Financial statements

Multiple choice questions:

1. Black Diamond Co. reported the following in 2005 financial statements: total assets $85,000,
total liabilities $35,000, contributed capital $20,000, net income $40,000. What was the retained
earnings?
A. $30,000
C. $20,000

B. $45,000
D. $35,000

2. Mike paid $500 to GEICO for car insurance for the next 6 month. The $500 should be
recognized as Mikes ____ and GEICOs_____.
A. Prepaid Expense; Unearned Revenue
B. Account Payable; Account Receivable
C. Account Receivable; Account Payable
D. Insurance Expense; Insurance Revenue
3. Which one is NOT a current asset?
A. Prepaid expense
C. Account receivable

B. Inventory
D. Copyright

4. The dividend paid to the shareholders is cash flow from____ activities.

A. Operating
B. Investing
C. Financing
D. None of the above
5. Shadyside Co. lent a $30,000 loan to Oakland Co. as a note receivable. The $30,000 is cash
flow from _______activities for Shadyside and cash flow from ______activities for Oakland.
A. operating, investing
B. investing, financing
C. financing, financing
D. operating, financing
6. Suppose that Kinko realizes a $500 loss on the sale of a printer. The printer has been in use
for 2 years. If the printer is sold for $2,000, and each years depreciation expense for that printer
is $500, what is the historical cost (purchasing price) of this printer?
A. $3,000
C. $2,000

B. $3,500
D. $2,500

7. Which of the following is an accrual?

A. Unearned rent
B. Depreciation
C. Interest receivable

8. In the 2006 balance sheet of Joanna Co., total assets is $50,000, stockholders equity is
$26,000, and current assets is $18,000. Joanna Co. does not have long-term liabilities. What is its
current ratio for 2006?
A. 0.80
C. 0.69

B. 0.75
D. 0.36

9. Which of the following is NOT a permanent account?

A. Prepaid rent
B. Depreciation expense
C. Accumulated depreciation
D. Unearned revenue

10. Assume CMU Bookstore purchased 200 calendars from a supplier at $5 each and sells 150
calendars at a retail selling price of $10 each. What is the total COGS incurred?
A. $500
B. $1,000
C. $750
D. $1,500

11. IronCity Inc. holds 50,000 shares of Steelers Inc. common stock and received $10,000
dividends from Steelers. The $10,000 is cash inflow from _______for IronCity and is cash
outflow from _______for Steelers.
A. operating, operating
B. financing, operating
C. investing, financing
D. operating, financing

12. The income statement equation is

A. Assets Liabilities = Stockholders' Equity.
B. Assets + Stockholders' equity = Liabilities.
C. Net income = Revenues Expenses.
D. Expenses Net income = Revenues.
13. On January 1, 2009 Mammoth Corporation had retained earnings of $4,000,000.
During 2009, they reported net income of $750,000 and dividends of $100,000. What is
the amount of Mammoth's retained earnings at the end of 2009?
A. $4,000,000
B. $4,450,000
C. $4,650,000
D. $4,850,000
14. If you wanted to know what accounting rules a company follows related to its
inventory, where would you look?
A. the balance sheet
B. the income statement
C. the notes to the financial statements
D. the headings to the financial statements

