinci"le
D)
Init6of6Eeasure Assum"tion
Feedback: Inder the unit6of6measure assum"tion, each business entity accounts for
and re"orts its financial results "rimarily in terms of the national monetary unit$
3 9f their ph$sical assets increase in -alue) businesses cannot recogni<e the
increase because of the5
A)
Init of measure assum"tion
B)
Historical cost "rinci"le
C)
)ontinuity assum"tion
D)
Eatching "rinci"le
Feedback: Historical cost "rinci"le requires the continued re"orting of historical cost
on the balance sheet and does not reflect any changes in market %alue, usually
because market %alue is a less %erifiable and ob?ecti%e measure$
4 The notion that each business must be accounted for as an indi-idual) separate
and apart from its owners) all other persons) and other entities is an e,ample of
the 5
A)
se"arate entity assum"tion$
B)
full disclosure "rinci"le$
C)
conser%atism constraint$
D)
industry "ractices constraint$
Feedback: The separate entity assumption states that all acti%ities of the business are
se"arate from the acti%ities of the o!ners$
5 The assets and liabilities of the compan$ would be shown at their estimated
li#uidation -alue if it were not for which accounting assumption?
A)
se"arate entity
B)
continuity
C)
unit of measure
D)
time "eriod
Feedback: Inder the continuity 'or going concern( assum"tion, it is normally
assumed a business !ill continue o"erating long enough to meet is current contractual
commitments and "lans$
6 regardless of how long ! !a"es !o #rod$%e and sell n&en!or'( n&en!or' s
alwa's considered to be a
A)
current asset$
B)
current liability$
C)
long6term asset$
D)
stockholders' equity$
Feedback: :n%entory is al!ays considered to be a current asset$
+ &ssets are listed on the balance sheet in order of
A)
"urchase date$
B)
maturity$
C)
liquidity$
D)
dollar amount$
Feedback: Eost com"anies list assets on the balance sheet in the order of their
liquidity, that is, ho! soon an asset is e9"ected to be con%erted into cash or used$
. 2onsider the following condensed balance sheet5
)urrent assets -34,///
7ther assets 20/,///
Total Assets -2<4,///
)urrent liabilities -24,///
7ther liabilities A
Total liabilities -<4,///
Stockholders' equity 2//,///
Total Stockholders' Equity and Liabilities B
)ha! are !he dollar a*o$n!s of A and B+
A)
-C/,/// and -2C4,///, res"ecti%ely
B)
-C/,/// and -24,///, res"ecti%ely
C)
-C/,/// and -2<4,///, res"ecti%ely
D)
-44,/// and -2<4,///, res"ecti%ely
Feedback: 7ther liabilities = -<4,/// 6 -24,/// = -C/,///$ Total Stockholders' Equity
and Liabilities must be equal to Total Assets, or -2<4,///$
0 2onsider the following condensed balance sheets5
,ear 2--. ,ear 2--/
)urrent assets -34,/// -3/,///
7ther assets 20/,/// 21/,///
Total Assets -2<4,/// -2C/,///
)urrent liabilities -24,/// -21,///
7ther liabilities C/,/// 3/,///
Total liabilities -<4,/// -41,///
Stockholders' equity 2//,/// B.,///
Total Stockholders' Equity and Liabilities -2<4,/// -2C/,///
)ha! s !he fnan%al le&erage ra!o for !he 'ear 2--.+
A)
2C$B
B)
2$CB
C)
2$/
D)
2$1C
Feedback: Financial Le%erage *atio = A%erage Total Assets J A%erage Stockholders'
Equity$ Financial Le%erage *atio = 1'-2<4,/// -2C/,///( J 1'-2//,/// -B.,///(
= -2C<,4// J -BB,/// = 2$CB$
1( a compan$ purchased a computer) office furniture) and office supplies b$
issuing a chec for '5)((( and a note pa$able for '10)5((* The maret -alue of the
items was '2%)3((* The total recorded -alue of the items is
A)
-1C,0//
B)
-2B,4//
C)
-13,4//
D)
-02,0//
Feedback: The historical cost "rinci"le states that cash6equi%alent cost needed to
acquire the assets on the date of acquisition 'the historical cost( should be used to
record all financial statement elements !hen acquired$ The historical cost of the
items, in total, is -13,4// '-4,/// -2B,4//($
11 Bnearned Ce-enue is classified as which t$pe of account?
A)
asset
B)
liability
C)
stockholders' equity
D)
re%enue
Feedback: Accounts !ith #unearned# in the title are al!ays liability accounts
re"resenting amounts "aid to the com"any in ad%ance of deli%ery of ser%ices or goods
from the com"any to the customer$
12 4otes Cecei-able is classified as which t$pe of account?
A)
asset
B)
liabiltity
C)
stockholders' equity
D)
re%enue
Feedback: Accounts !ith #recei%able# in the title are al!ays asset accounts
re"resenting amounts o!ed to the com"any by customers and other "arties$
13 :repaid 9nsurance is classified as which t$pe of account?
A)
asset
B)
liabiltity
C)
stockholders' equity
D)
re%enue
Feedback: Accounts !ith #"re"aid# in the title are al!ays asset accounts re"resenting
amounts "aid in ad%ance for future benefits, such as "re"aid insurance or "re"aid
ad%ertising$
14 2ost of ;oods Sold is classified as which t$pe of account?
A)
asset
B)
liability
C)
re%enue
D)
e9"ense
Feedback: The )ost of Foods Sold is an e9"ense account re"resenting the cost of the
in%entory that !as sold to customers$
15 Cetained "arnings is classified as which t$pe of account?
A)
asset
B)
liability
C)
stockholders' equity
D)
e9"ense
Feedback: Stockholders' equity consists of t!o accounts: )ontributed )a"ital and
*etained Earnings$
1% & compan$ purchased office supplies on credit* What two accounts are affected
b$ the transaction?
A)
Su""lies and )ash
B)
Su""lies and Accounts ,ayable
C)
Equi"ment and Accounts ,ayable
D)
Stockholders' Equity and Accounts ,ayable
Feedback: The transaction increased Su""lies 'an asset account( and increased
Accounts ,ayable 'a liability account($
1+ & compan$ sold 1()((( shares of its common stoc for a total of '45)(((* What
two accounts are affected b$ the transaction?
A)
)ash and *etained Earnings
B)
)ash and *e%enue
C)
)ash and )ontributed )a"ital
D)
)ash and Accounts *ecei%able
Feedback: The transaction increased )ash 'an asset account( and increased
)ontributed )a"ital 'a stockholders' equity account($
1. & compan$ purchased office e#uipment b$ issuing a short1term note pa$able*
What two accounts were affected b$ the transaction?
