Financial & Managerial Accounting 15th Edition By Williams – Test Bank

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Financial & Managerial Accounting 15th Edition By Williams – Test Bank

 

Chapter 02

Basic Financial Statements

 

True / False Questions

  1. A business entity is regarded as separate from the personal activities of its owners whether it is a sole proprietorship, a partnership, or a corporation.
    True    False

 

  1. Assets need not always have physical characteristics as do buildings, machinery, or inventory.
    True    False

 

  1. The going concern principle assumes that the business will continue indefinitely.
    True    False

 

  1. Notes payable and accounts payable are written promises to pay an amount owed by a certain date. Notes payable generally have interest, while accounts payable generally do not.
    True    False

 

  1. A net profit results from having more revenues than liabilities.
    True    False

 

  1. The sale of additional shares of capital stock will cause treasury stock to increase.
    True    False

 

  1. Articulation between the financial statements means that they relate closely to each other.
    True    False

 

 

  1. Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford.
    True    False

 

  1. In a business organized as a corporation, it is not necessary to list the equity of each stockholder on the balance sheet.
    True    False

 

  1. Total assets must always equal total liabilities plus total owners’ equity.
    True    False

 

  1. A cash flows statement reports revenue and expense activities for a specific time period such as one month or one year.
    True    False

 

  1. Any business event that might affect the future profitability of a business should be reported in its balance sheet.
    True    False

 

  1. Total assets plus total liabilities must equal total owners’ equity.
    True    False

 

  1. The practice of showing assets on the balance sheet at their cost, rather than at their current market value is explained, in part, by the fact that cost is supported by objective evidence that can be verified by independent experts.
    True    False

 

 

  1. The realization principle states that the activities of an entity should be kept separate from those of its owner.
    True    False

 

  1. The entity principle states that the affairs of the owners are not part of the financial operations of a business entity and should be separated.
    True    False

 

  1. The accounting equation may be stated as “assets minus liabilities equals owners’ equity.”
    True    False

 

  1. A transaction that causes an increase in an asset may also cause a decrease in another asset, an increase in a liability, or an increase in owners’ equity.
    True    False

 

  1. The collection of an account receivable will cause total assets to decrease.
    True    False

 

  1. The payment of a liability causes an increase in owners’ equity.
    True    False

 

  1. When a business borrows money from a bank, the immediate effect is an increase in total assets and a decrease in liabilities or owners’ equity.
    True    False

 

  1. The purchase of an asset, such as office equipment, for cash will cause owners’ equity to decrease.
    True    False

 

 

  1. The owner of a sole proprietorship is personally liable for the debts of the business, whereas the stockholders of a corporation are not personally liable for the debts of the business.
    True    False

 

  1. If a company purchases equipment with cash, its total assets will increase.
    True    False

 

  1. If a company purchases equipment by issuing a note payable, its total assets will not change.
    True    False

 

  1. It is not unusual for an entity to report a significant increase in cash from operating activities, but a decrease in the total amount of cash.
    True    False

 

  1. The cash flows statement provides a link between two balance sheets by showing how net income (or loss) has changed owners’ equity from one balance sheet date to the next.
    True    False

 

  1. According to the Sarbanes-Oxley Act of 2002, internal controls must be audited by the same accounting firm that audits the financial statements.
    True    False

 

  1. The Public Company Accounting Oversight Board was created by the American Institute of CPAs to oversee the public accounting profession.
    True    False

 

 

  1. The major outgrowth from business failures and allegations of fraudulent financial reporting during the 1990’s was the passage of the Securities and Exchange Act.
    True    False

 

 

Multiple Choice Questions

  1. Which of the following best describes liquidity?
    A. The ability to increase the value of retained earnings.
    B. The ability to pay the debts of the company as they become due.
    C. Being able to buy everything the company requires for cash.
    D. Purchasing everything the company requires on credit.

 

  1. Profitability may be defined as:
    A. The ability to pay the debts of the company as they fall due.
    B. The ability to increase retained earnings.
    C. Distributing dividends.
    D. Having excess cash.

 

  1. The principle of adequate disclosure means that a company should disclose:
    A. Only the important monetary information.
    B. All confidential information regarding the company.
    C. Any financial facts that a reasonably informed person would consider necessary for the proper interpretation of the financial statements.
    D. Only subsequent events.

 

  1. Blue Wholesale Shirt Co. sold shirts to Pink Retail Shoppe. The owner of Pink Retail said she would pay Blue at a later date, which Blue Wholesale agreed to. Blue Wholesale Shirt Co. is considered to be a:
    A. borrower.
    B. liability.
    C. creditor.
    D. debtor.

 

 

  1. Owners’ equity in a business increases as a result of which of the following?
    A. Payments of cash to the owners.
    B. Losses from unprofitable operation of the business.
    C. Earnings from profitable operation of the business.
    D. Borrowing from a commercial bank.

 

  1. Owners’ equity in a business decreases as a result of which of the following?
    A. Investments of cash by the owners.
    B. Profits from operating the business.
    C. Losses from unprofitable operation of the business.
    D. Repaying a loan to a commercial bank.

 

  1. Which one of the following is not considered one of the three primary financial statements?
    A. Balance sheet.
    B. Income statement.
    C. Statement of cash flows.
    D. Statement of budgeting activities.

 

  1. Which of the following is the primary objective of financial statements?
    A. Providing managers with detailed information tailored to the managers’ specific information needs.
    B. Providing users outside the business organization with information about the company’s financial position and operating results.
    C. Reporting to the Internal Revenue Service the company’s taxable income.
    D. Indicating to investors in a particular company the current market values of their investments.

 

  1. Which of the following is descriptive of the proper form of a balance sheet?
    A. The heading sets forth the period of time covered.
    B. Cash is always the first asset listed, followed by permanent assets (such as land and buildings), and finally by assets such as receivables and supplies.
    C. Liabilities are listed before owners’ equity.
    D. A subtotal for total assets plus total liabilities is shown.

 

 

  1. A balance sheet is designed to show:
    A. How much a business is worth.
    B. The profitability of the business during the current year.
    C. The assets, liabilities, and owners’ equity of a business as of a particular date.
    D. The cost of replacing the assets and of paying off the liabilities at December 31.

 

  1. The way in which financial statements relate is known as:
    A. Solvency.
    B. Objectivity.
    C. Articulation.
    D. Entity.

 

  1. If total assets equal $270,000 and total liabilities equal $202,500, the total owners’ equity must equal:
    A. $472,500.
    B. $67,500.
    C. $270,000.
    D. Cannot be determined from the information given.

 

  1. Which of the following best defines an asset?
    A. Something with physical form that is valued at cost in the accounting records.
    B. An economic resource owned by a business and expected to benefit future operations.
    C. An economic resource representing cash or the right to receive cash in the near future.
    D. Something owned by a business that has a ready market value.

 

  1. To appear in a balance sheet of a business entity, an asset need not:
    A. Be an economic resource.
    B. Have a ready market value.
    C. Be expected to benefit future operations.
    D. Be owned by the business.

 

 

  1. If total assets equal $345,000 and total owners’ equity equal $120,000, then total liabilities must equal:
    A. $465,000.
    B. $225,000.
    C. $120,000.
    D. Cannot be determined from the information given.

 

  1. A balance sheet:
    A. Provides owners, investors, and other interested parties with all the financial information they need to evaluate the financial strength, profitability, and future prospects of a given business entity.
    B. Shows the current market value of the owners’ equity in the business at the balance sheet date.
    C. Assists creditors in evaluating the debt-paying ability of a business by showing the assets and liabilities of the business combined with those of its owner (or owners).
    D. Shows the assets, liabilities, and owners’ equity of a business entity, valued in conformity with generally accepted accounting principles.

 

  1. Which of the following is correct if a company purchases equipment for $70,000 cash?
    A. Total assets will increase by $70,000.
    B. Total assets will decrease by $70,000.
    C. Total assets will remain the same.
    D. The company’s total owners’ equity will decrease.

 

  1. From an accounting viewpoint, when is a business considered an entity separate from its owner(s)?
    A. Only when organized as a sole proprietorship.
    B. Only when organized as a partnership.
    C. Only when organized as a corporation.
    D. In each of the above situations, the business is an accounting entity separate from the activities of the owner(s).

 

 

  1. If a company purchases equipment for $65,000 by issuing a note payable:
    A. Total assets will increase by $65,000.
    B. Total assets will decrease by $65,000.
    C. Total assets will remain the same.
    D. The company’s total owners’ equity will decrease.

 

  1. The valuation of assets in the balance sheet is based primarily upon:
    A. What it would cost to replace the assets.
    B. Cost, because cost is usually factual and verifiable.
    C. Current fair market value as established by independent appraisers.
    D. Cost, because in the event of liquidation, the assets would be sold at an amount equal to their original cost.

 

  1. Which of the following is not a generally accepted accounting principle relating to the valuation of assets?
    A. The cost principle – in general, assets are valued at cost, rather than at estimated market values.
    B. The objectivity principle – accountants prefer to use objective, rather than subjective, information as the basis for accounting information.
    C. The safety principle – assets are valued at no more than the value for which they are insured.
    D. The going-concern assumption – one reason for valuing assets such as buildings and equipment at cost rather than at their current market values is the assumption that the business will use these assets rather than sell them.

 

  1. Each year, the accountant for Southern Real Estate Company adjusts the recorded value of each asset to its market value. Using these market value figures on the balance sheet violates:
    A. The accounting equation.
    B. The stable-dollar assumption.
    C. The business entity concept.
    D. The cost principle.

 

 

  1. The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurant’s balance sheet. The reporting of this item in this manner violated the:
    A. Cost principle.
    B. Business entity concept.
    C. Objectivity principle.
    D. Going-concern assumption.

 

  1. Which of the following is correct when a corporation uses cash to pay for an expense?
    A. Total assets will decrease.
    B. Retained earnings will decrease.
    C. Owners’ equity will decrease.
    D. All three of the above statements are correct.

 

  1. If cash flows from operating activities is a negative amount:
    A. The company must have a net loss for the year.
    B. The company must have a net profit for the year.
    C. The company must have paid off more debts than it earned during the year.
    D. The company may have net income or a net loss for the year.

 

  1. Eton Corporation purchased land in 1990 for $190,000. In 2008, it purchased a nearly identical parcel of land for $430,000. In its 2008 balance sheet, Eton valued these two parcels of land at a combined value of $860,000. Reporting the land in this manner violated the:
    A. Cost principle.
    B. Principle of the business entity.
    C. Objectivity principle.
    D. Going-concern assumption.

 

 

  1. Bob Bertolucci, owner of Bob’s Bazaar, also owns a personal residence that costs $575,000. The market value of his residence is $725,000. During preparation of the financial statements for Bob’s Bazaar, the accounting principle most relevant to the presentation of Bob’s home is:
    A. The concept of the business entity.
    B. The cost principle.
    C. The going-concern assumption.
    D. The objectivity principle.

 

  1. Which of the following will not cause a change in the owners’ equity of a business?
    A. Payment of an interest free business debt.
    B. Withdrawal of cash by the owner.
    C. Sale of land at a profit.
    D. Losses from unprofitable operations.

 

  1. Which business organization is recognized as a separate legal entity under the law?
    A. Corporation.
    B. Sole proprietorship.
    C. Partnership.
    D. All business organizations are separate legal entities.

 

  1. The amount of owners’ equity in a business is not affected by:
    A. The percentage of total assets held in cash.
    B. Investments made in the business by the owner.
    C. The profitability of the business.
    D. The amount of dividends paid to stockholders.

 

  1. Decreases in owners’ equity are caused by:
    A. Purchases of assets and payment of liabilities.
    B. Purchases of assets and incurrence of liabilities.
    C. Payment of liabilities and unprofitable operations.
    D. Distributions of assets to the owner and unprofitable operations.

 

 

  1. Which of the following transactions would cause a change in owners’ equity?
    A. Repayment of the principal on a bank loan.
    B. Purchase of a delivery truck on credit.
    C. Sale of land on credit for a price above cost.
    D. Borrowing money from a bank.

 

  1. An expense is best defined as:
    A. Any payment of cash for the benefit of the company.
    B. Past, present, or future payments of cash required to generate revenues.
    C. Past payments of cash required to generate revenues.
    D. Future payments of cash required to generate revenues.

 

  1. If a transaction causes an asset account to decrease, which of the following related effects may occur?
    A. An increase of equal amount in an owners’ equity account.
    B. An increase in a liability account.
    C. An increase of equal amount in another asset account.
    D. An increase in the combined total of liabilities and owners’ equity.

 

  1. The payment of a business debt not including interest:
    A. Decreases total assets.
    B. Increases total liabilities.
    C. Increases the owners’ equity in the business.
    D. Decreases the owners’ equity in the business.

 

  1. The accounting principle that assumes that a company will operate in the foreseeable future is:
    A. Going concern.
    B. Objectivity.
    C. Liquidity.
    D. Disclosure.

 

 

  1. Deerpark Corporation recently borrowed $70,000 cash from its bank. Which of the following was unaffected by this transaction?
    A. Assets.
    B. Liabilities.
    C. Owners’ equity.
    D. Cash.

 

  1. Which of the following transactions would cause an increase in both assets and owners’ equity?
    A. Investment of cash in the business by the owner.
    B. Sale of land for a price less than its cost.
    C. Borrowing money from a bank.
    D. Sale of land for cash at a price equal to its cost.

 

  1. A transaction caused an increase in both assets and owners’ equity. This transaction could have been:
    A. A sale of service to a customer producing revenue.
    B. Sale of land for a price less than its cost.
    C. Borrowing money from a bank.
    D. Sale of land for cash at a price equal to its cost.

 

  1. Retained earnings is:
    A. The positive cash flows of a company.
    B. Net worth of a company.
    C. The owners’ equity that has accumulated as a result of profitable operations.
    D. Equal to the total assets of a company.

 

  1. A revenue transaction results in all of the following except:
    A. An increase in assets.
    B. An increase in owners’ equity.
    C. A positive cash flow in either the past, present, or future.
    D. An increase in liabilities.

 

 

  1. If a company has a profit:
    A. Assets will be equal to liabilities plus owners’ equity.
    B. Assets will be less than liabilities plus owners’ equity.
    C. Assets will be greater than liabilities plus owners’ equity.
    D. Owners’ equity will be greater than its assets.

 

  1. Which of the following activities is not a category into which cash flows are classified?
    A. Marketing activities.
    B. Operating activities.
    C. Financing activities.
    D. Investing activities.

 

  1. The change in owners’ equity from one balance sheet to the next is partially explained by the:
    A. Statement of cash flows.
    B. Statement of financial position.
    C. Income statement.
    D. Tax return.

 

  1. Capital stock represents:
    A. The amount invested in the business by stockholders when shares of stock were initially issued by a corporation.
    B. The owners’ equity for a business organized as a corporation.
    C. The owners’ equity accumulated through profitable operations that have not been paid out as dividends.
    D. The price paid by the current owners to acquire shares of stock in the corporation, regardless of whether they bought the shares directly from the corporation or from another stockholder.

 

 

  1. The balance sheet item that represents the portion of owners’ equity resulting from profitable operations of the business is:
    A. Accounts receivable.
    B. Cash.
    C. Capital stock.
    D. Retained earnings.

 

  1. Retained earnings appears on:
    A. The income statement.
    B. The balance sheet.
    C. The statement of cash flows.
    D. All three of the financial statements.

 

  1. Which of the following statements regarding liquidity and profitability is not true?
    A. If a business is unable to pay its debts as they come due, it is operating unprofitably.
    B. A business may be liquid, yet operate unprofitably for several years.
    C. A business may operate profitably, yet be unable to meet its obligations.
    D. In order to survive in the long-run, a business must both remain liquid and operate profitably.

 

  1. The concept of adequate disclosure means that:
    A. The accounting department of a business must inform management of the accounting principles used in preparing the financial statements.
    B. The company must inform users of any significant facts necessary for proper interpretation of the financial statements, including events occurring after the financial statement date.
    C. The independent auditors must disclose in the financial statements any and all errors detected in the company’s accounting records.
    D. The financial statements should include a comprehensive list of each transaction that occurred during the year.

 

 

  1. According to the Sarbanes-Oxley Act, CEOs and CFOs must certify to the accuracy of their company’s financial statements:
    A. Monthly and Quarterly.
    B. Quarterly and Annually.
    C. Monthly and Annually.
    D. CEOs and CFOs are not required to certify to the company’s financial statement; only CPA’s do.

 

  1. A strong statement of cash flows indicates that significant cash is being generated by:
    A. Operating activities.
    B. Financing activities.
    C. Investing activities.
    D. Effective tax planning.

 

At December 31, 2009, the accounting records of Braun Corporation contain the following items:
 

  1. If Capital Stock is $260,000, what is the December 31, 2009 cash balance?
    A. $86,000.
    B. $94,000.
    C. $46,000.
    D. $686,000.

 

 

  1. If Capital Stock is $320,000, total assets of Braun Corporation at December 31, 2009, amount to:
    A. $686,000.
    B. $926,000.
    C. $726,000.
    D. $106,000.

 

  1. If Cash at December 31, 2009, is $86,000, Capital Stock is:
    A. $260,000.
    B. $300,000.
    C. $620,000.
    D. $168,000.

 

  1. If Cash at December 31, 2009, is $26,000, total owners’ equity is:
    A. $160,000.
    B. $366,000.
    C. $606,000.
    D. $400,000.

 

  1. If Cash at December 31, 2009, is $66,000, total assets amount to:
    A. $606,000.
    B. $806,000.
    C. $662,000.
    D. $646,000.

 

At December 31, 2010, the accounting records of Hercules Manufacturing, Inc. contain the following items:
 

 

  1. If total assets of Hercules Manufacturing, Inc. are $556,000, Equipment is carried in Hercules Manufacturing accounting records at:
    A. $377,000.
    B. $179,000.
    C. $150,000.
    D. $90,000.

 

  1. If total assets of Hercules Manufacturing, Inc. are $556,000, Retained Earnings at December 31, 2010, must be:
    A. $811,000.
    B. $180,000.
    C. $221,000.
    D. $335,000.

 

  1. If Retained Earnings at December 31, 2010, is $140,000, total assets amount to:
    A. $98,000.
    B. $377,000.
    C. $475,000.
    D. $188,000.

 

  1. If Retained Earnings at December 31, 2010, is $100,000, Equipment is carried in Hercules Manufacturing, Inc. accounting records at:
    A. $42,000.
    B. $58,000.
    C. $43,500.
    D. $345,000.

 

  1. Assume the Equipment shown above was acquired by the business five years ago and has a book value of $156,000, but has a current appraised value of $200,000. Hercules Manufacturing’s Retained Earnings at December 31, 2010, amounts to:
    A. $533,000.
    B. $345,000.
    C. $198,000.
    D. $356,000.

 

 

At December 31, 2011 the accounting records of Gordon, Inc. contain the following items:
 

  1. If the Notes Payable is $10,000, the December 31, 2011 cash balance is:
    A. $60,000.
    B. $160,000.
    C. $30,000.
    D. $20,000.

 

  1. If the Notes Payable balance is $25,000, then the total assets of Gordon, Inc. at December 31, 2011 amount to:
    A. $27,500.
    B. $152,500.
    C. $120,000.
    D. $165,000.

 

  1. If the Cash balance at December 31, 2011 is $67,500, the Notes Payable balance is:
    A. $118,750.
    B. $47,500.
    C. $137,500.
    D. $140,000.

 

  1. If the Cash balance at December 31, 2011 is $62,500 then total liabilities amount to:
    A. $42,500.
    B. $140,000.
    C. $45,000.
    D. $182,500.

 

 

  1. Which of the following is correct if at the end of Crystal Imports’ first year of operations, assets are $800,000 and owners’ equity is $720,000?
    A. The owner must have invested $720,000 to start the business.
    B. The business must be operating profitably.
    C. Liabilities are $80,000.
    D. Liabilities are $1,520,000.

 

  1. During the current year, the assets of Wheatley’s increased by $362,000, and the liabilities increased by $260,000. The owners’ equity in the business must have:
    A. Decreased by $102,000.
    B. Decreased by $622,000.
    C. Increased by $102,000.
    D. Increased by $622,000.

 

  1. The total liabilities of Hogan’s Company on the balance sheet are $270,000; this amount is equal to three-fourths of the total assets. What is the amount of owners’ equity?
    A. $202,500.
    B. $90,000.
    C. $360,000.
    D. $630,000.

 

  1. Thirty percent of the total assets of Shanahan Corporation have been financed through borrowing. The total liabilities of the company are $600,000. What is the amount of owners’ equity?
    A. $180,000.
    B. $2,000,000.
    C. $1,400,000.
    D. $2,600,000.

 

 

  1. A transaction caused a $60,000 increase in both assets and total liabilities. This transaction could have been which of the following?
    A. Purchase of office equipment for $60,000 cash.
    B. Purchase of office equipment for $120,000, paying $60,000 cash and issuing a note payable for the balance.
    C. Repayment of a $60,000 bank loan.
    D. Investment of $60,000 cash in the business by the owner.

 

  1. If $9,600 cash and a $31,000 note payable are given in exchange for some office machines to be used in a business:
    A. Total assets are increased.
    B. Total liabilities are decreased.
    C. Total assets are decreased.
    D. The owners’ equity is increased.

 

  1. If during the current year, liabilities of Corbett’s Store increased by $220,000 and owners’ equity increased by $160,000, then:
    A. Assets at the end of the year total $380,000.
    B. Assets at the end of the year total $60,000.
    C. Assets increased during the year by $380,000.
    D. Assets decreased during the year by $60,000.

 

  1. If during the current year, liabilities of Hayden Travel decreased by $50,000 and owners’ equity increased by $75,000, then:
    A. Assets at the end of the year total $125,000.
    B. Assets at the end of the year total $25,000.
    C. Assets increased during the year by $25,000.
    D. Assets decreased during the year by $125,000.

 

 

  1. At the end of the current year, the owners’ equity in Barclay Bakery is $246,000. During the year, the assets of the business had increased by $120,000 and the liabilities had increased by $72,000. Owners’ equity at the beginning of the year must have been:
    A. $198,000.
    B. $174,000.
    C. $284,000.
    D. $438,000.

 

  1. At the end of the current year, the owners’ equity in Durante Co. is $360,000. During the year, the assets of the business had increased by $68,000 and the liabilities had increased by $118,000. Owners’ equity at the beginning of the year must have been:
    A. $410,000.
    B. $310,000.
    C. $546,000.
    D. $174,000.

 

  1. During the current year, the assets of Quality Stairs increased by $175,000 and the liabilities decreased by $15,000. If the owners’ equity in the business is $475,000 at the end of the year, the owners’ equity at the beginning of the year must have been:
    A. $335,000.
    B. $285,000.
    C. $665,000.
    D. $615,000.

 

  1. During the month of May, the Henderson Company had the following transactions:
    * Revenues of $60,000 were earned and received in cash.
    * Bank loans of $9,000 were paid off.
    * Equipment of $20,000 was purchased.
    * Expenses of $36,800 were paid.
    * Stockholders purchased additional shares for $22,000 cash.
    A statement of cash flows for May would report net cash flows from operating activities of:
    A. $60,000.
    B. $16,200.
    C. $23,200.
    D. $20,000.

 

 

Astoria Co. had the following transactions during the month of August:
 

  1. What amount of net income will be reported on an income statement for the month of August?
    A. $20,000.
    B. $7,500.
    C. $0.
    D. $33,500.

 

  1. At the beginning of August, 2010, owners’ equity in Astoria was $160,000. Given the transactions of August, what will owners’ equity be at the end of the month?
    A. $167,500.
    B. $150,500.
    C. $193,500.
    D. $158,000.

 

  1. For the month of August, net cash flows from operating activities for Astoria were:
    A. $33,500.
    B. $7,500.
    C. $20,000.
    D. $26,000.

 

 

  1. The major provisions of the Sarbanes-Oxley Act of 2002 include all of the following except:
    A. The creation of a new agency to oversee the public accounting profession.
    B. Restrictions on the types of consulting services that accounting firms can provide to audit clients.
    C. Reducing responsibility for audit committees when overseeing the financial reporting process.
    D. Requiring the chief executive office and the chief financial officer to certify the accuracy of their company’s financial statements.

 

During the month of August, the Boyce Company had the following transactions:
 

  1. A statement of cash flows for August, would report net cash flows from operating activities of:
    A. $26,000.
    B. $32,400.
    C. $40,000.
    D. $46,400.

 

  1. A statement of cash flows for August, would report net cash flows from financing activities of:
    A. $26,000.
    B. $32,400.
    C. $40,000.
    D. $46,400.

 

 

  1. A statement of cash flows for August, would report net cash flows from investing activities of:
    A. $26,000.
    B. $32,400.
    C. $40,000.
    D. $46,400.

 

  1. A statement of cash flows for August, would report an increase in cash of:
    A. $26,000.
    B. $32,400.
    C. $40,000.
    D. $46,400.

 

Waldorf Co. had the following transactions during the month of October:
 

  1. What amount of net income will be reported on an income statement for the month of October?
    A. $18,500.
    B. $22,500.
    C. $78,000.
    D. $100,500.

 

  1. At the beginning of October, owners’ equity in Waldorf was $480,000. Given the transactions of October, 2011, what will owners’ equity be at the end of the month?
    A. $480,000.
    B. $484,000.
    C. $502,500.
    D. $580,500.

 

 

  1. For the month of October, net cash flows from operating activities for Waldorf were:
    A. $18,500.
    B. $22,500.
    C. $78,000.
    D. $100,500.

 

During the month of February, the Fadness Company had the following transactions:
 

  1. A statement of cash flows for February, would report net cash flows from operating activities of:
    A. $4,000.
    B. $47,000.
    C. $53,600.
    D. $96,600.

 

  1. A statement of cash flows for February, would report net cash flows from financing activities of:
    A. $4,000.
    B. $47,000.
    C. $53,600.
    D. $96,600.

 

 

  1. A statement of cash flows for February, would report net cash flows from investing activities of:
    A. $4,000.
    B. $47,000.
    C. $53,600.
    D. $96,600.

 

  1. A statement of cash flows for February, would report an increase in cash of:
    A. $4,000.
    B. $47,000.
    C. $53,600.
    D. $96,600.