15. Chad Jones is the sole owner and manager of Jones Glass Repair Shop. In 2009,
Jones purchases a truck for $30,000 to be used in the business. Which of the following
fundamentals requires Jones to record the truck at the price paid to buy it?
A. Separate-entity assumption.
B. Revenue principle.
C. Full disclosure.
D. Historical cost principle.
16. Which of the following direct effects on the accounting equation is not possible as a
result of transaction analysis?
A. Increase a liability and decrease an asset.
B. Increase stockholders' equity and increase an asset.
C. Increase an asset and decrease an asset.
D. Decrease stockholders' equity and decrease an asset.
17. Which of the following is an example of revenue or expense recognized in the current
period's income statement?
A. Cash received from a client before the lawyer represents them in court.
B. Inventory purchased by a retail store.
C. Wage costs owed to employees who worked during the period.
D. Cash collected from an accounts receivable.
18. Which of the following would not be a cash flow from investing activities?
A. Purchase of long-term investments.
B. Sale of a patent.
C. Collection of principal of a note receivable.
D. Collection of interest revenue on a long-term note receivable.
19. Kela Corporation reported 2009 net income of $450,000 including the effects of
depreciation expense, $60,000 and amortization expense on a patent, $10,000. Also, cash
of $50,000 was borrowed on a 5-year note payable. Based on this data, total cash inflow
from operating activities for 2009 was
A. $440,000
B. $470,000
C. $520,000
D. $570,000

20. Allen Company's 2009 income statement reported total revenues, $850,000 and total
expenses (including $40,000 depreciation) of $720,000. The 2009 balance sheet reported
the following: accounts receivablebeginning balance, $50,000 and ending balance,
$40,000; accounts payablebeginning balance, $22,000 and ending balance, $28,000.
Therefore, based only on this information, the 2009 net cash inflow from operating
activities was
A. $126,000
B. $166,000
C. $174,000
D. $186,000

Problems:
1. Make the journal entries for each transaction.
SoHo Co. engaged in the following transactions:
A) On January 1, 2007, SoHo pays $1500 for the rent for January, 2007
B) On March 2nd, SoHo purchase $2,000 inventory from a supplier on credit
C) On April 10th, pay $2,000 of amounts owed to supplier in transaction B.
D) On May 5th, SoHo receives $4,000 from a customer for services that SoHo will provide in
the future.
E) On July 2nd, SoHo issues 10,000 shares of common stock and receives $50,000 from
investors. The par value for each share is $1.
A) January 1

B) March 2nd

C) April 10th

D) May 5th

E) July 2nd

Prepaid rent
Cash
Inventory

Cash

1,500

2,000
Account Payable

Account Payable
Cash
Cash

1,500

2,000

2,000

4,000
Unearned Revenue
50,000
Common Stock
APIC

2,000

4,000

10,000
40,000

2. Determine the financial statement component in which the accounting item would be found.
Indicate your selection by writing a X in the appropriate box.
Account name
Common Stock

Income
Statement

Balance
Sheet
x

Cash
Flow

Notes

Repayment of long-term debt

Unearned Revenue
Cost of Goods Sold

x
x

Changes in accounting policies

3. Whitewater Inc. 2005 total revenue was $250,000, total expense was $151,000, gain from
disposal of productive assets was $1,000. Give the closing entries for Whitewater.
Revenue 250,000
Gain
1,000
Retained earnings
251,000
Retained earnings 151,000
Expense
151,000
4. Summer Vacation Co. 2006 net income is $120,000. The following are the balance sheets of
Summer Vacation Co.:
Balance Sheet of Summer Vacation as of Dec 31, 2005
Asset:
Liabilities:
Current assets
Current liabilities
Cash
$50,000
Accounts payable $40,000
Inventory
$60,000
Unearned revenue $85,000
Prepaid expense
$20,000
Long-term debt
$15,000
Accounts receivable
$30,000
PPE
Stockholders equity
$130,000
Gross PPE
$90,000
Accumulated depreciation $15,000
Net PPE
$75,000
Intangible assets
$35,000
Balance Sheet of Summer Vacation as of Dec 31, 2006
Asset:
Liabilities:
Current assets
Current liabilities
Cash
$65,000
Accounts payable
Inventory
$70,000
Unearned revenue
Prepaid expense
$60,000
Long-term debt
Accounts receivable
$20,000
PPE
Stockholders equity
Gross PPE
$90,000
Accumulated depreciation $35,000
Net PPE
$55,000
Intangible assets
$37,000