A)
Equi"ment and )ash
B)
Equi"ment and Accounts ,ayable
C)
Equi"ment and +otes ,ayable
D)
Equi"ment and Stockholders' Equity
Feedback: The transaction increased Equi"ment 'an asset account( and increased
+otes ,ayable 'a liability account($
10 2onsider the following @ournal entr$5
,ro"erty and Equi"ment 03,///
Land C1,///
Eortgage ,ayable BC,///
This transaction ma$ be referred to as
A)
trans"osed entry$
B)
com"le9 entry$
C)
com"ound entry$
D)
combination entry$
Feedback: Ghen the recorded transaction affects more than t!o accounts, it is
referred to as a com"ound entry$
2( Which account is increased with a debit and decreased with a credit?
A)
)ash
B)
Accounts ,ayable
C)
)ontributed )a"ital
D)
*etained Earnings
Feedback: )ash is an asset$ Assets are increased !ith a debit and decreased !ith a
credit$
21
Asse!s 0a1l!es 2!o%"holders3
E4$!'
A$ :ncrease :ncrease +o change
8$ :ncrease ;ecrease +o change
)$ ;ecrease ;ecrease +o change
;$ :ncrease +o change :ncrease
Which line in the chart e,presses the change in the accounting e#uation when a
compan$ issues common stoc) recei-ing cash from in-estors?
A)
Line A
B)
Line 8
C)
Line )
D)
Line ;
Feedback: The transaction increased 'or debited( )ash, an asset account, and
increased 'or credited( )ontributed )a"ital, a stockholders' equity account$
22 & compan$ issues a chec to pa$ an account pa$able* The effect of the
transaction is to5
A)
:ncrease assets and liabilities$
B)
:ncrease assets and decrease liabilities$
C)
;ecrease assets and liabilities$
D)
:ncrease assets and stockholders' equity$
Feedback: )ash, an asset, is decreased and the account ,ayable, a liability, is also
decreased$
23 & compan$ declares a cash di-idend to be paid to its stocholders ne,t month*
The effect of the transaction is to5
A)
;ecrease assets and liabilities$
B)
:ncrease assets and stockholders' equity$
C)
;ecrease assets and stockholders' equity$
D)
:ncrease liabilities and decrease
stockholders' equity$
Feedback: The declaration of a di%idend creates a liability to shareholders and
decreases retained earnings$
24 & compan$ issues a chec for a short1term in-estment in another compan$* The
effect of the transaction is to5
A)
:ncrease assets and liabilities$
B)
;ecrease assets and liabilities$
C)
;ecrease assets and stockholders' equity$
D)
Ha%e no change in assets, liabilities or stockholders' equity$
Feedback: The asset cash is decreased and the asset short6term in%estments is
increased$ The result is no change in net assets$ Liabilities and stockholders' equity
!ere not affected$
25 2onsider the following accounts and their balances) shown in no particular
order5
)ash -2/,///
Accounts ,ayable 4,///
+otes *ecei%able 0,///
*etained Earnings 20,///
)ontributed )a"ital 4/,///
:n%entory C,///
Accounts *ecei%able .,///
+otes ,ayable 21,///
Inearned *e%enues 3,///
,re"aid E9"enses 2,///
Equi"ment 3C,///
What is the total of the current assets that would be listed on a balance sheet?
A)
-1.,///
B)
-<3,///
C)
-C0,///
D)
-04,///
Feedback: The current assets include )ash, +otes *ecei%able, :n%entory, Accounts
*ecei%able, and ,re"aid E9"enses$ They total -1.,/// '-2/,/// -0,/// -C,///
-.,/// -2,///($
2% 2onsider the following accounts and their balances) shown in no particular
order5
)ash -2/,///
Accounts ,ayable 4,///
+otes *ecei%able 0,///
*etained Earnings 20,///
)ontributed )a"ital 4/,///
:n%entory C,///
Accounts *ecei%able .,///
+otes ,ayable 21,///
Inearned *e%enues 3,///
,re"aid E9"enses 2,///
Equi"ment 3C,///
What is the total of the liabilities that would be listed on a balance sheet?
A)
-1.,///
B)
-C3,///
C)
-12,///
D)
-32,///
Feedback: The liabilities include Accounts ,ayable, +otes ,ayable, and Inearned
*e%enues$ They total -12,/// '-4,/// -21,/// -3,///($
2+ 2onsider the following transactions5
,urchased equi"ment for cash -14,///
8orro!ed money from bank -31,///
,aid cash di%idends -24,///
Sold long6term assets for cash -01,///
:ssued stock for cash -0/,///
What is the amount of the net cash pro-ided or used b$ in-esting acti-ities that
would be shown on a statement of cash flows?
A)
-<,/// "ro%ided
B)
-01,/// "ro%ided
C)
-C<,/// "ro%ided
D)
-14,/// used
Feedback: The net cash flo! "ro%ided by in%esting acti%ities !as -<,///, !hich
re"resents the cash inflo! of -01,/// from the sale of long6term assets less the cash
outflo! for the "urchase of equi"ment for -14,///$
2. 2onsider the following transactions:
,urchased equi"ment for cash -14,///
8orro!ed money from bank -31,///
,aid cash di%idends -24,///
Sold long6term assets for cash -01,///
:ssued stock for cash -0/,///
What is the amount of the net cash pro-ided or used b$ financing acti-ities that
would be shown on a statement of cash flows?
