MGMT 200H Exam 1

The owner of an office building should report rent collected in advance as a debit to Cash and a credit to:
A) A liability
B) Revenue
C) An asset other than Cash
D) Stockholders' equity

A) A liability

Which one of the following statements regarding financial reports is correct?
A) The income statement is used to show that a company's resources equal claims to those resources.
B) The statement of stockholders' equity updates the balances of common stock and retained earnings for related transactions during the year.
C) The statement of cash flows shows cash inflows and outflows from operating activities only.
D) The balance sheet classifies all assets according to operating, investing, and financing activities.

B) The statement of stockholders' equity updates the balances of common stock and retained earnings for related transactions during the year.

Which of the following statements is NOT correct about the financial statements?
A) The statement of stockholders' equity presents common stock, dividends, and retained earnings information.
B) A balance sheet reports assets, liabilities, and expenses.
C) An income statement reports revenues, expenses, and net income information.
D) The statement of cash flows shows cash inflows and outflows from operating, financing, and investing activities.

B) A balance sheet reports assets, liabilities, and expenses.

The account unearned revenue (or deferred revenue) is used to record:
A) revenues performed during the current period
B) cash received for services performed
C) revenues performed on account for customers
D) revenues/cash received in advance from customers

D) revenues/cash received in advance from customers

Revenues will \______ retained earnings, and dividends will \______ retained earnings.
A) increase; decrease
B) decrease; decrease
C) not change; decrease
D) increase; increase
E) decrease; increase

A) increase; decrease

Consider the following account balances of the Shattuck Law Firm at the end of the year:

Accounts Payable: $9,400
Salaries Expense: 10,800
Cash: 1,700
Common Stock: 2,400
Service Revenue: 10,300
Supplies: 1,300
Retained Earnings: 5,100
Utilities Expense: 5,000

How many of these accounts would appear in Shattuck's year-end income statement?
A) Five
B) Three
C) Four
D) Two

B) Three

Which of the following is NOT a liability account?
A) Accounts Payable
B) Deferred Revenue
C) Notes Payable
D) Accounts Receivable

D) Accounts Receivable

An alternative form of the accounting equation is:
A) Net Income \= Revenues - Expenses.
B) Assets - Liabilities \= Stockholders' Equity.
C) Stockholders' Equity \= Common Stocks - Retained Earnings.
D) Stockholders' Equity \= Assets + Liabilities.

B) Assets - Liabilities \= Stockholders' Equity.

Pumpkin Inc. sold $500 in pumpkins to a customer on account on January 1. On January 11 Pumpkin collected the cash from that customer. What is the impact on Pumpkin's accounting equation from the collection of cash?
A) Decrease assets and increase liabilities.
B) No net effect to the accounting equation.
C) Increase assets and increase liabilities.
D) Decrease assets and decrease liabilities.

B) No net effect to the accounting equation.

Adjusting entries are primarily needed for:
A) Manual accounting systems.
B) Accrual-basis accounting.
C) Cash-basis accounting.
D) Current value accounting.

B) Accrual-basis accounting.

Which of the following transactions would not require a journal entry using accrual-basis accounting?
A) Collecting cash from a sale made in a previous period
B) Anticipating greater demand for the firm's services in the following year
C) Buying supplies on account
D) Providing a good or service to a customer in exchange for cash

B) Anticipating greater demand for the firm's services in the following year

When the company pays stockholders a dividend, what is the effect on the accounting equation for that company?
A) Decrease assets and decrease stockholders' equity.
B) Decrease stockholders' equity and increase assets.
C) Increase liabilities and increase assets.
D) Decrease assets and decrease liabilities.

A) Decrease assets and decrease stockholders' equity.

A company orders office supplies in June. Those supplies are received and used in July. The supplies are paid for in August. In which month should the company record supplies expense based on GAAP?
A) August.
B) Evenly over the three months.
C) July.
D) June.

C) July.

A company has the following transactions:

• Pay workers' salaries for the current period.
• Pay next year's rent in advance.
• Pay dividends to stockholders in the current period.
• Receive (but do not pay) a current period utility bill.
• Use supplies previously purchased.

