Accounting 2301 Exam 1 (Chapters 1-3)

Transactions related to revenues and expenses

Operating (business activity)

Financing (business activity)

Transactions with lenders and owners

Investing (business activity)

Transactions involving the purchase and sale of productive assets

Will the company be capable of repaying its debt when it is due? (Explanation: Creditors make decisions related to lending money to the company.)

Which of the following questions is most likely to be asked by a creditor

False (Explanation: Financial accounting measures the business activities of a company and communicates those measurements to external parties for decision-making purposes.)

Financial accounting primarily deals with the methods accountants use to provide information to an organization's internal users.

Double Taxation (Explanation: Double taxation is, in fact, a disadvantage of the corporate form of business ownership.)

Which of the following is a feature of the corporate form of business ownership?

- unlimited liability

- lower tax rates

- limited resources

- double taxation

Assets − Liabilities = Stockholders' Equity (Explanation: The accounting equation illustrates a fundamental model of business valuation. It shows that a company's resources (assets) equal the creditors' claims (liabilities) and owners' claims (stockholders' equity) to those resources.)

Which of the following is an alternate form of the accounting equation?

- Assets − Liabilities = Stockholders' Equity

- Revenues − Expenses = Net Income

- Assets = Liabilities − Stockholders' Equity

- Expenses − Dividends = Net Income

Costs of providing products and services. (Explanation: Expenses are the costs of providing products and services.)

Expenses are best defined as:

- Amounts owed to creditors.

- Amounts the owners have invested in the business.

- Costs of providing products and services.

- Distributions to stockholders.

Trial Balance (Explanation: There are four primary financial statements: the income statement, the statement of stockholders' equity, the balance sheet, and the statement of cash flows.)

Which of the following is not one of the four primary financial statements?

- Balance Sheet

- Trial Balance

- Income Sheet

- Statement of Cash Flows

$21,000 (Explanation: Net Income = Revenues ($82,000) − Expenses ($61,000) = $21,000.)

Use the following amounts to calculate net income: Assets, $165,000; Dividends, $9,000; Expenses, $61,000; Liabilities, $74,000; Revenues, $82,000.

- $12,000

- $21,000

- $30,000

- $91,000

$584,000 (Explanation: Stockholders' Equity at the beginning of the year = Common Stock ($320,000) + Retained Earnings ($195,000) = $515,000. The change in Stockholders' Equity during the year = Issuance of Common Stock ($28,000) + Net Income ($46,000) − Dividends ($5,000) = $69,000. Stockholders' Equity at the end of the year = $515,000 + $69,000 = $584,000.)

Catalina Corporation begins the year with a $195,000 balance in Retained Earnings and a $320,000 balance in Common Stock. During the year, the company generated net income of $46,000, issued additional common stock for $28,000, and paid a dividend of $5,000. What is total stockholders' equity at the end of the year?

- $515,000

- $584,000

- $589,000

- $594,000

Presents the financial position of a company at a point in time. (Explanation: The balance sheet is a financial statement that presents the financial position of the company as of a particular date.)

The balance sheet:

- Presents the financial position of a company at a point in time.

- Indicates if a company is profitable.

- Shows the net change in cash over a period of time.

- Reports the difference between revenues and expenses.

Income Statement and Statement of Stockholders' Equity (Explanation: Net income from the Income Statement is reported in the Statement of Stockholders' Equity as part of the calculation of retained earnings.)

Net income appears in which two financial statements?

- Balance Sheet and Statement of Cash Flows

- Balance Sheet and Statement of Stockholders' Equity

- Income Statement and Statement of Cash Flows

- Income Statement and Statement of Stockholders' Equity

Management's discussion and analysis (Explanation: The management's discussion and analysis (MD&A) section typically includes management's views on significant events, trends, and uncertainties pertaining to the company's operations and resources.)

You are reading a particular section of a bank's annual report. This section provides the bank's views about the impact of an upcoming regulation on the banking industry as a whole and the bank in particular. Which section of the annual report are you reading?

- The income statement

- The statement of stockholders' equity

- Management's discussion and analysis

- Note disclosures to the financial statements

False (Explanation: Investors and creditors rely heavily on financial accounting information when making investment and lending decisions.)

Investors and creditors rely heavily on managerial accounting information in making investment and lending decisions.

Net income (Explanation: No single piece of company information better explains stock price performance than does financial accounting net income.)

Which of the following best explains a company's stock price performance?

- Dividends

- Net income

- Accounts receivable

- Preferred stock

Total liabilities (Explanation: A company's debt level is an important indicator of management's ability to respond to business situations and the possibility of bankruptcy)

Which of the following is an important indicator of a company management's ability to respond to business situations and the possibility of bankruptcy?

