Transcript
Chapter 1--Financial AccountingChapter 1--Financial Accounting
Student: ___________________________________________________________________________
1. Which of the following underlying assumptions for the conceptual framework is the reason the dollar is used in the preparation of financial statements?
A. Economic entity
B. Continuity
C. Time period
D. Monetary unit
2. Which of the following is an assumption made in the preparation of the financial statements?
A. Financial statements are prepared for a specific entity that is distinct from the entity's owners.
B. The current market value is assumed to be less relevant than the original cost paid.
C. The preparation of financial statements for a specific time period assumes that the balance sheet covers a designated period of time.
D. Financial statements are prepared assuming that inflation has a distinct effect on the monetary unit.
3. The time period assumption is necessary because:
A. inflation exists and causes confusing swings in financial statement amounts over time.
B. external users of financial statements want accurately-reported net income for a specific period of time.
C. financial statements users expect full disclosure of all events throughout the entire time period translated in dollars.
D. it is required by the federal government.
4. The going concern assumption is concerned with:
A. the company's ability to continue operations long enough to carry out its existing obligations.
B. any information that is capable of influencing the decisions of anyone using the financial statements.
C. measuring ongoing business activities at their exchange price at the time of the initial external transaction.
D. offsetting management's natural optimism by providing a prudent approach to uncertainty in financial statement items.
5. Which of the following concepts relates to separating the reporting of business and personal economic transactions?
A. Cost principle
B. Monetary unit assumption
C. Economic entity assumption
D. Objectivity assumption
6. "Revenues" are best described as:
A. decreases in resources resulting from the purchase of goods for the provision of services.
B. increases in resources resulting from the sale of goods or the provision of services.
C. assets used or consumed in the sale of products or services.
D. an increase in the financing activities section of the statement of cash flows.
7. Which of the following best describes the term "expenses"?
A. The cost of assets used in the investing activities of a business.
B. The amount of interest or claim that the owners have in the business.
C. The future economic resources of a business entity.
D. A decrease in resources resulting from the sale of goods or provision of services.
8. Which statement demonstrates the financial success or failure of the company over that specific period of time?
A. Statement of changes in stockholders’ equity
B. Statement of retained earnings
C. Balance sheet
D. Income statement
9. The resources used to generate revenues during a period are called:
A. net income.
B. expenses.
C. revenues.
D. dividends.
10. Which of the following is the correct date format for the financial statement heading?
A. Balance Sheet for the Year Ended June 30, 2012
B. Statement of Retained Earnings as of December 31, 2012
C. Income Statement for the Year Ending December 31, 2012
D. Statement of Retained Earnings at December 31, 2012
11. Which financial statement would you analyze to determine its operating performance for the past year?
A. Balance sheet
B. Statement of retained earnings
C. Income statement
D. Statement of cash flows
12. Doughtry's Pet Shop reported a net loss of $1,500,000 and total expenses of $2,900,000. How much were the total sales?
A. $4,400,000
B. $1,400,000
C. $2,900,000
D. $1,500,000
13. The income statement shows:
A. how much profit the company has earned since it began operations.
B. net income equal to the amount of cash on the balance sheet.
C. a summary of the results of operations for a period of time.
D. the liquidity of the company on an annual basis
14. Expenses can be matched against revenues:
A. if the earnings process is not complete.
B. when cash is collected from the sale of products.
C. in the same period as the revenue that it helped to generate.
D. when payment is made for costs related to revenue.
15. What does the phrase, "Revenue is recognized when earned" mean?
A. Revenue is recorded in the accounting records when the goods are received from a supplier, and reported on the income statement when sold to the customer.
B. Revenue is recorded in the accounting records and reported on the income statement when the cash is received from the customer.
C. Revenue is recorded in the accounting records when the goods are sold to a customer, and reported on the income statement when the cash payment is received from the customer.
D. Revenue is recorded in the accounting records and reported on the income statement when goods are sold and delivered to a customer.