A)
-<1,/// "ro%ided
B)
-24,/// used
C)
-4<,/// "ro%ided
D)
-31,/// "ro%ided
Feedback: The net cash flo! "ro%ided by financing acti%ities !as -4<,///, !hich
re"resents the cash inflo! of -31,/// from borro!ing, "lus the cash inflo! of
-0/,/// from the sales of stock, less the cash outflo! for di%idend "ayments$
CHAPTER 2(T or F)
1 The primar$ purpose of e,ternal financial reporting is to pro-ide e,ternal users
with the information necessar$ to profit from bu$ing and selling the shares (stoc)
of the business in an organi<ed stoc e,change *
A)
True
B)
False
Feedback: The "rimary "ur"ose of e9ternal financial re"orting is to "ro%ide useful
economic information about a business to hel" e9ternal "arties '"rimarily in%estors
and creditors( make sound financial decisions$
2 The users of accounting information are identified as decision maers*
A)
True
B)
False
Feedback: Decision makers include a%erage in%estors, creditors, and e9"erts !ho
"ro%ide financial ad%ice, and !ho are e9"ected to ha%e a reasonable understanding of
accounting conce"ts and "rocedures$
3 The term cost benefit) as used b$ accountants) refers to an accounting constraint *
A)
True
B)
False
Feedback: The cost benefit constraint is based on the notion that the benefits to users
should out!eigh costs of "ro%iding information$ )onstraints are discussed in detail in
)ha"ter 4$
4 =ost companies list assets on the balance sheet in order of the si<e of the dollar
amount of each asset*
A)
True
B)
False
Feedback: Assets are listed on the balance sheet in order of liquidity, or ho! soon an
asset is e9"ected to be turned into cash or used$
5 6iabilities are usuall$ listed on the balance sheet in order of maturit$ *
A)
True
B)
False
Feedback: Liabilities are usually listed on the balance sheet in order of maturity, and
are further categoriAed into current liabilities 'those due !ithin one year( and
liabilities due after one year$
% 6iabilities are probable debts or obligations that result from current and future
transactions that will be paid for with assets or ser-ices*
A)
True
B)
False
Feedback: Liabilities are "robable debts or obligations that result from "ast
transactions that !ill be "aid for !ith assets or ser%ices$
+ Stocholders! e#uit$ is made up of contributed capital and retained earnings$
A)
True
B)
False
Feedback: Stockholders' equity is com"osed of contributed ca"ital 'o!ner6"ro%ided
cash andDor assets( and retained earnings, !hich are the cumulati%e earnings of the
business not distributed to o!ners$
. The distribution of a compan$!s earnings are called di-idends
A)
True
B)
False
Feedback: Dividends are distributions of a com"any's earnings to its o!ners !ho are
called stockholders$
0 &n asset with a maret -alue of '21)((( that is purchased for cash of '10)(((
should be listed on the balance sheet at '21)(((
A)
True
B)
False
Feedback: The historical cost principle requires that the %alue of "urchased assets be
recorded, and sho!n on the balance sheet, at their cash equi%alent "rice$
1( 9f the financial le-erage ratio is 1*. and the a-erage stocholders! e#uit$ is
'245)((() then the a-erage total assets are '441)((( *
A)
True
B)
False
Feedback: Financial Le%erage *atio = A%erage Total Assets J A%erage Stockholders'
Equity$ Therefore, if the Financial Le%erage *atio = 2$., A%erage Total Asset J
A%erage Stockholder's Equity must equal = 2$.$ -332,/// J -134,/// = 2$., so the
ans!er is True$
11 & financial le-erage close to or at 151 indicates that a compan$ is hea-il$
utili<ing debt to e,pand its operations*
A)
True
B)
False
Feedback: A financial le%erage of 2:2 indicates that the com"any is not using any debt
at all to e9"and o"erations$ The com"any has a lo!er risk to creditors but is not
enhancing the return to stockholders if the earnings that could be generated from
borro!ing !ould be greater than the cost to borro!$
12 & transaction can onl$ occur between the business and an outside indi-idual or
entit$$
A)
True
B)
False
Feedback: There are t!o ty"es of transactions, e9ternal and internal$
13 & standardi<ed format that is used to accumulate the dollar effect of transactions
on each financial statement item is called an account
A)
True
B)
False
Feedback: An account is a standardiAed format used to accumulate the dollar effect of
transactions on each financial statement item$ A list of all of the accounts, their titles,
and their numbers is called a chart of accounts$
14 9f) at the beginning of Aanuar$) '45( of office supplies was purchased and at the
end of Aanuar$) '12( of office supplies remains on hand) then the using up of '33(
of office supplies is an e,ample of an internal transaction*
A)
True
B)
False
Feedback: There are t!o ty"es of transactions, e9ternal and internal$ An internal
transaction does not in%ol%e an e9change bet!een the business and outside "arties,
but does ha%e a measurable effect on the entity$ :nternal transactions may in%ol%e the
use of "ro"erty, "lant, and equi"ment$
15 The correct anal$sis of how a transaction affects the accounts of the business
will not alwa$s result in the accounting e#uation remaining in balance *
A)
True
B)
False
Feedback: T!o "rinci"les underlie the transaction analysis "rocess: '2( e%ery
transaction affects at least t!o accounts, and '1( the accounting equation must remain
in balance after each transaction$
1% When a current liabilit$ is paid) cash would be credited
A)
True
B)
False
Feedback: )ash, an asset, is decreased !ith a credit
1+ &ll increases in accounts are shown on the credit side of accounts
A)
True
B)
False
Feedback: :ncreases in assets and are sho!n as debits 'on the left side of the account(
and decreases are sho!n as credits 'on the right side of the account($ :ncreases in
liabilities, contributed ca"ital and retained earnings are sho!n as credits 'on the right
side of the account( and decreases are sho!n as debits 'on the left side of the
account($
1. The term debit means increase
A)
True
B)
False
Feedback: The term debit means left$ The term credit means right$
10 9f) at the end of the month) all of the transactions ha-e been correctl$ anal$<ed)
the total of all debits will e#ual the total of all credits*
A)
True
B)
False
Feedback: From the duality conce"t, accountants ha%e de%elo"ed !hat is kno!n as
the double6entry system of recordkee"ing, !hich requires a maintained equality of the
total dollar %alue of debits and the total dollar %alue of credits$
2( Dour compan$ purchased office supplies and office e#uipment b$ issuing a
chec for '2)5((* Cecording this transaction in a @ournal re#uires a combined
entr$*
A)
Tr$e
B)
False
Feedback: Ghen a transaction in%ol%es more than t!o accounts, the ?ournal entry to
record the transaction is called a compound entry$
21 &ll of the accounts used b$ the business are found in a ledger$
A)
True
B)
False
Feedback: As a grou", the accounts are called a ledger$
22 The T1account is a simplified representation of an account) and is -er$ useful
for summari<ing the transaction effects and determining the balance for indi-idual
accounts*
A)
True
B)
False
Feedback: The T6account, !ith only debit and credit columns, is a sim"lified %ersion
of a ledger account, !hich has a debit column, credit column, and balance column$
23 9f at the end of the accounting period the total of all the asset accounts is
'45()((( and the total of all stocholder e#uit$ accounts is '3(()((() then the total
of all the liabilit$ accounts must be '+5()(((*
A)
True
B)
False
Feedback: The total of the liability accounts must be -24/,/// '-34/,/// 6 -0//,///($
Assets = Liabilities Stockholders' Equity$
