ACC 231 Exam #1 Notes

Which of the following is the most significant current source of generally accepted accounting principles?

FASB

The capital allocation process uses what type of accounting information to attract investment capital?

Timely, relevant information

The due process system employed by the Financial Accounting Standards Board

Enables interested parties to express their views on issues under consideration

Morgan is researching a very specific topic. He wants to find the exact area in which his topic is discussed in the Codification. What area should he search to find this information?

Paragraph

Joe is one of the lead accountants for his company. Last month he was pressured to prepare the financial reports more quickly than usual, which led to errors that went undetected. Joe’s manager was very upset about this, and explained that he was negatively impacting the whole company with his mistakes. Why does the manager react in this manner?

The resources at Joe’s company are limited, and financial reports that are timely and reliable will help attract investment capital

How did the role of the AICPA change after the establishment of the FASB?

The AICPA no longer has formal involvement in the accounting standard setting process.

Fill in the blank: Assumptions, principles, and cost constraints can be used to describe the ________ based on the accounting conceptual framework.

Present reporting environment

Which of the following increases when accountants rely on a conceptual framework?

A user’s understanding of financial reporting

Which aspects of the conceptual framework help ensure the financial reporting objective(s) are met that include which of the following

Qualitative characteristics, elements, and recognition, measurement, and disclosure

A company may need to submit general-purpose financial reports in order to

Obtain loans and other types of credit

Which of the following statements BEST reflects the economic entity assumption in accounting?

The financial activity of a business enterprise must be kept separate and distinct from its owners and any other business unit

Meg is reviewing documents regarding a company that will very likely be liquidated soon. Which assumption is no longer applicable?

The going concern assumption

Dave and Kelly are discussing how quickly products now become obsolete in their industry. David believes this will make it more difficult to provide timely information. Is he correct?

Yes, it makes it more difficult for the company to define an appropriate time period

An implication of the going concern assumption could be

• Depreciation and amortization policies are justifiable and appropriate.

• The current-noncurrent classification of assets and liabilities is justifiable and significant.

• The historical cost principle is credible.

The going concern assumption recognizes

Depreciation over an asset’s life.

Accountants often have to choose between

Allowable alternatives

Hill Properties updates its online financial reports each time it lists or sells a property, even if it is not time for its normal quarterly report. Which financial reporting challenge is Hill Properties most interested in addressing?

Timeliness

Jennifer got caught in an ethical situation because it was not obvious until it was too late. What characteristic of ethical dilemmas does this situation embody?

Ethical dilemmas often build gradually

It would be inaccurate to say that one of the following is a future challenge for financial reporting. Which one would it be?

Recording current liabilities

One problem with current financial statements of public companies is that the most frequent issuance of statements is provided

Quarterly

When companies concentrate primarily on maximizing the bottom line, what impact does it have on accountants?

It can create a stressful work environment prone to conflict

Which of the following explains the purpose of the International Accounting Standards Board?

To provide a set of accounting standards to be used globally

Because financial reports can be complex and use technical language, many financial reports today lack

Understandability

It is true that

Politics and political pressure affect GAAP

Fill in the blank: Due to accounting scandals at companies like Enron, Xerox, and WorldCom, the ________ Act was passed.

Sarbanes-Oxley

Runa runs a company in Norway that is listed with a U.S stock exchange. What accounting standards will Runa’s company likely use?

IFRS

Jonas is the CFO for his company. For more than 10 years he has been personally reviewing the company’s financial statements to ensure they are correct. This was not an expectation of his position 25 years ago. What is responsible for this change?

The Sarbanes-Oxley Act

Paul is an accountant at a company that has recently issued its financial statements. The public feels that more information should be included in the statements, but Paul believes that he and the other accountants provided all of the information that they could. What is this an example of?

The expectations gap

An ethical concern for accountants may be

Earnings manipulation

It would be inaccurate to say that GAAP is a product of

congressional legislation

In response to concerns about reporting nonfinancial information, some companies are preparing reports on the company’s

Sustainability efforts

Ethical decisions are made more difficult because

There is no comprehensive system to provide guidelines

The Sarbanes-Oxley Act

Increased resources for the SEC to combat fraud

Companies that prepare reports about their sustainability efforts are attempting to address the financial reporting challenge of

Nonfinancial measurements

Matthew is an accountant at Larson Enterprises. He frequently feels pressured to make unethical accounting decisions in order to report a higher profit for the company. What situation is most likely to make him feel this way?

The CEO persistently pressures the CFO to record revenues before it is appropriate to do so

Fill in the blank: __________ involve a single entity, while __________ involve both an entity and an outside party.