 

 

Essay Questions
 

  1. Accounting terminology
    Listed below are nine technical accounting terms introduced in this chapter:

    Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer “None” if the statement does not correctly describe any of the terms. Do not use a term more than once.
    (A.) Having the financial ability to pay debts as they become due.
    (B.) An assumption that a business will operate in the foreseeable future.
    (C.) Economic resources owned by businesses that are expected to benefit future operations.
    (D.) The debts or obligations of a business organization.
    (E.) Assets = Liabilities + Owners’ Equity
    (F.) The principle which states that assets are valued in the balance sheet at their historical cost.
    (G.) A residual amount equal to assets minus liabilities.

 

 

 

 

  1. Accounting equation
    (A.) During the current year, the assets of Duffy Stationery increased by $650,000 and the liabilities decreased by $340,000. What was the change in owners’ equity during the year?
    (B.) The owners’ equity of Graham Interiors appears on the balance sheet as $720,000 and is equal to one-fourth of total assets. Compute the amount of total liabilities.
    (C.) At the end of the year, the owners’ equity in Scott Mfg. amounted to $845,000. During 2009, the assets of the business increased by $515,000 and the liabilities increased by $205,000. The owners’ equity at the beginning of 2009 was how much?

 

 

 

 

 

  1. Effects of transactions on elements of the accounting equation. Some of the transactions carried out by Tudor Wholesale during the first month of the company’s operations are listed below. You are to determine the effect of each transaction on the total assets, the total liabilities, and the owners’ equity. Prepare your answer in columnar form, identifying each transaction by letter and using the symbols (+) for increase, (-) for decrease, and (NC) for no change. An answer is provided for the first transaction to serve as an example.

 

 

 

 

 

  1. Effects of transactions on elements of the accounting equation. Some of the transactions carried out by Tsang Company during the first month of the company’s operations are listed below. You are to determine the dollar effect of each transaction on the total assets, the total liabilities, and the owners’ equity of Tsang Company. Use the symbols (+) for increase, (?) (-) for decrease, and (NC) for no change. An answer is provided for the first transaction to serve as an example.

 

 

 

 

 

  1. List the following accounts in the order that they would appear in a balance sheet.
    Capital Stock
    Equipment
    Accounts Receivable
    Retained Earnings
    Revenue
    Accounts Payable
    Cash
    Rent Expense

 

 

 

 

  1. Computation of assets, liabilities, and owners’ equity after a series of transactions. On April 30, 2009, the balance sheet of China Collectibles showed total assets of $700,000, total liabilities of $400,000, and owners’ equity of $300,000. The following transactions occurred in May of 2009:
    (1) Capital stock was issued in exchange for $165,000 cash.
    (2) The business purchased equipment for $360,000, paying $160,000 cash and issuing a note payable for $200,000.
    (3) The business paid $70,000 of its accounts payable.
    (4) The business collected $54,000 of its accounts receivable.
    Compute the following as of May 31, 2009:
    (A.) Total assets $___________
    (B.) Total liabilities $___________
    (C.) Owners’ equity $___________

 

 

 

 

 

  1. Computation of assets, liabilities, and owners’ equity after a series of transactions. The December 31, 2009 balance sheet of Charles Realty reported total assets of $900,000, total liabilities of $350,000, and owners’ equity of $550,000. The following transactions occurred in January of 2010:
    (1) The business purchased land for $250,000, paying $100,000 cash and issuing a note payable for the balance.
    (2) The business collected accounts receivable totaling $45,000.
    (3) The business sold land costing $50,000 for $60,000 cash.
    (4) The business paid $50,000 of the note payable.
    Compute the following at January 31, 2010:
    (A.) Total assets $__________
    (B.) Total liabilities $__________
    (C.) Owners’ equity $__________

 

 

 

 

  1. Preparation of balance sheet
    Prepare the balance sheet as of December 31, 2009, for Gamma Company, from the following list of items which are arranged in random order. You must compute the amount for accounts payable to complete the balance sheet.

 

 

 

 

 

  1. Preparation of balance sheet after a series of transactions
    The balance sheet was as follows for Custom Ceramics on February 1, 2010:

    During the first week of February, the following transactions occurred:
    * The business used cash to pay off $5,000 of its accounts payable. (No payment was made on the notes payable.)
    * Additional capital stock was issued to Joan Custom for $15,000 cash.
    *Equipment was purchased on credit for $1,800
    * The business collected $4,000 cash from accounts receivable.
    Complete the balance sheet for Custom Ceramics as of February 8, 2010.

 

 

 

 

 

  1. Completion of balance sheet
    Use the following information to complete the balance sheet of Adelphi Construction as of December 31, 2010.
    (1) The company was organized on January 1, 2010 and has operated for the full year 2010.
    (2) Earnings were $275,000 and dividends of $70,000 were paid to stockholders.
    (3) Cash and accounts receivable together amount to one and one-half times as much as notes payable.

 

 

 

 

 

  1. Completion of balance sheet
    Use the following information to complete the December 31, 2009 balance sheet of Copper Supplies Company.
    (1) Owners’ equity as of January 1, 2009, totaled $175,000, which included capital stock of $150,000.
    (2) Additional capital stock was issued during 2009 in exchange for $40,000 cash.
    (3) Net income for 2009 amounted to $200,000; no dividends were paid during 2009.
    (4) Cash and accounts receivable together amount to 3 times as much as accounts payable.

 

 

 

 

 

  1. Effects of transactions on balance sheet items
    Show the effect of each of the seven listed transactions on the balance sheet items of Distinctive Draperies. Indicate the new balances after the transaction of May 2 and each subsequent transaction. The effects of the May 1 transaction are already filled in to provide you with an example.

 

 

 

 

 

 

  1. Effects of transactions on balance sheet items
    Show the effect of each of the seven listed transactions on the balance sheet items of Renaissance Investment Services, Inc. Indicate the new balances after the transaction of November 2 and each subsequent transaction. The effects of the November 1 transaction are already filled in to provide you with an example.

 

 

 

 

 

  1. An inexperienced accounting intern at Tasso Company prepared the following income statement for the month of July 2009:

    Instructions: Prepare a revised income statement in accordance with generally accepted accounting principles.

 

 

 

 

 

  1. From the following accounts and amounts prepare a balance sheet for the Swell Company for December 31, 2010. You must compute the amount for retained earnings to complete the balance sheet.

 

 

 

 

  1. Financial statements
    A set of financial statements includes three related accounting reports, or statements. In the space provided, list the names of three primary statements, and give a brief description of the accounting information contained in each.

 

 

 

 

 

  1. Development of generally accepted accounting principles
    (A.) What is meant by the phrase “generally accepted accounting principles”?
    (B.) Give the names of three organizations that currently play an active role in the development of accounting principles in the United States.

 

 

 

 

  1. Valuation of assets under generally accepted accounting principles. Under generally accepted accounting principles, the assets owned by a business are reported in the balance sheet at their historical cost. Identify and briefly explain two accounting principles other than the cost principle that support the valuation of assets at cost in the balance sheet.

 

 

 

 

  1. Forms of Business Organization
    State and describe the three most common forms of business organizations in the United States.

 

 

 

 

 

Multiple Choice Questions
 

  1. The financial statements of a business entity:
    A. Include the balance sheet, income statement, and income tax return.
    B. Provide information about the profitability and financial position of the company.
    C. Are the first step in the accounting process.
    D. Are prepared for a fee by the Financial Accounting Standards Board.

 

  1. A balance sheet is designed to show the financial position of an entity:
    A. At a single point in time.
    B. Over a period of time such as a year or quarter.
    C. At December 31 of the current year.
    D. At January 1 of the coming year.

 

  1. Accounts payable and notes payable are:
    A. Always less than the amount of cash a business owns.
    B. Creditors.
    C. Written promises to pay a certain amount, plus interest, at a definite future date.
    D. Liabilities.

 

  1. The balance sheet of Dotty Designs includes the following items:

    This list includes:
    A. Four assets and three liabilities.
    B. Five assets and three liabilities.
    C. Five assets and two liabilities.
    D. Six assets and two liabilities.

 

 

  1. An accounting entity may best be described as:
    A. An individual.
    B. A particular economic unit.
    C. A publicly owned corporation.
    D. Any corporation, regardless of size.

 

Presented below is the balance sheet for Sabino Family Dentistry on January 1 of the current year.

During the first few days of January, the following transactions occurred:
Jan 1 The business borrowed $99,000 from the bank, giving a note payable due in 90 days.
3 Additional capital stock was issued in exchange for $44,550 cash.
3 Equipment was purchased for $62,700 on credit.
5 The business collected $26,400 of its accounts receivable and paid $37,950 of its accounts payable.

 

  1. On January 6, total assets of the business amount to:
    A. $826,650.
    B. $994,950
    C. $957,000.
    D. $950,400.

 

 

  1. On January 6, owners’ equity amounts to:
    A. $752,400.
    B. $44,550.
    C. $796,950.
    D. $895,950.

 

  1. On January 6, the accounts payable balance is:
    A. $136,950.
    B. $36,300.
    C. $24,750.
    D. $99,000.

 

  1. On January 6, the accounts receivable balance is:
    A. $24,750.
    B. $38,775.
    C. $77,550.
    D. $63,525.

 

  1. On January 6, the cash balance is:
    A. $127,050.
    B. $138,600.
    C. $165,000.
    D. $202,950

 

 

Essay Questions
 

  1. Presented below is the balance sheet for Manhattan Family Dentistry on January 1 of the current year.

    During the first few days of January, the following transactions occurred:
    Jan 2 Equipment was purchased for $38,000 on credit.
    2 The business collected $16,000 of its accounts receivable and paid $23,000 of its accounts payable.
    3 The business borrowed $60,000 from the bank, giving a note payable due in 90 days.
    3 Additional capital stock was issued in exchange for $27,000 cash.
    Complete the following balance sheet for Manhattan Family Dentistry on January 4 of the current year.

 

 

 

 

 

  1. Complete the January 31, 20__, balance sheet of Countrywide Legal Services using the following information.
    (1) Stockholders’ equity at January 1, 20__, included capital stock of $140,000.
    (2) The land and building were purchased by the business for a total price of $200,000 on January 25, 20__, from a company forced out of business. On January 31, an appraiser valued the property at $260,000.
    (3) Additional capital stock was issued in exchange for $50,000 cash.
    (4) Retained earnings at January 31, 20___, amounted to $49,400.

 

 

 

 

 

Multiple Choice Questions
 

  1. A set of financial statements:
    A. Is intended to assist users in evaluating the financial position, profitability, and future prospects of an entity.
    B. Is intended to assist the IRS in determining the amount of income taxes owed by a business organization.
    C. Includes notes disclosing information necessary for the proper interpreta­tion of the statements.
    D. Is intended to assist investors and creditors in making decisions involving the allocation of economic resources.

 

  1. Which of the following statements is not consistent with generally accepted accounting principles relating to asset valuation?
    A. Many assets are originally recorded in accounting records at their cost to the business entity.
    B. Subtracting total liabilities from total assets indicates what the owner’s equity in the business is worth under current market conditions.
    C. Accountants assume that assets such as office supplies, land, and buildings will be used in business operations, rather than being sold at current market prices.
    D. Accountants prefer to base the valuation of assets upon objective, verifiable evidence rather than upon appraisals or personal opinion.

 

  1. Water world Boat Shop purchased a truck for $12,000, making a down payment of $5,000 cash, and signing a $7,000 note payable due in 60 days. As a result of this transaction:
    A. Total assets increased by $12,000.
    B. Total liabilities increased by $7,000.
    C. From the viewpoint of a short-term creditor, this transaction makes the business more solvent.
    D. This transaction had no immediate effect upon the owner’s equity in the business.

 

  1. A transaction caused a $15,000 decrease in both total assets and total liabilities. This transaction could have been:
    A. Purchase of a delivery truck for $15,000 cash.
    B. An asset with a cost of $15,000 was destroyed by fire.
    C. Repayment of a $15,000 bank loan.
    D. Collection of a $15,000 account receivable.

 

 

  1. Which of the following is (are) correct about a company’s balance sheet?
    A. It displays sources and uses of cash for the period.
    B. It is an expansion of the basic accounting equation: Assets = Liabilities + Owners’ Equity.
    C. It is sometimes referred to as a statement of financial position.
    D. It is unnecessary if both an income statement and statement of cash flows are available.

 

  1. Which of the following would you expect to find in a correctly-prepared income statement?
    A. Cash balance at the end of the period.
    B. Revenues earned during the period.
    C. Contributions by the owner during the period.
    D. Expenses incurred during the period to earn revenues.

 

  1. What information would you find in a statement of cash flows that you would not be able to get from the other two primary financial statements?
    A. Cash provided by or used in financing activities.
    B. Cash balance at the end of the period.
    C. Total liabilities due to creditors at the end of the period.
    D. Net income.

 

  1. Which of the following statements relating to the role of professional judgment in the financial reporting process are valid?
    A. Different accountants may evaluate similar situations differently.
    B. The determination of which items should be disclosed in notes to financial statements requires professional judgment.
    C. Once a complete list of generally accepted accounting principles is prepared, judgment need no longer enter into the financial reporting process.
    D. The possibility always exists that professional judgment later may prove to have been incorrect.

 

 

 

Chapter 02 Basic Financial Statements Answer Key
 

True / False Questions

  1. A business entity is regarded as separate from the personal activities of its owners whether it is a sole proprietorship, a partnership, or a corporation.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Reporting
Bloom’s: Understand
Difficulty: Easy
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

  1. Assets need not always have physical characteristics as do buildings, machinery, or inventory.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Easy
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

  1. The going concern principle assumes that the business will continue indefinitely.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Easy
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

 

  1. Notes payable and accounts payable are written promises to pay an amount owed by a certain date. Notes payable generally have interest, while accounts payable generally do not.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Easy
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. A net profit results from having more revenues than liabilities.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Easy
Learning Objective: 02-05 Explain how the income statement reports an enterprise’s financial performance for a period of time in terms of the relationship of revenues and expenses.
Topic: Income Statement

  1. The sale of additional shares of capital stock will cause treasury stock to increase.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Articulation between the financial statements means that they relate closely to each other.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-07 Explain how the statement of financial position (balance sheet); income statement; and statement of cash flows relate to each other.
Topic: Relationships among Financial Statements

  1. Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Measurement
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-08 Explain common forms of business ownership—sole proprietorship; partnership; and corporation—and demonstrate how they differ in terms of their presentation in the statement of financial position.
Topic: Forms of Business Organization

  1. In a business organized as a corporation, it is not necessary to list the equity of each stockholder on the balance sheet.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Reporting
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-08 Explain common forms of business ownership—sole proprietorship; partnership; and corporation—and demonstrate how they differ in terms of their presentation in the statement of financial position.
Topic: Forms of Business Organization

 

  1. Total assets must always equal total liabilities plus total owners’ equity.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Easy
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. A cash flows statement reports revenue and expense activities for a specific time period such as one month or one year.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

  1. Any business event that might affect the future profitability of a business should be reported in its balance sheet.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

 

  1. Total assets plus total liabilities must equal total owners’ equity.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Easy
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. The practice of showing assets on the balance sheet at their cost, rather than at their current market value is explained, in part, by the fact that cost is supported by objective evidence that can be verified by independent experts.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

  1. The realization principle states that the activities of an entity should be kept separate from those of its owner.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

 

  1. The entity principle states that the affairs of the owners are not part of the financial operations of a business entity and should be separated.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

  1. The accounting equation may be stated as “assets minus liabilities equals owners’ equity.”
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Easy
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. A transaction that causes an increase in an asset may also cause a decrease in another asset, an increase in a liability, or an increase in owners’ equity.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

 

  1. The collection of an account receivable will cause total assets to decrease.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. The payment of a liability causes an increase in owners’ equity.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. When a business borrows money from a bank, the immediate effect is an increase in total assets and a decrease in liabilities or owners’ equity.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

 

  1. The purchase of an asset, such as office equipment, for cash will cause owners’ equity to decrease.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. The owner of a sole proprietorship is personally liable for the debts of the business, whereas the stockholders of a corporation are not personally liable for the debts of the business.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Measurement
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-08 Explain common forms of business ownership—sole proprietorship; partnership; and corporation—and demonstrate how they differ in terms of their presentation in the statement of financial position.
Topic: Forms of Business Organization

  1. If a company purchases equipment with cash, its total assets will increase.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Easy
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

 

  1. If a company purchases equipment by issuing a note payable, its total assets will not change.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. It is not unusual for an entity to report a significant increase in cash from operating activities, but a decrease in the total amount of cash.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

  1. The cash flows statement provides a link between two balance sheets by showing how net income (or loss) has changed owners’ equity from one balance sheet date to the next.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

 

  1. According to the Sarbanes-Oxley Act of 2002, internal controls must be audited by the same accounting firm that audits the financial statements.
    TRUE

 

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties

  1. The Public Company Accounting Oversight Board was created by the American Institute of CPAs to oversee the public accounting profession.
    FALSE

 

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties

  1. The major outgrowth from business failures and allegations of fraudulent financial reporting during the 1990’s was the passage of the Securities and Exchange Act.
    FALSE

 

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties

 

Multiple Choice Questions
 

  1. Which of the following best describes liquidity?
    A.The ability to increase the value of retained earnings.
    B. The ability to pay the debts of the company as they become due.
    C. Being able to buy everything the company requires for cash.
    D. Purchasing everything the company requires on credit.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. Profitability may be defined as:
    A.The ability to pay the debts of the company as they fall due.
    B. The ability to increase retained earnings.
    C. Distributing dividends.
    D. Having excess cash.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-05 Explain how the income statement reports an enterprise’s financial performance for a period of time in terms of the relationship of revenues and expenses.
Topic: Income Statement

  1. The principle of adequate disclosure means that a company should disclose:
    A.Only the important monetary information.
    B. All confidential information regarding the company.
    C. Any financial facts that a reasonably informed person would consider necessary for the proper interpretation of the financial statements.
    D. Only subsequent events.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

 

  1. Blue Wholesale Shirt Co. sold shirts to Pink Retail Shoppe. The owner of Pink Retail said she would pay Blue at a later date, which Blue Wholesale agreed to. Blue Wholesale Shirt Co. is considered to be a:
    A.borrower.
    B. liability.
    C. creditor.
    D. debtor.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. Owners’ equity in a business increases as a result of which of the following?
    A.Payments of cash to the owners.
    B. Losses from unprofitable operation of the business.
    C. Earnings from profitable operation of the business.
    D. Borrowing from a commercial bank.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Owners’ equity in a business decreases as a result of which of the following?
    A.Investments of cash by the owners.
    B. Profits from operating the business.
    C. Losses from unprofitable operation of the business.
    D. Repaying a loan to a commercial bank.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. Which one of the following is not considered one of the three primary financial statements?
    A.Balance sheet.
    B. Income statement.
    C. Statement of cash flows.
    D. Statement of budgeting activities.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 02-07 Explain how the statement of financial position (balance sheet); income statement; and statement of cash flows relate to each other.
Topic: Relationships among Financial Statements

 

  1. Which of the following is the primary objective of financial statements?
    A.Providing managers with detailed information tailored to the managers’ specific information needs.
    B. Providing users outside the business organization with information about the company’s financial position and operating results.
    C. Reporting to the Internal Revenue Service the company’s taxable income.
    D. Indicating to investors in a particular company the current market values of their investments.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-01 Explain the nature and general purpose of financial statements.
Topic: Introduction to Financial Statements

  1. Which of the following is descriptive of the proper form of a balance sheet?
    A.The heading sets forth the period of time covered.
    B. Cash is always the first asset listed, followed by permanent assets (such as land and buildings), and finally by assets such as receivables and supplies.
    C. Liabilities are listed before owners’ equity.
    D. A subtotal for total assets plus total liabilities is shown.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. A balance sheet is designed to show:
    A.How much a business is worth.
    B. The profitability of the business during the current year.
    C. The assets, liabilities, and owners’ equity of a business as of a particular date.
    D. The cost of replacing the assets and of paying off the liabilities at December 31.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. The way in which financial statements relate is known as:
    A.Solvency.
    B. Objectivity.
    C. Articulation.
    D. Entity.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 02-07 Explain how the statement of financial position (balance sheet); income statement; and statement of cash flows relate to each other.
Topic: Relationships among Financial Statements

 

  1. If total assets equal $270,000 and total liabilities equal $202,500, the total owners’ equity must equal:
    A.$472,500.
    B. $67,500.
    C. $270,000.
    D. Cannot be determined from the information given.

$270,000 – $202,500 = $67,500

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. Which of the following best defines an asset?
    A.Something with physical form that is valued at cost in the accounting records.
    B. An economic resource owned by a business and expected to benefit future operations.
    C. An economic resource representing cash or the right to receive cash in the near future.
    D. Something owned by a business that has a ready market value.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. To appear in a balance sheet of a business entity, an asset need not:
    A.Be an economic resource.
    B. Have a ready market value.
    C. Be expected to benefit future operations.
    D. Be owned by the business.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. If total assets equal $345,000 and total owners’ equity equal $120,000, then total liabilities must equal:
    A.$465,000.
    B. $225,000.
    C. $120,000.
    D. Cannot be determined from the information given.

$345,000 – $120,000 = $225,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

 

  1. A balance sheet:
    A.Provides owners, investors, and other interested parties with all the financial information they need to evaluate the financial strength, profitability, and future prospects of a given business entity.
    B. Shows the current market value of the owners’ equity in the business at the balance sheet date.
    C. Assists creditors in evaluating the debt-paying ability of a business by showing the assets and liabilities of the business combined with those of its owner (or owners).
    D. Shows the assets, liabilities, and owners’ equity of a business entity, valued in conformity with generally accepted accounting principles.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. Which of the following is correct if a company purchases equipment for $70,000 cash?
    A.Total assets will increase by $70,000.
    B. Total assets will decrease by $70,000.
    C. Total assets will remain the same.
    D. The company’s total owners’ equity will decrease.

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. From an accounting viewpoint, when is a business considered an entity separate from its owner(s)?
    A.Only when organized as a sole proprietorship.
    B. Only when organized as a partnership.
    C. Only when organized as a corporation.
    D. In each of the above situations, the business is an accounting entity separate from the activities of the owner(s).

 

AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Decision Making
Bloom’s: Understand
Difficulty: Easy
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

  1. If a company purchases equipment for $65,000 by issuing a note payable:
    A.Total assets will increase by $65,000.
    B. Total assets will decrease by $65,000.
    C. Total assets will remain the same.
    D. The company’s total owners’ equity will decrease.

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. The valuation of assets in the balance sheet is based primarily upon:
    A.What it would cost to replace the assets.
    B. Cost, because cost is usually factual and verifiable.
    C. Current fair market value as established by independent appraisers.
    D. Cost, because in the event of liquidation, the assets would be sold at an amount equal to their original cost.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

  1. Which of the following is not a generally accepted accounting principle relating to the valuation of assets?
    A.The cost principle – in general, assets are valued at cost, rather than at estimated market values.
    B. The objectivity principle – accountants prefer to use objective, rather than subjective, information as the basis for accounting information.
    C. The safety principle – assets are valued at no more than the value for which they are insured.
    D. The going-concern assumption – one reason for valuing assets such as buildings and equipment at cost rather than at their current market values is the assumption that the business will use these assets rather than sell them.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

 

  1. Each year, the accountant for Southern Real Estate Company adjusts the recorded value of each asset to its market value. Using these market value figures on the balance sheet violates:
    A.The accounting equation.
    B. The stable-dollar assumption.
    C. The business entity concept.
    D. The cost principle.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

  1. The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurant’s balance sheet. The reporting of this item in this manner violated the:
    A.Cost principle.
    B. Business entity concept.
    C. Objectivity principle.
    D. Going-concern assumption.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

 

  1. Which of the following is correct when a corporation uses cash to pay for an expense?
    A.Total assets will decrease.
    B. Retained earnings will decrease.
    C. Owners’ equity will decrease.
    D. All three of the above statements are correct.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. If cash flows from operating activities is a negative amount:
    A.The company must have a net loss for the year.
    B. The company must have a net profit for the year.
    C. The company must have paid off more debts than it earned during the year.
    D. The company may have net income or a net loss for the year.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

 

  1. Eton Corporation purchased land in 1990 for $190,000. In 2008, it purchased a nearly identical parcel of land for $430,000. In its 2008 balance sheet, Eton valued these two parcels of land at a combined value of $860,000. Reporting the land in this manner violated the:
    A.Cost principle.
    B. Principle of the business entity.
    C. Objectivity principle.
    D. Going-concern assumption.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

  1. Bob Bertolucci, owner of Bob’s Bazaar, also owns a personal residence that costs $575,000. The market value of his residence is $725,000. During preparation of the financial statements for Bob’s Bazaar, the accounting principle most relevant to the presentation of Bob’s home is:
    A.The concept of the business entity.
    B. The cost principle.
    C. The going-concern assumption.
    D. The objectivity principle.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

 

  1. Which of the following will not cause a change in the owners’ equity of a business?
    A.Payment of an interest free business debt.
    B. Withdrawal of cash by the owner.
    C. Sale of land at a profit.
    D. Losses from unprofitable operations.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. Which business organization is recognized as a separate legal entity under the law?
    A.Corporation.
    B. Sole proprietorship.
    C. Partnership.
    D. All business organizations are separate legal entities.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 02-08 Explain common forms of business ownership—sole proprietorship; partnership; and corporation—and demonstrate how they differ in terms of their presentation in the statement of financial position.
Topic: Forms of Business Organization

  1. The amount of owners’ equity in a business is not affected by:
    A.The percentage of total assets held in cash.
    B. Investments made in the business by the owner.
    C. The profitability of the business.
    D. The amount of dividends paid to stockholders.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

 

  1. Decreases in owners’ equity are caused by:
    A.Purchases of assets and payment of liabilities.
    B. Purchases of assets and incurrence of liabilities.
    C. Payment of liabilities and unprofitable operations.
    D. Distributions of assets to the owner and unprofitable operations.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. Which of the following transactions would cause a change in owners’ equity?
    A.Repayment of the principal on a bank loan.
    B. Purchase of a delivery truck on credit.
    C. Sale of land on credit for a price above cost.
    D. Borrowing money from a bank.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. An expense is best defined as:
    A.Any payment of cash for the benefit of the company.
    B. Past, present, or future payments of cash required to generate revenues.
    C. Past payments of cash required to generate revenues.
    D. Future payments of cash required to generate revenues.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-05 Explain how the income statement reports an enterprise’s financial performance for a period of time in terms of the relationship of revenues and expenses.
Topic: Income Statement

 

  1. If a transaction causes an asset account to decrease, which of the following related effects may occur?
    A.An increase of equal amount in an owners’ equity account.
    B. An increase in a liability account.
    C. An increase of equal amount in another asset account.
    D. An increase in the combined total of liabilities and owners’ equity.