24 >orrowing mone$ from a ban is a financing acti-it$
A)
True
B)
False
Feedback: Financing acti%ities include borro!ing and re"aying debt, issuing and
re"urchasing stock, and "aying cash di%idends$
25 Selling long1term assets for cash is an in-esting acti-it$
A)
True
B)
False
Feedback: :n%esting acti%ities include buying and selling noncurrent assets and
in%estments$
2% The statement of cash flows di-ides all cash transactions into four categories$
A)
True
B)
False
Feedback: The statement of cash flo!s di%ides all cash transactions into three
categories: o"erating, in%esting, and financing$
2+ The 2ash at end of month shown on the statement of cash flows must agree with
the balance of 2ash shown on the balance sheet
A)
True
B)
False
Feedback: The e9"lanation of cash inflo!s and outflo!s, as sho!n on the statement
of cash flo!s, must ha%e the same ending balance of cash as that listed on the balance
sheet$
CHAPTER 2 (Q)
1 Write the formula for determining the financial le-erage ratio) e,plain what it
measures) and e,plain how a compan$!s financial le-erage ratio of 151 might be
interpreted when compared to another compan$ with a ratio of 15+5
Feed8ack: Financial Le%erage *atio = A%erage Total AssetsDA%erage Stockholders'
Equity$ The financial le%erage ratio measures the relationshi" bet!een total assets and
total stockholders' equity used to finance the assets$ A financial le%erage ratio of 2:2
indicates a conser%ati%e use of creditor financing and a lo! rate of risk for creditors
!ho might lend money or "ro%ide assets to the com"any$ A 2:2 ratio indicates that
assets are financed by the stockholders$ A lo!6risk ratio, ho!e%er, is not al!ays
fa%orable to stockholders$ A financial le%erage ratio of 2:<4 indicates a higher rate of
risk for creditors !ho might lend money or "ro%ide assets to the com"any$ A high rate
may be fa%orable for stockholders if the cost of borro!ing is less than the additional
earnings generated by using the borro!ed funds to finance gro!th$
2 ",plain the four accounting assumptions of (1) separate entit$) (2) continuit$) (3)
unit of measure) and (4) time period*
Feed8ack: Se"arate entity: An assum"tion that all acti%ities related to the business
must be ke"t se"arate and a"art from the acti%ities of the o!ner or o!ners$ This
essentially treats the business as an indi%idual organiAation, se"arate and a"art from
its o!ner, all other "ersons, and other entities$
)ontinuity: An assum"tion that e%ery business has the e9"ectation of continuing
o"erations for an indefinite "eriod of time, !ill not go out of business in the near
future, and !ill be in business long enough to meet its contractual commitments and
"lans$
Init of measure: An assum"tion that all accounting measurements and re"orts of
financial results !ill be made in the national monetary unit 'dollars in the Inited
States($
Time "eriod: An assum"tion that the long life of a com"any can be re"orted o%er a
series of shorter time "eriods 'monthly, quarterly, semiannually, or annually($
3 What are the three elements of the balance sheet and how are the$ listed on the
balance sheet?
Feedback: The three elements are assets, liabilities, and stockholders' equity$ Assets
are di%ided into t!o grou"s, current and long6term$ )urrent assets are assets e9"ected
to be turned into cash or used !ithin one year$ They are listed on the balance sheet in
order of liquidity$ Long6term assets include "ro"erty, "lant, equi"ment, and
intangibles$
Liabilities are di%ided into t!o grou"s, current and long6term$ )urrent liabilities are
listed in order of maturity and are usually due and "ayable !ithin one year$ Long6term
liabilities are due and "ayable after one year$ Stockholders' equity is com"osed of t!o
"arts, contributed ca"ital and retained earnings$ )ontributed ca"ital is the amount of
cash or assets contributed by the stockholders$ *etained earnings are the cumulati%e
earnings of the com"any minus losses and "ayments of di%idends$
4 2onsider the following accounting assumptions) principles) and constraints
/istorical cost 2ost benefit
)ontinuity Time "eriod
Eateriality Se"arate entity
)onser%atism Init of measure
3rom the list presented) identif$ and describe the accounting assumptions
Feedback: 7ne of the accounting assum"tions is continuity, an assum"tion that the
entity !ill not go out of business in the near future$ The second accounting
assum"tion is time period, an assum"tion that the long life of the entity can be
re"orted o%er a series of shorter time "eriods$ The third accounting assum"tion is
separate entity, an assum"tion that the acti%ities of the business are se"arate and
distinct from the acti%ities of the o!ner's($ The last accounting assum"tion is unit of
measure, an assum"tion that accounting information should be re"orted in the national
monetary unit$
5 9n accounting) how are the terms debit and credit used?
Feedback: The term debit means left$ The left6hand side of an account is the debit
side$ The increases in assets are sho!n on the debit or left6hand side$ The term credit
means right$ The right6hand side of an account is the credit side$ The increases in
liability and equity accounts are sho!n on the credit or right6hand side of the account$
% 2onsider the following transactions5
2$ 8orro!ed money from a lending institution$
1$ Sold stock for cash$
0$ ,urchased "lant and equi"ment for cash$
3$ ,aid a cash di%idend$
4$ ,urchased the stock of another com"any for cash$
C$ *e"aid money borro!ed on a long6term note$
<$ *ecei%ed "ayment on a loan made to a com"any
officer$
?efine financing acti-it$ and identif$ each transaction that is a financing acti-it$*
Feed8ack: 8orro!ing money, selling stock, "aying a cash di%idend, and re"aying a
long6term note are financing activities$ Financing acti%ities are transactions for
financing the business that include '2( borro!ing and 'C( re"aying money, '1( selling
and re"urchasing stock, and '3( "aying cash di%idends.
+ ?escribe and gi-e an e,ample of an e,ternal e-ent and an internal e-ent*
Feed8ack: An e9ternal e%ent is an e9change of assets and liabilities bet!een the
business and one or more outside "arties$ An e9am"le of an e9ternal e%ent is the
"urchase of in%entories from a su""lier$ An internal e%ent is not an e9change bet!een
the business and outside "arties, but has a direct and measurable effect on the entity$
An e9am"le of an internal e%ent is the using u" of su""lies in normal o"erating
acti%ities$
CHAPTER 5 (MC)
1 Which of the following is the first phase of the t$pical operating c$cle?
A)
sell goods and ser%ices to customers
B)
"urchase goods and ser%ices
C)
recei%e cash from customers
D)
"ay cash to su""liers
Feedback: E5,L: The ty"ical accounting cycle in%ol%es four "hases, in order: '2(
"urchase goods and ser%ices, '1( "ay cash to su""liers, '0( sell goods and ser%ices to
customers, and '3( recei%e cash from customers$ This cycle is generally re"eated
continuously and the "hases are often intermingled$
2 &lthough income is earned continuousl$) companies measure income for a
specific period of time* &ccountants refer to this practice as5
A)
unit of measure assum"tion$
B)
time "eriod assum"tion$
C)
matching "rinci"le$
D)
continuity assum"tion$
Feedback: To measure income for a s"ecific "eriod of time, accountants follo! the
time "eriod assum"tion, !hich assumes that the long life of a com"any can be
re"orted in shorter time "eriods, such as months, quarters, and years$
3 2onsider the following totals5
*e%enues -2//,///
)ost and e9"enses 34,///
7ther re%enues and e9"enses 4,///
:ncome ta9es 2.,///
+et income -31,///
What was the total of operating income?