Internal events; external events

What is the primary difference between internal events and external events?

Internal events occur within an entity, while external events involve interaction between an entity and outside forces

Which of the following most accurately describes the accounting cycle?

A series of steps to collect and process transaction data and communicate financial information to decision-makers

Fill in the blank: __________ is the series of steps that, taken together, make up the

The accounting cycle

A journal entry to record rent received in advance by a company will include which of the following?

Credit to Unearned Rent Revenue

Which of the following is how account information is shown in the basic form of a journal entry?

Debit account entered first at the left margin

A trial balance prepared at year-end showed Puccinelli Co.'s debit total exceeding the credit total by $6,300. This discrepancy could have been caused by

The balance of $700 in the Equipment account being entered as a debit of $7,000

If Havana Corporation pays cash dividends of $600, the entry for this transaction will include a debit of $600 to which of the following accounts?

Dividends

If Jackson Enterprises recorded journal entries for the issuance of common stock for $160,000, a payment of $52,000 on accounts payable, and a payment of salaries and wages expense of $84,000, the net effect of these entries on stockholder’s equity would be an

Increase of $76,000.

Which of the following is not a principal purpose of an unadjusted trial balance?

It proves that debits and credits were properly entered in the ledger accounts

If an adjusting entry to accrue a revenue item were not made, which of the following would result?

An understatement of revenues and an understatement of assets

Which of the following is an example of an accrued expense?

Property taxes incurred during the year, to be paid in the first quarter of the subsequent year

Which of the following would not be a correct form for an adjusting entry?

A debit to an asset and a credit to a liability

On December 31, 2028, Milford Company's account balances for Accounts Receivable and the Allowance for Doubtful Accounts are $480,000 debit and $900 credit. Sales during 2029 were $1,750,000. It has determined bad debt expense to be $15,600. Which of the following amounts would be the credit to the allowance account in the adjusting entry at the end of 2029?

$15,600

On December 1, 2028, Port Corporation loaned $450,000 to another corporation and received a 3-month, 8% interest-bearing note with a face value of $450,000. On December 31, 2028, the adjusting entry recorded by Port should be

Debit Interest Receivable and credit Interest Revenue, $3,000

Deferred, or unearned, revenue is

Cash received before revenue is recognized

Which of the following journal entries is appropriate when a company receives payment in advance for goods or services?

Debit cash and credit a liability account

A prepaid expense is

An expense paid in cash before it is used/consumed

Assets AND expenses will not be affected by the recording of which of the following adjusting entries?

Customer deposits for future services

Which one of the following explains how prepaid expenses for rent and supplies expire?

Rent expires with the passage of time while Supplies expire through use and consumption

If an expense has been incurred and consumed but not yet paid for or recorded, the end-of-period adjusting entry would involve which of the following?

A liability account and an expense account

Which of the following statements accurately describes an adjusting entry?

An adjusting entry affects one balance sheet account and one income statement account

The formula for computing interest expense on a note for an adjusting entry is: (face value of note × annual rate × a fraction). Which of the following is the fraction?

Length of time note is outstanding (in months) ÷ 12 months

A debit to an expense account and a credit to a prepaid account would result in an adjusting entry. This would capture the accrued expense and result in an increase (debit) to an expense account and a increase (credit)to a liability account.

A debit to an expense account and a credit to a liability account

On September 1, 2028, the Milo Corporation received $24,000 for one year’s rent in advance and recorded the transaction with a credit to Unearned Rent Revenue. What adjusting entry should the Milo make on December 31, 2028?

Debit Unearned Rent Revenue and credit Rent Revenue, $8,000

On June 1, 2028, Telos Corporation paid $60,000 for one year’s rent in advance and recorded the transaction with a debit to Prepaid Rent. What adjusting entry should Telos make on December 31, 2028?

Debit Rent Expense and credit Prepaid Rent, $35,000

An omitted adjusting entry to record depreciation expense would result in

An overstatement of assets and an overstatement of stockholder’s equity

If an adjusting entry to accrue an expense were not made, which of the following would result?

An understatement of expenses and an understatement of liabilities

Fill in the blank: Blakely Enterprises had revenues of $300,000, expenses of $200,000, and dividends of $45,000. When closing Income Summary to Retained Earnings, the company should _____________ to Retained Earnings.

Credit $100,000

Which of the following accounts will have a zero balance after closing entries have been posted?

Dividends

Which of the following is the primary source used by a firm when preparing its financial statements?