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. The payment of a business debt not including interest:
    A.Decreases total assets.
    B. Increases total liabilities.
    C. Increases the owners’ equity in the business.
    D. Decreases the owners’ equity in the business.

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

 

  1. The accounting principle that assumes that a company will operate in the foreseeable future is:
    A.Going concern.
    B. Objectivity.
    C. Liquidity.
    D. Disclosure.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Easy
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

  1. Deerpark Corporation recently borrowed $70,000 cash from its bank. Which of the following was unaffected by this transaction?
    A.Assets.
    B. Liabilities.
    C. Owners’ equity.
    D. Cash.

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

 

  1. Which of the following transactions would cause an increase in both assets and owners’ equity?
    A.Investment of cash in the business by the owner.
    B. Sale of land for a price less than its cost.
    C. Borrowing money from a bank.
    D. Sale of land for cash at a price equal to its cost.

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

  1. A transaction caused an increase in both assets and owners’ equity. This transaction could have been:
    A.A sale of service to a customer producing revenue.
    B. Sale of land for a price less than its cost.
    C. Borrowing money from a bank.
    D. Sale of land for cash at a price equal to its cost.

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

 

  1. Retained earnings is:
    A.The positive cash flows of a company.
    B. Net worth of a company.
    C. The owners’ equity that has accumulated as a result of profitable operations.
    D. Equal to the total assets of a company.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. A revenue transaction results in all of the following except:
    A.An increase in assets.
    B. An increase in owners’ equity.
    C. A positive cash flow in either the past, present, or future.
    D. An increase in liabilities.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. If a company has a profit:
    A.Assets will be equal to liabilities plus owners’ equity.
    B. Assets will be less than liabilities plus owners’ equity.
    C. Assets will be greater than liabilities plus owners’ equity.
    D. Owners’ equity will be greater than its assets.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Which of the following activities is not a category into which cash flows are classified?
    A.Marketing activities.
    B. Operating activities.
    C. Financing activities.
    D. Investing activities.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

  1. The change in owners’ equity from one balance sheet to the next is partially explained by the:
    A.Statement of cash flows.
    B. Statement of financial position.
    C. Income statement.
    D. Tax return.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-07 Explain how the statement of financial position (balance sheet); income statement; and statement of cash flows relate to each other.
Topic: Relationships among Financial Statements

 

  1. Capital stock represents:
    A.The amount invested in the business by stockholders when shares of stock were initially issued by a corporation.
    B. The owners’ equity for a business organized as a corporation.
    C. The owners’ equity accumulated through profitable operations that have not been paid out as dividends.
    D. The price paid by the current owners to acquire shares of stock in the corporation, regardless of whether they bought the shares directly from the corporation or from another stockholder.

 

AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Measurement
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. The balance sheet item that represents the portion of owners’ equity resulting from profitable operations of the business is:
    A.Accounts receivable.
    B. Cash.
    C. Capital stock.
    D. Retained earnings.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Retained earnings appears on:
    A.The income statement.
    B. The balance sheet.
    C. The statement of cash flows.
    D. All three of the financial statements.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Understand
Difficulty: Easy
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. Which of the following statements regarding liquidity and profitability is not true?
    A.If a business is unable to pay its debts as they come due, it is operating unprofitably.
    B. A business may be liquid, yet operate unprofitably for several years.
    C. A business may operate profitably, yet be unable to meet its obligations.
    D. In order to survive in the long-run, a business must both remain liquid and operate profitably.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties

 

  1. The concept of adequate disclosure means that:
    A.The accounting department of a business must inform management of the accounting principles used in preparing the financial statements.
    B. The company must inform users of any significant facts necessary for proper interpretation of the financial statements, including events occurring after the financial statement date.
    C. The independent auditors must disclose in the financial statements any and all errors detected in the company’s accounting records.
    D. The financial statements should include a comprehensive list of each transaction that occurred during the year.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties

  1. According to the Sarbanes-Oxley Act, CEOs and CFOs must certify to the accuracy of their company’s financial statements:
    A.Monthly and Quarterly.
    B. Quarterly and Annually.
    C. Monthly and Annually.
    D. CEOs and CFOs are not required to certify to the company’s financial statement; only CPA’s do.

 

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties

 

  1. A strong statement of cash flows indicates that significant cash is being generated by:
    A.Operating activities.
    B. Financing activities.
    C. Investing activities.
    D. Effective tax planning.

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

At December 31, 2009, the accounting records of Braun Corporation contain the following items:
 

  1. If Capital Stock is $260,000, what is the December 31, 2009 cash balance?
    A.$86,000.
    B. $94,000.
    C. $46,000.
    D. $686,000.

A/P ($16,000) + N/P ($190,000) + Capital Stock ($260,000) + R.E. ($160,000) = $626,000 Cash (?) + A/R ($40,000) +Land ($240,000) + Building ($180,000) + Equipment ($120,000) = $626,000 Cash = $46,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. If Capital Stock is $320,000, total assets of Braun Corporation at December 31, 2009, amount to:
    A.$686,000.
    B. $926,000.
    C. $726,000.
    D. $106,000.

A/P ($16,000) + N/P ($190,000) + Capital Stock ($320,000) + R.E. ($160,000) $686,000 Total Assets = $686,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. If Cash at December 31, 2009, is $86,000, Capital Stock is:
    A.$260,000.
    B. $300,000.
    C. $620,000.
    D. $168,000.

Cash ($86,000) + A/R ($40,000) +Land ($240,000) + Building ($180,000) + Equipment ($120,000) = $666,000 A/P ($16,000) + N/P ($190,000) + Capital Stock (?) + R.E. ($160,000) = $666,000 Capital Stock = $300,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. If Cash at December 31, 2009, is $26,000, total owners’ equity is:
    A.$160,000.
    B. $366,000.
    C. $606,000.
    D. $400,000.

Cash ($26,000) + A/R ($40,000) +Land ($240,000) + Building ($180,000) + Equipment ($120,000) = $606,000
A/P ($16,000) + N/P ($190,000) + Capital Stock (?) + R.E. ($160,000) = $606,000
Capital Stock= ($240,000) + R. E. ($160,000) = $400,000
Total Owners’ Equity = $400,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. If Cash at December 31, 2009, is $66,000, total assets amount to:
    A.$606,000.
    B. $806,000.
    C. $662,000.
    D. $646,000.

Cash ($66,000) + A/R ($40,000) +Land ($240,000) + Building ($180,000) + Equipment ($120,000) = $646,000 Total Assets = $646,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

At December 31, 2010, the accounting records of Hercules Manufacturing, Inc. contain the following items:
 

  1. If total assets of Hercules Manufacturing, Inc. are $556,000, Equipment is carried in Hercules Manufacturing accounting records at:
    A.$377,000.
    B. $179,000.
    C. $150,000.
    D. $90,000.

Cash ($7,000) + A/R ($30,000) +Land ($90,000) + Building ($250,000) + Equipment (?) = $556,000 Equipment = $179,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. If total assets of Hercules Manufacturing, Inc. are $556,000, Retained Earnings at December 31, 2010, must be:
    A.$811,000.
    B. $180,000.
    C. $221,000.
    D. $335,000.

A/P ($12,000) + N/P ($135,000) + Capital Stock ($188,000) + R.E.(?) = $556,000
Retained Earnings = $221,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. If Retained Earnings at December 31, 2010, is $140,000, total assets amount to:
    A.$98,000.
    B. $377,000.
    C. $475,000.
    D. $188,000.

A/P ($12,000) + N/P ($135,000) + Capital Stock ($188,000) + R.E. ($140,000) = $475,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. If Retained Earnings at December 31, 2010, is $100,000, Equipment is carried in Hercules Manufacturing, Inc. accounting records at:
    A.$42,000.
    B. $58,000.
    C. $43,500.
    D. $345,000.

A/P ($12,000) + N/P ($135,000) + Capital Stock ($188,000) + R.E. ($100,000) = $435,000 Cash ($7,000) + A/R ($30,000) + Land ($90,000) + Building ($250,000) + Equipment (?) = $435,000 Equipment = $58,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. Assume the Equipment shown above was acquired by the business five years ago and has a book value of $156,000, but has a current appraised value of $200,000. Hercules Manufacturing’s Retained Earnings at December 31, 2010, amounts to:
    A.$533,000.
    B. $345,000.
    C. $198,000.
    D. $356,000.

Cash ($7,000) + A/R ($30,000) + Land ($90,000) + Building ($250,000) + Equipment ($156,000) = $533,000 A/P ($12,000) + N/P ($135,000) + Capital Stock ($188,000) + R.E.(?) = $533,000 Retained Earnings = $198,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

At December 31, 2011 the accounting records of Gordon, Inc. contain the following items:
 

  1. If the Notes Payable is $10,000, the December 31, 2011 cash balance is:
    A.$60,000.
    B. $160,000.
    C. $30,000.
    D. $20,000.

Cash (?) + A/R ($18,750) +Land ($30,000) + Building ($31,250) + Equipment ($40,000) = $150,000 Cash = $30,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. If the Notes Payable balance is $25,000, then the total assets of Gordon, Inc. at December 31, 2011 amount to:
    A.$27,500.
    B. $152,500.
    C. $120,000.
    D. $165,000.

A/P ($2,500) + N/P ($25,000) + Capital Stock ($12,500) + R.E. ($125,000) = $165,000 Total Assets = $165,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. If the Cash balance at December 31, 2011 is $67,500, the Notes Payable balance is:
    A.$118,750.
    B. $47,500.
    C. $137,500.
    D. $140,000.

Cash ($67,500) + A/R ($18,750) + Land ($30,000) + Building ($31,250) + Equipment ($40,000) = $187,500 A/P ($2,500) + N/P (?) + Capital Stock ($12,500) + R.E. ($125,000) = $187,500 Notes Payable = $47,500

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. If the Cash balance at December 31, 2011 is $62,500 then total liabilities amount to:
    A.$42,500.
    B. $140,000.
    C. $45,000.
    D. $182,500.

Cash ($62,500) + A/R ($18,750) + Land ($30,000) + Building ($31,250) + Equipment ($40,000) = $182,500
A/P ($2,500) + N/P (?) + Capital Stock ($12,500) + R.E. ($125,000) = $182,500
$2,500 (Accounts Payable) + $42,500 (Notes Payable) = $45,000
Total Liabilities = $45,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. Which of the following is correct if at the end of Crystal Imports’ first year of operations, assets are $800,000 and owners’ equity is $720,000?
    A.The owner must have invested $720,000 to start the business.
    B. The business must be operating profitably.
    C. Liabilities are $80,000.
    D. Liabilities are $1,520,000.

$800,000 – $720,000 = $80,000 (Liabilities)

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. During the current year, the assets of Wheatley’s increased by $362,000, and the liabilities increased by $260,000. The owners’ equity in the business must have:
    A.Decreased by $102,000.
    B. Decreased by $622,000.
    C. Increased by $102,000.
    D. Increased by $622,000.

$362,000 – $260,000 = $102,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. The total liabilities of Hogan’s Company on the balance sheet are $270,000; this amount is equal to three-fourths of the total assets. What is the amount of owners’ equity?
    A.$202,500.
    B. $90,000.
    C. $360,000.
    D. $630,000.

¾ A = $270,000 A=$360,000; O.E. = ($360,000 – $270,000), or $90,000 (Owners’ Equity)

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Thirty percent of the total assets of Shanahan Corporation have been financed through borrowing. The total liabilities of the company are $600,000. What is the amount of owners’ equity?
    A.$180,000.
    B. $2,000,000.
    C. $1,400,000.
    D. $2,600,000.

30%A = 600,000 A = 2,000,000; O.E. = (2,000,000 – 600,000) or 1,400,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. A transaction caused a $60,000 increase in both assets and total liabilities. This transaction could have been which of the following?
    A.Purchase of office equipment for $60,000 cash.
    B. Purchase of office equipment for $120,000, paying $60,000 cash and issuing a note payable for the balance.
    C. Repayment of a $60,000 bank loan.
    D. Investment of $60,000 cash in the business by the owner.

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. If $9,600 cash and a $31,000 note payable are given in exchange for some office machines to be used in a business:
    A.Total assets are increased.
    B. Total liabilities are decreased.
    C. Total assets are decreased.
    D. The owners’ equity is increased.

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. If during the current year, liabilities of Corbett’s Store increased by $220,000 and owners’ equity increased by $160,000, then:
    A.Assets at the end of the year total $380,000.
    B. Assets at the end of the year total $60,000.
    C. Assets increased during the year by $380,000.
    D. Assets decreased during the year by $60,000.

$220,000 + $160,000 = $380,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. If during the current year, liabilities of Hayden Travel decreased by $50,000 and owners’ equity increased by $75,000, then:
    A.Assets at the end of the year total $125,000.
    B. Assets at the end of the year total $25,000.
    C. Assets increased during the year by $25,000.
    D. Assets decreased during the year by $125,000.

$75,000 – $50,000 = $25,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. At the end of the current year, the owners’ equity in Barclay Bakery is $246,000. During the year, the assets of the business had increased by $120,000 and the liabilities had increased by $72,000. Owners’ equity at the beginning of the year must have been:
    A.$198,000.
    B. $174,000.
    C. $284,000.
    D. $438,000.

$120,000 – $72,000 = $48,000 $246,000 – $48,000 = $198,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Hard
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. At the end of the current year, the owners’ equity in Durante Co. is $360,000. During the year, the assets of the business had increased by $68,000 and the liabilities had increased by $118,000. Owners’ equity at the beginning of the year must have been:
    A.$410,000.
    B. $310,000.
    C. $546,000.
    D. $174,000.

$68,000 – $118,000 = ($50,000) $360,000 – $(50,000) = $410,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Hard
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. During the current year, the assets of Quality Stairs increased by $175,000 and the liabilities decreased by $15,000. If the owners’ equity in the business is $475,000 at the end of the year, the owners’ equity at the beginning of the year must have been:
    A.$335,000.
    B. $285,000.
    C. $665,000.
    D. $615,000.

$175,000 + $15,000 = $190,000 $475,000 – $190,000 = $285,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Hard
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. During the month of May, the Henderson Company had the following transactions:
    * Revenues of $60,000 were earned and received in cash.
    * Bank loans of $9,000 were paid off.
    * Equipment of $20,000 was purchased.
    * Expenses of $36,800 were paid.
    * Stockholders purchased additional shares for $22,000 cash.
    A statement of cash flows for May would report net cash flows from operating activities of:
    A.$60,000.
    B. $16,200.
    C. $23,200.
    D. $20,000.

$60,000 -$36,800 = $23,200

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

Astoria Co. had the following transactions during the month of August:
 

 

  1. What amount of net income will be reported on an income statement for the month of August?
    A.$20,000.
    B. $7,500.
    C. $0.
    D. $33,500.

$33,500 – $26,000 = $7,500

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Analyze
Difficulty: Medium
Learning Objective: 02-05 Explain how the income statement reports an enterprise’s financial performance for a period of time in terms of the relationship of revenues and expenses.
Topic: Income Statement

  1. At the beginning of August, 2010, owners’ equity in Astoria was $160,000. Given the transactions of August, what will owners’ equity be at the end of the month?
    A.$167,500.
    B. $150,500.
    C. $193,500.
    D. $158,000.

$160,000 + $7,500 (Net income) – $9,500 (Dividends) = $158,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Analyze
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. For the month of August, net cash flows from operating activities for Astoria were:
    A.$33,500.
    B. $7,500.
    C. $20,000.
    D. $26,000.

$33,500 – $26,000 = $7,500

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Analyze
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

  1. The major provisions of the Sarbanes-Oxley Act of 2002 include all of the following except:
    A.The creation of a new agency to oversee the public accounting profession.
    B. Restrictions on the types of consulting services that accounting firms can provide to audit clients.
    C. Reducing responsibility for audit committees when overseeing the financial reporting process.
    D. Requiring the chief executive office and the chief financial officer to certify the accuracy of their company’s financial statements.

 

AACSB: Ethics
AICPA BB: Legal
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties

During the month of August, the Boyce Company had the following transactions:
 

 

  1. A statement of cash flows for August, would report net cash flows from operating activities of:
    A.$26,000.
    B. $32,400.
    C. $40,000.
    D. $46,400.

Cash revenues $120,000 – cash expenses $73,600 = $46,400

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

  1. A statement of cash flows for August, would report net cash flows from financing activities of:
    A.$26,000.
    B. $32,400.
    C. $40,000.
    D. $46,400.

Sale of stock $44,000 – bank loan paid $18,000 = $26,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

 

  1. A statement of cash flows for August, would report net cash flows from investing activities of:
    A.$26,000.
    B. $32,400.
    C. $40,000.
    D. $46,400.

Equipment purchased $40,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

  1. A statement of cash flows for August, would report an increase in cash of:
    A.$26,000.
    B. $32,400.
    C. $40,000.
    D. $46,400.

$46,400+ $26,000 – $40,000 = $32,400

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

Waldorf Co. had the following transactions during the month of October:
 

 

  1. What amount of net income will be reported on an income statement for the month of October?
    A.$18,500.
    B. $22,500.
    C. $78,000.
    D. $100,500.

$100,500 – $78,000 = $22,500

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Analyze
Difficulty: Medium
Learning Objective: 02-05 Explain how the income statement reports an enterprise’s financial performance for a period of time in terms of the relationship of revenues and expenses.
Topic: Income Statement

  1. At the beginning of October, owners’ equity in Waldorf was $480,000. Given the transactions of October, 2011, what will owners’ equity be at the end of the month?
    A.$480,000.
    B. $484,000.
    C. $502,500.
    D. $580,500.

$480,000 + $22,500 (Net income) – $18,500 (Dividends) = $484,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Analyze
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. For the month of October, net cash flows from operating activities for Waldorf were:
    A.$18,500.
    B. $22,500.
    C. $78,000.
    D. $100,500.

$100,500 – $78,000 = $22,500

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Analyze
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

During the month of February, the Fadness Company had the following transactions:
 

 

  1. A statement of cash flows for February, would report net cash flows from operating activities of:
    A.$4,000.
    B. $47,000.
    C. $53,600.
    D. $96,600.

Cash revenues $225,000 – cash expenses $171,400 = $53,600

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

  1. A statement of cash flows for February, would report net cash flows from financing activities of:
    A.$4,000.
    B. $47,000.
    C. $53,600.
    D. $96,600.

Sale of stock $50,000 + bank loan issued $15,000 – bank loan paid 18,000 = $47,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

 

  1. A statement of cash flows for February, would report net cash flows from investing activities of:
    A.$4,000.
    B. $47,000.
    C. $53,600.
    D. $96,600.

Equipment purchased $40,000 – equipment sold $36,000 = $4,000 used

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

  1. A statement of cash flows for February, would report an increase in cash of:
    A.$4,000.
    B. $47,000.
    C. $53,600.
    D. $96,600.

$53,600+ $47,000 – $4,000 = $96,600

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.
Topic: Statement of Cash Flows

 

Essay Questions
 

  1. Accounting terminology
    Listed below are nine technical accounting terms introduced in this chapter:

    Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer “None” if the statement does not correctly describe any of the terms. Do not use a term more than once.
    (A.) Having the financial ability to pay debts as they become due.
    (B.) An assumption that a business will operate in the foreseeable future.
    (C.) Economic resources owned by businesses that are expected to benefit future operations.
    (D.) The debts or obligations of a business organization.
    (E.) Assets = Liabilities + Owners’ Equity
    (F.) The principle which states that assets are valued in the balance sheet at their historical cost.
    (G.) A residual amount equal to assets minus liabilities.

(A.) Liquidity; (B.) Going concern assumption; (C.) Assets; (D.) Liabilities; (E.) Accounting equation; (F.) Cost principle; (G.) Owners’ equity

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

 

  1. Accounting equation
    (A.) During the current year, the assets of Duffy Stationery increased by $650,000 and the liabilities decreased by $340,000. What was the change in owners’ equity during the year?
    (B.) The owners’ equity of Graham Interiors appears on the balance sheet as $720,000 and is equal to one-fourth of total assets. Compute the amount of total liabilities.
    (C.) At the end of the year, the owners’ equity in Scott Mfg. amounted to $845,000. During 2009, the assets of the business increased by $515,000 and the liabilities increased by $205,000. The owners’ equity at the beginning of 2009 was how much?

(A.) $990,000 increase
(B.) $2,160,000
(C.) $535,000

Feedback: (A.) Change in owners’ equity = $650,000 + $340,000 = $990,000 increase
(B.) Total assets = 4($720,000) = $2,880,000
Total liabilities = $2,880,000 assets – $720,000 owners’ equity = $2,160,000
(C.) Change in owners’ equity = $515,000 – $205,000 = $310,000 increase
Beginning owners’ equity = $845,000 ending balance – $310,000 increase = $535,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Analyze
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

 

  1. Effects of transactions on elements of the accounting equation. Some of the transactions carried out by Tudor Wholesale during the first month of the company’s operations are listed below. You are to determine the effect of each transaction on the total assets, the total liabilities, and the owners’ equity. Prepare your answer in columnar form, identifying each transaction by letter and using the symbols (+) for increase, (-) for decrease, and (NC) for no change. An answer is provided for the first transaction to serve as an example.

 

 

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

 

  1. Effects of transactions on elements of the accounting equation. Some of the transactions carried out by Tsang Company during the first month of the company’s operations are listed below. You are to determine the dollar effect of each transaction on the total assets, the total liabilities, and the owners’ equity of Tsang Company. Use the symbols (+) for increase, (?) (-) for decrease, and (NC) for no change. An answer is provided for the first transaction to serve as an example.

 

 

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Topic: A Starting Point: Statement of Financial Position

 

  1. List the following accounts in the order that they would appear in a balance sheet.
    Capital Stock
    Equipment
    Accounts Receivable
    Retained Earnings
    Revenue
    Accounts Payable
    Cash
    Rent Expense

Cash, Accounts Receivable, Equipment, Accounts Payable, Capital Stock, Retained Earnings

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Computation of assets, liabilities, and owners’ equity after a series of transactions. On April 30, 2009, the balance sheet of China Collectibles showed total assets of $700,000, total liabilities of $400,000, and owners’ equity of $300,000. The following transactions occurred in May of 2009:
    (1) Capital stock was issued in exchange for $165,000 cash.
    (2) The business purchased equipment for $360,000, paying $160,000 cash and issuing a note payable for $200,000.
    (3) The business paid $70,000 of its accounts payable.
    (4) The business collected $54,000 of its accounts receivable.
    Compute the following as of May 31, 2009:
    (A.) Total assets $___________
    (B.) Total liabilities $___________
    (C.) Owners’ equity $___________

(A.) Total assets = $995,000
(B.) Total liabilities = $530,000
(C.) Owners’ equity = $465,000

Feedback: (A.) Total assets: $700,000 + $165,000 + $360,000 – $160,000 – $70,000 + $54,000 – $54,000 = $995,000
(B.) Total liabilities: $400,000 + $200,000 – $70,000 = $530,000
(C.) Owners’ equity: $300,000 + $165,000 = $465,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Computation of assets, liabilities, and owners’ equity after a series of transactions. The December 31, 2009 balance sheet of Charles Realty reported total assets of $900,000, total liabilities of $350,000, and owners’ equity of $550,000. The following transactions occurred in January of 2010:
    (1) The business purchased land for $250,000, paying $100,000 cash and issuing a note payable for the balance.
    (2) The business collected accounts receivable totaling $45,000.
    (3) The business sold land costing $50,000 for $60,000 cash.
    (4) The business paid $50,000 of the note payable.
    Compute the following at January 31, 2010:
    (A.) Total assets $__________
    (B.) Total liabilities $__________
    (C.) Owners’ equity $__________

(A.) Total assets = $1,010,000
(B.) Total liabilities = $450,000
(C.) Owners’ equity = $560,000

Feedback:
(A.) Total assets: $900,000 + $250,000 – $100,000 + $45,000 – $45,000 – $50,000 + $60,000 – $50,000 = $1,010,000
(B.) Total liabilities: $350,000 + $150,000 – $50,000 = $450,000
(C.) Owners’ equity: $550,000 + $10,000 = $560,000

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Preparation of balance sheet
    Prepare the balance sheet as of December 31, 2009, for Gamma Company, from the following list of items which are arranged in random order. You must compute the amount for accounts payable to complete the balance sheet.

 

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Preparation of balance sheet after a series of transactions
    The balance sheet was as follows for Custom Ceramics on February 1, 2010:

    During the first week of February, the following transactions occurred:
    * The business used cash to pay off $5,000 of its accounts payable. (No payment was made on the notes payable.)
    * Additional capital stock was issued to Joan Custom for $15,000 cash.
    *Equipment was purchased on credit for $1,800
    * The business collected $4,000 cash from accounts receivable.
    Complete the balance sheet for Custom Ceramics as of February 8, 2010.

 

Feedback: (a.) $7,000 + $4,000 + $15,000 – $5,000 = $21,000
(b.) $5,200 – $4,000 collected = $1,200
(c.) $30,000 + $1,800 = $31,800
(d.) $6,000 + $1,800 (equipment purchase) – $5,000 paid = $2,800
(e.) $126,200 + $15,000 (additional investment) = $141,200

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Completion of balance sheet
    Use the following information to complete the balance sheet of Adelphi Construction as of December 31, 2010.
    (1) The company was organized on January 1, 2010 and has operated for the full year 2010.
    (2) Earnings were $275,000 and dividends of $70,000 were paid to stockholders.
    (3) Cash and accounts receivable together amount to one and one-half times as much as notes payable.

 

Feedback:
(a.) Total assets must be $620,000 to agree with the total of liabilities plus owners’ equity.
(b.) Cash must be $5,000 to achieve a total asset figure of $620,000.
(c.) Cash ($5,000) plus accounts receivable ($85,000) equals $90,000. This total is stated to be 1.5 times the amount of notes payable. Notes payable is computed as $90,000 divided by 1.5, or $60,000.
(d.) Accounts payable must be $115,000 to achieve total liabilities figure of $215,000.
(e.) Retained earnings at the end of the first accounting period must be earnings ($275,000) less dividends $(70,000), or $205,000.
(f.) Capital stock must be $200,000 to achieve total liabilities and owners’ equity figure of $620,000.