A)
-31,///
B)
-44,///
C)
-C/,///
D)
-0<,///
Feedback: 7"erating :ncome = *e%enues 6 )osts and E9"enses$ 7"erating income =
-2//,/// 6 -34,/// = -44,///$
4 Which of the following is an e,pense?
A)
"urchasing o"erating equi"ment
B)
"urchasing cleaning ser%ices
C)
"urchasing an in%estment in another com"any
D)
"urchasing a com"uter for the accounting office
Feedback: Expenditures are the outflo!s of money for any "ur"ose, !hether to buy
equi"ment or "ay off a bank loan$ Ho!e%er, not all e9"enditures are e9"enses$
Expenses are more narro!ly defined as outflo!s of money 'or other assets( used to
generate re%enues during the "eriod$ )leaning ser%ices used is an e9"ense
5 8n September 15) 9ndigo 2ompan$ recei-ed the following pa$ments from
customers* 2ustomer & paid '1()((( for goods to be deli-ered 8ctober 15) customer
> paid '%)((( for goods deli-ered on &ugust 15 and customer 2 paid '3)((( for
goods deli-ered on September 15* The compan$ should recogni<e what amount of
re-enue for the month ending September5
A)
-0,///
B)
-B,///
C)
-B,///
D)
-2.,///
Feedback: Ghen a customer "ays for goods and ser%ices in ad%ance of deli%ery, a
liability is created, and re%enue is not recogniAed until the goods or ser%ices are
deli%ered$ *e%enue is recogniAed !hen the customer "ays cash at time of deli%ery or
establishes credit !ith the com"any and "ays after deli%ery$ The -2/,/// is
recogniAed as a liability in Se"tember and a re%enue in 7ctober, the -C,/// is
recogniAed as re%enue in August, the -0,/// is recogniAed as re%enue in Se"tember$
% What is the last e,pense listed on the income statement?
A)
salaries and !ages e9"ense
B)
general and administrati%e e9"enses
C)
interest e9"ense
D)
income ta9 e9"ense
Feedback: The income ta9 e9"ense is the last e9"ense listed on the income statement$
+ Which of the following is a peripheral transaction?
A)
income ta9 e9"ense
B)
interest e9"ense
C)
general and administrati%e e9"enses
D)
de"reciation e9"ense
Feedback: ,eri"heral transactions are normal but not central to ongoing o"erations$
:nterest e9"ense is a function of borro!ing money, not selling goods or ser%ices, and
is called a "eri"heral transaction$
. 2urrent $ear sales re-enues total '1)25()(((* The total assets at the end of the
pre-ious $ear totaled '0(()(((* Total assets at the end of the current $ear totaled
'0.()(((* What is the asset turno-er ratio?
A)
2$01B
B)
2$0.B
C)
2$1<C
D)
2$24C
Feedback: Asset Turno%er *atio = Sales 'or 7"erating( *e%enuesDA%erage Total
Assets$ The a%erage total assets are -B3/,/// K'-B./,/// -B//,///(D1L$ The asset
turno%er ratio is 2$01B '-2,14/,///D-B3/,///($
0 Which of the following) when all else remains unchanged) will increase the asset
turno-er ratio?
A)
decrease in sales re%enue
B)
decrease in total a%erage assets
C)
increase in total a%erage assets
D)
both 'A( and ')($
Feedback: Asset Turno%er *atio = Sales 'or 7"erating( *e%enuesDA%erage Total
Assets$ A decrease in the denominator 'a%erage total assets( or an increase in the
numerator 'sales re%enue( !ill increase the asset turno%er ratio$
1( Which criteria does not need to be met before the re-enue principle has been
satisfied?
A)
)ash must be recei%ed$
B)
;eli%ery has occurred or ser%ices ha%e been rendered$
C)
)ollection is reasonably assured$
D)
The "rice is fi9ed or determinable$
Feedback: There are four criteria to meet: 2( deli%ery has occurred or ser%ices ha%e
been rendered, 1( there is "ersuasi%e e%idence of an arrangement for customer
"ayment, 0( the "rice is fi9ed or determinable, and 3( collection is reasonably assured$
)ash does not need to be recei%ed to recogniAe re%enue.
11 When a deli-er$ of goods and ser-ices for '25)((( results in a cash receipt of
'15)((( and the balance of '1()((( on account) the reported re-enues for the time
period are
A)
-24,///
B)
-14,///
C)
-2/,///
D)
-4,///
Feedback: Inder the re%enue "rinci"le, re%enues are recogniAed !hen the goods or
ser%ices are deli%ered to the customer, there is "ersuasi%e e%idence of an arrangement
for customer "ayment, the "rice is fi9ed or determinable, and collection is reasonably
certain$
12 & customer paid $ou '3)5(( for tractor wor to be performed when weather
permits* /ow much of the '3)5(( should be recogni<ed as re-enue if $ou are
unable to perform an$ tractor wor during the current accounting period?
A)
-6/6
B)
-0,4//
C)
-2,<4/
D)
-0,///
Feedback: Ghen a customer "ays for ser%ices in ad%ance of "erformance, a liability
'Inearned *e%enues( is created and re%enue is recogniAed !hen the liability is
satisfied through "erformance of ser%ices$
13 Dour compan$ recei-ed '45)((( in ad-ance for ser-ices to be performed during
the accounting period) 173 of the ser-ices were rendered* &t the beginning of the
period) $ou paid '12)((( for insurance co-ering three accounting periods* 9f these
are the onl$ transactions during the accounting period) how much operating
income should $ou report on the income statement?
A)
-22,///
B)
-24,///
C)
-0,///
D)
-00,///
Feedback: Inder the re%enue "rinci"le, -24,/// of re%enue should be recogniAed$
Inder the matching "rinci"le, -3,/// of insurance e9"ense should be recogniAed$
7"erating income for the accounting "eriod is -22,/// '-24,/// 6 -3,///($
14 Which of the following accounts would be increased with a debit?
A)
)ontributed )a"ital
B)
*etained Earnings
C)
*e%enues
D)
E9"enses
Feedback: Stockholders' Equity accounts are increased !ith credits$ Since e9"enses
are a decrease of equity, they are recorded !ith a debit$
15 6anghurst 2ompan$ sold hardware for '12)((( cash and '1.)((( of hardware
to credit customers* Which of the following is the correct @ournal entr$ to record
this transaction?