16. "Matching principle" is best described as:
A. the principle that a revenue should be recorded when a resource has been earned.
B. an increase in resources resulting from the sale of goods or the provision of services.
C. the principle that expenses should be recorded in the period resources are used to generate revenues.
D. an increase in the financing activities.
17. Monaco Lawn Service Company used $250 of fuel to mow customer lawns in June. The fuel was purchased on account and due in July. Fuel Expense should be recorded in:
A. July.
B. June.
C. August.
D. April.
18. Monaco Lawn Service Company creates revenue each time:
A. it is scheduled for service.
B. amount is paid in full.
C. a lawn is mowed.
D. money is received in advance.
19. IPOD CORPORATION
IPOD Corporations' end-of-year Balance Sheet consisted of the following amounts.
Cash
$ 180,000
Accounts receivable
$700,000
Property, plant & equipment
950,000
Long-term debt
600,000
Capital stock
1,000,000
Accounts payable
350,000
Retained earnings
?
Inventory
540,000
Refer to the information provided above for IPOD Corporation.What amount should IPOD report on its balance sheet for total assets?
A. $1,420,000
B. $1,830,000
C. $2,370,000
D. $2,190,000
20. IPOD CORPORATION
IPOD Corporations' end-of-year Balance Sheet consisted of the following amounts.
Cash
$ 180,000
Accounts receivable
$700,000
Property, plant & equipment
950,000
Long-term debt
600,000
Capital stock
1,000,000
Accounts payable
350,000
Retained earnings
?
Inventory
540,000
Refer to the information provided above for IPOD Corporation. What is IPOD’s retained earnings balance at the end of the current year?
A. $ 420,000
B. $1,420,000
C. $1,950,000
D. $2,370,000
21. Peck Company
The Peck Company reported the following items on its financial statements for the year ending December 31, 2012.
Sales
$1,560,000
Cost of sales
$1,400,000
Selling, general and
Other expense
30,000
administrative expense
40,000
Dividends
10,000
Income tax expense
25,000
Refer to the information provided above for Peck Company. The Income Statement of Peck will report net income for the current year in the amount of:
A. $ 55,000.
B. $ 65,000.
C. $ 85,000.
D. $120,000.
22. Peck Company
The Peck Company reported the following items on its financial statements for the year ending December 31, 2012.
Sales
$1,560,000
Cost of sales
$1,400,000
Selling, general and
Other expense
30,000
administrative expense
40,000
Dividends
10,000
Income tax expense
25,000
Refer to Peck Company. How much will be reported as retained earnings on its balance sheet at December 31, 2012, if this is the first year of operations?
A. $45,000
B. $55,000
C. $85,000
D. Not enough information is provided.
23. Ponzi Corporation
Ponzi Corporation reported the following information for the year ended December 31, 2012.
Net income
$100,000
Dividends
6,000
Retained earnings at December 31, 2012
$120,000
Refer to the information provided above for Ponzi Corporation. What was the balance of retained earnings at January 1, 2012?
A. $ 21,000
B. $ 26,000
C. $106,000
D. $214,000
24. Ponzi Corporation
Ponzi Corporation reported the following information for the year ended December 31, 2012.
Net income
$100,000
Dividends
6,000
Retained earnings at December 31, 2012
$120,000
Refer to the information provided above for Ponzi Corporation. What was the economic effect of the payment of Ponzi's dividends?
A. The dividend reduced net income for 2012.
B. The dividend should be added to net income if the company's accounting equation is in balance.
C. The dividend reduced total retained earnings.
D. The dividends must be paid whenever Ponzi Corporation reports net income.
25. Which of the following terms best describes a distribution of the net income of a corporation to its owners?
A. Retained earnings
B. Dividends
C. Liquidation of assets
D. Revenue
26. You are a potential creditor and are concerned that a particular company you are ready to give a loan to might have too much debt. Which financial statement would provide you information needed in order to evaluate your concern?
A. Balance sheet
B. Income statement
C. Statement of retained earnings
D. Statement of cash flows
27. Which financial statement would you refer to in order to determine how many resources (assets) the company owns?
A. Balance sheet
B. Statement of retained earnings
C. Income statement
D. Statement of cash flows
28. Which one of the following events creates a liability for a business?
A. An obligation to pay for goods purchased on credit from a supplier
B. Inventories purchased for cash
C. Amounts invested by the owners
D. Stock sold to the general public
29. Which of the following is a correct fundamental accounting equation?
A. Assets + Liabilities = Equity
B. Assets + Retained Earnings = Equity
C. Assets + Equity = Liabilities
D. Assets = Liabilities + Equity
30. On January 1, 2012, Blackstone Company reported assets of $1,000,000 and liabilities of $600,000. During 2012 assets decreased by $200,000 and Equity decreased $250,000. What is the amount of Equity on December 31, 2012.