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Completion of balance sheet
    Use the following information to complete the December 31, 2009 balance sheet of Copper Supplies Company.
    (1) Owners’ equity as of January 1, 2009, totaled $175,000, which included capital stock of $150,000.
    (2) Additional capital stock was issued during 2009 in exchange for $40,000 cash.
    (3) Net income for 2009 amounted to $200,000; no dividends were paid during 2009.
    (4) Cash and accounts receivable together amount to 3 times as much as accounts payable.

 

Feedback: (a.) Total of liabilities & owners’ equity must be $835,000 to agree with the amount of total assets.
(b.) Cash and accounts receivable together amount to 3 times accounts payable, or $120,000. Since cash is $30,000, accounts receivable are $120,000 – $30,000, or $90,000.
(c.) Equipment must be $200,000 to achieve total assets of $835,000.
(d.) Beginning capital stock is $150,000 + stock issued of $40,000 = $190,000.
(e.) Beginning retained earnings (175,000 – 150,000) + net income of 200,000 = 225,000.
(f.) Total liabilities must be $420,000 to achieve the total of liabilities plus owners’ equity of $835,000.
(g.) Since total liabilities are $420,000 and accounts payable are $40,000, notes payable must be $380,000.

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Effects of transactions on balance sheet items
    Show the effect of each of the seven listed transactions on the balance sheet items of Distinctive Draperies. Indicate the new balances after the transaction of May 2 and each subsequent transaction. The effects of the May 1 transaction are already filled in to provide you with an example.

 

 

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Effects of transactions on balance sheet items
    Show the effect of each of the seven listed transactions on the balance sheet items of Renaissance Investment Services, Inc. Indicate the new balances after the transaction of November 2 and each subsequent transaction. The effects of the November 1 transaction are already filled in to provide you with an example.

 

 

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. An inexperienced accounting intern at Tasso Company prepared the following income statement for the month of July 2009:

    Instructions: Prepare a revised income statement in accordance with generally accepted accounting principles.

 

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-05 Explain how the income statement reports an enterprise’s financial performance for a period of time in terms of the relationship of revenues and expenses.
Topic: Income Statement

 

  1. From the following accounts and amounts prepare a balance sheet for the Swell Company for December 31, 2010. You must compute the amount for retained earnings to complete the balance sheet.

 

 

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Financial statements
    A set of financial statements includes three related accounting reports, or statements. In the space provided, list the names of three primary statements, and give a brief description of the accounting information contained in each.

* Balance sheet. A report showing at a specific date the financial position of the company by reporting the assets (resources) that it owns, the liabilities (debts) that it owes, and the amount of the owners’ equity in the business.
* Income statement. A report indicating the profitability (or net income) of the business over a specific time period.
* Statement of cash flows. A report summarizing the cash receipts and cash payments of the business over the same time period covered by the income statement. The cash flows from three activities are presented on the statement. In order of presentation, they include: (1) operating activities; (2) investing activities; and (3) financing activities.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-01 Explain the nature and general purpose of financial statements.
Topic: Introduction to Financial Statements

  1. Development of generally accepted accounting principles
    (A.) What is meant by the phrase “generally accepted accounting principles”?
    (B.) Give the names of three organizations that currently play an active role in the development of accounting principles in the United States.

(A.) Generally accepted accounting principles are the concepts, standards, or rules used in the preparation of financial statements.
(B.) Student may list any three of the following:
* Financial Accounting Standards Board (FASB)
* American Institute of Certified Public Accountants (AICPA)
* Securities and Exchange Commission (SEC)
* American Accounting Association (AAA)

 

AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

 

  1. Valuation of assets under generally accepted accounting principles. Under generally accepted accounting principles, the assets owned by a business are reported in the balance sheet at their historical cost. Identify and briefly explain two accounting principles other than the cost principle that support the valuation of assets at cost in the balance sheet.

Student may choose any two of the following:
* Going-concern assumption. An assumption by accountants that a business will operate indefinitely unless specific evidence to the contrary exists, such as impending bankruptcy. Since assets of the business were acquired for use and not for resale, estimated current market prices or appraisal values are of less importance than if these items were intended for sale.
* Objectivity principle. Accounting measurements should be based upon dollar amounts that are factual and subject to independent verification. Historical cost of assets is objective; estimated market values or appraisals change over time and are not factual or objective.
* Stable-dollar assumption. An assumption by accountants that the dollar is a stable unit of measure. This assumption permits reporting assets at cost, even though individual assets may have been acquired in different years.

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

  1. Forms of Business Organization
    State and describe the three most common forms of business organizations in the United States.

(1) Sole Proprietorship-One person, unlimited liability, and owner acts as manager.
(2) Partnership-Two or more persons and owners are personally responsible for debts.
(3) Corporation-Stockholders are owners, limited liability, ease of transfer of ownership, and separate entity under the law.

 

AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Reporting
Bloom’s: Remember
Difficulty: Easy
Learning Objective: 02-08 Explain common forms of business ownership—sole proprietorship; partnership; and corporation—and demonstrate how they differ in terms of their presentation in the statement of financial position.
Topic: Forms of Business Organization

 

 

 

Multiple Choice Questions

  1. The financial statements of a business entity:
    A.Include the balance sheet, income statement, and income tax return.
    B. Provide information about the profitability and financial position of the company.
    C. Are the first step in the accounting process.
    D. Are prepared for a fee by the Financial Accounting Standards Board.

 

Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise’s financial performance for a period of time in terms of the relationship of revenues and expenses.
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.

  1. A balance sheet is designed to show the financial position of an entity:
    A.At a single point in time.
    B. Over a period of time such as a year or quarter.
    C. At December 31 of the current year.
    D. At January 1 of the coming year.

 

Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise’s financial performance for a period of time in terms of the relationship of revenues and expenses.
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.

 

  1. Accounts payable and notes payable are:
    A.Always less than the amount of cash a business owns.
    B. Creditors.
    C. Written promises to pay a certain amount, plus interest, at a definite future date.
    D. Liabilities.

 

Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise’s financial performance for a period of time in terms of the relationship of revenues and expenses.
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.

 

  1. The balance sheet of Dotty Designs includes the following items:

    This list includes:
    A.Four assets and three liabilities.
    B. Five assets and three liabilities.
    C. Five assets and two liabilities.
    D. Six assets and two liabilities.

 

Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise’s financial performance for a period of time in terms of the relationship of revenues and expenses.
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.

  1. An accounting entity may best be described as:
    A.An individual.
    B. A particular economic unit.
    C. A publicly owned corporation.
    D. Any corporation, regardless of size.

 

Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise’s financial performance for a period of time in terms of the relationship of revenues and expenses.
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company’s operating; investing; and financing activities.

 

Presented below is the balance sheet for Sabino Family Dentistry on January 1 of the current year.

During the first few days of January, the following transactions occurred:
Jan 1 The business borrowed $99,000 from the bank, giving a note payable due in 90 days.
3 Additional capital stock was issued in exchange for $44,550 cash.
3 Equipment was purchased for $62,700 on credit.
5 The business collected $26,400 of its accounts receivable and paid $37,950 of its accounts payable.

 

  1. On January 6, total assets of the business amount to:
    A.$826,650.
    B. $994,950
    C. $957,000.
    D. $950,400.

 

Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.

 

  1. On January 6, owners’ equity amounts to:
    A.$752,400.
    B. $44,550.
    C. $796,950.
    D. $895,950.

 

Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.

  1. On January 6, the accounts payable balance is:
    A.$136,950.
    B. $36,300.
    C. $24,750.
    D. $99,000.

 

Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.

  1. On January 6, the accounts receivable balance is:
    A.$24,750.
    B. $38,775.
    C. $77,550.
    D. $63,525.

 

Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.

 

  1. On January 6, the cash balance is:
    A.$127,050.
    B. $138,600.
    C. $165,000.
    D. $202,950

 

Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners’ Equity.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.

 

Essay Questions
 

  1. Presented below is the balance sheet for Manhattan Family Dentistry on January 1 of the current year.

    During the first few days of January, the following transactions occurred:
    Jan 2 Equipment was purchased for $38,000 on credit.
    2 The business collected $16,000 of its accounts receivable and paid $23,000 of its accounts payable.
    3 The business borrowed $60,000 from the bank, giving a note payable due in 90 days.
    3 Additional capital stock was issued in exchange for $27,000 cash.
    Complete the following balance sheet for Manhattan Family Dentistry on January 4 of the current year.

 

Computations:
a $20,000 + $16,000 (A/R collected) – $23,000 (paid on A/P) + $60,000 (borrowed) + $27,000 (invested) = $100,000
b $31,000 – $16,000 collected = $15,000
c $35,000 + $38,000 (equipment purchased) = $73,000
d $456,000 + $27,000 additional investment = $483,000
e A/P $45,000 + $38,000 – $23,000 (paid) = $60,000

 

Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.

 

  1. Complete the January 31, 20__, balance sheet of Countrywide Legal Services using the following information.
    (1) Stockholders’ equity at January 1, 20__, included capital stock of $140,000.
    (2) The land and building were purchased by the business for a total price of $200,000 on January 25, 20__, from a company forced out of business. On January 31, an appraiser valued the property at $260,000.
    (3) Additional capital stock was issued in exchange for $50,000 cash.
    (4) Retained earnings at January 31, 20___, amounted to $49,400.

 

Computations:
a. Total assets must be equal to total liabilities plus owners’ equity of $375,000.
b. $200,000 (cost of land and building) less $135,000 for land = $65,000 for building. (Appraised value of property ignored.)
c. Accounts receivable must be $50,000 to achieve total assets of $375,000.
d. $140,000 (capital stock at January 1) plus $50,000 (additional investment).
e. Total liabilities must be $135,600 to achieve total liabilities plus owners’ equity of $375,000.
f. Notes payable must be $90,000 to achieve total liabilities of $135,600.

 

Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.

 

Multiple Choice Questions
 

  1. A set of financial statements:
    A.Is intended to assist users in evaluating the financial position, profitability, and future prospects of an entity.
    B. Is intended to assist the IRS in determining the amount of income taxes owed by a business organization.
    C. Includes notes disclosing information necessary for the proper interpreta­tion of the statements.
    D. Is intended to assist investors and creditors in making decisions involving the allocation of economic resources.

 

  1. Which of the following statements is not consistent with generally accepted accounting principles relating to asset valuation?
    A.Many assets are originally recorded in accounting records at their cost to the business entity.
    B. Subtracting total liabilities from total assets indicates what the owner’s equity in the business is worth under current market conditions.
    C. Accountants assume that assets such as office supplies, land, and buildings will be used in business operations, rather than being sold at current market prices.
    D. Accountants prefer to base the valuation of assets upon objective, verifiable evidence rather than upon appraisals or personal opinion.

 

  1. Water world Boat Shop purchased a truck for $12,000, making a down payment of $5,000 cash, and signing a $7,000 note payable due in 60 days. As a result of this transaction:
    A.Total assets increased by $12,000.
    B. Total liabilities increased by $7,000.
    C. From the viewpoint of a short-term creditor, this transaction makes the business more solvent.
    D. This transaction had no immediate effect upon the owner’s equity in the business.

 

  1. A transaction caused a $15,000 decrease in both total assets and total liabilities. This transaction could have been:
    A.Purchase of a delivery truck for $15,000 cash.
    B. An asset with a cost of $15,000 was destroyed by fire.
    C. Repayment of a $15,000 bank loan.
    D. Collection of a $15,000 account receivable.

 

 

  1. Which of the following is (are) correct about a company’s balance sheet?
    A.It displays sources and uses of cash for the period.
    B. It is an expansion of the basic accounting equation: Assets = Liabilities + Owners’ Equity.
    C. It is sometimes referred to as a statement of financial position.
    D. It is unnecessary if both an income statement and statement of cash flows are available.

 

  1. Which of the following would you expect to find in a correctly-prepared income statement?
    A.Cash balance at the end of the period.
    B. Revenues earned during the period.
    C. Contributions by the owner during the period.
    D. Expenses incurred during the period to earn revenues.

 

  1. What information would you find in a statement of cash flows that you would not be able to get from the other two primary financial statements?
    A.Cash provided by or used in financing activities.
    B. Cash balance at the end of the period.
    C. Total liabilities due to creditors at the end of the period.
    D. Net income.

 

  1. Which of the following statements relating to the role of professional judgment in the financial reporting process are valid?
    A.Different accountants may evaluate similar situations differently.
    B. The determination of which items should be disclosed in notes to financial statements requires professional judgment.
    C. Once a complete list of generally accepted accounting principles is prepared, judgment need no longer enter into the financial reporting process.
    D. The possibility always exists that professional judgment later may prove to have been incorrect.

Chapter 04

The Accounting Cycle: Accruals and Deferrals

 

True / False Questions

  1. Adjusting entries are needed whenever transactions affect the revenue or expenses of more than one accounting period.
    True    False

 

  1. The book value of a depreciable asset can be determined by its market value at a particular time.
    True    False

 

  1. The adjusting entry to record estimated income taxes in a profitable period consists of a credit to Income Tax Expense and a debit to Income Tax Payable.
    True    False

 

  1. The failure to record an adjusting entry for depreciation would cause assets to be overstated and net income to be understated.
    True    False

 

  1. The need for adjusting entries results from timing differences between the receipt or disbursement of cash and the dates on the financial statements.
    True    False

 

  1. The adjusted trial balance may be used in place of the income statement.
    True    False

 

  1. The book value of an asset may also be called the market value of the asset.
    True    False

 

 

  1. The period of time over which the cost of an asset is allocated to depreciation expense is called its useful life.
    True    False

 

  1. The adjusted trial balance combines the trial balance items with the adjusting entries to determine the adjusted balances.
    True    False

 

  1. When a company receives cash in advance and it is obligated to provide a service or a product in the future, the entry would be a credit to a liability account and a debit to revenue.
    True    False

 

  1. Adjusting entries are only required when errors are made.
    True    False

 

  1. The Cash account is usually affected by adjusting entries.
    True    False

 

  1. Avalon Company paid $4,400 cash for an insurance policy providing three years protection against fire loss. This transaction could properly be recorded by a $4,400 debit to Unexpired Insurance and a $4,400 credit to Cash.
    True    False

 

  1. Unearned revenue is a liability and should be reported on the income statement.
    True    False

 

  1. Unpaid expenses may be included as an expense on the income statement.
    True    False

 

 

  1. Prepaid expenses are assets that should appear on the balance sheet.
    True    False

 

  1. One of the purposes of adjusting entries is to convert assets to expenses.
    True    False

 

  1. Every adjusting entry involves the recognition of either revenue or owner’s equity.
    True    False

 

  1. An adjusting entry to recognize that a fee received in advance has now been earned will cause an increase in total liabilities.
    True    False

 

  1. Omission of the adjusting entry needed to accrue an expense at the end of the period would cause liabilities to be understated.
    True    False

 

  1. Wages are an expense to the employer when earned, rather than when paid.
    True    False

 

  1. Immaterial items may be accounted for in the most convenient manner, without regard to other theoretical concepts.
    True    False

 

  1. All assets should be depreciated.
    True    False

 

 

  1. Materiality is a matter of professional judgment.
    True    False

 

  1. An expenditure that benefits the year in which it is made should be deducted from revenue in the same year.
    True    False

 

  1. An expenditure that benefits year one but is paid for in year two should not be capitalized until year two.
    True    False

 

  1. Companies that engage in fraud will often capitalize an asset rather than an expense account.
    True    False

 

 

Multiple Choice Questions

  1. If Hot Bagel Co. estimates depreciation on an automobile to be $578 for the year, the company should make the following adjusting entry:
    A. Debit Accumulated Depreciation $578 and credit Depreciation Expense $578.
    B. Debit Depreciation Expense $578 and credit Automobile $578.
    C. Debit Depreciation Expense $578 and credit Accumulated Depreciation $578.
    D. Debit Automobile $578 and credit Depreciation Expense $578.

 

  1. Accumulated Depreciation is:
    A. An asset account.
    B. A revenue account.
    C. A contra-asset account.
    D. An expense account.

 

 

  1. Adjusting entries are prepared:
    A. Before financial statements and after a trial balance has been prepared.
    B. After a trial balance has been prepared and after financial statements are prepared.
    C. After posting but before a trial balance is prepared.
    D. Anytime an accountant sees fit to prepare the entries.

 

  1. The normal balance of the Accumulated Depreciation account is:
    A. A debit balance.
    B. A credit balance.
    C. Either a debit balance or a credit balance.
    D. There is no normal balance for this account.

 

  1. Unearned revenue may also be called:
    A. Net income.
    B. Deferred revenue.
    C. Unexpired revenue.
    D. Services rendered.

 

  1. The adjusting entry to record income taxes at the end of an unprofitable accounting period consists of a:
    A. Debit to Income Tax Expense and a credit to Income Tax Payable.
    B. Credit to Income Tax Expense and a debit to Income Tax Payable.
    C. Credit to Income Tax Receivable and a debit to Income Tax Expense.
    D. No adjusting entry is required for income taxes if there are no profits.

 

  1. Which of the following is not considered a basic type of adjusting entry?
    A. An entry to convert a liability to a revenue.
    B. An entry to accrue unpaid expenses.
    C. An entry to convert an asset to an expense.
    D. An entry to convert an asset to a liability.

 

 

  1. The United Shipping Co. made an adjusting entry accruing interest for $800 on a note payable for the month of January. The note required 12% per annum on the principal. The principal amount of the note payable must have been:
    A. $7,000.
    B. $9,600.
    C. $80,000.
    D. $10,800.

 

  1. Rose Corp. has a note receivable from Jewel Co for $80,000. The note matures in 5 years and bears interest of 6%. Rose is preparing financial statements for the month of June. Rose should make an adjusting entry:
    A. Debiting Interest Revenue for $400 and crediting Interest Receivable for $400.
    B. Debiting Interest Receivable for $400 and crediting Interest Revenue for $400.
    C. Debiting Interest Revenue for $4,800 and crediting Interest Receivable for $4,800.
    D. Crediting Interest Payable for $400 and debiting Interest Expense for $400.

 

  1. Hahn Corp. has three employees. Each earns $600 per week for a five day work week ending on Friday. This month the last day of the month falls on a Wednesday. The company should make an adjusting entry:
    A. Debiting Wage Expense for $1,080 and crediting Wages Payable for $1,080.
    B. Debiting Wage Expense for $360 and crediting Wages Payable for $360.
    C. Crediting Wage Expense for $1,080 and debiting Wages Payable for $1,080.
    D. Crediting Wage Expense for $360 and debiting Wages Payable for $360.

 

  1. Which of the following activities is least likely to be limited to “year-end”?
    A. Closing the accounts.
    B. Drafting notes to accompany statements.
    C. Recording routine transactions.
    D. Undergoing an audit.

 

 

  1. Depreciation is:
    A. An exact calculation of the decline in value of an asset.
    B. Only an estimate of the decline in value of an asset.
    C. Only recorded at the end of a year and never over a shorter time period.
    D. Management must know the exact life of an asset in order to calculate an acceptable depreciation expense.

 

  1. We can compare income of the current period with income of a previous period to determine whether the operating results are improving or declining:
    A. Only if each accounting period covered is a full year.
    B. Only if the same accountant prepares the income statement each period.
    C. Only if the accounting periods are equal in length.
    D. Only if a manual accounting system is used in both periods.

 

  1. The purpose of adjusting entries is to:
    A. Prepare the revenue and expense accounts for recording the revenue and expenses of the next accounting period.
    B. Record certain revenue and expenses that are not properly measured in the course of recording daily routine transactions.
    C. Correct errors made during the accounting period.
    D. Update the owners’ equity account for the changes in owners’ equity that had been recorded in revenue and expense accounts throughout the period.

 

  1. Unearned revenue is:
    A. An asset.
    B. Income.
    C. A liability.
    D. An expense.

 

 

  1. Which of the following is not a purpose of adjusting entries?
    A. To prepare the revenue and expense accounts for recording transactions of the following period.
    B. To apportion the proper amounts of revenue and expense to the current accounting period.
    C. To establish the proper amounts of assets and liabilities in the balance sheet.
    D. To accomplish the objective of offsetting the revenue of the period with all the expenses incurred in generating that revenue.

 

  1. Which of the following situations does not require Empire Company to record an adjusting entry at the end of January?
    A. On January 1, Empire Company purchased delivery equipment with an estimated useful life of five years.
    B. On January 1, Empire Company began delivery service for a large client who will pay at the end of a three-month period.
    C. At the end of January, Empire Company pays the custodian for January office cleaning services.
    D. On January 1, Empire Company paid rent for six months on its office building.

 

  1. Adjusting entries are needed:
    A. Whenever revenue is not received in cash.
    B. Whenever expenses are not paid in cash.
    C. Only to correct errors in the initial recording of business transactions.
    D. Whenever transactions affect the revenue or expenses of more than one accounting period.

 

  1. Adjusting entries help achieve the goals of accrual accounting by applying the following two accounting principles:
    A. Business entity concept and realization principle.
    B. Cost principle and the accounting equation.
    C. Realization principle and matching principle.
    D. Matching principle and safety principle.

 

 

  1. No adjusting entry should consist of:
    A. A debit to an expense and a credit to an asset.
    B. A debit to an expense and a credit to revenue.
    C. A debit to an expense and a credit to a liability.
    D. A debit to a liability and a credit to revenue.

 

  1. The entry to record depreciation is an example of an adjusting entry:
    A. To apportion a recorded cost.
    B. To apportion unearned revenue.
    C. To convert a liability to revenue.
    D. To record unrecorded revenue.

 

  1. During the last month of its fiscal year, Echo Lake Resort accepted numerous deposits from customers. By the end of the month many, but not all, of these guests had completed their stays. The entry to record this event is an example of an adjusting entry:
    A. To apportion a recorded cost.
    B. To apportion unearned revenue.
    C. To record unrecorded expenses.
    D. To record unearned revenue.

 

  1. Prepaid expenses are:
    A. Assets.
    B. Income.
    C. Liabilities.
    D. Expenses.

 

  1. Colonial Systems prepares monthly financial statements. Colonial would record a prepaid expense in each of the following situations except:
    A. Colonial Systems purchased a two-year fire insurance policy.
    B. Colonial Systems paid for six months’ gardening services in advance.
    C. A tenant paid Colonial Systems three months’ rent in advance.
    D. Colonial Systems purchased enough office supplies to last several months.

 

 

  1. Which of the following statements is not true regarding prepaid expenses?
    A. Prepaid expenses represent assets.
    B. Prepaid expenses are shown in a special section of the income statement.
    C. Prepaid expenses become expenses only as goods or services are used up.
    D. Prepaid expenses appear in the balance sheet.

 

  1. The concept of materiality:
    A. Involves only tangible assets and not intangible assets.
    B. Relates only to the income statement and not the balance sheet.
    C. Is always an exact percentage of a financial account balance.
    D. Is measured as an item significant enough to influence the decisions of users of financial statements.

 

  1. The balance of an unearned revenue account:
    A. Appears in the balance sheet as a component of owners’ equity.
    B. Appears in the income statement along with other revenue accounts.
    C. Appears in a separate section of the income statement for revenue not yet earned.
    D. Appears in the liability section of the balance sheet.

 

  1. In which of the following situations would Daystar Company record unearned revenue in May?
    A. In April, Daystar Company received payment from a customer for services that are performed in May.
    B. Daystar Company completes a job for a customer in May; payment will be received in June.
    C. Daystar Company is paid on May 25 for work done in the first two weeks of May.
    D. Daystar Company receives payment in May for work to be performed in June and July.

 

  1. Interest that has accrued during the accounting period on a note payable requires an adjusting entry consisting of:
    A. A debit to Interest Expense and a credit to Cash.
    B. A debit to Notes Payable and a credit to Interest Payable.
    C. A debit to an asset and a credit to a liability.
    D. A debit to Interest Expense and a credit to Interest Payable.

 

 

  1. The adjusting entry to record interest that has accrued on a note payable to the bank will cause an immediate:
    A. Increase in liabilities and reduction in net income.
    B. Decrease in liabilities and reduction in net income.
    C. Decrease in assets and reduction in net income.
    D. Increase in assets and increase in net income.

 

  1. Which of the following would not be considered an adjusting entry?

    A. A Above.
    B. B Above.
    C. C Above.
    D. D Above.

 

  1. In which of the following situations would an adjusting entry be made at the end of January to record an accrued expense?
    A. Ramona’s Nursery purchased playground equipment on January 1 with an estimated useful life of six years.
    B. On January 25, Ramona’s Nursery hired a college student to drive the minibus; the new employee is to begin work in February.
    C. January 31 falls on a Tuesday; salaries are paid on Friday of each week.
    D. On January 31, Ramona’s Nursery paid the interest owed on a note payable for January.

 

 

  1. As of January 31, Princess Company owes $500 to Butler Co. for equipment rented during January. If no adjustment is made for this item at January 31, how will Princess’s financial statements be affected?
    A. Cash will be overstated at January 31.
    B. Net income for January will be overstated.
    C. Owners’ equity will be understated.
    D. The financial statements will be accurate since the $500 does not have to be paid yet.

 

  1. The accountant for the Grassroots Company failed to make an adjusting entry to record revenue earned but not yet billed to customers. The effect of this error is:
    A. An overstatement of assets and of net income offset by an understatement of owners’ equity.
    B. An overstatement of net income and an understatement of assets.
    C. An understatement of assets, net income, and owners’ equity.
    D. An overstatement of liabilities offset by an understatement of owners’ equity.

 

  1. Recently, Bon Appetite Café contracted and paid for a relatively expensive advertisement in Haute Cuisine magazine. Despite the fact that the ad will appear in Haute Cuisine three months after the end of Bon Appetite Café’s current fiscal year, the Cafe’s accountant recorded the disbursement to advertising expense. If no adjusting entry is made, how will this year’s financial statements of Bon Appetite Café be affected?
    A. Net income will be overstated and total assets will be understated.
    B. Net income will be overstated and total assets will be overstated.
    C. Net income will be understated and total assets will be understated
    D. Net income will be understated and total assets will be overstated.