A)
)ash, debit, -21,///= Accounts *ecei%able, credit, -2.,///=
Inearned *e%enues, credit, -0/,///
B)
)ash, debit, -21,///= Accounts *ecei%able, debit, -2.,///,
Hard!are *e%enues, credit, -0/,///
C)
)ash, debit, -21,///= Inearned *e%enues, debit, -2.,///=
Hard!are *e%enues, -0/,///
D)
)ash, debit, -0/,///= Hard!are *e%enues, credit, -0/,///
Feedback:
The correct ?ournal entry is:
)ash 21,/// Mnbs"=
Accounts *ecei%able 2.,/// Mnbs"=
Hard!are *e%enues Mnbs"= 0/,///
1% 6anghurst 2ompan$ sold hardware for '12)((( cash and '1.)((( of hardware
to credit customers* The cost of sales was '24)(((* Which of the following is the
correct @ournal entr$ to record the cost of sales?
A)
)ost of Sales, debit, -13,///= :n%entories, credit, -13,///
B)
)ost of Sales, debit, -0/,///= :n%entories, credit, -13,///=
Inearned *e%enues, credit, -C,///
C)
)ost of Sales, debit, -0/,///= :n%entories, credit, -0/,///
D)
)ost of Sales, debit, -13,///= :n%entories, credit, -13,///=
Hard!are :ncome, credit, -C,///
Feedback:
The correct ?ournal entry is:
)ost of Sales 13,/// Mnbs"=
:n%entories Mnbs"= 13,///
1+ 8n Aanuar$ 20) 6anghurst 2ompan$ sold lumber for '3()((( to a cash
customer and on the same da$ another customer paid '14)((( for lumber to be
deli-ered on =arch 5* Which of the following is the correct @ournal entr$ to record
a summar$ of the transactions of Aanuar$ 20?
A)
)ash, debit, -0/,///= Accounts *ecei%able, debit,
-23,///= Lumber *e%enues, credit, -33,///
B)
)ash, debit, -33,///= Lumber *e%enues, credit,
-33,///
C)
)ash, debit, -0/,///= Lumber *e%enues, credit,
-0/,///= Inearned *e%enues, credit, -23,///
D)
)ash, debit, -33,///= Lumber *e%enues, credit,
-0/,///= Inearned *e%enues, credit, -23,///
Feedback:
The correct ?ournal entry is:
)ash 33,/// Mnbs"=
Lumber *e%enues Mnbs"= 0/,///
Inearned *e%enues Mnbs"= 23,///
1. The 6anghurst 2ompan$ purchased '31)((( in supplies in-entor$) pa$ing
'1%)((( in cash and charging the rest on account to the supplier* Which of the
following is the correct @ournal entr$ for recording this transaction?
A)
:n%entories, debit, -02,///= )ash, credit, -2C,///=
Accounts ,ayable, credit, -24,///
B)
:n%entories, debit, -2C,///= )ash, credit, -2C,///=
Accounts ,ayable, credit, -24,///
C)
:n%entories, debit, -02,///= )ash, credit, -2C,///=
Inearned *e%enues, credit, -24,///
D)
:n%entories, debit, -02,///= )ash, credit, -2C,///=
Accounts *ecei%able, credit, -24,///
Feedback:
The correct ?ournal entry is:
:n%entories 02,/// Mnbs"=
)ash Mnbs"= 2C,///
Accounts ,ayable Mnbs"= 24,///
10 &t the beginning of Aanuar$) 6anghurst 2ompan$ paid '%)((( for insurance for
the ne,t four months beginning Aanuar$ 1) '3)((( for ad-ertising to be run from
3ebruar$ 1 to =arch 15) and '.)((( for rent o-er the ne,t two months beginning
Aanuar$ 1* What is the correct @ournal entr$ for recording a summar$ of these
transactions?
A) Feneral and Administrati%e E9"enses 2<,///
)ash 2<,///
B) Feneral and Administrati%e E9"enses 2<,///
Accounts ,ayable 2<,///
C) ,re"aid E9"enses 2<,///
)ash 2<,///
D) ,re"aid E9"enses 23,///
Ad%ertising E9"ense 0,///
)ash 2<,///
Feedback:
The correct ?ournal entry is:
,re"aid E9"enses 2<,/// Mnbs"=
)ash Mnbs"= 2<,///
2( 9n Aanuar$) 6anghurst 2ompan$ paid '0)((( for utilities) repairs) and
maintenance of deli-er$ -ehicles* Which of the following is the correct @ournal
entr$ for recording this transaction?
A) 7ther E9"enses and Losses B,///
)ash B,///
B) Feneral and Administrati%e E9"enses B,///
Accounts ,ayable B,///
C) Feneral and Administrati%e E9"enses B,///
)ash B,///
D) ,re"aid E9"enses B,///
)ash B,///
Feedback:
The correct ?ournal entry is:
Feneral and Administrati%e E9"enses B,/// Mnbs"=
)ash Mnbs"= B,///
21 2onsider the following information pro-ided in no particular order:
Lumber *e%enues -21/,///
Feneral and Administrati%e E9"enses 34,///
*ent E9"ense C,///
;e"reciation E9"ense 0,///
Loss on Sale of Land 1,///
Hard!are *e%enues .4,///
:nterest E9"ense 3,///
:ncome Ta9es 22,///
)ost of sales 224,///
What is the dollar amount of the operating income?
A)
-0C,///
B)
-24,///
C)
-2<,///
D)
-1/4,///
Feedback: The unad?usted income statement6
Re&en$es
Lumber re%enues -21/,///
Hard!are re%enues .4,///
Total re%enues -1/4,///
Cos!s and e7#enses Mnbs"=
)ost of sales -224,///
Feneral and administrati%e e9"enses 34,///
*ent e9"ense C,///
;e"reciation e9"ense 0,///
Total costs and e9"enses -2CB,///
8#era!ng n%o*e 956(---
8!her re&en$es and e7#enses Mnbs"=
:nterest e9"ense '3,///(
Loss on sale of land '1,///(
:n%o*e 1efore n%o*e !a7 -0/,///
:ncome Ta9es '22,///(
;e! n%o*e -2B,///
22 The balance of 2ash at the beginning of the period was '45)(((* The net cash
pro-ided b$ in-esting acti-ities was '12()(((* The net cash used b$ financing
acti-ities was '13()(((* The net change increase in cash was '15)(((* What was
the cash flow from operating acti-ities?