A. $650,000
B. $150,000
C. $400,000
D. $800,000
31. Which one of the following items appears on a balance sheet?
A. Retained earnings
B. Sales revenue
C. Utilities expense
D. Dividends
32. Who among the following generally lends funds to a business entity and expects repayment of the funds?
A. A partner
B. A stockholder
C. An owner
D. A creditor
33. Who among the following invest funds into a business and are considered owners?
A. Stockholders
B. Creditors
C. Bankers
D. Lenders
34. Which one of the following financial statements reports an entity's financial position at a specific date?
A. Balance sheet
B. Statement of retained earnings
C. Income statement
D. Statement of cash flows
35. Ranger Company has assets of $5,000,000, liabilities of $3,000,000, and retained earnings of $1,200,000. How much is total equity?
A. $8,000,000
B. $2,000,000
C. $3,800,000
D. $1,800,000
36. "Economic resources" are known as:
A. assets.
B. liabilities.
C. owners' equity.
D. retained earnings.
37. The assets and liabilities of the company are $175,000 and $40,000, respectively. Equity should equal:
A. $215,000.
B. $135,000.
C. $175,000.
D. $40,000.
38. Liabilities are reported on the:
A. income statement.
B. statement of retained earnings.
C. statement of cash flows.
D. balance sheet.
39. Which of the following is not an asset?
A. Investments
B. Cash
C. Inventory
D. Equity
40. How is the balance sheet linked to the other financial statements?
A. The amount of retained earnings is reported on the balance sheet as a liability.
B. Retained earnings is added to total assets and reported on the balance sheet.
C. Retained earnings from the statement of retained earnings is reported on the balance sheet.
D. There is no link between the balance sheet and other statements, as each contains different accounts and provides different information.
41. Which of the following best describes the term "retained earnings" of a company?
A. The amount of total profits earned by a company since it began operations.
B. The amount of claim that the owners have on the assets of the company.
C. The future economic resources of a company.
D. The accumulated net income of a company that has not been distributed to owners in the form of dividends.
42. Which one of the following equations represents the statement of retained earnings activity?
A. Beginning retained earnings + net income + dividends = ending retained earnings
B. Beginning retained earnings + cash inflows - cash outflows = ending retained earnings
C. Beginning retained earnings + dividends - net income = ending retained earnings
D. Beginning retained earnings + net income - dividends = ending retained earnings
43. Four financial statements are usually prepared for a business. The statement of cash flows is usually prepared last. The retained earnings statement (RE), the balance sheet (B), and the income statement (I) are prepared in a certain order to obtain information needed for the next statement. In what order are these three statements prepared?
A. I, RE, and B
B. B, I, and RE
C. RE, I, and B
D. RE, B, and I
44. Bailout Corporation
Bailout Corporation reported the following information for the year ended December 31, 2012.
Revenues
$2,500,000
Expenses
2,000,000
Retained earnings at December 31, 2011
100,000
Retained earnings at December 31, 2012
450,000
Refer to the selected information provided for Bailout Corporation. How much was paid out in dividends in 2012?
A. $500,000
B. $150,000
C. $350,000
D. $250,000
45. Jetson Corporation
Jetson Corporation reported the following information for the year ended December 31, 2012.
Revenue
$14,000,000
Expenses
11,500,000
Dividends
1,000,000
Retained earnings at December 31, 2012
1,750,000
Refer to the selected information provided for Jetson Corporation. What was the retained earnings balance on December 31, 2011?
A. $ 250,000
B. $2,500,000
C. $1,500,000
D. $ 350,000
46. On January 1, 2012, Money Company's balance in retained earnings was $10,000,000. At the end of the year, December 31, 2012, the balance in retained earnings was $9,400,000. During 2012, the company earned net income of $440,000. How much were dividends?