$90,000
$25,000
$45,000
$147,000

Using indirect method, calculate the cash flow from operations for 2006.
(Start point) Net Income
$120,000
For 2005, there is an increase in inventory by $10,000;
-$10,000
an increase in prepaid expense by $40,000;
-$40,000
a decrease in accounts receivable by $10,000;
+$10,000
depreciation expense for this year is $20,000;
+$20,000
(see the difference between the accumulated depreciation of 2004 and 2005)
an increase in accounts payable by $50,000;
+$50,000
a decrease in unearned revenue by $60,000
-$60,000

Cash flows from operations

$90,000

5. Prepare journal entries for each of the following transactions for Kinko Co.
a. Kinko borrowed $30,000 from PNC Bank on Jan 1st, 2004. The annual interest rate was 10%.
The interest would be due on Jan 1st 2005. Write down the journal entries for Jan. 1st 2004 and the
adjusting journal entries for the interest on Dec 31, 2004.
Jan 01, 2004: Cash
30,000
Notes payable 30,000
Dec. 31, 2004: Interest expense 3,000
Interest payable 3,000
b. Kinko purchased $26,000 inventory from a supplier, paid $10,000 in cash and the rest was on
credit
Inventory 26,000
Account payable 16,000
Cash
10,000
c. Kinko paid $10,000 it owed to the supplier in transaction b.
Account payable
10,000
Cash
10,000
d. Kinko rented an office from Nov. 1st. Kinko made $24,000 payment for the next 6 month rent.
Prepare the journal entries on Nov. 1 and the adjusting entry related to this rent on Dec 31, 2004.
Nov. 1, 2004
Prepaid rent
24,000
Cash
24,000
Dec. 31. 2004 Rent expense
8,000
Prepaid rent 8,000
f. Kinko sold the entire inventory purchased in transaction b on credit for $30,000.
Accounts receivable
30,000
Sales revenue
30,000
COGS
26,000
Inventory
26,000
g. Kinko received $5,000 on Nov. 1st from a customer for 500 units of merchandises. 250 units
were delivered to the customer on Dec. 16th. The rest 250 units would be delivered on January 16,
2005. Prepare the journal entries on Nov 1st and on Dec 16th.
Nov. 01, 2004:
Cash
5,000
Unearned revenue 5,000
Dec. 16, 2004: Unearned revenue 2,500
Sales revenue
2,500

6. Following the last problem, what should be the 2004 closing entries for Kinko?
Sales revenue
32,500
Income summary

32,500

Income summary
37,000
Interest expense
Rent expense
COGS

3,000
8,000
26,000

Retained Earnings
4,500
Income summary

4,500

7. Use the following information to prepare a statement of cash flows for Hanson Inc. for
the year ended December 31, 2009 using the indirect method. Prepare a schedule for any
non-cash items for disclosure, if appropriate.
A. Net income $10,000 (depreciation expense, 5,000; inventory decrease, $1,000; no
changes in accounts receivable or accounts payable)
B. Issued capital stock for $4,000 of equipment.
C. Sold equipment for $8,000, book value $8,000.
D. Paid cash dividend, $3,000 (declared in prior year).
E. Paid long-term debt principal, $8,000 and short-term debt principal, $2,000.
F. Purchased equipment for $12,000 in exchange for a note payable due in two years.
The cash balance on January 1, 2009 was
$10,000.

8. Marissa Company is preparing a statement of cash flows using the indirect method.
The following data are available:

Calculate cash flows from operating activities.

$30,000 + $18,000

$5,000

$10,000 + $10,000

$7,000 = $36,000

9. Part A. Perform transaction analysis for Blake Company regarding the following
transactions for March. Indicate the account affected by the transaction as well as the
increase (+) or decrease ( ) to the components of the accounting equation and the
amount.

Part B. Determine whether the transactions A-F above affected cash flows. If so,
determine the type of activity as an operating activity, an investing activity, or a financing
activity. If cash is not affected use "no effect." Place a check mark under the appropriate
column for each transaction.