 

  1. An adjusting entry involving recognition of accrued revenue is necessary at the end of March in which of the following situations?
    A. Midwood Consultants received payment in February for consulting services rendered in March.
    B. Midwood Consultants began working for a client on March 15; bills will be sent monthly beginning April 15.
    C. Midwood Consultants made payment in January for office rent for the first three months of the year.
    D. On March 31, a major customer paid his bill for a consulting job completed in February.

 

 

  1. An example of a contra-asset account is:
    A. Depreciation Expense.
    B. Accumulated Depreciation.
    C. Prepaid expenses.
    D. Unearned revenue.

 

  1. Which of the following entries causes an immediate decrease in assets and in net income?
    A. The entry to record depreciation expense.
    B. The entry to record revenue earned but not yet received.
    C. The entry to record the earned portion of rent received in advance.
    D. The entry to record accrued wages payable.

 

  1. Which of the following is not considered an end-of-period adjusting entry?
    A. The entry to record the portion of unexpired insurance which has become expense during the period.
    B. An entry to record revenue which has been earned but has not yet been billed to customers.
    C. The entry to record depreciation expense.
    D. An entry to record repayment of a bank loan and to recognize related interest expense.

 

  1. Which of the following is the accounting principle that governs the timing of revenue recognition?
    A. Realization principle.
    B. Materiality.
    C. Matching.
    D. Depreciation.

 

 

  1. Which of the following statements concerning materiality is true?
    A. Generally accepted accounting principles are violated if estimates are used in end-of-period adjustments.
    B. Each year the Financial Accounting Standards Board (FASB) publishes the dollar amount considered “material” for each industry.
    C. Immaterial items should be handled in the most expedient manner, even if resulting financial statements are not completely precise.
    D. Accountants should not waste time and money in recording transactions involving small dollar amounts.

 

  1. The concept of materiality:
    A. Treats as material only those items that are greater than 2% or 3% of net income.
    B. Justifies ignoring the matching principle or the realization principle in certain circumstances.
    C. Affects only items reported in the income statement.
    D. Results in financial statements that are less useful to decision makers because many details have been omitted.

 

  1. Which of the following would not be a proper application of the concept of materiality by Millridge Corporation?
    A. Transactions involving small dollar amounts are not recorded in Millridge’s accounting records.
    B. Estimates of supplies on hand are used to determine the supplies expense for the period.
    C. On a monthly basis, utility bills are expensed in the month paid, rather than in the month in which services are used.
    D. Immaterial items are ignored in making end-of-period adjusting entries.

 

  1. After preparing the financial statements for the current year, the accountant for Barbara’s Jewel Co closed the dividends account at year-end by debiting Retained Earnings and crediting the dividends account. What is the effect of this entry on current-year net income and the balance in the owners’ equity account(s) at year-end?
    A. Net income is overstated; balance in the retained earnings account is correct.
    B. Net income is correct; balance in the capital stock account is correct.
    C. Net income is understated; balance in the capital stock account is correct.
    D. Net income is understated; balance in the retained earnings account is understated.

 

 

  1. Which of the following accounting principles is concerned with offsetting revenue with the expenses incurred in producing that revenue?
    A. Realization principle.
    B. Materiality.
    C. Matching.
    D. Depreciation.

 

  1. Which of the following is not an example of an adjusting entry?
    A. The entry to record unpaid expenses.
    B. The entry to record uncollected revenues.
    C. The entry to convert liabilities to revenue.
    D. The entry to pay outstanding bills.

 

  1. Unearned revenue appears:
    A. As income on the income statement.
    B. As an asset on the balance sheet.
    C. As a liability on the balance sheet.
    D. As a part of the retained earnings.

 

  1. Prepaid expenses appear:
    A. As an expense on the income statement.
    B. As an asset on the balance sheet.
    C. As a liability on the balance sheet.
    D. As a reduction to retained earnings.

 

  1. Which of the following is considered an adjusting entry?
    A. The entry to record depreciation.
    B. The entry to pay salaries.
    C. The entry to pay outstanding bills.
    D. The entry to declare a dividend distribution.

 

 

  1. Which of the following is considered a contra-asset account?
    A. Prepaid expenses.
    B. Unearned revenue.
    C. Accumulated depreciation.
    D. Accounts receivable.

 

  1. Which statement is true about land?
    A. Land should be depreciated over the same period as the building located on it.
    B. Land cannot be depreciated for greater than a 40-year period.
    C. Land should not be depreciated.
    D. The straight line method should be used to depreciate land.

 

  1. Which statement is true about an adjusted trial balance?
    A. It is prepared before adjusting entries.
    B. Revenue accounts and expense accounts should not appear on the adjusted trial balance.
    C. Balance sheet items are presented before income statement items.
    D. Accumulated depreciation should equal depreciation expense.

 

  1. On the adjusted trial balance, retained earnings is:
    A. Stated at the period-end amount.
    B. Stated at the period-beginning amount.
    C. Adjusted for all revenues and expenses for the period.
    D. Adjusted for the period’s dividends.

 

  1. Depreciation expense is:
    A. Only an estimate.
    B. An exact calculation prepared by an appraiser.
    C. Not to be calculated unless the exact life of an asset can be determined.
    D. To be determined for all assets owned by a company.

 

 

  1. The cost of insurance is considered an expense:
    A. Only when the entire policy period has passed.
    B. Only when the policy is purchased.
    C. Only when the premium is paid.
    D. Evenly over the term of the policy.

 

  1. Shop supplies are expensed when:
    A. Consumed.
    B. Purchased.
    C. Paid for.
    D. Ordered.

 

  1. Accumulated depreciation is:
    A. The depreciation expense recorded on an asset to date.
    B. The remaining book value of an asset.
    C. The depreciation expense taken on an asset during the current period.
    D. An expense on the income statement.

 

  1. The accrual of interest on a note payable will:
    A. Reduce total liabilities.
    B. Increase total liabilities.
    C. Have no effect upon total liabilities.
    D. Will have no effect upon the income statement but will affect the balance sheet.

 

  1. In which of the following situations would the largest amount be recorded as an expense of the current year? (Assume accrual basis accounting.)
    A. $4,000 is paid in January for equipment with a useful life of four years.
    B. $1,800 is paid in January for a two-year fire insurance policy.
    C. $10,000 cash is withdrawn by the owner for personal use.
    D. $900 is paid to an attorney for legal services rendered during the current year.

 

 

  1. Gourmet Shop purchased cash registers on April 1 for $12,000. If this asset has an estimated useful life of four years, what is the book value of the cash registers on May 31?
    A. $250.
    B. $3,000.
    C. $9,000.
    D. $11,500.

 

  1. Videobusters, Inc. offered books of video rental coupons to its patrons at $40 per book. Each book contained a certain number of coupons for video rentals. During the current period 500 books were sold for $20,000, and this amount was credited to Unearned Rental Revenue. At the end of the period, it was determined that $15,000 worth of book coupons had been used by customers to rent videos. The appropriate adjusting entry at the end of the period would be:
    A. Debit Rental Revenue $5,000 and credit Unearned Rental Revenue $5,000.
    B. Debit Rental Revenue $15,000 and credit Unearned Rental Revenue $15,000.
    C. Debit Unearned Rental Revenue $5,000 and credit Rental Revenue $5,000.
    D. Debit Unearned Rental Revenue $15,000 and credit Rental Revenue $15,000.

 

  1. Regal Real Estate which maintains its accounts on the basis of a fiscal year ending June 30, began the management of an office building on June 15 for an agreed annual fee of $4,800. The first payment is due on July 15. The adjusting entry required at June 30 is:
    A. A debit to Management Fees Receivable for $200 and a credit to a revenue account for $200.
    B. A $200 debit to Unearned Management Fees and a $200 credit to Management Fees Earned.
    C. A debit to Cash for $200 and a credit to Management Fees Earned.
    D. A debit to Cash for $400 offset by a credit to a revenue account for $200 and a liability for $200.

 

 

  1. Great Kids Co. began providing day care for the children of employees of a large corporation on January 15 for an agreed monthly fee of $9,000. The first payment is to be received on February 15. The adjusting entry required by Great Kids Co. on January 31 includes:
    A. A credit to Child Care Fees Earned of $4,500.
    B. A debit to Child Care Fees Receivable of $9,000.
    C. A debit to Unearned Child Care Revenue of $4,500.
    D. A debit to Fees Receivable of $9,000.

 

  1. Before any month-end adjustments are made, the net income of Bennett Company is $76,000. The following adjustments are necessary: office supplies used, $3,160; services performed for clients but not yet recorded or collected, $3,640; interest accrued on note payable to bank, $3,040. After adjusting entries are made for the items listed above, Bennett Company’s net income will be:
    A. $66,160.
    B. $78,560.
    C. $73,440.
    D. $76,000

 

  1. The accountant for Perfect Painting forgot the following two adjustments at the end of 2010:
    (a) The entry to record depreciation: $3,000.
    (b) The entry to record the portion of fees received in advance which have now been earned: $3,000.
    As a result of these two omissions:
    A. Net income for Perfect Painting for 2010 is overstated.
    B. Net income for Perfect Painting for 2010 is understated.
    C. Assets of Perfect Painting are overstated at December 31, 2010.
    D. Liabilities of Perfect Painting are understated at December 31, 2010.

 

 

  1. Before making month-end adjustments, net income of Cardinal Company was $116,000 for March. Adjusting entries are necessary for the following items:
    -Depreciation for the month of March: $2,300.
    -Interest income accrued to March 31, on deposits in banks: $800.
    -Supplies used in March: $100.
    -Fees earned in March that had been collected in advance: $2,600.
    After recording these adjustments, net income for March is:
    A. $112,400.
    B. $113,620.
    C. $117,000.
    D. $110,800.

 

Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31:
(1) A one-year bank loan of $720,000 at an annual interest rate of 12% had been obtained on December 1.
(2) The company pays all employees up-to-date each Friday. Since December 31 fell on Tuesday, there was a liability to employees at December 31 for two day’s pay amounting to $6,800.
(3) On December 1, rent on the office building had been paid for four months. The monthly rent is $6,000.
(4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $9,360; no change has occurred in the account during the year.
(5) Fees of $9,800 were earned during the month for clients who had paid in advance.

 

  1. What amount of interest expense has accrued on the bank loan?
    A. $6,400.
    B. $7,000.
    C. $7,200.
    D. $7,800.

 

 

  1. The accrued interest should be:
    A. Debited to Notes Payable.
    B. Credited to Interest Payable.
    C. Credited to Cash.
    D. Credited to Interest Expense.

 

  1. By what amount will the book value of the office equipment decline after the appropriate December adjustment is recorded?
    A. $1,560.
    B. $130.
    C. $0.
    D. $1,430.

 

  1. After the appropriate adjusting entry is recorded, the balance in the liability account Unearned Fees will:
    A. Decrease by $9,800.
    B. Increase by $9,800.
    C. Equal $9,800.
    D. Be unaffected.

 

  1. The entry to record rent expense will include:
    A. A debit to Prepaid Rent for $6,000.
    B. A credit to Prepaid Rent for $6,000.
    C. A credit to Prepaid Rent for $18,000.
    D. A debit to Prepaid Rent for $18,000.

 

  1. Failure to make the appropriate adjustment to the Salary Expense account will:
    A. Understate net income for December by $6,800.
    B. Understate net income for January by $6,800.
    C. Overstate total liabilities at December 31.
    D. Overstate the balance in Cash at December 31.

 

 

Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance at March 31 before adjustments is as follows:
 

  1. According to service contracts, $4,810 of the Unearned Service Revenue has been earned in March. The amount of Service Revenue Earned to be reported in the March income statement is:
    A. $16,510.
    B. $21,320.
    C. $11,700.
    D. $20,410.

 

  1. On March 1, Hoffman paid in advance for four months’ insurance. The necessary adjusting entry at March 31 includes which of the following?
    A. A credit to Prepaid Insurance for $2,340.
    B. A credit to Prepaid Insurance for $780.
    C. A debit to Prepaid Insurance for $2,340.
    D. A debit to Prepaid Insurance for $780.

 

 

  1. At March 31, the amount of supplies on hand is $520. What amount is reported in the January income statement for supplies expense?
    A. $1,300.
    B. $0.
    C. $520.
    D. $780.

 

  1. The equipment had an estimated useful life of five years. Compute the book value of the equipment at March 31, after the proper March adjustment is recorded.
    A. $10,833.
    B. $15,167.
    C. $25,567.
    D. $10,400.

 

  1. Employees are owed $750 for services since the last payday in March, to be paid the first week in April. The amount to be reported in the March income statement for salaries expense is:
    A. $7,800.
    B. $750.
    C. $7,050.
    D. $8,550.

 

  1. On December 31, Louis Jeweler’s made an adjusting entry to record $4,200 accrued interest payable on its mortgage. On January 10, the mortgage payment was made. This payment included interest charges of $6,300, $2,100 of which were applicable to the period from January 1 through January 10. When recording this mortgage payment, the accountant should:
    A. Debit Interest Expense $2,100 and debit Accrued Interest Payable $4,200.
    B. Debit Interest Expense $6,300.
    C. Debit Accrued Interest Payable $6,300.
    D. Debit Interest Expense $2,100 and credit Accrued Interest Payable $4,200.

 

 

  1. An asset purchased on January 1, 2006 for $60,000 that has an estimated life of 10 years will have a book value on December 31, 2009 of:
    A. $60,000.
    B. $24,000.
    C. $36,000.
    D. $42,000.

 

  1. If an asset was purchased on January 1, 2006 for $140,000 with an estimated life of 5 years, what is the accumulated depreciation at December 31, 2009?
    A. $28,000.
    B. $112,000.
    C. $56,000.
    D. $84,000.

 

  1. Under accrual accounting, salaries earned by employees but not yet paid should be expensed:
    A. In the period in which they are earned.
    B. In the period in which they are paid.
    C. In the period with the higher earnings.
    D. In the period with the lower earnings.

 

  1. Under accrual accounting, fees received in advance from customers should be shown as being earned:
    A. When cash is collected.
    B. When services are performed or goods delivered.
    C. When tax rates are low.
    D. When tax rates are high.

 

 

  1. Dolphin Co. received $1,500 in fees during 2009, 1/3 of which was earned in 2010, the rest was earned when received. The company should report which of the following amounts as income in 2009?
    A. $1,500.
    B. $500.
    C. $1,000.
    D. $0.

 

  1. Swordfish Co. earned $75,000 in 2009 and expects to receive 2/3 of the amount in 2010 and the remainder in 2011. How much revenue should they report in 2009?
    A. $0.
    B. $25,000.
    C. $50,000.
    D. $75,000.

 

  1. Tuna Co. purchased a building in 2009 for $650,000 and debited an asset called “Buildings” for the entire amount. The company never depreciated the building although it had a useful life of 15 years. This action will cause:
    A. Net income to be understated.
    B. Net income to be overstated.
    C. Net income will not be affected.
    D. Total assets will be understated.

 

  1. Leland Corp. has a note receivable from Jewel Co for $50,000. The note matures in 2 years and bears interest of 3%. Leland is preparing financial statements for the quarter ending June 30. Leland should make an adjusting entry:
    A. Debiting Interest Revenue for $375 and crediting Interest Receivable for $375.
    B. Debiting Interest Receivable for $375 and crediting Interest Revenue for $375.
    C. Debiting Interest Revenue for $1,500 and crediting Interest Receivable for $1,500.
    D. Crediting Interest Payable for $375 and debiting Interest Expense for $375.

 

 

  1. Mounder Corp. charges interest on its past due accounts receivable. A late fee of 18% per annum is added to each past due account. Mounder is preparing financial statements for the month of July and has determined there are $18,000 in past due accounts. Mounder should make an adjusting entry as follows
    A. Debiting Late Fee Revenue for $270 and crediting Accounts Receivable for $270.
    B. Debiting Accounts Receivable for $270 and crediting Late Fee Revenue for $270
    C. Debiting Late Fee Revenue for $3,240 and crediting Late Fee Receivable for $3,240.
    D. Crediting Late Fee Payable for $270 and debiting Late Fee Expense for $270.

 

  1. Gordy’s Corp. has seven employees. Each earns $800 per week for a five day work week ending on Friday. This month, the last day of the month falls on a Thursday. The company should make an adjusting entry:
    A. Debiting Wage Expense for $4,480 and crediting Wages Payable for $4,480.
    B. Debiting Wage Expense for $640 and crediting Wages Payable for $640.
    C. Crediting Wage Expense for $4,480 and debiting Wages Payable for $4,480.
    D. Crediting Wage Expense for $640 and debiting Wages Payable for $640.

 

  1. Before any month-end adjustments are made, the net income of Russell Company is $38,000. However, the following adjustments are necessary: office supplies used, $3,160; services performed for clients but not yet recorded or collected, $3,040; interest accrued on a note payable to bank, $3,640. After adjusting entries are made for the items listed above, Russell Company’s net income would be:
    A. $38,000.
    B. $34,240.
    C. $41,160.
    D. $44,200.

 

Chapter 09

Plant and Intangible Assets

 

True / False Questions

  1. Incidental costs incurred in the purchase of land that are charged to Land Improvements will affect net income at some future time.
    True    False

 

  1. To capitalize an expenditure means charging it to an asset account.
    True    False

 

  1. Charging an expenditure directly to an expense account is based on the assumption that the benefits of that expenditure have been used up in the current period.
    True    False

 

  1. The journal entry to record depreciation expense consists of a credit to Accumulated Depreciation and a debit to the asset being depreciated.
    True    False

 

  1. Depreciation is a process of asset valuation.
    True    False

 

  1. Book value represents the cost of an asset that is yet to be allocated to expense.
    True    False

 

  1. The half-year convention allows us to take six months depreciation during the first year of an asset’s life even if the asset was purchased on January 25th.
    True    False

 

  1. The book value of an asset is equal to its cost plus accumulated depreciation.
    True    False

 

  1. The formula for the double-declining balance method of depreciation is: Remaining book value times the straight line rate is equal to depreciation expense.
    True    False

 

  1. The rule of consistency does not require a company to use the same method of depreciation from year to year for all assets.
    True    False

 

  1. The term plant assets refers to long-lived assets acquired for use in business operations, rather than for resale to customers.
    True    False

 

  1. Any reasonable and necessary expenditures to place a newly acquired plant asset in service should be debited to a separate asset account.
    True    False

 

  1. Sales tax on equipment is not part of the acquisition cost and should not be capitalized.
    True    False

 

  1. Land improvements are not subject to depreciation.
    True    False

 

  1. It is an acceptable accounting practice to treat an expenditure that is not material in dollar amount as an expense of the current period even though the expenditure may benefit several periods.
    True    False

 

  1. The erroneous recording of a revenue expenditure as a capital expenditure will cause an overstatement of total revenue for the period.
    True    False

 

  1. In accounting, depreciation refers to a decline in the asset’s current market value, not the allocation of the cost of an asset to expense.
    True    False

 

  1. Just as there are depreciation methods to calculate the decline in value of assets, there are appreciation methods to record the increase in value of assets.
    True    False

 

  1. If an accelerated depreciation method is used for an asset with a useful life of five years, more depreciation expense would be recorded in the third year than in the fifth year.
    True    False

 

  1. Revenue expenditures are a part of selling and administrative expenses.
    True    False

 

  1. Under the half-year convention, six months’ depreciation is recorded on an asset in the year of acquisition and in the year of retirement regardless of the month in which the asset is actually purchased or retired.
    True    False

 

  1. Once the estimated life is determined for a depreciable asset it can never be changed.
    True    False

 

  1. Annual depreciation expense is increased when salvage values are small.
    True    False

 

  1. Most companies benefit by using accelerated depreciation methods for income tax purposes.
    True    False

 

  1. Goodwill is only recorded when the value of a company increases and not when it decreases in value.
    True    False

 

  1. Straight-line is the most widely used depreciation method in financial statements, and MACRS is the most widely used method in federal income tax returns.
    True    False

 

  1. The tax basis of a depreciable asset generally is higher than the book value of that asset for financial reporting purposes.
    True    False

 

  1. Research and development costs should be capitalized to match the period of benefit.
    True    False

 

  1. The systematic write-off of intangible assets to expense is called depletion.
    True    False

 

  1. The balance sheet always reflects a company’s current values.
    True    False

 

  1. U. S. GAAP requires that a company should capitalize goodwill and adjust its value if subject to impairment.
    True    False

 

  1. A revenue expenditure is an operating expense.
    True    False

 

  1. A capital expenditure is charged to owners’ capital.
    True    False

 

 

Multiple Choice Questions

  1. After March, 2004 international standards required that goodwill:
    A. Be capitalized and amortized over 20 years or less.
    B. Be capitalized and amortized over 40 years or less.
    C. Be capitalized and reviewed annually and its value should be adjusted if impaired.
    D. Be expensed immediately.

 

  1. If an asset is determined to be impaired, it should be:
    A. Depreciated only using the straight-line method.
    B. Written up to its historical cost.
    C. Reclassified as a liability.
    D. Written down to its fair market value.

 

  1. All of the following may be considered intangible assets except:
    A. Accounts receivables.
    B. Copyrights.
    C. Franchises.
    D. Goodwill.

 

  1. The cost of a new windshield wiper on a delivery vehicle would be classified as:
    A. A capital expenditure.
    B. A revenue expenditure.
    C. Part of the cost of goods sold.
    D. An unusual and infrequent expense.

 

  1. When straight-line depreciation is in use, the depreciation rate of an asset is equal to:
    A. 1 divided by the life of the asset.
    B. 1 divided by the cost of the asset.
    C. The cost of the asset divided by the life of the asset.
    D. The cost of the asset less its salvage value divided by the life of the asset.

 

  1. When a depreciable asset is sold at a price equal to its book value, a journal entry would include:
    A. A credit to the asset account for its book value.
    B. A debit to accumulated depreciation.
    C. A credit to accumulated depreciation.
    D. A credit to cash.

 

  1. All of the following assets are amortized except:
    A. Patents.
    B. Franchises.
    C. Copyrights.
    D. Natural resources.

 

  1. Land is purchased for $256,000. Additional costs include a $15,300 fee to a broker, a survey fee of $2,400, $1,750 to construct a fence, and a legal fee of $8,500. What is the cost of the land?
    A. $256,000.
    B. $281,000.
    C. $284,600.
    D. $282,200.

 

  1. If the 150% declining balance method is being used and an asset has a useful life of 20 years what is the depreciation rate?
    A. 7.5%.
    B. 10%.
    C. 15%.
    D. Some other amount.

 

  1. Machinery is purchased on May 15, 2009 for $50,000 with a $5,000 salvage value and a five year life. The half year convention is followed. What method of depreciation will give the highest amount of depreciation expense in year 2?
    A. Straight line
    B. Double declining balance
    C. 150% declining balance
    D. Amount cannot be determined

 

  1. An asset which costs $18,800 and has accumulated depreciation of $6,000 is sold for $11,600. What amount of gain or loss will be recognized when the asset is sold?
    A. A gain of $1,200.
    B. A loss of $1,200.
    C. A loss of $7,200.
    D. A gain of $7,200.

 

  1. The entry to record amortization on a copyright would include:
    A. A debit to amortization expense
    B. A debit to accumulated amortization
    C. A debit to copyright
    D. A credit to amortization expense

 

  1. Which of the following would not be considered part of the cost of equipment recently purchased?
    A. Sales tax.
    B. Transportation charges.
    C. Installation and setup charges.
    D. All three are capitalized costs.

 

  1. Armstrong Company recently acquired a new computer system. Which of the following costs associated with the computer should not be debited to the Equipment account?
    A. Insurance coverage purchased by Armstrong to cover the computer during shipment from the manufacturer.
    B. Wages paid to system programmers hired to prepare the new computer for use.
    C. Replacement of several circuit boards damaged during installation.
    D. Installation of new electrical power supplies required for the computer.

 

  1. Coca-Cola’s famous name printed in distinctive typeface is an example of:
    A. A trademark.
    B. A patent.
    C. A copyright.
    D. Goodwill.

 

  1. When comparing the units-of-output method of depreciation with straight-line depreciation:
    A. The depreciation expense in the first year will always be greater under units-of-output method.
    B. The depreciation expense in the first year will always be less under the units-of-output method.
    C. The depreciation expense in the first year will always be the same.
    D. The depreciation expense in the first year may be greater than, equal to, or less under the units-of-output method.

 

  1. The fair market value of Lewis Company’s net identifiable assets is $5,000,000. Martin Corporation purchases Lewis’ entire business for $5,800,000. Which of the following statements is not correct?
    A. Martin Corporation paid $800,000 for goodwill generated by Lewis Company.
    B. Martin feels that Lewis Company has the ability to generate earnings in excess of a normal return on net identifiable assets.
    C. Martin will record amortization expense over a period not to exceed 40 years.
    D. Martin Corporation will record $800,000 to goodwill, an intangible asset, which will be reported in its balance sheet.

 

  1. Tomassi Company paid $450,000 to acquire a piece of real estate consisting of land and an office building with a parking lot. In this situation:
    A. The purchase price should be apportioned among the Land, Land Improvement, and Building accounts.
    B. The entire purchase price should be debited to the Plant and Equipment account.
    C. Land, Land Improvement, and Building accounts should each be debited for the respective appraisal value of each item.
    D. Allocation of the entire $450,000 to Land results in an understatement of net income in the current and future accounting periods.

 

  1. Which of the following is a capital expenditure?
    A. Sales tax paid in conjunction with the purchase of office equipment.
    B. Monthly rent of a delivery truck.
    C. Research and development costs.
    D. Small expenditures to acquire long-lived assets, such as $13 to purchase a wastebasket.

 

  1. The legal life of most patents is:
    A. 5 years.
    B. 20 years.
    C. 40 years.
    D. 50 years.

 

  1. Which of the following should not be treated as a revenue expenditure?
    A. Delivery costs on newly purchased equipment.
    B. Annual fire insurance premiums on plant and equipment.
    C. Repair to an elevator of a five year old building.
    D. The purchase of a pencil sharpener for $10 used in an office.

 

  1. Which of the following is not a capital expenditure?
    A. Advertising expenditures to introduce a new product line.
    B. Sales tax paid in conjunction with the purchase of new machinery.
    C. Installation of elevators to replace escalators.
    D. An amount paid to acquire a patent with a remaining life of only three years.