A. $1,040,000
B. $1,000,000
C. $ 600,000
D. $ 440,000
47. The statement of cash flows has which of the following economic activity categories?
A. Financing, investing, and operating
B. Cash, credit, and noncash
C. Financing, credit, and operating
D. Financing, management, and operating
48. Which one of the following is not one of the three business activities as shown in statement of cash flows?
A. Financing
B. Operating
C. Investing
D. Measuring
49. Which one of the following is not one of the activities on the statement of cash flows?
A. Operating activities
B. Investing activities
C. Business activities
D. Financing activities
50. Which of the following best describes a company's operating activities?
A. Operating activities are cash flows directly related to earning income.
B. Operating activities are necessary to provide the money to start a business.
C. Operating activities are needed to provide the valuable assets required to run a business.
D. Operating activities represent the right to receive a benefit in the future.
51. If stockholders want to know how money flowed into and out of the company, what financial statement would they use?
A. Income statement
B. Statement of cash flows
C. Balance sheet
D. Statement of retained earnings
52. Cash investments made by stockholders in exchange for capital stock in a business are reported on the statement of cash flows in the:
A. financing activities section.
B. investing activities section.
C. operating activities section.
D. supplemental section.
53. Which one of the following is a correct basic structure of the cash flow statement?
A. Cash flows provided (used) by operating activities + / - cash flows provided (used) by business activities + / - cash flows provided (used) by financing activities = net increase (decrease) in cash
B. Cash flows provided (used) by operating activities + / - cash flows provided (used) by investing activities + / - cash flows provided (used) by business activities = net increase (decrease) in cash
C. Cash flows provided (used) by operating activities + / - cash flows provided (used) by financing activities + / - net change in working capital = net increase (decrease) in cash
D. Cash flows provided (used) by operating activities + / - cash flows provided (used) by investing activities + / - cash flows provided (used) by financing activities = net increase (decrease) in cash
54. Cash received from customers for mowing their lawns is reported on the statement of cash flows in the:
A. financing activities section.
B. investing activities section.
C. operating activities section.
D. supplemental section.
55. Cash used to purchase a truck to transport lawn mowers and other tools to customer locations is reported on the statement of cash flows in the:
A. financing activities section.
B. investing activities section.
C. operating activities section.
D. supplemental section.
56. Which one of the following financial statements shows the end of the year cash balance for a business entity?
A. Income statement and statement of retained earnings
B. Balance sheet and statement of cash flows
C. Statement of retained earnings and statement of cash flows
D. Balance sheet and statement of retained earnings
57. Tarp Corporation
Beginning retained earnings
$550,000
Ending retained earnings
700,000
Dividends paid
100,000
Revenue
525,000
Refer to the selected information provided for Tarp Corporation. What is the net income for Tarp Corporation?
A. $150,000
B. $250,000
C. $525,000
D. $350,000
58. Tarp Corporation
Beginning retained earnings
$550,000
Ending retained earnings
700,000
Dividends paid
100,000
Revenue
525,000
Refer to the selected information provided for Tarp Corporation. The company's expenses are:
A. $100,000.
B. $150,000.
C. $450,000.
D. $275,000.
59. If a company has $10,500,000 of revenues, declares and pays $550,000 in dividends, and has net income of $1,600,000, how much were expenses for the year?
A. $8,350,000
B. $1,050,000
C. $2,150,000
D. $8,900,000
60. Davis Construction Inc.
Davis Construction began operation on January 1, 2012, with an initial investment of $100,000 from each of its three stockholders. During the year ending 2012 Davis Construction had net income of $125,000 and paid dividends of $50,000.
Refer to the information provided for Davis Construction, Inc. and calculate its retained earnings balance at December 31, 2012.
A. $175,000
B. $ 75,000
C. $150,000
D. $275,000
61. Davis Construction Inc.
Davis Construction began operation on January 1, 2012, with an initial investment of $100,000 from each of its three stockholders. During the year ending 2012 Davis Construction had net income of $125,000 and paid dividends of $50,000.
Refer to the information provided for Davis Construction, Inc. The dividends for the year:
A. increases the amount of capital stock reported by the company.
B. are part of Davis Construction's operating expense.
C. are reported on the statement of retained earnings.
D. are reported on the income statement.
62. Davis Construction Inc.
Davis Construction began operation on January 1, 2012, with an initial investment of $100,000 from each of its three stockholders. During the year ending 2012 Davis Construction had net income of $125,000 and paid dividends of $50,000.