A)
-14,/// !as used by o"erating acti%ities$
B)
-14,/// !as "ro%ided from o"erating acti%ities$
C)
-2/,/// !as used by o"erating acti%ities$
D)
-2/,/// !as "ro%ided from o"erating acti%ities$
Feedback:
The statement of cash flo!s:
Cash flows fro* o#era!ng a%!&!es 92.(---
)ash flo! "ro%ided by in%esting acti%ities 21/,///
)ash flo! used by financing acti%ities '20/,///(
+et increase in cash -24,///
)ash at beginning of "eriod 34,///
)ash at end of "eriod -C/,///
)HA,TE* 0 'T or F(
1 The time it taes for a compan$ to pa$ cash for supplies and other in-entories)
sell goods and7or ser-ices to customers) and collect cash from customers is called
the operating c$cle*
A)
True
B)
False
Feedback: The cash6to6cash cycle is most often called the operating cycle, !hich is
the time bet!een !hen in%entory and em"loyee ser%ices are "aid for and !hen
customers "ay cash to the com"any$ This time "eriod de"ends on the nature of the
business$
2 The reporting of the long life of a compan$ in shorter periods of one month) one
#uarter) or one $ear is supported b$ the time period assumption*
A)
True
B)
False
Feedback: ;ecision makers require information "eriodically about the com"any's
financial condition and "erformance$ Accountants follo! the time period assumption
to measure income for s"ecific "eriods of time !ithin the long life of a com"any$
3 Ce-enues ma$ be defined as increases in assets or settlements of liabilities
resulting from an earning process from ongoing operations
A)
True
B)
False
Feedback: Ghen goods or ser%ices are sold for cash or on account to credit customers,
there is an increase in cash or accounts recei%able 'both are assets( and re%enue is
recogniAed$ Ghen goods or ser%ices are deli%ered to customers !ho "aid for the
goods or ser%ices in ad%ance of deli%ery, the liability for the goods or ser%ices is
settled and re%enue is recogniAed$
4 &n e,pense is an$ outflow of mone$ for an$ purpose *
A)
True
B)
False
Feedback: Expenditures are the outflo!s of money for any "ur"ose, !hether to buy
equi"ment or "ay off a bank loan$ Ho!e%er, not all e9"enditures are e9"enses$
5 &cti-ities affecting an income statement but not central to ongoing operations are
called peripheral transactions*
A)
True
B)
False
Feedback: :nflo!s of cash or other assets classified as other re%enues, gains,
e9"enses, or losses are called peripheral transactions$
% The pa$ment of interest is considered a peripheral transaction$
A)
True
B)
False
Feedback: The "ayment of interest is related to borro!ing money, not ongoing
o"erations$ The "ayment of interest is considered a "eri"heral transaction$
+ 9n-estment income is considered to be a portion of re-enue generated from
ongoing operations*
A)
True
B)
False
Feedback: :n%estment income is usually generated from in%esting nonessential cash or
idle cash for short "eriods of time= therefore, in%estment income is not central to
ongoing o"erations and is considered to be a "eri"heral transaction$
. 6osses on the disposal of operating e#uipment result from peripheral
transactions*
A)
True
B)
False
Feedback: ;is"osing of "roducti%e assets is not central to ongoing o"erations of
generating re%enue$ The re"lacement of "roducti%e assets is a normal, "eriodic
"rocess and considered to be a "eri"heral transaction$
0 The asset turno-er ratio is a measure of management!s effecti-eness in using
assets to generate re-enues*
A)
True
B)
False
Feedback: The total asset turno%er ratio measures the sales dollars generated "er
dollar of assets, and is measured as: Sales 'or 7"erating( *e%enues MN13<= A%erage
Total Assets$
1( 9f the asset turno-er ratio is 4*( and the a-erage total assets are '45()((() the
operating re-enues must be '1).(()(((*
A)
True
B)
False
Feedback: Asset Turno%er *atio = Sales 'or 7"erating( *e%enueDA%erage Total
Assets$ The o"erating re%enues must be -2,.//,/// '3 9 -34/,///($
11 & build up of in-entories in anticipation of increased sales will decrease the asset
turno-er ratio*
A)
True
B)
False
Feedback: Asset Turno%er *atio = Sales 'or 7"erating( *e%enueDA%erage Total
Assets$ Any increase in the denominator 'A%erage Total Assets( !ithout a
corres"onding or greater increase in the numerator 'Sales *e%enue( !ill decrease the
asset turno%er ratio$
12 & compan$ that recogni<es re-enue and e,penses when the transaction that
causes them occurs) not necessaril$ when cash is recei-ed or paid) is using accrual
basis accounting*
A)
True
B)
False
Feedback: Inder accrual basis accounting, re%enue is recogniAed !hen it is earned
and e9"enses are recogniAed !hen they are incurred$ Inder cash basis accounting,
re%enue is recogniAed !hen it is recei%ed and e9"enses are recogniAed !hen they are
"aid$
13 The two basic accounting principles that determine when re-enues and e,penses
are recorded under accrual accounting are the re-enue principle and historical cost
principle*
A)
True
B)
False
Feedback: The t!o basic accounting "rinci"les that determine !hen re%enues and
e9"enses are recorded under accrual accounting are the revenue principle and
matching principle$
14 2ollection from the customer must be reasonabl$ assured before re-enue can be
recogni<ed under the re-enue principle*
A)
True
B)
False
Feedback: There are four criteria to meet: 2( deli%ery has occurred or ser%ices ha%e
been rendered, 1( there is "ersuasi%e e%idence of an arrangement for customer
"ayment, 0( the "rice is fi9ed or determinable, and 3( collection is reasonably assured$
)ash does not need to be recei%ed to recogniAe re%enue.