How many of these transactions result in an expense being reported in the current period using accrual-basis accounting?
A) 1
B) 2
C) 3
D) 4

C) 3

Consider the following events for Sophia Incorporated:

April 5: Sophia purchases volleyballs for $200 on account.
April 6: Sophia advertises a sand volleyball camp for $20 a person.
April 12: Thirty people sign up for the camp paying a total of $600.
April 21: Sophia hosts the sand volleyball camp.
April 23: Sophia pays for the volleyballs purchased on April 5.

Under cash-basis accounting, what is the appropriate day to record the revenues related to the sand volleyball camp?
A) April 5
B) April 12
C) April 21
D) April 23

B) April 12

Which of the accounts are decreased on the debit side and increased on the credit side?
A) Dividends, liabilities, and assets.
B) Expenses and stockholders' equity.
C) Assets and expenses.
D) Liabilities and revenues.

D) Liabilities and revenues.

Consider the following transactions:

1. The company uses supplies purchased in the previous period, $1,500.
2. The company pays cash for rent in advance, $6,000.
3. The company repays a loan to the bank, $10,000 (ignore any interest cost).

The amount of accrual-basis expense is \_____ while the amount of cash-basis expense is \_____.
A) $6,000; 11,500
B) $1,500; 16,000
C) $6,000; $16,000
D) $1,500; $6,000

D) $1,500; $6,000

At the beginning of December, Global Corporation had $2,000 in supplies on hand. During the month, supplies purchased amounted to $3,000, but by the end of the month the supplies balance was only $800. What is the appropriate month-end adjusting entry?
A) Debit Supplies Expense $4,200, credit Supplies $4,200.
B) Debit Cash $4,200, credit Supplies $4,200.
C) Debit Supplies $4,200, credit Supplies Expense $4,200.
D) Debit Cash $800, credit Supplies $800.

A) Debit Supplies Expense $4,200, credit Supplies $4,200.

Managerial accounting

For internal users (managers, CEO, etc.), has no rules and regulations

Financial accounting

For external users (investors, creditors, customers, suppliers, employees, etc.), follows rules and regulations

Financing activities

Transactions the company has with investors and creditors

Investing activities

Transactions involving the purchase and sale of resources that provide benefit for several years

Operating activites

Transactions that relate to the primary operations of the company

Income statement

Revenues - Expenses \= Net Income/Loss, for certain interval of time

Statement of stockholders' equity

Stockholders' Equity \= Common Stock + Retained Earnings, for certain interval of time

Balance sheet

Assets - Liabilities \= Net Assets \= Stockholders' Equity, for a certain point in time

Statement of cash flows

Measures activities involving cash receipts and cash payments, for a certain interval of time

Liabilities

Borrowing

Stockholders' equity

Stockholders' investments

Dividends

Distributions to stockholders

Assets

Company's resources

Revenues

Sales to customers

Expenses

Costs of selling to customers

Notes disclosures

Accounting estimates and judgments, supplemental information not included in the financial statements

Auditor's opinion

External opinion about fairness of statements and adherence to accounting principles

Securities and Exchange Commission (SEC)

Created by 1933/1934 Securities Acts to protect the interest of investors by ensuring full and fair disclosure. Given legal authority to establish accounting standards, which they designate to the FASB

Financial Accounting Standards Board (FASB)

The private-sector body responsible for establishment of U.S. accounting standards (authority remains with SEC)

In 1973, the following private-sector body was organized to set accounting standards in the United States:
A) The Financial Accounting Foundation
B) The Securities and Exchange Commission
C) The FASB

C) The FASB

Primary responsibility for GAAP and public reporting currently rests with the:
A) SEC
B) FASB
C) Congress
D) AICPA

A) SEC

Are dividends an expense?