 

  1. The application of the matching principle to depreciation of plant and equipment can best be described as:
    A. The matching of the book value of an asset with its market value.
    B. Offsetting the revenue of an accounting period with the estimated decline in value of plant and equipment during the accounting period.
    C. Offsetting revenue of an accounting period with the portion of the cost of plant and equipment estimated to have been used up during the accounting period.
    D. The matching of the depreciation expense reported in the income statement for an accounting period with the accumulated depreciation reported in the balance sheet.

 

  1. The term accumulated depreciation, as used in accounting, is best defined as:
    A. The portion of a plant asset recognized as expense since the asset was acquired.
    B. Funds (or cash) set aside to replace the asset being depreciated.
    C. Earnings retained in the business that will be used to purchase another asset when the present asset is depreciated.
    D. An expense of doing business.

 

  1. Which depreciation method is most commonly used among publicly owned corporations?
    A. Straight-line.
    B. Double-declining balance.
    C. Units-of-output.
    D. All of the various depreciation methods are used equally.

 

  1. The book value of an asset in the plant and equipment category is:
    A. The undepreciated cost of the asset.
    B. The current replacement cost of the asset.
    C. The original cost of the asset.
    D. The accumulated depreciation on the asset to date.

 

  1. A gain is recognized on the disposal of plant assets when:
    A. The sales price is greater than the residual value but less than the book value.
    B. The sales price is less than both the book value and the residual value.
    C. The sales price is greater than the book value and greater than the residual value.
    D. The sales price is greater than the book value and less than the residual value.

 

  1. Which of the following would not be amortized?
    A. Oil well.
    B. Copyright.
    C. Franchise fee.
    D. Patent.

 

  1. An accelerated depreciation method:
    A. Results in reporting higher earnings every year.
    B. Depreciates an asset over a shorter life than does the straight-line method.
    C. Recognizes more depreciation expense in the early years of an asset’s useful life and less in the later years.
    D. Is required for assets that become technologically obsolete before they physically wear out.

 

  1. Accelerated depreciation methods are used primarily in:
    A. Income tax returns.
    B. The financial statements of small businesses.
    C. The financial statements of publicly owned corporations.
    D. Companies with computer-based accounting systems.

 

  1. Capital expenditures are recorded as:
    A. An expense.
    B. An asset.
    C. A liability.
    D. Income.

 

  1. In the fixed-percentage-of-declining-balance depreciation method, the book value of the asset is multiplied by:
    A. An increasing depreciation rate.
    B. A constant depreciation rate.
    C. A decreasing depreciation rate.
    D. A rate that changes each year but is determined from a table.

 

  1. Revenue expenditures are recorded as:
    A. An expense.
    B. An asset.
    C. A liability.
    D. Income.

 

  1. Which of the following situations is impossible?
    A. Book value is greater than residual value.
    B. Book value is equal to the residual value.
    C. Book value is less than residual value.
    D. Book value is less than the original cost.

 

  1. For depreciable property other than real estate, MACRS is based upon:
    A. Either the 150% or 200% declining-balance method.
    B. The straight-line method.
    C. A 10-year recovery period.
    D. The depreciation method and recovery period used by the company in its financial statements.

 

  1. Which of the following statements about MACRS is not correct?
    A. MACRS is the only accelerated depreciation method that may be used on newly acquired assets for federal income tax purposes.
    B. The method permits “depreciating” the asset to a tax basis of $0 over a specified recovery period.
    C. If a company uses MACRS in its income tax returns, it also must use MACRS in its financial statements.
    D. Most businesses would benefit from using MACRS rather than straight-line depreciation in their income tax returns.

 

  1. The term net identifiable assets means:
    A. All assets minus all liabilities.
    B. All assets except goodwill, minus all liabilities.
    C. All assets except intangibles, minus all liabilities.
    D. All fixed assets less liabilities.

 

  1. Responsibility for selection of the depreciation methods used in financial reporting rests with:
    A. Company management.
    B. The FASB.
    C. The IRS.
    D. The CPA firm that audits the company’s financial statements.

 

  1. With respect to depreciation policies, the principle of consistency means:
    A. A company should use the same depreciation methods in its financial statements that it uses in its income tax returns.
    B. A company should use the same depreciation methods as other companies in the same industry.
    C. A company should use the same depreciation method from year to year for a given plant asset.
    D. A company should use the same depreciation method in computing depreciation expense on all its assets.

 

  1. The book value of plant assets (other than land):
    A. Increases with the passage of time.
    B. Decreases with the passage of time.
    C. Remains the same with the passage of time.
    D. May increase or decrease depending upon the economy.

 

  1. The gain on the disposal of equipment is recognized when:
    A. The book value of the equipment is greater than the value received.
    B. The book value of the equipment is less than the value received.
    C. A salvage value exists.
    D. A gain should not be recognized on the disposal of an asset.

 

  1. For financial reporting purposes, the gain or loss on the sale of a plant asset is determined by comparing the asset’s:
    A. Cost with its book value.
    B. Sales price with its book value.
    C. Tax basis with its book value.
    D. Sales price with its tax basis.

 

  1. The gain or loss on the disposal of a depreciable asset reported in financial statements often differs from that reported for income tax purposes. The principal reason for the difference is:
    A. The cost of the asset is different for financial reporting and income tax purposes.
    B. The sales price of the asset is different for financial reporting and income tax purposes.
    C. Different depreciation methods have been used in financial statements and in income tax returns.
    D. The company has made an error because the same amount of gain or loss should appear in the income tax return as in the financial statements.

 

  1. When a company uses straight-line depreciation and the half-year convention, assets with a five-year life:
    A. Will have the same depreciation expense in the first and last years.
    B. Will be depreciated over six accounting years.
    C. Book value will equal its salvage value at the end of its economic life.
    D. All of the above statements are correct.

 

  1. Which of the following assets is not subject to depreciation and whose usefulness does not decline over time?
    A. Patents.
    B. Copyrights.
    C. Land.
    D. Coal mine.

 

  1. Intangible assets are assets used in business operations but which:
    A. Lack physical substance.
    B. Cannot be sold.
    C. Have been depreciated below their estimated salvage values.
    D. Cannot be specifically identified.

 

  1. For the financial statements of publicly traded companies, MACRS:
    A. Is recommended.
    B. Is required.
    C. Is optional.
    D. Is not considered to be in conformity with GAAP.

 

  1. The inclusion of the intangible asset goodwill in the financial statements of a company indicates:
    A. That the company has a favorable reputation with its customers.
    B. A monopoly position in the industry or superior management.
    C. An unbroken record of annual earnings and dividends.
    D. That the company has purchased a going business at a price in excess of the fair market value of the net identifiable assets.

 

  1. Expenditures for research and development intended to lead to new products of commercial value:
    A. Should be recorded as intangible assets and amortized during the years in which benefits are expected.
    B. Should be charged to expense when incurred.
    C. Should be capitalized only if patents are expected to be granted.
    D. Should be classified as deferred charges.

 

  1. The basic purpose of the matching principle is to allocate the cost of an asset to expense over the years in which the asset contributes to revenue. Current accounting practice does not strictly apply this principle to expenditures for:
    A. Natural resources.
    B. Research and development.
    C. Trademarks.
    D. Equipment.

 

  1. The adjusting entries to record depreciation or amortization expense or to write down assets that have become impaired:
    A. Reduce both net income and cash balances.
    B. Reduce net income, but have no direct effect on cash balances.
    C. Decrease cash balances, but have no direct effect upon net income.
    D. Affect neither net income nor cash balances.

 

  1. Harvard Company purchased equipment having an invoice price of $11,500. The terms of sale were 2/10, n/30, and Harvard paid within the discount period. In addition, Harvard paid a $160 delivery charge, $185 installation charge, and $931 sales tax. The amount recorded as the cost of this equipment is:
    A. $11,845.
    B. $12,776.
    C. $11,615.
    D. $12,546.

 

  1. Land and a warehouse were acquired for $890,000. What amounts should be recorded in the accounting records for land and for the warehouse if an appraisal showed the estimated values to be $400,000 for the land and $700,000 for the warehouse?
    A. $400,000 for land; $490,000 for warehouse.
    B. $323,960 for land; $566,040 for warehouse.
    C. $400,000 for land; $700,000 for warehouse.
    D. $190,000 for land; $700,000 for warehouse.

 

  1. On March 2, 2009, Glen Industries purchased a fleet of automobiles at a cost of $550,000. The cars are to be depreciated by the straight-line method over five years with no salvage value. Glen uses the half-year convention to compute depreciation for fractional periods. The book value of the fleet of automobiles at December 31, 2010, will be:
    A. $165,000.
    B. $400,000.
    C. $495,000.
    D. $385,000.

 

  1. On April 8, 2009, Jupitor Corp. acquired equipment at a cost of $480,000. The equipment is to be depreciated by the straight-line method over six years with no provision for salvage value. Depreciation for fractional years is computed by rounding the ownership period to the nearest month. Depreciation expense recognized in 2009 will be:
    A. $53,333.
    B. $66,667.
    C. $60,000.
    D. $80,000.

 

On April 30, 2009, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $8,000 residual value.

 

  1. Refer to the information above. Assume that in its financial statements, Tilton Products uses straight-line depreciation and the half-year convention. Depreciation expense recognized on this machinery in 2009 and 2010 will be:
    A. $7,500 in 2009 and $11,000 in 2010.
    B. $6,000 in 2009 and $12,000 in 2010.
    C. $5,000 in 2009 and $10,000 in 2010.
    D. $5,500 in 2009 and $11,000 in 2010.

 

  1. Refer to the information above. Assume that in its financial statements, Tilton Products uses straight-line depreciation and rounds depreciation for fractional years to the nearest month. Depreciation expense recognized on this machinery in 2009 and 2010 will be:
    A. $2,333 in 2009 and $7,000 in 2010.
    B. $5,833 in 2009 and $10,000 in 2010.
    C. $6,667 in 2009 and $10,000 in 2010.
    D. $10,000 in 2009 and $10,000 in 2010.

 

  1. Refer to the information above. Assume that in its financial statements, Tilton Products uses the 200%-declining-balance method and the half-year convention. Depreciation expense in 2009 and 2010 will be:
    A. $11,000 in 2009 and $19,250 in 2010.
    B. $22,000 in 2009 and $12,571 in 2010.
    C. $22,000 in 2009 and $7,857 in 2010.
    D. $11,000 in 2009 and $22,000 in 2010.

 

  1. Refer to the information above. Assume that in its financial statements, Tilton Products uses the 150%-declining-balance method and the half-year convention. Depreciation expense in 2009 and 2010 will be:
    A. $8,250 in 2009 and $14,953 in 2010.
    B. $16,500 in 2009 and $12,964 in 2010.
    C. $16,500 in 2009 and $16,500 in 2010.
    D. $15,000 in 2009 and $11,786 in 2010.

 

  1. Refer to the information above. In the year 2015, Tilton Products sells this machinery for $4,500. At the date of sale, the machinery had been depreciated by Tilton Products to its estimated residual value of $8,000. This sale results in:
    A. A $3,500 loss in both the company’s financial statements and income tax return.
    B. No gain or loss in either the financial statements or income tax return.
    C. A $3,500 loss in the financial statements, a $3,500 gain in the income tax return.
    D. A $3,500 loss in the financial statements, but no gain or loss in the income tax return.

 

On April 2, 2009, Victor, Inc. acquired a new piece of filtering equipment. The cost of the equipment was $160,000 with a residual value of $20,000 at the end of its estimated useful lifetime of 4 years.

 

  1. Refer to the information above. Assume that in its financial statements, Victor uses straight-line depreciation and rounds depreciation for fractional years to the nearest whole month. Depreciation recognized on this equipment in 2009 and 2010 will be:
    A. $23,333 in 2009 and $35,000 in 2010.
    B. $40,000 in 2009 and $30,000 in 2010.
    C. $20,000 in 2009 and $35,000 in 2010.
    D. $26,250 in 2009 and $35,000 in 2010.

 

  1. Refer to the information above. Assume that in its financial statements, Victor uses straight-line depreciation and the half-year convention. Depreciation recognized on this equipment in 2009 and 2010 will be:
    A. $40,000 in 2009 and $30,000 in 2010.
    B. $23,333 in 2009 and $30,000 in 2010.
    C. $17,500 in 2009 and $35,000 in 2010.
    D. $20,000 in 2009 and $35,000 in 2010.

 

  1. Refer to the information above. If Victor uses straight-line depreciation with the half-year convention, the book value of the equipment at December 31, 2010 will be:
    A. $90,000.
    B. $107,500.
    C. $106,667.
    D. $105,000.

 

  1. Machinery acquired new on January 1 at a cost of $80,000 was estimated to have a useful life of 10 years and a residual salvage value of $20,000. Straight-line depreciation was used. On January 1, following six full years of use of the machinery, management decided that the estimate of useful life had been too long and that the machinery would have to be retired after three years, that is, at the end of the ninth year of service. Under this revised estimate, the depreciation expense for the seventh year of use would be:
    A. $8,000.
    B. $10,000.
    C. $13,000.
    D. $24,000.

 

  1. Clark Imports sold a depreciable plant asset for cash of $35,000. The accumulated depreciation amounted to $70,000, and a loss of $5,000 was recognized on the sale. Under these circumstances, the original cost of the asset must have been:
    A. $65,000.
    B. $75,000.
    C. $100,000.
    D. $110,000.

 

  1. Mayer Instrumentation sold a depreciable asset for cash of $300,000. The original cost of the asset was $1,200,000. Mayer recognized a gain of $45,000 on the sale. What was the amount of accumulated depreciation on the asset at the time of its sale?
    A. $945,000.
    B. $255,000.
    C. $1,155,000.
    D. $990,000.

 

  1. Suffolk Associates sold office furniture for cash of $42,000. The accumulated depreciation at the date of sale amounted to $38,000, and a gain of $18,000 was recognized on the sale. The original cost of the asset must have been:
    A. $31,000.
    B. $62,000.
    C. $84,000.
    D. $59,000.

 

  1. Total stockholders’ equity of Tucker Company is $4,000,000. The fair market value of Tucker’s net identifiable assets (assets less liabilities) is $5,000,000. Empire Corporation makes an offer to purchase Tucker’s entire business for $5,800,000. In this situation:
    A. Tucker Company should report goodwill of $800,000 in its balance sheet.
    B. Tucker Company should report goodwill of $1,800,000 in its balance sheet.
    C. Empire Corporation is willing to pay $1,800,000 for goodwill generated by Tucker, and Empire will report this goodwill in its balance sheet if the purchase is finalized.
    D. Empire Corporation is willing to pay $800,000 for goodwill generated by Tucker, and Empire will report this goodwill in its balance sheet if the purchase is finalized.

 

  1. Early in the current year, Tokay Co. purchased the Silverton Mine at a cost of $20,000,000. The mine was estimated to contain 200,000 tons of ore and to have a residual value of $5,000,000 after mining operations are completed. During the year, 105,000 tons of ore were removed from the mine. At year-end, the book value of the mine (cost minus accumulated depletion) is:
    A. $15,000,000.
    B. $12,125,000.
    C. $7,875,000.
    D. Less than $10,000,000.

 

  1. In February 2009, Brilliant Industries purchased the Topaz Mine at a cost of $10,000,000. The mine is estimated to contain 500,000 carats of stone and to have a residual value of $500,000 after mining operations are completed. During 2009, 50,000 carats of stone were removed from the mine and sold. In this situation:
    A. The book value of the mine is $9,000,000 at the end of 2009.
    B. The amount of depletion deducted from revenue during 2009 is $950,000.
    C. The amount of depletion deducted from revenue during 2009 is $1,000,000.
    D. The mine is classified as an intangible asset and amortized over a period not to exceed 40 years.

 

  1. Land is purchased for $456,000. Additional costs include a $30,300 fee to a broker, a survey fee of $3,400, $2,750 to construct a fence, and a legal fee of $12,500. What is the cost of the land?
    A. $456,000.
    B. $486,300.
    C. $502,200.
    D. $504,950.

 

  1. An asset which costs $97,600 and has accumulated depreciation of $82,000 is sold for $18,000. What amount of gain or loss will be recognized when the asset is sold?
    A. A gain of $15,600.
    B. A loss of $15,600.
    C. A loss of $2,400.
    D. A gain of $2,400.

 

  1. Yale Company purchased equipment having an invoice price of $21,500. The terms of sale were 2/10, n/30, and Yale paid within the discount period. In addition, Yale paid a $320 delivery charge, $350 installation charge, and $1,183 sales tax. The amount recorded as the cost of this equipment is:
    A. $21,070.
    B. $21,500.
    C. $21,740.
    D. $22,923

 

  1. Early in the current year, Amazon Co. purchased the Rio Silver Mine at a cost of $30,000,000. The mine was estimated to contain 400,000 tons of ore and to have a residual value of $7,500,000 after mining operations are completed. During the year, 115,000 tons of ore were removed from the mine. At year-end, the book value of the mine is:
    A. $22,500,000.
    B. $6,468,750.
    C. $23,531,250.
    D. $30,000,000.

 

  1. In February 2012, Gemstone Industries purchased the Opal Mine at a cost of $20,000,000. The mine is estimated to contain 500,000 carats of stone and to have a residual value of $1,000,000 after mining operations are completed. During 2012, 50,000 carats of stone were removed from the mine and sold. In this situation:
    A. The book value of the mine is $19,000,000 at the end of 2012.
    B. The amount of depletion deducted from revenue during 2012 is $1,900,000.
    C. The amount of depletion deducted from revenue during 2012 is $1,000,000.
    D. The mine is classified as an intangible asset and amortized over a period not to exceed 40 years.Chapter 13

    Statement of Cash Flows

     

    True / False Questions

    1. The principal purpose of a statement of cash flows is to measure the profitability of a business that maintains its accounting records on the cash basis.
      True    False

     

    1. All cash receipts and cash payments not classified as investing or financing activities are classified as indirect activities.
      True    False

     

    1. Interest paid belongs in the operating section of the statement of cash flows.
      True    False

     

    1. Collections of interest revenue are classified as operating activities.
      True    False

     

    1. Dividends paid belong in the operating section of the statement of cash flows.
      True    False

     

    1. In a statement of cash flows, the term cash includes both cash and cash equivalents.
      True    False

     

    1. Companies that show profits on the income statement will always show positive cash flows from operating activities.
      True    False

     

    1. The purchase of equipment for the manufacturing of inventory belongs in the operations section of the statement of cash flows.
      True    False

     

    1. In the long run, it is more important for a business to generate positive cash flows from investing activities than from operating activities.
      True    False

     

    1. Depreciation is a non-cash expense.
      True    False

     

    1. If accounts receivable decrease during the period, cash received from customers probably exceeds net sales.
      True    False

     

    1. Depreciation expense reduces net income but does not reduce the net cash flow from operating activities.
      True    False

     

    1. If cash increased during the year and there was also a net loss for the year, there must be positive cash flows from financing and investing activities.
      True    False

     

    1. Any “non-cash” investing and financing transactions should be disclosed in a supplementary schedule accompanying a statement of cash flows.
      True    False

     

    1. The FASB permits a company to use the direct method or the indirect method for the statement of cash flows.
      True    False

     

    1. Net cash flows from operating activities will have the same total no matter which method is used, direct or indirect.
      True    False

     

    1. Both the direct method and the indirect method of computing net cash flow from operating activities convert accrual-based income statement amounts into cash flows.
      True    False

     

    1. Under the indirect method, when machinery is sold at a gain, the gain is added in the operating section of the statement of cash flows and the cost is added in the investing section.
      True    False

     

    1. A net decrease in accounts payable to suppliers indicates that cash payments to suppliers were less than purchases made during the period.
      True    False

     

    1. Whether one uses the direct or the indirect method of presentation of the statement of cash flows, the totals from each of the three sections (activities) will be the same regardless of the method used.
      True    False

     

    1. Under the indirect method, depreciation, increase in inventories, and “non-operating” losses are added to net income to arrive at net cash flow from operating activities.
      True    False

     

    1. The “worksheet approach” to preparing a statement of cash flows involves analyzing changes in non-cash balance sheet accounts.
      True    False

     

    1. The operating activities section of the cash flow statement includes the cash effects of those transactions reported on the income statement.
      True    False

     

    1. The purchase or sale of marketable securities is reported in the statement of cash flows as a financing activity.
      True    False

     

    1. For a company to survive in the long-run it must have positive cash flows from investing activities.
      True    False

     

    1. If accounts receivable increased during the year, deducting the increase from net sales determines the amount of cash received.
      True    False

     

    1. If a company’s accounts payable has increased over a year, it is an indication that the company is buying more goods.
      True    False

     

    1. To determine cash dividends paid, subtract the increase in dividends payable from the amount of dividends declared.
      True    False

     

    1. The indirect method of computing cash flows from operations begins with net income.
      True    False

     

    1. Products that tie in with a company’s other products are called complementary products.
      True    False

     

    1. Free cash flow refers to the excess of cash inflows over cash outflows.
      True    False

     

    1. When a company uses peak pricing, it is charging the highest or “peak” prices the public will be willing to pay during periods of low demand.
      True    False

     

    1. When applying the direct method in a statement of cash flows, the amount of depreciation is added to net income.
      True    False

     

    1. The SEC requires public companies to use the indirect method for the statement of cash flows.
      True    False

     

    1. Both FASB and IASB require the cash flow statement to be organized in three categories, operating activities, investing activities, and financing activities.
      True    False

     

    1. Large cash flows from operations are more important to financial statement analysts over the long term than cash flows from financing or investing.
      True    False

     

    1. When preparing a statement of cash flows, money held in cash equivalents is considered the same as cash.
      True    False

     

     

    Multiple Choice Questions

    1. All of the following are advantages of an increasing cash flow from operations except:
      A. A company is likely to pay its current bills with cash from operations not earnings.
      B. A company with cash is in a better position to fund growth.
      C. Large cash flows eliminate the need for borrowing.
      D. Earnings are viewed better if cash flows from operations closely match net income.

     

    1. Free cash flow arises out of:
      A. Operating activities.
      B. Investing activities.
      C. Financing activities.
      D. All three types of activities.

     

    1. Peak pricing charges:
      A. A higher price when demand is high and a lower price when demand is low.
      B. A lower price when demand is high and a higher price when demand is low.
      C. A low price when demand is high and a lower price when demand is low.
      D. A high price when demand is high and a higher price when demand is low.

     

    1. Cash flows from operating activities include all of the following except:
      A. Collections from customers for sales of goods.
      B. Interest and dividends received.
      C. Payments of interest.
      D. Payments of dividends.

     

    1. Cash flows from investing activities include all of the following except:
      A. Cash proceeds from selling investments.
      B. Cash proceeds from collections on loans.
      C. Cash advanced to borrowers.
      D. Cash proceeds from borrowing.

     

    1. All of the following are considered cash equivalents except:
      A. Marketable securities.
      B. Money market funds.
      C. Commercial paper.
      D. Treasury bills.

     

    1. Net income differs from net cash flows from operations because of all the following except:
      A. Non-cash expenses such as depreciation.
      B. Timing differences between recognizing revenue and expenses and their cash flows.
      C. Gains and losses included in net income but classified as investing or financings activities.
      D. Non-cash expenses such as depreciation, timing differences between recognizing revenue and expenses and their cash flows, and gains and losses included in net income but classified as investing or financings activities will all will cause a difference between net income and cash flows.

     

    1. All of the following are financing activities except:
      A. Borrowing money.
      B. Lending money.
      C. Selling capital stock.
      D. Paying dividends.

     

    1. A stock dividend is reported on the:
      A. Financing section of the statement of cash flows.
      B. Balance sheet.
      C. Income statement.
      D. Operating section of the statement of cash flows.

     

    1. A statement of cash flows is not intended to assist investors in evaluating:
      A. Reasons for differences between the amount of net income and net cash flow from operations.
      B. The company’s ability to meet its obligations and to pay dividends.
      C. Non-cash aspects of investing and financing activities.
      D. The profitability of business operations.

     

    1. The “bottom line” in a statement of cash flows shows:
      A. The cash (including cash equivalents) on the balance sheet at the end of the period.
      B. Net increase or decrease in cash during the period.
      C. Net income, computed by the cash basis of accounting.
      D. Net cash flow from operating activities.

     

    1. In the statement of cash flows, the purchase of supplies is classified as:
      A. Operating activities.
      B. Financing activities.
      C. Investing activities.
      D. This would not appear on a statement of cash flows.

     

    1. In a statement of cash flows, cash transactions are classified into three major categories. Which of the following is not one of these three categories?
      A. Managing activities.
      B. Operating activities.
      C. Financing activities.
      D. Investing activities.

     

    1. In a statement of cash flows, collections of accounts receivable are classified as:
      A. Operating activities.
      B. Financing activities.
      C. Investing activities.
      D. Revenues and Gains.

     

    1. In a statement of cash flows, payments of dividends are classified as:
      A. Operating activities.
      B. Financing activities.
      C. Investing activities.
      D. Costs and Expenses

     

    1. Which of the following would indicate a cash disbursement?
      A. Selling equipment at a loss.
      B. A decrease in accounts receivable.
      C. An increase in prepaid expenses.
      D. A decrease in inventory.

     

    1. Which of the following does not decrease the cash flow from operating activities?
      A. The prepayment of an expense.
      B. The purchase of operating equipment.
      C. The payment of interest.
      D. The prepayment of an expense, the purchase of operating equipment, and the payment of interest all decrease cash from operating activities.

     

    1. Which of the following is not classified among the operating activities in a statement of cash flows?
      A. Payment of interest on a bank loan.
      B. Payment of the principal amount owed on a bank loan.
      C. Payment of an account payable to a merchandise supplier.
      D. Payment of income taxes.

     

    1. Which of the following is not classified among the investing activities in a statement of cash flows?
      A. Purchase of marketable securities for cash.
      B. Collection of the principal amount of cash loans made to others.
      C. Investment of cash made in the business by the owners.
      D. Purchase of plant assets for cash.

     

    1. Which of the following is not classified among the financing activities in a statement of cash flows?
      A. Long-term borrowing.
      B. Payment of dividends to stockholders.
      C. Payment of interest to creditors.
      D. Short-term borrowing.

     

    1. Which of the following is an investing activity?
      A. Purchase of equipment.
      B. Payment of interest.
      C. Issuing common stock.
      D. Issuing long-term debt.