Refer to Davis Construction. If Davis Construction's revenues were $500,000 for the year ended December 31, 2012, how much were total expenses?
A. $450,000
B. $375,000
C. $325,000
D. $625,000
63. In order for accounting information to be useful in making informed decisions, it must be:
A. internal.
B. relevant.
C. reliable.
D. both relevant and reliable.
64. Which of the following qualitative characteristic of useful accounting information implies that only items that meet or exceed certain thresholds will affect decisions?
A. Conservatism
B. Materiality
C. Relevance
D. Comparability
65. The principle of conservatism is concerned with:
A. the avoidance of overstating assets or income in the preparation of financial statements.
B. the minimization of costs associated with providing financial information.
C. the company's ability to carry out its existing commitments.
D. the company's procedures for recording activities at their initial exchange price.
66. Mullins, Inc. manufactures furniture. Mullins has given you its most recent annual report in an effort to obtain a sizeable loan. The company is very profitable and appears to have a strong financial position. However, based on a news report you saw on television last night, you are aware that Mullins is a defendant in a class action lawsuit related to defective products. Serious injuries were allegedly caused by Mullins' infant high chairs overturning. The television news report is an example of financial information that is:
A. predictable.
B. conservative.
C. relevant.
D. comparable.
67. If an investor can use accounting information for two different companies to evaluate the types and amounts of expenses, the information is said to have the quality of:
A. comparability.
B. consistency.
C. neutrality.
D. materiality.
68. PTG Enterprises purchases many small pieces of office furniture, such as trash cans, that cost less than $100 each. PTG accounts for these items as expenses when acquired rather than reporting them as property, plant, and equipment on its balance sheet. The company's accountant states that no accounting principle has been violated. Justification for PTG's policy of expensing these furniture items is based on cost vs. benefit considerations as well as qualitative characteristic of accounting information of:
A. conservatism.
B. materiality.
C. reliability.
D. verifiability.
69. Scott Brothers, Inc. follows the qualitative characteristic of consistency. This means that:
A. for expenses, Scott uses the same account titles as used by its competitors.
B. Scott has elected certain accounting principles that can never be changed.
C. Scott applies the same accounting methods each period.
D. Scott applies the same accounting principles as its competitors.
70. Information that is material means that an error in recording the dollar amount of a transaction would:
A. likely affect the judgment of someone relying on the financial statements.
B. not affect the decisions of financial statement users.
C. not impact a business decision of a creditor.
D. result in the overstatement of assets or income.
71. An accountant is uncertain about the best estimate of an amount for a business transaction. If there are two possible amounts that could be recorded, the amount least likely to overstate assets and earnings is selected. Which of the following qualities is characterized by this action?
A. Comparability
B. Conservatism
C. Materiality
D. Neutrality
72. One of the qualitative characteristics of accounting information include:
A. reliability.
B. cash flow information.
C. all accounting information.
D. assets reported on the balance sheet.
73. Times Corporation
The accountant for the Times Corporation prepared the following list from the company's accounting records for the year ended December 31, 2012.
Retained earnings
?
Prepaid expenses
$ 70,000
Cash
$ 97,000
Common stock
500,000
Accounts payable
70,000
Accounts receivable
260,000
Sales revenue
1,075,000
Interest income
70,000
Cost of sales
780,000
Salary expense
220,000
Land
810,000
Income tax expense
60,000
Notes payable
520,000
Selling expense
75,000
Inventory
280,000
Salaries payable
55,000
Determine the following amounts for Times Corporation.
A)
Total assets at the end of 2012.
B)
Total liabilities at the end of 2012.
C)
Total equity at the end of 2012.
74. Times Corporation
The accountant for the Times Corporation prepared the following list from the company's accounting records for the year ended December 31, 2012.
Retained earnings
?
Prepaid expenses
$ 70,000
Cash
$ 97,000
Common stock
500,000
Accounts payable
70,000
Accounts receivable
260,000
Sales revenue
1,075,000
Interest income
70,000
Cost of sales
780,000
Salary expense
220,000
Land
810,000
Income tax expense
60,000
Notes payable
520,000
Selling expense
75,000
Inventory
280,000
Salaries payable
55,000
Determine the following amounts for Times Corporation:
A)
Total revenues for 2012.