- Inventory

- Accumulated depreciation

- Total stockholders' equity

- Total liabilities

True (Explanation: Financial accounting serves two main functions: (1) it measures business activities, and (2) it communicates those measurements to investors and creditors.)

The main functions of financial accounting are to measure business activities and to communicate those measurements to investors and creditors.

International Accounting Standards Board (Explanation: The goal of the International Accounting Standards Board (IASB) is to create a single set of global accounting standards. The standards being developed and promoted by the IASB are called International Financial Reporting Standards (IFRS).)

The organization responsible for creating a single set of global accounting standards is the:

- International Accounting Standards Board

- Internal Revenue Service

- Financial Accounting Standards Board

- Securities and Exchange Commission

It set forth accounting and disclosure requirements for initial offerings of securities. (Explanation: The 1933 act sets forth accounting and disclosure requirements for initial offerings of securities (stocks and bonds).)

What was the objective of the 1933 Securities Act?

- It set forth accounting and disclosure requirements for initial offerings of securities.

- It provided for the regulation of auditors and the types of services they furnish to clients.

- It paved the way for the creation of the Public Company Accounting Oversight Board.

- It created a government agency, the Securities and Exchange Commission (SEC).

True (Explanation: If auditors find mistakes or fraudulent reporting behavior, they require the company to correct all significant information before issuing financial statements.)

If mistakes or fraudulent reporting behavior are discovered, auditors require the company to correct all significant information before issuing financial statements.

Tells about economic resources, claims to resources, and changes in resources and claims. (Explanation: Recall that financial accounting refers to accounting information that is provided to external users.)

The FASB has explicitly stated the specific objectives of financial accounting. Which of the following is not one of those objectives?

- Helps to predict cash flows.

- Tells about economic resources, claims to resources, and changes in resources and claims.

- It is useful to investors and creditors in making decisions.

- It is useful to company management in making decisions.

A code or moral system that provides criteria for evaluating right and wrong behavior. (Explanation: Investors, creditors, government, and the general public rely on general ethical behavior among those who record and report the financial activities of the business.)

Ethics is best described as:

- A consensus among different measures.

- The rules of financial accounting.

- A code or moral system that provides criteria for evaluating right and wrong behavior.

- Accounting information that is complete, neutral, and free from error.

materiality (Explanation: Materiality reflects the impact of financial accounting information on the decisions of investors and creditors.)

Based on the concept of _____, big companies probably do not record all their assets as assets.

- faithful representation

- materiality

- relevance

- reliability

Completeness (Explanation: Completeness means including all information necessary for faithful representation of the business activity the firm is reporting.)

Part of the inventory of memory chips of a semiconductor company is obsolete because of the launch of more advanced products. However, the company's management still carries this inventory at historical prices in its balance sheet. Which primary qualitative characteristic is being violated here?

- Neutrality

- Completeness

- Correctness

- Freedom from error

True (Explanation: The cost constraint indicates that financial accounting information is provided only when the benefits of doing so exceed the costs.)

According to the cost constraint, financial accounting information is provided when the benefits of providing the information exceed the costs.

Resources of a company

Assets

Amounts owed

Liabilities

Owner's claim to resources

Stockholder's Equity

Distribution to stockholders

Dividends

Sales of products or services to customers

Revenues

Costs of selling products or services

Expenses

Income Statement

How can I tell if a company is profitable?

False (Explanation: The two functions of financial accounting are to measure business activities and communicate those measurements to external parties for decision-making purposes.)

The two functions of financial accounting are to measure business activities and prepare tax returns.

external

A(n) ____________ transaction involves an exchange between the company and a separate economic entity.

Liabilities (Explanation:

The accounting equation is: Assets = ________ + Stockholders' Equity.

common stock and retained earnings.

The two components of stockholders' equity are

- assets and liabilities.

- common stock and retained earnings.

- revenues and dividends.

- retained earnings and notes payable.

Revenues, expenses, and dividends

What are the three components of retained earnings?

- Assets, liabilities, and stockholders' equity

- Assets, liabilities, and income

- Common stock, net income, and notes payable

- Revenues, expenses, and dividends

communicate information to external parties for decision making purposes & measure business activities of the company.

Select all that apply

The two roles of financial accounting are to:

- communicate information to external parties for decision making purposes.

- report cost accounting information for internal decisions.

- measure business activities of the company.

- measure and report results to taxing authorities.

revenue

Consistent with the _______ recognition principle, companies record revenue at the time goods are provided to customers.

True (Explanation: An external transaction occurs with a separate economic entity.)