     

    1. In a statement of cash flows, the term cash includes:
      A. Only money on deposit in bank accounts.
      B. Only bank accounts and cash on hand.
      C. Bank accounts, cash on hand, and cash equivalents.
      D. Bank accounts, cash on hand, cash equivalents, and marketable securities classified as current assets.

     

    1. Which of the following is a financing activity?
      A. Payment of interest.
      B. Payment of dividends.
      C. Making sales on account.
      D. Paying off accounts payable.

     

    1. Which of the following indicates cash receipts?
      A. Debit entries in the Notes Receivable account.
      B. Credit entries in the Marketable Securities account.
      C. Debit entries in the Notes Payable account.
      D. Credit entries in the Accumulated Depreciation account.

     

    1. Which of the following indicates a cash receipt?
      A. A decrease in accrued expenses, such as wages payable.
      B. A decrease in accounts receivable.
      C. An increase in inventory.
      D. A decrease in accounts payable.

     

    1. Which method will yield higher cash flows from operating activities?
      A. The indirect method.
      B. The direct method.
      C. Both direct and indirect methods will yield the same amount.
      D. Depends upon the situation.

     

    1. Which of the following would not be presented in the cash from operating activities section of the statement of cash flows when the indirect method is used?
      A. Gain on the sale of investments.
      B. Depreciation expense.
      C. Neither a gain on the sale of investments nor depreciation expense would be shown.
      D. Both a gain on the sale of investments and depreciation expense would be shown.

     

    1. Which of the following sets of data is sufficient to compute the amount of cash paid for merchandise?
      A. Cost of goods sold, increase or decrease in inventory, increase or decrease in accounts payable.
      B. Increase or decrease in cash, increase or decrease in inventory, increase or decrease in accounts payable.
      C. Cost of goods sold, increase or decrease in accounts payable.
      D. Cost of goods sold.

     

    1. Which of the following does not create a difference between net income and the net cash flow from operations?
      A. Non-operating gains and losses.
      B. Depreciation expense.
      C. Timing differences between credit sales and collections from customers.
      D. Payment of a cash dividend.

     

    1. Which method will yield the higher cash flows from financing activities?
      A. The indirect method.
      B. The direct method.
      C. Both direct and indirect methods will yield the same amount.
      D. Depends upon the situation.

     

    1. Cigna Corporation’s 2010 net income is smaller than net cash flow from operating activities. Which of the following would not be an explanation of why net income is smaller than net cash flow from operating activities?
      A. Cigna paid dividends to shareholders during 2010.
      B. Cigna’s accounts payable increased during 2010.
      C. Cigna recognized depreciation expense in 2010.
      D. Cigna sold equipment at a loss in 2010.

     

    1. When using the indirect method, depreciation expense:
      A. Increases net cash flow from operations.
      B. Decreases net cash flow from operations.
      C. Does not affect net income.
      D. Does not affect net cash flow from operations.

     

    1. At the beginning of 2009, Baldwin Corporation bought an automobile for $36,000 by issuing a note payable. The automobile has a six-year life and is depreciated using the straight-line method. To determine net cash flow from operating activities for 2009 using the indirect method, net income should be:
      A. Increased by $6,000.
      B. Decreased by $6,000.
      C. Increased by $42,000.
      D. Neither increased nor decreased. No adjustments are necessary since no cash was received or paid.

     

    1. Which of the following statements regarding the direct and indirect methods of reporting cash flow from operating activities is false?
      A. Although both methods result in the same net increase or decrease in cash for the year, net cash flow from operating activities will be different under the two methods.
      B. The direct method shows the specific cash inflows and outflows constituting the operating activities of the business.
      C. Under the indirect method, the computation of net cash flow from operating activities begins with net income as shown in the income statement.
      D. The FASB permits both the direct and the indirect methods, but has expressed a preference for the direct method.

     

    1. Which of the following would not be presented in the cash flows from operating activities section of the statement of cash flows when the direct method is used?
      A. Dividends paid.
      B. Dividends received.
      C. Neither dividends paid nor dividends received would be shown.
      D. Both dividends paid and dividends received would be shown.

     

    1. An example of a non-cash investing or financing activity that is disclosed in a supplementary schedule accompanying the statement of cash flows is:
      A. Recording depreciation expense for the current year.
      B. Declaring, but not paying, dividends on common stock.
      C. Selling land in exchange for a note receivable.
      D. Transferring cash from a checking account into a money market fund.

     

    1. When equipment is sold at a loss:
      A. The net proceeds are shown in the investing section.
      B. The book value of the asset is shown in the investing section.
      C. The book value of the asset is shown in the investing section, and the loss is shown in the operating section.
      D. The net proceeds are shown in the financing section.

     

    1. When net cash flow from operating activities is presented by the direct method, the statement of cash flows is accompanied by a supplementary schedule reconciling:
      A. Net cash flow from operating activities with net sales.
      B. Net income with the net increase or decrease in cash and cash equivalents.
      C. Net income with net cash flow from operating activities.
      D. Net cash flow from operating activities shown in the statement with that which would result from use of the indirect method.

     

    1. Which of the following is not true regarding the direct and indirect methods of computing net cash flow from operating activities?
      A. Both methods result in the same dollar amount of cash flow from operating activities.
      B. Both methods involve adjusting entries to the company’s books so that the accounting records reflect the figures shown in the statement of cash flows.
      C. Both methods are acceptable to the FASB for reporting purposes.
      D. Both methods convert accrual-based income statement amounts to cash flow results.

     

    1. When equipment is purchased entirely through a loan:
      A. The equipment is shown as an increase in the investing activities section.
      B. The equipment is shown as a decrease in the investing activities section.
      C. The loan is shown as an increase in the financing section.
      D. Neither the loan nor the purchase of equipment is shown in the investing or the financing sections.

     

    1. From the viewpoint of stockholders or potential investors, which of the following cash flow measurements would be of least importance?
      A. The dollar amount of net cash flow from operating activities for the current year.
      B. The trend in net cash flow from operating activities from year to year.
      C. The corporation’s free cash flow for the current year.
      D. The dollar amount of overall increase or decrease in cash for the current year.

     

    1. Craig Corporation’s reported net income for 2009 is less than its net cash flow from operating activities. One reason for this could be:
      A. The sale of machinery at a loss in 2009.
      B. An increase in inventory levels during 2009.
      C. The sale of investments at a gain in 2009.
      D. An error in the preparation of the statement of cash flows; net income should be greater than or equal to net cash flow from operating activities.

     

    1. The Nelson Corporation reported net income in excess of its net cash flow from operating activities for the current year. An explanation for this may be:
      A. A loss on the sale of equipment in the current year.
      B. An increase in accounts payable during the year.
      C. Depreciation expense recognized for the year.
      D. A gain on the sale of investments during the year.

     

    1. Gannon Corporation uses the indirect method to prepare its statement of cash flows. Following this approach, a gain on sale of equipment was deducted from net income in computing net cash flow from operating activities. The most likely reason for this adjustment is that:
      A. The sale of equipment did not result in the receipt of any cash by Gannon Corporation.
      B. The sale resulted in a cash receipt in an accounting period different from the period in which the gain was recognized.
      C. The amount of the gain recognized was not equal to the cash received.
      D. This type of transaction is not classified as an operating activity.

     

    1. Which statement is true as to the FASB’s position on the presentation of the statement of cash flows?
      A. The FASB recommends the use of the indirect method, but most companies use the direct method.
      B. The FASB recommends the use of the direct method, but most companies use the indirect method.
      C. The FASB recommends the use of the direct method, and most companies use the direct method.
      D. The FASB recommends the use of the indirect method, and most companies use the indirect method.

     

    1. The statement of cash flows of Bosley Corporation shows the amount of cash received from customers as $720,000. If net sales in Bosley Corporation’s income statement are reported at $670,000 then:
      A. Bosley’s accounts receivable increased $50,000.
      B. Bosley’s Cash account decreased $50,000.
      C. Bosley’s accounts receivable decreased $50,000.
      D. Bosley’s accounts receivable are $50,000 at the end of the year.

     

    1. The FASB classifies interest received on investments and interest paid on debt financing as part of operating cash flows, while the IASB:
      A. Allows interest received to be classified as either operating or investing and interest paid as either operating or financing.
      B. Allows interest received to be classified as either operating or financing and interest paid as either operating or investing.
      C. Allows interest received to be classified only as investing and interest paid only as financing.
      D. Allows interest received to be classified only as financing and interest paid only as investing.

     

    1. Hamilton Company reported an increase of $370,000 in its accounts receivable during the year 2009. The company’s statement of cash flows for 2009 reported $1 million of cash received from customers. What amount of net sales must Hamilton have recorded in 2009?
      A. $630,000.
      B. $1,370,000.
      C. $1,000,000.
      D. $370,000

     

    1. Rent expense in Marrin Company’s 2010 income statement is $420,000. If Prepaid Rent was $70,000 at December 31, 2009, and is $95,000 at December 31, 2010, the cash paid for rent during 2010 is:
      A. $420,000.
      B. $445,000.
      C. $395,000.
      D. $480,000.

     

    1. Bert’s Bungy Jumping, Inc. paid $650,000 cash for casualty insurance during the year 2009. If the income statement for the year reports insurance expense of $620,000:
      A. Bert’s prepaid insurance decreased $30,000.
      B. Bert’s cash account balance decreased $30,000.
      C. Bert’s prepaid insurance increased $30,000.
      D. Bert’s prepaid insurance was $30,000 at year-end.

     

    The financial statements of New World, Inc., provide the following information for the current year:
     

    1. Compute the amount of cash received from customers during the current year.
      A. $3,097,500.
      B. $3,129,000.
      C. $3,066,000.
      D. $3,612,000.

     

    1. Compute the amount of New World’s cash payments for purchases of merchandise during the current year.
      A. $1,627,500.
      B. $1,622,250.
      C. $1,638,000.
      D. $2,157,750.

     

    1. Compute the amount of New World’s cash payments for operating expenses.
      A. $277,200.
      B. $283,500.
      C. $378,000.
      D. $349,650.

     

    1. New World’s net cash flow from operating activities for the current year is:
      A. $1,191,750.
      B. $1,192,800.
      C. $1,113,000.
      D. $1,160,250.

     

    The financial statements of Seldin, Inc., provide the following information for the current year:
     

    1. Compute the amount of cash received from customers during the current year.
      A. $265,000.
      B. $255,000.
      C. $260,000.
      D. $40,000.

     

    1. Compute the amount of Seldin’s cash payments for purchases of merchandise during the current year.
      A. $130,000.
      B. $125,000.
      C. $133,000.
      D. $127,000.

     

    1. Compute the amount of Seldin’s cash payments for operating expenses.
      A. $73,000.
      B. $59,000.
      C. $81,000.
      D. $65,000.

     

    1. Seldin’s net cash flow from operating activities for the current year is:
      A. $57,000.
      B. $59,000.
      C. $61,000.
      D. $67,000.

     

    1. Early in 2010, Larsen Corporation purchased marketable securities at a cost of $90,000. In September, dividends of $6,600 were received; Larsen sold the securities in December at a gain of $5,600. How would these transactions be reported on Larsen’s statement of cash flows for 2010?
      A. $5,600 net cash provided by investing activities; $6,600 included in cash provided by operating activities.
      B. $12,200 net cash provided by investing activities.
      C. $95,600 cash provided by investing activities; $90,000 cash used in financing activities.
      D. $84,400 net cash used in investing activities; $95,600 cash provided by investing activities.

     

    1. In 2009, Anderson Company purchased equipment for $363,000 and also sold some special purpose machinery with a book value of $155,000 for $182,000. In its statement of cash flows for 2009, Anderson should report the following with respect to the above transactions:
      A. $363,000 net cash used by investing activities.
      B. $181,000 net cash used by investing activities; $27,000 net cash provided by operating activities.
      C. $181,000 net cash used by investing activities.
      D. $363,000 cash used by investing activities; $182,000 cash provided by financing activities.

     

    An analysis of Korman Corporation’s Investment in Marketable Securities account during 2009 disclosed the following:

    Korman’s 2009 income statement included a $40,000 gain on sale of marketable securities and $30,000 dividend income from marketable securities. All payments and proceeds relating to marketable securities transactions were in cash.

     

    1. The amount of cash paid by Korman Corporation in 2009 for the purchase of marketable securities was:
      A. $240,000.
      B. $160,000.
      C. $200,000.
      D. $190,000.

     

    1. The cash proceeds received by Korman Corporation in 2009 for the sale of marketable securities was:
      A. $160,000.
      B. $230,000.
      C. $240,000.
      D. $280,000.

     

    1. How should the transactions involving marketable securities be classified in Korman’s statement of cash flows for 2009?
      A. The purchase of marketable securities, sales of marketable securities, and receipt of dividends are all classified as investing activities.
      B. The purchase and the sale of marketable securities are classified as investing activities; the receipt of dividends is classified as an operating activity.
      C. The purchase of marketable securities is classified as an investing activity; the sale of marketable securities is classified as a financing activity; the receipt of dividends is classified as an operating activity.
      D. The purchase and the sale of marketable securities are classified as investing activities; the receipt of dividends is classified as a financing activity.

     

    1. Based solely on the above information, Korman’s net cash flow from investing activities for 2009 is:
      A. $80,000 net cash used by investing activities.
      B. $80,000 net cash provided by investing activities.
      C. $120,000 net cash provided by investing activities.
      D. $240,000 net cash provided by investing activities.

     

    An analysis of Kenny Corporation’s Investment in Marketable Securities account during 2010 disclosed the following:

    Kenny’s 2010 income statement included a $90,000 loss on sale of marketable securities and $65,000 dividend income from marketable securities. All payments and proceeds relating to marketable securities transactions were in cash.

     

    1. The amount of cash paid by Kenny Corporation in 2010 for the purchase of marketable securities was:
      A. $445,000.
      B. $535,000.
      C. $355,000.
      D. $420,000.

     

    1. The cash proceeds received by Kenny Corporation in 2010 for the sale of marketable securities was:
      A. $230,000.
      B. $280,000.
      C. $195,000.
      D. $180,000.

     

    1. How should the transactions involving marketable securities be classified in Kenny’s statement of cash flows for 2010?
      A. The purchase of marketable securities, sales of marketable securities, and receipt of dividends are all classified as investing activities.
      B. The purchase and the sale of marketable securities are classified as investing activities; the receipt of dividends is classified as an operating activity.
      C. The purchase of marketable securities is classified as an investing activity; the sale of marketable securities is classified as a financing activity; the receipt of dividends is classified as an operating activity.
      D. The purchase and the sale of marketable securities are classified as investing activities; the receipt of dividends is classified as a financing activity.

     

    1. Based solely on the above information, Kenny’s net cash flow from investing activities for 2010 is:
      A. $215,000 net cash used by investing activities.
      B. $165,000 net cash provided by investing activities.
      C. $265,000 net cash used by investing activities.
      D. $290,000 net cash provided by investing activities.Chapter 17

      Job Order Cost Systems and Overhead Allocations

       

      True / False Questions

      1. An increase in an activity base must cause an increase in actual overhead costs incurred for that base to be considered a cost driver.
        True    False

       

      1. Overhead application rates allow overhead to be assigned at the completion of a period to help set prices.
        True    False

       

      1. Activity-based costing uses multiple activity bases to assign overhead costs to units of production.
        True    False

       

      1. A collection of job cost sheets would be similar to a subsidiary ledger and the work-in-process account would be similar to the controlling account.
        True    False

       

      1. A credit balance in the manufacturing overhead account at month end indicates that the actual overhead costs were less than the amount of overhead costs applied to jobs.
        True    False

       

      1. A debit balance in the manufacturing overhead account at month end indicates overhead applied to jobs was greater than the actual overhead costs.
        True    False

       

      1. The two steps required in activity-based costing are identifying separate activity cost pools and allocating each cost pool to the product using an appropriate cost driver.
        True    False

       

      1. Job order costing is appropriate for businesses that produce mass quantities of identical units using the same amount of direct materials, direct labor, and manufacturing overhead.
        True    False

       

      1. An overhead application rate is computed by dividing the estimated overhead costs by the expected amount of units in the activity base.
        True    False

       

      1. When goods are sold, a journal entry is made transferring the goods from cost of goods sold to finished goods.
        True    False

       

      1. Pepsi Cola would most likely use a job order costing system.
        True    False

       

      1. A principal objective of cost accounting systems is to ensure that cost reports to management are prepared in accordance with generally accepted accounting principles.
        True    False

       

      1. Management can compute the per-unit cost of finished goods accurately only when a job order cost system is in use.
        True    False

       

      1. A job order cost system requires the cost of direct materials, direct labor, and manufacturing overhead applicable to each department or process for a given time period be compiled.
        True    False

       

      1. A debit balance in the Manufacturing Overhead account at the end of the period indicates that overhead has been under-applied to jobs.
        True    False

       

      1. Activity-based costing tracks cost to the activities that consume resources.
        True    False

       

      1. If the manufacturing overhead account at month end has a credit balance before adjustment, this indicates that overhead is under-applied.
        True    False

       

      1. If actual overhead costs are less than the amount of overhead applied to production, this indicates that manufacturing overhead is over-applied.
        True    False

       

      1. The new manufacturing environment is characterized by its shift toward labor intensive production and declining manufacturing overhead costs.
        True    False

       

      1. A cost driver is an activity base that is highly correlated with manufacturing overhead costs.
        True    False

       

      1. Job order costing cannot be used for a service company.
        True    False

       

      1. An activity-based costing system cannot help managers make better product pricing decisions.
        True    False

       

      1. In activity-based costing, only one cost driver should be used in applying overhead.
        True    False

       

      1. Activity-based costing systems always result in more accurate measurements of unit costs.
        True    False

       

      1. An overhead application rate is a device used to assign overhead costs to units of product in proportion to some “activity base” that can be traced directly to the manufactured products.
        True    False

       

      1. Metalworks Incorporated purchased $54,500 worth of direct materials to be used in Job #222. During the accounting period, Job #222 used $45,600 of direct materials. The amount of direct materials that would be shown in Job #222 Job Cost Sheet at the end of the accounting period should be $54,500, since this is the amount of direct materials the company had purchased for this particular job.
        True    False

       

      1. Metalworks applies manufacturing overhead on the basis of direct materials used in production. During the current period, direct materials used for job #123 amounted to $22,545. If Metalworks’ overhead rate is 0.65 of direct materials used, the overhead applied to job #123 for the period was $15,000.
        True    False

       

      1. Metalworks employs 3 assembly workers that, on average, each work 40 hours per week and earn $9 per hour. During the current accounting period, Job #543 consumed 77 hours of direct labor totaling $693.
        True    False

       

       

      Multiple Choice Questions

      1. Which of the following costing systems would always use job cost sheets?
        A. Job order costing.
        B. Process costing.
        C. Activity-based costing.
        D. All three systems.

       

      1. The basic types of cost accounting systems are:
        A. Job order cost systems, activity based cost systems, and process cost systems.
        B. Direct cost systems and indirect cost systems.
        C. Completed job cost systems and work in process cost systems.
        D. Fixed cost systems and variable cost systems.

       

      1. A job order cost system would be appropriate in the manufacturing of:
        A. Paints.
        B. Custom-made furniture.
        C. Breakfast cereal.
        D. Standard-grade plywood.

       

      1. Under a job order cost system, costs are accumulated for:
        A. Each department in the production cycle.
        B. Each batch of production, known as a job or lot.
        C. Each individual unit produced.
        D. Each job supervisor.

       

      1. A job cost sheet usually contains a record of each of the following except:
        A. The cost of direct materials charged to a particular job.
        B. The overhead costs actually incurred on a particular job.
        C. The cost of direct labor charged to a particular job.
        D. The overhead cost applied to a particular job.

       

      1. In a job cost system, the Work-in-Process Inventory controlling account may be reconciled to the total of the:
        A. Employee time cards.
        B. Materials requisitions.
        C. Work-in-Process Inventory records for each department or process.
        D. Job cost sheets.

       

      1. The year-end balance in the Materials Inventory controlling account is equal to:
        A. The total of the various materials subsidiary ledger accounts (the materials on hand at the end of the period.)
        B. The total amount of materials requisitioned during the period.
        C. The total amount of materials purchased during the period.
        D. The amount of materials debited to the Work-in-Process Inventory account during the period.

       

      1. A job order cost system traces direct materials cost to a particular job by means of:
        A. Materials requisitions.
        B. A production budget.
        C. The Materials Inventory controlling account.
        D. A debit to the job cost sheet for the job.

       

      1. A job cost sheet should:
        A. Contain information that summarizes all jobs finished.
        B. Contain information on each individual job in process.
        C. Contain only the direct costs of a particular job.
        D. Only be used for jobs that have been completed.

       

      1. The employee time card for John Winter indicates that he spent last week performing routine maintenance on factory machinery. Payments made to Winter for last week’s work should be:
        A. Debited to Work in Process Inventory.
        B. Credited to the Direct Labor account.
        C. Debited to the Direct Labor account.
        D. Debited to the Manufacturing Overhead account.

       

      1. When a job is completed:
        A. Cost of goods sold is debited.
        B. Work-in-process inventory is debited.
        C. Finished goods inventory is credited.
        D. None of the above.

       

      1. Which of the following is a characteristic of manufacturing overhead in a job order cost system?
        A. It is indirectly traceable to specific jobs or units.
        B. It includes the cost of all labor relating to manufacturing operations.
        C. It is assigned to units produced by means of an overhead application rate.
        D. It includes the cost of direct materials used and of indirect labor.

       

      1. Debits to the Manufacturing Overhead account record:
        A. The actual amounts of overhead costs incurred during a period.
        B. The amount of overhead applied to production during a period.
        C. The amount of overhead incurred on a specific job.
        D. All conversion costs of a period.

       

      1. At the end of the accounting period, applied overhead was larger than actual overhead by a material amount. The over-applied overhead should be:
        A. Treated as an extraordinary gain.
        B. Treated as an extraordinary loss.
        C. Apportioned among Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.
        D. Ignored; actual overhead is determined only for internal control purposes.

       

      1. All of the following are advantages of developing a predetermined overhead application rate except:
        A. Short-run fluctuations in volume of output are normalized.
        B. In a job order system, unit costs can be determined as soon as jobs are completed.
        C. The overhead application rate facilitates assigning overhead costs to the ending inventory of work in process.
        D. Actual overhead will always be less than applied overhead.

       

      1. The advantage of using a predetermined overhead application rate is that:
        A. Units produced are charged with a “normal” amount of manufacturing overhead regardless of whether they are produced in a high-volume month or a low-volume month.
        B. Overhead costs will be limited to the predetermined amount.
        C. Entries need not be made to record actual overhead costs incurred.
        D. The unit cost of production will be lower than it would be if actual overhead costs were assigned to units produced.

       

      1. A predetermined overhead application rate:
        A. Is used in a job order cost system but cannot be used in a process cost system.
        B. Can be determined by dividing budgeted direct labor cost by the budgeted factory overhead costs.
        C. Is not generally accepted for financial reporting purposes.
        D. Tends to avoid wide variations in per-unit overhead costs because of short-run changes in volume.

       

      1. Under-applied overhead at the end of a month:
        A. Results when actual overhead costs are less than amounts applied to work in process.
        B. Indicates a poorly designed cost accounting system.
        C. Is represented by a debit balance remaining in the Manufacturing Overhead account.
        D. Is represented by a credit balance remaining in the Manufacturing Overhead account.

       

      1. Which of the following statements is true about activity-based costing?
        A. Only one activity should be used for a company.
        B. Many different activity bases are used in applying overhead.
        C. There can only be one cost driver.
        D. Direct materials and direct labor are applied to work-in-process based upon cost drivers.

       

      1. Which of the following is not a commonly used cost accounting system?
        A. Manufacturing yield costing.
        B. Job order costing.
        C. Process costing.
        D. Activity-based costing.

       

      1. The type of cost accounting system best suited to a particular company depends on:
        A. The nature of the company’s manufacturing operations.
        B. The requirements set forth by the FASB.
        C. Government regulations.
        D. The type of cost drivers available.

       

      1. Manufacturing overhead is:
        A. A direct cost that can traced to a specific job.
        B. An indirect cost that can be traced to a specific job.
        C. A direct cost that cannot be traced to a specific job.
        D. An indirect cost that cannot be traced to a specific job.

       

      1. In an activity-based costing system, manufacturing overhead costs are divided into separate:
        A. Cost drivers.
        B. Activity cost pools.
        C. Activity bases.
        D. Indirect cost centers.

       

      1. Benefits of activity-based costing include all of the following except:
        A. More accurate measures of product costs.
        B. More accurate evaluations of product profitability.
        C. A better understanding of what “drives” manufacturing overhead costs.
        D. More subjective product pricing decisions.

       

      1. Manufacturing overhead is not:
        A. A product cost.
        B. An indirect cost.
        C. A manufacturing cost.
        D. A period cost.

       

      1. An activity-based costing system would probably not be appropriate if:
        A. A company produces more than one product line.
        B. A company produces only one product.
        C. A company is highly automated.
        D. A company has more than one production facility.

       

      1. Overhead costs are assigned to production using an overhead application rate, whereas no such “application rate” is used to assign the costs of direct materials and direct labor to production. The reason for this difference in procedures is that:
        A. Overhead is an indirect cost which cannot be traced easily and directly to specific units of product.
        B. Overhead is always larger in dollar amount than either direct materials or direct labor.
        C. The amounts of direct material and direct labor applicable to each unit of production cannot be determined as easily as the amount of overhead.
        D. Overhead is always equal to a constant percentage of direct labor costs.

       

      1. An activity base is said to be a “driver” of overhead costs when the activity base:
        A. Is independent of the amount of overhead cost incurred.
        B. Results in an overhead application rate greater than 100%.
        C. Is a causal factor in the amount of overhead cost incurred.
        D. Is the largest of the various types of expenditures classified as manufacturing overhead.

       

      1. Which of the following would likely be the most appropriate cost driver to allocate machinery set-up costs to products?
        A. Machine hours.
        B. Direct labor hours.
        C. Number of production runs.
        D. Repair work orders.

       

      1. Using machine hours to assign manufacturing overhead to a labor intensive product line is likely to:
        A. Over-apply overhead to the product line.
        B. Under-apply overhead to the product line.
        C. Understate direct labor costs.
        D. Overstate direct labor costs.

       

      1. If manufacturing overhead is materially over-applied, it is best to close it to:
        A. Work-in-process inventory.
        B. Finished goods inventory.
        C. Cost of goods sold.
        D. Apportioned among work-in-process, finished goods, and cost of goods sold.