No, it is a distribution after net income is calculated

Accounting

Maintaining records of a company's operations and communicating that information to decision makers

Corporation

Company that is legally separate from its owners

Sole proprietorship

Business owned by one person

Partnership

Business owned by 2+ people

Accounting equation

Assets \= Liabilities + Stockholders' Equity

Financial statements

Periodic reports published by a company to provide information to external users

Account

Maintains a record of business activities related to certain item

Common Stock

External equity, amounts invested by stockholders when they purchase common stock

Retained Earnings

Internal equity, all net income minus all dividends over life of company

Operating cash flows

Cash payments for transactions involving revenue and expense activities during the period

Investing cash flows

Cash transactions for purchase and sale of investments and long-term assets

Financing cash flows

Cash transactions with lenders and stockholders

Management discussion and analysis (MD&A)

Management's views on significant events, trends, and uncertainties with company's operations and resources

Generally Accepted Accounting Principles (GAAP)

Rules of financial accounting

International Accounting Standards Board (IASB)

Goal is to eliminate differences in accounting standards around the world (U.S. is not a part of it)

Public Company Accounting Oversight Board (PCAOB)

Ensures that auditors follow strict guidelines when conducting audits

External transactions

Business activities with another separate economic entity

Internal transactions

Events that affect the financial position of the company but don't include an exchange with another separate economic entity

Measuring external transactions (during the period)

Identify accounts affected by external transaction, analyze impact on accounting equation, assess whether transaction is debit or credit to account, record transaction in journal, post transaction to t-account in general ledger, prepare a trial balance

Business documents

Provide evidence that transactions have occurred

Chart of accounts

List of all account names used to record transactions

Double-entry accounting

Each transaction has a dual effect (increase on one side increases other side)

Company sells shares of common stock for $25,000.

Which accounts are affected & do they increase or decrease?

Cash (A), common stock (O); increase

Company borrows $10,000 from bank and signs a note for it.

Which accounts are affected & do they increase or decrease?

Cash (A), notes payable (L); increase

Company purchases equipment with cash, $24,000.

Which accounts are affected & do they increase or decrease?

No change (Cash and equipment are assets)

Company pays one year of rent in advance, $6,000.

Which accounts are affected & do they increase or decrease?

No change (Cash and prepaid rent are assets)

Company purchases supplies on account, $2,300.

Which accounts are affected & do they increase or decrease?

Supplies (A), accounts payable (L); increase

Company provides services to customers for cash, $4,300.

Which accounts are affected & do they increase or decrease?

Cash (A), service revenue (O); increase

Company provides service to customers on account, $2,000.

Which accounts are affected & do they increase or decrease?

Accounts receivable (A), service revenue (O); increase

Company receives cash in advance from customers, $600.

Which accounts are affected & do they increase or decrease?

Cash (A), deferred revenue (L); increase

Company pays salaries in cash to workers, $2,800.

Which accounts are affected & do they increase or decrease?

Cash (A), salaries expense (O); decrease

Company pays cash dividends to stockholders, $200.

Which accounts are affected & do they increase or decrease?

Cash (A), dividends (O); decrease

What would be the effect on total assets if a company purchased land for $200,000 cash?
A) Total assets would go up by $200,000
B) Total assets would go down by $200,000
C) There would be zero effect on total assets
D) None of the above

C) There would be zero effect on total assets

What effect does the payment of dividends have on the accounting equation?
A) Assets decrease and equity increases
B) Assets decrease and equity decreases
C) Assets decrease and liabilities increase
D) Assets increase and equity increases

B) Assets decrease and equity decreases

Debit

Left side of t-account

Credit

Right side of t-account

Debit vs. Credit: Dividends, expenses, assets

Debit \= increase; credit \= decrease

Debit vs. Credit: Liabilities, Stockholders' Equity, Revenues

Credit \= increase; debit \= decrease

Journal entry

Transactions that are recorded as debit/credit in chronological order

Posting

Transfer of debit/credit information from the journal to the appropriate accounts in the general ledger, a COPYING PROCESS

General ledger

Collection of accounts maintained by a business and shows a statement of account for each account as support of an account balance

Trial balance

List of all accounts and their balances, assures that total debits \= total credits, NOT PUBLISHED, assists in preparing adjusting entries