Adjusted trial balance

The purpose of closing entries is to

Reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period.

Fill in the blanks: When preparing closing journal entries, there are typically ___________ entries.

Four

Melanie recorded and posted entries to several accounts at the beginning of an accounting period. This is an example of a(n)

Reversing entry

Which account is only used during the closing process?

Income summary

If the balance of the retained earnings account increases during the period, what will be the effect of the retained earnings balance of the balance sheet?

It will be greater than the balance at the beginning of the period

Fill in the blank: The Income Summary account is only used during the __________ process.

Closing

Of the following changes in a firm’s adjusted trial balance, which would affect the firm’s retained earnings statement and balance sheet but not its income statement?

An increase in common stock issued

Fill in the blank: When preparing its __________, a firm should use information directly from the revenue and expense accounts listed on its adjusted trial balance.

Income statement

Fill in the blank: ____________  is (are) generally only prepared at the end of a company’s annual accounting period.

A post-closing trial balance

Fill in the blank: _________ accounts are always debited during the closing process.

Revenue

Which of the following items is reported on the balance sheet but not on the adjusted trial balance?

The ending retained earnings balance

As the cash amount listed on a firm’s adjusted trial balance increases, the net income amount listed on the firm’s income statement will

Behave in no predictable manner

Fill in the blank: The following accounts all show balances on a firm’s adjusted trial balance. Of these four accounts, only the ________ account will show a different balance on the adjusted trial balance than on the firm’s balance sheet.

Retained earnings

Fill in the blank: The assets portion of Daisy Corporation’s May balance sheet shows a total value of $184,000. In order for the firm’s balance sheet to correctly balance, the __________ portion of the balance sheet must also show a total value of $184,000.

Liabilities and stockholder’s equity

When closing the books for a corporation,

Revenues, expenses, and the Dividends account are closed to the Income Summary account

Ransdell Corporation estimates that $15,000 of the accounts receivable will be uncollectible. Where will these related expense for the accounts be reported in Ransdell’s financial statements?

On the income statement as bad debt expense

Assuming all other entries on its adjusted trial balance and income statement remain constant, as a firm’s cost of goods sold decreases, its

Net income and retained earnings will both increase

If a corporation opts not to distribute any of its net income in the form of dividends, then it will

Retain that income in the business

Last year, Potter Paints had total selling and administrative expenses of $12,000. When compiling the income statement for the year, Potter should

Deduct this $12,000 from the firm’s gross profit on sales amount

In what way do the financial statements for a merchandiser differ from those for a service company?

The merchandiser’s financial statements will account for gross profit on sales

What is the “single-step” involved in single-step income statements?

Subtracting expenses from revenues

Which of the following is true about condensed income statements?

They contain line items that must be described elsewhere in the statement or the notes

Fill in the blanks: A company’s ________ performance can be separated from non-recurring sources of income to help determine the risk associated with achieving future cash flows.

Operating

Fill in the blanks: Because income measurement involves ________, users may not be able to compare net income from different companies directly.

Judgment

Fill in the blank: _____________________ relates the income tax expense of a fiscal period to the specific items that give rise to the amount of the tax provision.

Intraperiod tax allocation

When Dorman Company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as

An amount after continuing operations.

In 2028, Austin Enterprises reported net income of $674,000. It declared and paid preferred stock dividends of $200,000 and common stock dividends of $75,000. During 2028, Austin Enterprises had a weighted-average of 300,000 common shares outstanding. Compute Austin Enterprises’ 2028 earnings per share.

$1.58

Income before taxes is $3,425,000. Net sales are $6,500,000, cost of goods sold is $1,800,000, and the loss on sale of investments is $600,000. What is the amount of selling and administrative expenses assuming no other expenses or other expenses and losses?

$675,000

Which of the following occurrence would have no effect on 2028 net income (assuming that all amounts involved are material)?

The collection in 2028 of a receivable from a customer whose account was written off in 2027 by a charge to the allowance account

Which of the following would an accountant report on both the Statement of Stockholders’ Equity and the Balance Sheet?

Accumulated other comprehensive income

George Barton, an accounting student, took a quiz and answered that all of the following are acceptable ways to display the components of other comprehensive income. For which of the following is he in error?

The combined statement of retained earnings

What is the title of the account credited when a company transfers an amount of restricted retained earnings into a different account?

Appropriated Retained Earnings

What is the purpose of the post-closing trial balance?

To prove the equality of the permanent account balances that are carried forward into the next accounting period

In order to comply with contractual requirements or current necessity, companies may restrict retained earnings.

True