An external transaction is a transaction the firm conducts with a separate economic entity.

assets.

Accounts receivable are

- a component of net income and retained earnings.

- stockholders' equity accounts.

- liabilities.

- assets.

Stockholders' Equity

The accounting equation is: Assets = Liabilities +

- Retained Earnings

- Revenues

- Creditors' Interest

- Stockholders' Equity

- Net Income

debit

In a double-entry accounting system, the _____ represents the left side of the account.

Retained earnings & Common stock

Select all that apply

Which of the following are stockholder equity accounts?

- Accounts receivable

- Inventory

- Retained earnings

- Common stock

- Notes payable

Revenue

Which type of account is increased with a credit?

- Dividend

- Revenue

- Asset

- Expense

revenues, expenses & dividends

Select all that apply

The types of accounts which affect retained earnings are

- revenues.

- expenses.

- dividends.

- liabilities.

- assets.

journal

A chronological record of all economic events affecting a firm are recorded in a(n)

- journal

- ledger

- balance sheet

- trial balance

provided goods or services to a customer.

Ursula Company's bookkeeper records revenue relating to a customer transaction. This indicates that the company

- provided goods or services to a customer.

- received a cash payment from a customer.

- signed a contract with a customer.

the amounts owed by customers.

Accounts receivable are assets which represent

- the amounts owed by customers.

- the amounts owed to suppliers.

- total revenues for the period.

- net income for the period.

ledger

A transaction is initially recorded in the journal, and then subsequently posted to the general:

posting

The process of transferring information from the journal to the ledger is referred to as

- transaction analysis.

- preparing journal entries.

- preparing adjustments.

- posting.

Expense

Which type of account is increased with a debit?

- Liability

- Expense

- Revenue

- Stockholders' Equity

account; general ledger

A(n) ______ is maintained for each financial statement item, whereas a(n) ______ contains all of the accounts of the company.

- account; general ledger

- general ledger; journal

- account; journal

- journal; general ledger

chronological record of all transactions affecting a firm.

A journal provides a

- chronological record of all transactions affecting a firm.

- listing of all accounts used by a firm.

- summary of all the debits and credits made during the period.

provide in a single location the list of transactions affecting each account and the account's balance.

The purpose of a general ledger is to

- record a chronological listing of the accounts used by a particular company.

- record all transactions for a particular item.

- provide in a single location the list of transactions affecting each account and the account's balance.

the account title & columns for debits and credits.

Select all that apply

The type of information included in an account includes

- a posting reference.

- the account title.

- columns for debits and credits.

- a daily total.

False

A ledger provides a chronological record of all transactions affecting the firm.

Journal entries are instantly posted to the ledger

Which of the following represents a common advantage of a computerized accounting system?

- Journal entries are instantly posted to the ledger

- Ensures accuracy of all the accounts in the general ledger

- Prevents errors in the preparation of journal entries

General ledger

Which of the following contains a list of transactions affecting each account and the account's balance?

- Account

- General ledger

- General journal

Debit cash; credit common stock.

Carnival Company issues common stock to investors for $50,000. Which of the following is used to record this transaction?

- Debit cash; credit common stock.

- Debit cash; credit revenue.

- Debit common stock; credit retained earnings.

- Debit common stock; credit cash.

debits and credits.

An account should have an account title, account number, a place for the date of the transaction, and two columns for

- revenues and expenses.

- closing and post-closing.

- debits and credits.

- assets and liabilities.

Credit note payable & Debit cash

Select all that apply

Pluto Inc. borrows $3,000 from Second National Bank by signing a promissory note. Recording this transaction will include which of the following?

- Debit notes receivable

- Credit note payable

- Credit revenue

- Debit cash

False (Explanation: A trial balance is a list of all accounts and their balances showing debits equals credits. A balance sheet presents assets, liabilities, and stockholders' equity.)

A balance sheet is a list of all accounts and their balances showing that debits equals credits.

Credit common stock & Debit to cash

Select all that apply

Geo Corporation issues stock to investors for $100,000. Recording this transaction will include which of the following?

- Credit common stock

- Debit to cash

- Debit to retained earnings

- Credit revenues

credit to notes payable & debit to cash

Select all that apply

Roland Corporation borrows $10,000 from the bank by signing a promissory note. Recording this transaction will include:

- debit to accounts receivable

- credit to notes payable

- debit to cash

- credit to retained earnings

trial balance

A list of all accounts and their balances at a particular date showing that debits equal credits is referred to as a(n)

Debit cash $3,000; credit note payable $3,000.

Rawlings Corp. borrows $3,000 on a note payable from Third National Bank. Which of the following is used to record this transaction?

- Debit note payable $3,000; credit note receivable $3,000.