       

      1. The cost of salaries paid to employees who work in a factory maintaining the heating system is considered:
        A. Direct labor.
        B. Indirect materials.
        C. Factory overhead.
        D. General and administrative costs.

       

      1. The account Work-in-Process Inventory:
        A. Consists of completed goods that have not yet been sold.
        B. Consists of goods being manufactured that are incomplete.
        C. Consists of materials to be used in the production process.
        D. Consists of the cost of new materials used, labor but not overhead.

       

      1. The account Finished Goods:
        A. Consists of completed goods that have not yet been sold.
        B. Consists of goods being manufactured that are incomplete.
        C. Consists of materials to be used in the production process.
        D. Consists of the cost of new materials used, labor but not overhead.

       

      1. A job order cost system would be suitable for which of the following:
        A. A manufacturer of laundry detergent.
        B. A manufacturer of candy bars.
        C. A sugar refinery.
        D. A sailboat builder.

       

      1. The document that provides information for the cost of goods manufactured is:
        A. The job cost sheet.
        B. Time cards.
        C. Material requisition.
        D. Payroll check.

       

      1. The Work in Process account in a job order cost accounting system will be debited for:
        A. Only direct labor and direct materials.
        B. Direct labor, direct materials, and applied overhead.
        C. Direct labor, direct materials, and actual overhead.
        D. Only direct materials and applied overhead.

       

      1. A job cost sheet will include:
        A. All raw materials purchased.
        B. Actual overhead.
        C. Direct labor applied to production.
        D. Selling costs.

       

      1. Moran Company uses a job order cost system and has established a predetermined overhead application rate for the current year of 150% of direct labor cost, based on budgeted overhead of $900,000 and budgeted direct labor cost of $600,000. Job no. 1 was charged with direct materials of $36,000 and with overhead of $27,000. What is the total cost of job no. 1?
        A. $64,000.
        B. $81,000.
        C. $91,000.
        D. Cannot be determined without additional information.

       

      1. Doyle Co. uses a job order cost accounting system. At year-end the Work-in-Process Inventory controlling account showed a debit balance of $43,125. For the two jobs in process at year-end, one showed $6,000 in direct materials and $4,500 in direct labor. The job cost sheet for the second job showed $9,000 in direct materials and $6,750 in direct labor. If the company is using a predetermined overhead application rate based on direct labor cost, the rate is:
        A. 50%.
        B. 100%.
        C. 150%.
        D. 200%.

       

      1. Edwards Auto Body uses a job order cost system. Overhead is applied to jobs on the basis of direct labor hours. During the current period, Job No. 337 was charged $425 in direct materials, $475 in direct labor, and $190 in overhead. If direct labor costs an average of $16 per hour, the company’s overhead application rate is:
        A. $7.27 per direct labor hour.
        B. $6.40 per direct labor hour.
        C. $17.50 per direct labor hour.
        D. $40 per direct labor hour.

       

      1. Marty’s Metal Shop uses a job order cost system. It applies overhead to jobs at a rate of 175% of direct labor costs. Job No. 2617 required $800 in direct labor costs. The job was initially budgeted to require $850 in direct labor costs. Overhead applied to Job No. 2617 during the period amounted to:
        A. $850.
        B. $1,400.
        C. $1,275.
        D. Some other amount.

       

      Capri Boat Corporation uses a job order cost system and applies overhead based on a percentage of direct labor cost. Cost flows through the Work in Process Inventory account during March are given below:

      Only Job #007 was still in process at the end of March and this job had been charged with $40,000 in direct materials cost.

       

      1. The amount of direct materials cost charged to completed jobs during March was:
        A. $20,000.
        B. $50,000.
        C. $30,000.
        D. Some other amount.

       

      1. The predetermined overhead application rate at Capri Boat is what percentage of direct labor costs?
        A. 38%.
        B. 62%.
        C. 260%.
        D. 580%.

       

      1. The amount of overhead costs applied to Job #007 during March was:
        A. $90,000.
        B. $26,250.
        C. $65,000.
        D. $60,000.

       

      1. The journal entry which accounts for the $300,000 transferred out of Work in Process account includes a debit of $300,000 to:
        A. Finished Goods.
        B. Cost of Goods Sold.
        C. Accounts Receivable.
        D. Sales.

       

      Canfield Construction applies overhead to its projects at a rate of $65 per direct labor hour. Laborers are paid an average rate of $30 per hour. The Jefferson Apartments project was charged a total of $1,200,000 in direct materials and $450,000 in direct labor costs.

       

      1. Overhead applied to the Jefferson Apartments project amounted to:
        A. $450,000.
        B. $650,000.
        C. $975,000.
        D. Some other amount.

       

      1. The journal entry to transfer the completed Jefferson Apartments project to Canfield’s finished goods inventory would include:
        A. A debit to the Finished Goods Inventory account of $975,000.
        B. A debit to the Finished Goods Inventory account of $2,625,000.
        C. A debit to the Finished Goods Inventory account of $1,650,000.
        D. A credit to the Work-in-Process Inventory account of $2,175,000.

       

      1. The journal entry made by Canfield to record the sale of the Jefferson Apartments project to King Development Company for $5,250,000 would include:
        A. A debit to Sales of $5,250,000.
        B. A debit to Cost of Goods Sold of $2,625,000.
        C. A credit to Finished Goods Inventory of $975,000.
        D. A debit to Finished Goods Inventory of $975,000.

       

      Riverview Company’s budget for the coming year includes $6,000,000 for manufacturing overhead, 50,000 hours of direct labor, and 250,000 hours of machine time.

       

      1. Refer to the above data. If Riverview applies overhead using a predetermined rate based on machine-hours, what amount of overhead will be assigned to a unit of output which requires 0.5 machine hours and 0.25 labor hours to complete?
        A. $12.00.
        B. $16.00.
        C. $20.00.
        D. Some other amount.

       

      1. Refer to the above data. If Riverview applies overhead using a predetermined rate based on labor-hours, what amount of overhead will be assigned to a unit of output which requires 0.5 machine hours and 0.25 labor hours to complete?
        A. $16.00.
        B. $30.00.
        C. $20.00.
        D. Some other amount.

       

      1. An effective cost accounting system should match processes with the _____ used in order to maintain competitive advantage. Select the best answer to complete the sentence.
        A. sales
        B. shareholders
        C. resources
        D. disbursements

       

      1. The method used by managers when comparing unit costs with budgeted costs or other measures is broadly known as:
        A. Sales management.
        B. Cost control.
        C. Employee evaluation.
        D. Account reconciliation.

       

      Starbright manufactures children car seats, strollers, and baby swings. Starbright manufacturing costs are budgeted as follows:Chapter 21

      Incremental Analysis

       

      True / False Questions

      1. Identifying information relevant to a particular business decision requires an understanding of both quantitative and qualitative considerations.
        True    False

       

      1. Incremental analysis rarely requires the decision maker to exercise judgment.
        True    False

       

      1. A sunk cost is the benefit that could have been obtained by pursuing an alternate course of action.
        True    False

       

      1. Sunk costs may be defined as unavoidable future costs resulting from past decisions.
        True    False

       

      1. The term “out-of-pocket cost” is often used to describe costs which have not yet been incurred and which may vary among alternative courses of action.
        True    False

       

      1. Joint products are similar products that serve the same exact function.
        True    False

       

      1. Joint costs are the middle costs of a product.
        True    False

       

      1. All incremental revenue or incremental costs are relevant.
        True    False

       

      1. Sunk costs are relevant to decisions about replacing plant assets.
        True    False

       

      1. Opportunity costs are recorded in the accounting records.
        True    False

       

      1. A decision to discontinue a given product on the basis of contribution margin data should include consideration of the probable impact of the discontinuance on the sales of other products.
        True    False

       

      1. Maple syrup and pancakes are examples of joint products.
        True    False

       

      1. A sunk cost is an expenditure that has proven to be nonproductive.
        True    False

       

      1. In determining whether to scrap or to rebuild defective units of product, the cost already incurred in producing the defective units is not relevant.
        True    False

       

      1. Products resulting from a shared manufacturing process are referred to as complimentary products.
        True    False

       

      1. When sales of one product contribute to the sales of another product they are called contribution products.
        True    False

       

      1. The split-off point is the point at which joint products can be separated into two or more products.
        True    False

       

      1. Differential analysis is a tool for evaluating alternative courses of action always resulting in higher profits for the organization.
        True    False

       

      1. In making a decision, management will look thoroughly at both relevant and irrelevant data.
        True    False

       

      1. An opportunity cost is a relevant cost when making a business decision.
        True    False

       

      1. Even though costs, revenues, and other factors do not vary among possible courses of action, they may be relevant to a decision.
        True    False

       

      1. Sunk costs have already been incurred and cannot be changed by future actions.
        True    False

       

      1. The most common method to allocate joint costs is in proportion to the relative sales value of the products.
        True    False

       

      1. After January 1, 2009, in order to be consistent with IASB Standards, U.S. GAAP now requires that borrowing costs on assets that require a substantial period to bring them to a marketable condition be expensed immediately.
        True    False

       

      1. Differential costs are those that are the same among alternatives.
        True    False

       

      1. Assuming that the MR Corporation has an inventory of 200 defective motors costing $450,000 to produce and $150,000 to repair, if the company receives an offer to purchase these motors for $325,000 before repairing them, the company’s decision should be to sell the motors at the offered price.
        True    False

       

      1. Assuming that the MR Corporation has an inventory of 200 defective motors costing $450,000 to produce and $150,000 to repair, if the company receives an offer to purchase these motors for $100,000, the company’s decision should be to sell the motors at the offered price.
        True    False

       

      1. Direct material costs are always considered relevant costs in a make or buy decision.
        True    False

       

      1. Opportunity costs are irrelevant in decision making.
        True    False

       

      1. Nonfinancial considerations are relevant in decision making.
        True    False

       

      1. Incremental revenue is relevant in decision making.
        True    False

       

      1. Sunk costs are relevant costs when considering a special order.
        True    False

       

       

      Multiple Choice Questions

      1. A cost that has already been incurred and cannot be changed is called a(n):
        A. Opportunity cost.
        B. Out-of-pocket cost.
        C. Joint cost.
        D. Sunk cost.

       

      1. Costs that have not yet been incurred and that may vary among different courses of action are called:
        A. Opportunity costs.
        B. Out-of-pocket costs.
        C. Joint costs.
        D. Sunk costs.

       

      1. Incremental revenues:
        A. Always increase revenue when one course of action is selected over another.
        B. Always decrease revenue when one course of action is selected over another.
        C. May increase or decrease when one course of action is selected over another.
        D. Cause revenues to remain steady.

       

      1. By choosing to go into business for himself, Jim Lazar foregoes the possibility of getting a highly paid job with a large company. This is called a(n):
        A. Sunk cost.
        B. Out-of-pocket cost.
        C. Opportunity cost.
        D. Joint cost.

       

      1. Which of the following types of cost are always relevant to a decision?
        A. Sunk costs.
        B. Average costs.
        C. Incremental costs.
        D. Fixed costs.

       

      1. Which is an example of joint products?
        A. Sugar and beef.
        B. Pens and erasers.
        C. Granulated coal and methyl alcohol.
        D. Iron and plastic.

       

      1. Which factor is not relevant in deciding whether or not to accept a special order?
        A. Incremental revenue that will be earned.
        B. Additional costs that will be incurred.
        C. The effect that the order will have on the company’s regular sales volume and selling prices.
        D. The average cost of production if the special order is accepted.

       

      1. In deciding whether or not to accept a special order, what is the opportunity cost of using machinery for which the firm has sufficient excess capacity to accept the order?
        A. The historical cost of the machinery.
        B. The undepreciated cost of the machinery.
        C. The same machinery cost allocated to regular production orders.
        D. Zero.

       

      1. Incremental costs can be defined as:
        A. Costs that are expected to increase regardless of the course of action chosen.
        B. The differences between costs incurred under alternative courses of action.
        C. Costs incurred in the past.
        D. Costs that are irrelevant in decision making.

       

      1. Accepting a special order is profitable whenever the revenue from the special order exceeds:
        A. The average unit cost of production multiplied by the number of units in the order.
        B. The incremental cost of producing the order.
        C. The materials and direct labor costs of producing the order.
        D. The fixed manufacturing costs for the period.

       

      1. Which of the following would be an example of a sunk cost?
        A. The cost of a new oil burner that replaced a destroyed one.
        B. The cost of an old inefficient oil burner that will be replaced by a more modern and efficient one.
        C. Depreciation expense.
        D. Lost revenue from a bad debt.

       

      1. Sunk costs:
        A. Have already been incurred as a result of past actions.
        B. Vary among the alternative courses of action being considered.
        C. Are benefits that could have been obtained by following another course of action.
        D. Result from unfavorable cost variances.

       

      1. Mell Co. manufactured 100 personal computers at a cost of $30,000. It can sell them as is for $65,000, or install hard disks in them and sell them for $105,000. The $30,000 original manufacturing cost is:
        A. An out-of-pocket cost because it has already been paid.
        B. A sunk cost because it is not relevant to the decision.
        C. An incremental cost because it is relevant to the decision.
        D. A fixed cost because it will remain the same no matter which action is taken.

       

      Fancy Furniture produced a batch of 2,000 coffee tables at a cost of $355,000. It was discovered that the entire batch was finished improperly. Fancy can sell the tables as seconds for $305,000 or spend an additional $315,000 to refinish them and sell them for $605,000.

       

      1. In deciding whether to rework the tables or sell them as is, management should:
        A. Compare the $305,000 proceeds from the sale of the tables as is, with the $355,000 cost of the tables.
        B. Compare the $605,000 possible revenue from refinished tables with the total cost of $355,000 plus $315,000 to refinish.
        C. Compare the $315,000 cost to refinish the tables with the incremental revenue of $300,000 if the tables are refinished.
        D. Eliminate any alternative that results in a loss on the sale of the product.

       

      1. Which of the following is not relevant to management’s decision regarding refinishing the tables or selling them as is?
        A. The additional $300,000 revenue that can be generated if the tables are refinished.
        B. The $355,000 manufacturing cost of the tables already incurred.
        C. The additional $315,000 cost to refinish the tables.
        D. The effect of selling “seconds” on Fancy’s reputation as a fine-furniture manufacturer.

       

      1. Which cost is not relevant in making financial decisions?
        A. Sunk costs.
        B. Opportunity costs.
        C. Incremental costs.
        D. All three are relevant.

       

      1. Products for which sales of one contribute to the sales of another are called:
        A. Complementary products.
        B. Competing products.
        C. Contributory products.
        D. Codependent products.

       

      1. Perfect Plumbing Corporation currently manufactures a valve for use in water pumps that it produces for sale. The company is considering purchasing the valves from an outside supplier rather than manufacturing them. Which of the following costs is not relevant to the decision?
        A. The cost of direct material required to make the valve.
        B. The price charged by the outside supplier for an identical valve.
        C. The cost of the machinery owned by Perfect Plumbing used exclusively to manufacture this valve.
        D. The salvage value of the machinery owned by Perfect Plumbing used exclusively to manufacture this valve.

       

      1. The Magic Microbrewery has a limited amount of vat capacity available in which it can ferment beer. In deciding which beers to brew, Magic management should consider:
        A. The contribution margins of the individual beers.
        B. The unit contribution margins of the individual beers.
        C. The contribution margin ratios of the individual beers.
        D. The contribution margin per unit of vat capacity of the individual beers.

       

      1. The cost of draining sap out of a maple tree to manufacture maple syrup and maple sugar is an example of:
        A. After-split-off costs.
        B. Sunk costs.
        C. Incremental costs.
        D. Joint costs.

       

      1. Products which emerge from a shared manufacturing process are referred to as:
        A. Complementary products.
        B. Joint products.
        C. Contributory products.
        D. Codependent products.

       

      Burns Industries currently manufactures and sells 20,000 power saws per month, although it has the capacity to produce 35,000 units per month. At the 20,000-unit-per-month level of production, the per-unit cost is $65, consisting of $40 in variable costs and $25 in fixed costs. Burns sells its saws to retail stores for $80 each. Allen Distributors has offered to purchase 5,000 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs.

       

      1. Which of the following is not a relevant factor in Burns’ decision concerning whether to accept the special order from Allen?
        A. The opportunity cost involved in accepting Allen’s order.
        B. The incremental cost of manufacturing an additional 5,000 saws per month.
        C. The $65 average cost per unit to manufacture a power saw.
        D. Where and at what price Allen intends to sell the saws.

       

      1. Assume that Allen Distributors offers to purchase the additional 5,000 saws at a price of $47 per unit. If Burns accepts this price, Burns’ monthly gross profit on sales of power saws will:
        A. Increase by $35,000.
        B. Increase by $185,000.
        C. Decrease by $40,000.
        D. Decrease by $240,000.

       

      1. Using an incremental analysis approach, Burns should consider accepting this special order only if the price per unit offered by Allen is at least:
        A. $20.
        B. $50.
        C. $80.
        D. $40.

       

      1. Burns decides to accept the special order for 5,000 units from Allen at a unit sales price that will add $100,000 per month to its operating income. The unit price Burns is charging Allen is:
        A. $20.80.
        B. $60.00.
        C. $62.50.
        D. $55.00.

       

      John Boyd Corporation manufactures and sells 1,000 tractors each month. The primary component in each tractor is the motor. John Boyd has the monthly capacity to produce 1,300 motors. The variable costs associated with manufacturing each motor are shown below:

      Fixed manufacturing overhead per month (for up to 1,300 units of production) averages $27,000. Joan Reid, Inc. has offered to purchase 200 motors from John Boyd per month to be used in its own outboard motors.

       

      1. If Joan Reid’s order is rejected, what will be John Boyd ‘s average unit cost of manufacturing each motor?
        A. $68.
        B. $70.
        C. $96.
        D. Some other amount.

       

      1. What is the incremental cost of producing each additional motor?
        A. $29.
        B. $69.
        C. $95.
        D. Some other amount.

       

      1. Assuming John Boyd wants to earn a pretax profit of $10,000 on this special order, what price must it charge Joan Reid?
        A. $69.
        B. $83.
        C. $95.
        D. Some other amount.

       

      JCN Industries normally produces and sells 5,000 keyboards for personal computers each month. Variable manufacturing costs amount to $25 per unit, and fixed costs are $146,000 per month. The regular sales price of the keyboards is $86 per unit. JCN has been approached by a foreign company that wants to purchase an additional 1,000 keyboards per month at a reduced price. Filling this special order would not affect JCN’s regular sales volume or fixed manufacturing costs.

       

      1. On the basis of the above information only, which of the following is not true?
        A. At the 5,000-unit level of production, JCN’s average cost per unit is $54.20.
        B. At the 6,000-unit level of production, JCN’s average cost per unit is $49.33.
        C. It would not be profitable for JCN to consider the special order at a price less than $49 per unit.
        D. Neither the fixed manufacturing costs of $146,000 nor the variable manufacturing costs of $25 per unit is relevant to this decision regarding the special order.

       

      1. Assume that the price offered by the foreign company is $43 per unit. Accepting the special order will cause JCN’s operating income to:
        A. Increase by $18,000.
        B. Decrease by $2,000.
        C. Decrease by $33,000.
        D. Decrease by $35,000.

       

      1. The Fine Point Company currently produces all of the components for its one product; an electric pencil sharpener. The unit cost of manufacturing the motor for this pencil sharpener is:

        The company is considering the possibility of buying this motor from a subcontractor and has been quoted a price of $3.60 per unit. The relevant cost of manufacturing the motor to be considered in reaching the decision is:
        A. $4.75.
        B. $4.15.
        C. $3.55.
        D. $4.05.

       

      Perry’s Cycle Company manufactures annually 20,000 units of TushSeat, a bicycle seat used on many of the company’s products, and also sold directly to retailers for $38 per unit. At the current level of production, the cost per unit to produce TushSeat consists of:

      It has come to the attention of management that a seat of similar quality can be purchased from outside suppliers.

       

      1. Assume that Perry’s fixed costs remain unchanged if the seats are purchased from an outside supplier. In order to operate more profitably by buying the seats rather than manufacturing them, Perry must negotiate a price per unit from the outside supplier that is less than:
        A. $27.
        B. $25.
        C. $22.
        D. $16.

       

      1. Assume that seats can be purchased from the outside supplier at $25 each, and that 60% of total fixed costs incurred in producing TushSeat will be eliminated by this strategy. Buying the seats instead of manufacturing them would cause Perry’s operating income to:
        A. Decrease by $20,000.
        B. Increase by $36,000.
        C. Increase by $16,000.
        D. Decrease by $24,000.

       

      1. Aircraft Products, a manufacturer of aircraft landing gear, makes 1,000 units each year of a special valve used in assembling one of its products. The unit cost of producing this valve includes variable costs of $70 and fixed costs of $60. The valves could be purchased from an outside supplier at $77 each. If the valve were purchased from the outside supplier, 40% of the total fixed costs incurred in producing this valve could be eliminated. Buying the valves from the outside supplier instead of making them would cause the company’s operating income to:
        A. Increase by $26,000.
        B. Increase by $17,000.
        C. Decrease by $9,000.
        D. Decrease by $29,000.

       

      1. Seidman Company manufactures and sells 30,000 units of product X per month. Each unit of product X sells for $16 and has a contribution margin of $7. If product X is discontinued, $85,000 in fixed monthly overhead costs would be eliminated and there would be no effect on the sales volume of Seidman Company’s other products. If product X is discontinued, Seidman Company’s monthly income before taxes should:
        A. Increase by $210,000.
        B. Increase by $125,000.
        C. Decrease by $210,000.
        D. Decrease by $125,000.

       

      Creative Star Corporation produces three lines of desks from wood: classic, royal, and standard. Cost and revenue data pertaining to each product are shown below:

      Classic desks require five square yards of wood, Royal requires ten square yards, and Standard requires three square yards. High demand for each product line far exceeds the company’s production capacity.

       

      1. If Creative Corporation has an unlimited supply of wood available, which products should it produce?
        A. Royal only.
        B. Classic and royal.
        C. Royal and standard.
        D. Classic only.

       

      1. If Creative Corporation has a limited supply of wood available, which products should it produce?
        A. Royal only.
        B. Classic and royal.
        C. Royal and standard.
        D. Classic only.

       

      1. If Creative Corporation has only 250,000 square yards of wood available, what is the highest total amount of fixed cost the company can incur and still break-even?
        A. $2,500,000.
        B. $4,000,000.
        C. $5,000,000.
        D. $6,000,000.

       

      1. Speedy Co. manufactures four products. Direct materials and direct labor are available in sufficient quantities, but machine capacity is limited to 3,000 hours. Cost and revenue data for the four products are given below:

        Of the four products, which is the most profitable for Speedy Co.?
        A. Product A.
        B. Product B.
        C. Product C.
        D. Product D.

       

      BT&T Corporation manufactures telephones. Recently, the company produced a batch of 600 defective telephones at a cost of $9,000. BT&T can sell these telephones as scrap for $9 each. It can also rework the entire batch at a cost of $6,500, after which the telephones could be sold for $20 per unit.

       

      1. Which of the following statements is false regarding the defective units?
        A. BT&T will not recover its costs if it sells the defective units as scrap.
        B. BT&T will recover its costs if it reworks the defective units.
        C. BT&T will not recover its costs if it reworks the defective units.
        D. BT&T will recover more of its costs if it decides to rework the defective units.

       

      1. If BT&T reworks the defective telephones, by how much will its operating income change?
        A. Increase by $500.
        B. Decrease by $1,600.
        C. Increase by $5,500.
        D. Decrease by $6,500.

       

      General Chemical Company (GCC) manufactures two products as part of a joint process: A1 and B1. Joint costs up to the split-off point total $22,000. The joint costs are allocated to A1 and B1 in proportion to their relative sales values. At the split-off point, product A1 can be sold for $42,000, whereas product B1 can be sold for $63,000. Product A1 can be processed further to make product A2, at an incremental cost of $38,000. A2 can be sold for $85,000. Product B1 can be processed further to make product B2, at an incremental cost of $48,000. B2 can be sold for $95,000.

       

      1. Joint costs allocated to product A1 total:
        A. $8,800.
        B. $13,500.
        C. $13,200.
        D. $22,000.

       

      1. Joint costs allocated to product B1 total:
        A. $8,800.
        B. $13,200.
        C. $13,500.
        D. $22,000.

       

      1. The net change in operating income resulting from a decision to manufacture product A2 is:
        A. $15,000 (increase).
        B. $15,000 (decrease).
        C. $5,000 (increase).
        D. $45,000 (increase).

       

      1. The net change in operating income resulting from a decision to manufacture product B2 is:
        A. $6,000 (decrease).
        B. $16,000 (decrease).
        C. $48,000 (decrease).
        D. $48,000 (increase).

       

      1. Legendary Motors has 7,000 defective autos on hand which cost $12,880,000 to manufacture. Legendary can either sell these defective autos as scrap for $8,000 per auto, or spend an additional $18,320,000 on repairs and then sell them for $12,000 per unit. What is the net advantage to repair the autos?
        A. $84,000,000.
        B. $18,320,000.
        C. $9,680,000.
        D. $56,000,000.

       

      Express, Inc., is considering replacing equipment. The following data are available:
      Replacement
       

      1. Which of the data above is a sunk cost?
        A. The annual cost of operating the new equipment.
        B. The annual cost of operating the old equipment.
        C. The disposal value of the old equipment.
        D. The original cost of the old equipment.

       

      1. What are the total relevant costs of keeping the old equipment?
        A. $8,000.
        B. $50,000.
        C. $10,000.
        D. $45,000.

       

       

      Essay Questions

      1. Accounting terminology
        Listed below are eight technical accounting terms introduced or emphasized in this chapter:

        Each of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer “None” if the statement does not correctly describe any of the terms. ______ (a) Data pertaining to future time periods which may vary among alternative courses of action. ______ (b) The point at which manufacturing costs are split between finished goods inventory and work in progress. ______ (c) The benefit foregone by pursuing one course of action over another. ______ (d) Products which emerge from common materials and shared production processes. ______ (e) A cost incurred in the past that will not change as a result of future actions. ______ (f) Costs yet to be incurred which are expected to vary under different courses of action. ______ (g) The examination of differences between future costs and revenue under varying courses of action.

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