ACCT 2301 Final Exam Practice

The matching concept -

a. requires that the dollar amount of debits equal the dollar amount of credits on a trial balance

b. states that expenses related to revenue be reported at the same time the revenue is reported

c. addresses the relationship btwn the journal and the balance sheet

d. determines whether the normal balance of an account is a debit or credit

b. states that expenses related to revenue be reported at the same time the revenue is reported

The statement of cash flows shows the effects on cash of a company's operating, investing, and lending activities.

a. True

b. False

b. False

Financing not lending

Accounts Receivable will increase with a…

a. Debit

b. Credit

a. Debit

Accounts Payable will increase with a…

a. Debit

b. Credit

b. Credit

What are the 4 inventory methods?

FIFO (oldest cost expensed)

LIFO (newest costs expensed)

Specific Identification

Other

What are the 2 types of Bookkeeping:

Perpetual

Periodic

What are the 3 dates included in a dividend payment:

1. Date of declaration - liability incurred & recorded

2. Date of record - info gathered

3. Date of payment - cash payment made, liability paid

What is the Earnings per Share (EPS) computation?

EPS = Net Income - Preferred Dividends, all divided by avg. # of Common shares outstanding

Statement of Cash Flows

What is Operating activities?

Transactions that affect the net income from operations

Statement of Cash Flows

What is Investing activities?

Transactions that affect investments in assets both purchase and sale

Statement of Cash Flows

What is Financing activities?

Transactions that affect the debt or equity financing increases or decreases

Part 1: Cash Flow indirect Method - Sources & Uses of Cash

Increase in Accounts Receivable and Inventory is a USE of cash.

Ex: Increase in Accts Receivable

represents

an increase in cash not collected from customers

Part 2: Cash Flow Indirect Method - Sources & Uses of Cash

Increase in Accounts Payable is a SOURCE of cash

Ex: Increase in Accts Payable

represents

an increase in cash not paid out to vendors for expenses

For proper matching of revenues and expenses, the estimated cost of fringe benefits must be recognized as an expense of the period during which the employee earns the benefits.
a. True

b. False

True

The purchase of land will be classified on the Cash Flow Statement as:

a. Operating

b. Investing

c. Financing

b. Investing

An increase in Accounts Payable will be classified on the Cash Flow Statement as:

a. Operating

b. Investing

c. Financing

a. Operating

The sale of stock will be classified on the Cash Flow Statement as:

a. Operating

b. Investing

c. Financing

c. Financing

The purchase of a subsidiary will be classified on the Cash Flow Statement as:

a. Operating

b. Investing

c. Financing

b. Investing

An increase in Accounts Receivable will be classified on the Cash Flow Statement as:

a. Operating

b. Investing

c. Financing

a. Operating

The payment of dividends will be classified on the Cash Flow Statement as:

a. Operating

b. Investing

c. Financing

c. Financing

Purchasing Treasury Stock will be classified on the Cash Flow Statement as:

a. Operating

b. Investing

c. Financing

c. Financing

If 10,000 shares are authorized, 5,000 shares are issued, and 1,000 shares are reacquired as Treasury Stock, the number of outstanding shares is 4,000.

a. True

b. False

a. True

Outstanding shares are owned by external shareholders.

The par value of common stock must always be equal to its market value on the date the stock is issued.
a. True

b. False

b. False

McDonalds par value is $0.01

The two main sources of stockholders' equity are investments contributed by stockholders and retained earnings.

a. True

b. False

a. True

The issuance of common stock affects both paid-in capital and retained earnings.

True or False

False

Affects Common Stock and Paid-in-Capital if stock has a par value.
Doesn’t affect retained earnings.

Dividends must be paid to preferred stockholders before they can be paid to common stockholders.

True or False

True

Treasury stock is a contra equity account which means it has a debit balance when other equity accounts normally have a credit balance.

True or False

True

The declaration and issuance of a stock dividend does not affect the total amount of a corporation's assets, liabilities, or stockholders' equity.

True or False

True

Dividends decrease net income.

True or False

False

Retained Earnings represents past net income
less past dividends.

True or False

True

Net Income - Dividends = Retained Earnings

Gross profit = sales – returns and allowances – cost of merchandise (goods) sold.

True or False

True

The computation of Gross Profit includes deductions for selling, general and administrative expenses.

True or False

False

NEVER include deductions for selling, general & administrative expenses in Gross Profit

The book value of a fixed asset reported on the balance sheet represents its market value on that date.

True or False

False

Book value is the original cost of a tangible asset accumulated depreciation

True or False

True

When merchandise is sold for $1,000 plus 8% sales tax, the Sales Revenue account should be credited for $1,080.  

True or False

False

1,000 + 0.08 = 1000.08

Ford Motor Company records warranty costs
when they sell an automobile to a customer.

True

Interest expense is computed using the equation:
 
principal x interest rate x days / 365.

True or False

True

Depreciation is a non-cash expense and is added back in the operating section of the cash flow statement. 

True or False

True

The purchase of the asset being depreciated is a use of cash in the investing section.

The Unearned Revenues account is an example of a liability.

True or False

True

GAAP requires companies with receivables to use
the allowance method.

True or False

True

Bad debt expense is estimated when sales are made.

Companies must record the estimated cost of employee benefits during the same period of time that the employee provides the services that earn the benefits.

True or False

True

During periods of increasing costs, the use of the FIFO method of costing inventory will yield a higher inventory amount on the balance sheet than LIFO would produce.  