- Debit cash $3,000; credit note payable $3,000.

- Debit cash $3,000; credit note receivable $3,000.

- Debit account receivable $3,000; credit note payable $3,000.

Accounts Payable

Which of the following is not an asset account?

- Accounts Payable

- Cash

- Equipment

- Supplies

A change in marketing strategy

Which of the following events will not pose an immediate impact on the accounting equation of a retail company?

- Sale of merchandise

- A change in marketing strategy

- Payment of employee salaries

- Purchase of supplies

Palmer Corporation borrows $40,000 cash by signing a note with the bank. Which of the following statements correctly shows the effect of this transaction on the accounting equation?

Assets will increase by $40,000, liabilities will increase by $40,000, and stockholders' equity will remain unchanged

Bell Company purchased supplies for $700 cash. Which of the following statements correctly shows the effect of this transaction on the accounting equation?

Assets will remain unchanged, liabilities will remain unchanged, and stockholders' equity will remain unchanged

An increase in revenues increases net income, and net income increases stockholders' equity.

True

Amber Corporation provided services to customers on account for $26,000. Which of the following statements correctly shows the effect of this transaction on the accounting equation?

Assets will increase by $26,000, liabilities will remain unchanged, and stockholders' equity will increase by $26,000

Beta Company paid utilities expense of $2,000 for the current month. Which of the following statements correctly shows the effect of this transaction on the accounting equation?

Assets will decrease by $2,000, liabilities will remain unchanged, and stockholders' equity will decrease by $2,000

A company borrows cash from a local bank. The company records this transaction with a:

debit to cash

Timmons Corporation purchases office supplies for $350 cash. How would this transaction be recorded?

Debit Supplies $350, credit Cash $350

A company bills customers for services provided. The company records this transaction with a:

Credit to Service Revenue

Livingston Company pays utilities of $2,500 in cash. How would this transaction be recorded?

Debit Utilities Expense $2,500, credit Cash $2,500

In preparing journal entries, it is acceptable for the amount of total debits to be higher than the amount of total credits.

False

A transaction involving a debit to an asset account should be posted on the right side of the T-account.

False

Reporting revenues when goods or services are provided and expenses in the period they are incurred to generate related revenues is referred to as ___________ -basis accounting

accrual

Under cash-basis accounting, (Select all that apply.)

- expenses are recorded in the period related revenue is generated.

- revenues are recorded when cash is received.

- expenses are recorded when cash is paid.

- revenues are recorded when goods or services are provided.

- revenues are recorded when cash is received.

- expenses are recorded when cash is paid.

A primary purpose of adjusting entries is to record events that

have occurred but that have not yet been recorded.

Prepaid rent appears in the ______.

balance sheet because it is an asset

After the adjusting entries have been completed, the adjusted balance in the Supplies Expense account represents the cost of supplies:

used during the accounting period

_____ are recorded in the period that goods and services are provided to customers and _____ are recorded in the period that costs are incurred while providing those goods and services.

Revenues; expenses

The process of allocating the cost of an asset to expense over the useful life of the asset is called

depreciation

Reporting revenues only when cash is received and expenses only when cash is paid is called the _____ basis of accounting

cash

After the adjusting entries have been completed, the adjusted balance in the Deferred Revenue account represents:

the amount of the sales or services still owed to the customer.

Adjusting entries: (Select all that apply.)

- are prepared at the beginning of the period.

- update the accounts to their proper balances.

- are needed before financial statement preparation.

- are required in cash-basis accounting only.

- update the accounts to their proper balances.

- are needed before financial statement preparation.

When a company records an adjusting entry for services previously recorded as Deferred Revenue, it records which two of the following?

- debit to Cash

- credit to Accounts Receivable

- credit to Cash

- credit to Deferred Revenue

- credit to Revenue

- debit to Deferred Revenue

- credit to Revenue

- debit to Deferred Revenue

Prepaid insurance is a(n) ______.

asset in the balance sheet

Supplies should be ______ and Supplies Expense should be ______ for the cost of supplies used up during the period.

decreased; increased

Which of the following statements describes the effect that adjusting entries may have on liabilities?

Adjusting entries increase liabilities for the amount of any accrued and unpaid expenses at the end of the period.

Depreciation is an allocation of the ______ of buildings, vehicles, and equipment to expense over time as they are used.

cost

If an adjusting entry's credit is to a liability account, then the debit must be to ______.

expense

Deferred revenue is a(n) ______.

liability

_________ is defined as the "cost of borrowing money."

interest

The adjusting entry for a deferred revenue includes a debit to a(n) ______ account and a credit to a(n) _____ account.

liability; revenue