15 Ce-enues ma$ result from the decrease in a liabilit$) the pa$ment of cash at the
time of the deli-er$ of goods or ser-ices to customers) or the pa$ment of cash after
the deli-er$ of goods or ser-ices to customers*
A)
True
B)
False
Feedback: Ghen cash is recei%ed "rior to deli%ery of goods or ser%ices, the
#unearned# re%enue is recorded as a liability, !hich is settled !hen the goods or
ser%ices are deli%ered allo!ing re%enue to be recogniAed$ Ghen cash is recei%ed at the
time of deli%ery of goods or ser%ices, re%enue is recogniAed$ Ghen goods or ser%ices
are deli%ered before cash is recei%ed, an account recei%able is created and re%enue is
recogniAed$
1% When a deli-er$ of goods and ser-ices for '15)((( results in a cash receipt of
'4)((( and the balance of '11)((( on account) the reported re-enues for the time
period are '4)(((*
A)
True
B)
False
Feedback: Inder the re%enue "rinci"le, re%enues are recogniAed !hen the goods or
ser%ices are deli%ered to the customer, there is "ersuasi%e e%idence of an arrangement
for customer "ayment, the "rice is fi9ed or determinable, and collection is reasonably
certain$
1+ 9f $ou recei-ed '1)5(( for ser-ices to be performed in the subse#uent time
period) $ou should not record re-enues of '1)5(( for the current time period*
A)
True
B)
False
Feedback: The condition 'criterion( of deli%ery occurring or ser%ices rendered has not
been met$ Therefore, under the re%enue "rinci"le the -2,4// !ould not be recorded as
re%enue$
1. The matching principle re#uires that e,penses be recorded when incurred in
generating re-enues*
A)
True
B)
False
Feedback: The matching "rinci"le requires e9"enses related to generating the current
"eriod re%enues be recorded in the same time "eriod as the re%enues$ A""lying the
re%enue "rinci"le and the matching "rinci"le hel"s accom"lish accrual basis
accounting= that is, recording re%enues !hen earned and recording e9"enses !hen
incurred, regardless of !hen cash is recei%ed or "aid$
10 9f $ou paid '4)5(( for three month!s rent) beginning with the current month)
$ou should record '4)5(( of rent e,pense for the current month*
A)
True
B)
False
Feedback: Inder the matching "rinci"le, only -2,4// of rent e9"ense !ould be
a""lied to the current month$ The balance of -0,/// !ould be recorded as a "re"aid
e9"ense to be used u" o%er the ne9t t!o months, at -2,4// "er month$
2( Ce-enues ha-e a normal credit balance and e,penses ha-e a normal debit
balance$
A)
True
B)
False
Feedback: *e%enues increase stockholders' equity through *etained Earnings and
therefore ha%e credit balances, and are credited for increases$ E9"enses decrease
stockholders' equity through *etained Earnings and, therefore, ha%e debit balances
and are increased !ith debits$
21 &ccounts must be ad@usted to reflect all re-enues earned and e,penses incurred
before financial statements reflecting ;enerall$ &ccepted &ccounting :rinciples
can be prepared*
A)
True
B)
False
Feedback: Some items of assets, such as "re"aid e9"enses, and some liabilities, such
as unearned re%enues, must be ad?usted for "ortions used or "ortions earned$ :n
addition, some e9"enses that ha%e been incurred but ha%e not been billed by another
entity, such as utilities, ta9es, and interest, are yet to be calculated and recorded$ The
"rocess of ad?usting the accounts is "resented in )ha"ter 3
CHAPTER 5 (Q)
1 ?escribe the steps in a t$pical operating c$cle
Feedback: Ste" 2: The )om"any "urchases in%entories and acquires ser%ices of
em"loyees$ The in%entories 'or com"any generated ser%ices( are to be sold to
customers$
Ste" 1: The )om"any "ays cash for the in%entories and ser%ices of em"loyees
acquired in Ste" 2, !hich requires the com"any to ha%e adequate cash on hand to
meet this obligation$
Ste" 0: The )om"any sells the in%entories 'or com"any generated ser%ices( to
customers, either for cash or on credit$
Ste" 3: The )om"any collects cash from the cash and credit customers$
2 ?escribe each element reported on an income statement
Feedback: The first element is re%enues from o"erations$ *e%enues may be
categoriAed into ma?or ty"es of re%enue$ The second element is cost and e9"enses$
This includes the cost of sales, salaries and benefits "aid to em"loyees, rent e9"ense,
ad%ertising e9"ense, general and administrati%e e9"enses, de"reciation e9"ense, and
other e9"enses directly related to generating re%enues$ The total of all re%enues minus
the total of all costs and e9"enses is called o"erating income, the income generated
from re%enues$ The third element is other re%enues, gains, e9"enses, and losses$ This
element includes those re%enues and e9"enses not directly related to generating
re%enues of the ongoing business, but rather are the result of "eri"heral transactions$
The other re%enues, gains, e9"enses, and losses are either added to 'if re%enues and
gains e9ceed e9"enses and losses( or subtracted from 'if e9"enses and losses e9ceed
re%enues and gains( o"erating income to determine income before ta9es$ The ne9t
element is income ta9es, !hich are subtracted from income before ta9es to determine
net income 'after ta9es($
3 6ist and describe the four criteria or conditions of the re-enue principle*
Feedback:
2$ ;eli%ery has occurred or ser%ices ha%e been rendered$ The com"any has
substantially "erformed the ser%ices "romised to the customer, or has deli%ered the
goods the customer "urchased$
1$ There is "ersuasi%e e%idence of an arrangement for customer "ayment$ The
customer has "ro%ided cash for the goods or ser%ices "romised by the com"any, or the
customer has made arrangements to "ay 'created an account recei%able( for the goods
and ser%ices after deli%ery$
0$ The "rice is fi9ed or determinable$ There are no uncertainties as to the amount to be
collected from the customer$
3$ )ollection is reasonable assured$ For cash sales, collection is not an issue$ For
credit sales, the com"any analyAes the customer's ability to "ay and establishes credit
limits based on the analysis$
4 What does the asset turno-er ratio measure and how might the ratio be
interpreted?
Feedback: The asset turno%er ratio, !hich is com"uted as Sales 'or 7"erating(
*e%enuesDA%erage Total Assets, is a measure of the efficient 'or inefficient( use of
assets by managers$ A high ratio may indicate a %ery efficient use of assets to generate
o"erating re%enues, !hile a lo! ratio may indicate an inefficient use of assets to
generate o"erating re%enues$ Ho!e%er, inter"retation of the ratio should be based on a
com"arison of historical, "ast ratios or com"ared to industry ratios$
5 >riefl$ describe the transaction anal$sis rules of debit and credit*
Feedback: The rules can be described as follo!s: Asset, e9"ense, and loss accounts
are increased !ith debits= and liabilities, contributed ca"ital, retained earnings, and
re%enue accounts are increased !ith credits$
% Wh$ are e,pense accounts) which are stocholder e#uit$ accounts) debited for
increases?
Feedback: E9"enses decrease stockholders' equity through *etained Earnings, !hich
is debited for decreases= therefore, a debit to an e9"ense effecti%ely decreases
*etained Earnings
+ What is meant b$ the statement Ethe financial statements are unad@ustedE?
Feed8ack: At the end of the accounting "eriod, '2( some asset accounts may contain
amounts that ha%e been used in o"erations but not recorded as e9"enses, '1( some
re%enues may ha%e been earned but not yet recorded as accrued re%enues, '0( some
unearned re%enues 'liabilities( may ha%e been earned but not recorded as earned
re%enues, and '3( some liabilities may ha%e been incurred but not recorded as accrued
liabilities$