True or False

True

During periods of increasing costs, the use of FIFO,
rather than LIFO, will result in a greater amount of COGS being reported.

True or False

False

LIFO expenses higher recent costs to cost of goods sold.

Inventory amount is less.

If the market rate of interest is 7% and a corporation's bonds have a stated/contract interest rate of 8%, the bonds will sell at a premium.

True or False

True

If bonds were sold at a discount, the interest expense reported on the income statement will be more than the interest paid in cash to bondholders.

True or False

True

During the first year of operations, employees earned vacation pay of $35,000. Vacation Expense will be debited in the second year as the vacations are taken by the employees.

True or False

False

The prepaid expenses (assets) eventually become expenses on the income statement.

True or False

True

All long-term liabilities eventually become current liabilities.

True or False

True

The due date is eventually going to be due within 12 months.

An intangible asset does not have a physical existence.

True or False

True

Tangible/fixed assets have physical existence.

A 15% increase in sales will always result in a 15% increase in net income.

True or False

False

No reason to believe that all expenses will always increase by the same percentage.

Comparing total sales over 5 years is an example of horizontal analysis.

True or False

True

The relationship of each asset item as a percent of total assets is an example of vertical analysis.

True or False

True

Ford Motor Company records warranty costs
when they pay for repairs on a customer's automobile.

True or False

False

Comparing the stated interest rate to the market rate determines if a bond will be sold at a premium or a discount.

True or False

True

Revenue is recognized (credited on the income statement) when it is earned even if the amount of the revenue has not been collected in cash from the customer.

True or False

True

Receiving payment prior to delivering goods or services causes a liability to be incurred.

True or False

True

Unearned revenue is a liability

What is the accounting standard-setting body for U.S. GAAP?

The Financial Accounting Standards Board (FASB)

Who regulates publicly traded companies in the US?

The Securities Exchange Commission (SEC)

What must publicly traded companies file with the SEC?

Their financial statements

What form is used by a US company to file its annual report with the SEC?

Form 10-K

What form is used by a foreign company listed on a US stock exchange to file its annual report with the SEC?

Form 20-F

What section of Form 10-K contains the Management’s Discussion & Analysis (MD&A)?

Item 7

What type of information is included in the MD&A section of Form 10-K?

Info about the company’s operations that are not included in the GAAP financial statements and notes

What does the MD&A section often explain or analyze?

Changes btwn the current & prior years’ financial statements

Can the MD&A section include the company’s plans for the future?

Yes, it can include future plans

What section of Form 10-K includes the financial statements?

Item 8

What are public companies required to include in their financial statements?

The Balance Sheet, Income Statement, Comprehensive Income Statement, Statement of Changes in Equity, and Cash Flow Statement.

What is another name for the Balance Sheet?

Statement of Financial Position.

What is another name for the Income Statement?

Statement of Activities.

What does the Comprehensive Income Statement include?

Items of “other comprehensive income.”

How can the Comprehensive Income Statement be presented in the financial statements?

It may be combined with the income statement or follow the income statement

What does the Statement of Changes in Equity show?

Changes in stock and retained earnings.

Which financial statement reports cash inflows and outflows from operating, investing, and financing activities?

The Cash Flow Statement

What is the normal balance (sign) for assets?

Debit

If assets have a normal debit balance, what must the normal balance be for liabilities and equity to balance the accounting equation?

Credit

What is the accounting equation that must stay balanced?

A = L + E

What are receivables?

Amounts expected to be collected in cash in the future

or

money claims

they are also assets

What is the difference between accounts receivable and notes receivable?

Accounts receivable - usually short-term amounts owed by customers

Notes receivable - written promises to pay, often with interest and over a longer period.

Why do companies need to estimate bad debts?

Because they do not know exactly which customers will fail to pay, but they do know that some will not.

What method is commonly used to estimate bad debts?

The allowance method

To whom do companies usually extend credit?

To customers who are expected to pay

What is a note receivable?

A written promissory agreement with an interest rate and payment terms

including a due date

where the company will COLLECT both interest and principal in the future.

What is a note payable

A written promissory agreement with an interest rate and payment terms

including a due date

where the company will PAY both interest and principal in the future.

What makes a note (or any financial amount) classified as short-term?

If it is expected to be received or paid WITHIN one year

What makes a note (or any financial amount) classified as long-term?

If it is expected to be received or paid AFTER one year.

What are capitalized costs?

Assets used in the operation of the business or held for investment.

Which capitalized costs are written off over time?

Only assets used in the operations of the business.

How are fixed (tangible) assets such as property, plant, and equipment written off?

They are depreciated over their useful lives.

What is the method used to write off intangible assets that do not have an indefinite life?

Amortization.

Can you give an example of an intangible asset that is amortized?

A patent

Are assets held for investment depreciated or amortized?

No, only assets used in business operations are written off.

Where is common stock in the Balance Sheet?

Equity

Revenue increases Equity

True or False

True

Assets are presented in the order of liquidity.

True or False

True

Revenues increase Equity

True or False

True

Accrual Basis rules:

Revenue recognition - when earned NOT when cash is received

Expenses recognized - when incurred NOT when paid in cash

The revenue recognition principle states that revenue should be recorded when the cash is received from the customer.

True or False

False

Revenue recognized when earned

balance sheet is a permanent acct

Income Statement is closed out at year end