B)
Total expenses for 2012.
C)
Net income for 2012.
75. Times Corporation
The accountant for the Times Corporation prepared the following list from the company's accounting records for the year ended December 31, 2012.
Retained earnings
?
Prepaid expenses
$ 70,000
Cash
$ 97,000
Common stock
500,000
Accounts payable
70,000
Accounts receivable
260,000
Sales revenue
1,075,000
Interest income
70,000
Cost of sales
780,000
Salary expense
220,000
Land
810,000
Income tax expense
60,000
Notes payable
520,000
Selling expense
75,000
Inventory
280,000
Salaries payable
55,000
Prepare an income statement for Times Corporation in a proper format.
76. Times Corporation
The accountant for the Times Corporation prepared the following list from the company's accounting records for the year ended December 31, 2012.
Retained earnings
?
Prepaid expenses
$ 70,000
Cash
$ 97,000
Common stock
500,000
Accounts payable
70,000
Accounts receivable
260,000
Sales revenue
1,075,000
Interest income
70,000
Cost of sales
780,000
Salary expense
220,000
Land
810,000
Income tax expense
60,000
Notes payable
520,000
Selling expense
75,000
Inventory
280,000
Salaries payable
55,000
Prepare a Balance Sheet for the Times Corporation in a proper format.
77. Several amounts from GM Company at December 31, 2012, are listed below. Answer the questions.
Service revenue
$817,500
Salaries expense
$343,500
Dividends paid
75,000
Rent expense
129,000
Buildings
165,000
Land
150,000
Accounts payable
60,000
Accounts receivable
42,000
Capital stock
90,000
Retained earnings, Jan. 1, 2012
600,000
Utilities expense
28,500
Notes payable
45,000
Income tax payable
6,000
Income tax expense
165,000
A)
Calculate net income for 2012.
B)
How much is GM Company's retained earnings at the end of 2012?
78. The following information comes from the records of America Corporation:
Assets
Liabilities
Equity
January 1, 2012
$750,000
$270,000
$________
December 31, 2012
905,000
_______
700,000
A)
What is the amount of equity at January 1, 2012?
B)
What is the amount of liabilities at December 31, 2012?
C)
Assume that the company paid dividends of $310,000 during the year. How much net income did it earn during the year?
D)
Assume that the company paid no dividends during the year. Without looking at the income statement, how can you tell if the company is profitable or not?
79. Cardinal Corporation reported the following information at December 31, 2012:
Accounts payable
$400,000
Dividends paid
$100,000
Cash
$100,000
Expenses
$600,000
Inventories
$700,000
Revenue
$750,000
A)
Calculate Cardinal Corporation's total assets.
B)
Calculate Cardinal Corporations' net income for 2012.
C)
Calculate Cardinal Corporation's total equity at the end of 2012.
80. Newton Corporation began operations on January 2, 2010, with a total investment of $150,000 by its stockholders. Net loss for its first year of business was $20,000. During 2011 and 2012, net income increased to $120,000 and $150,000, respectively. Newton paid $50,000 per year in dividends to its shareholders in 2011 and 2012.
A)
Prepare a statement of retained earnings for the year ended December 31, 2011.
B)
How much is total retained earnings at December 31, 2012?
C)
Explain the link between the statement of retained earnings and the balance sheet.
81. The beginning balance of retained earnings was $2,400,000, and the ending balance was $1,500,000. The company paid dividends of $150,000.
A)
Determine the amount of net income (loss) for the year.
B)
What information would one find on the income statement in addition to net income?
82. President Corporation started business at the beginning of the year, with assets of $2,000,000 and equity of $1,130,000. By the end of the year, assets increased by $200,000 and liabilities decreased by $300,000. Other than net income or loss, the only change in equity was dividends of $100,000.
A)
What was the amount of President Corporation’s equity at the end of the year?
B)
What was the amount of President Corporation’s net income or net loss for the year?
83. The financial statement in which you list revenues, starting with sales revenue (service revenue), is called the ____________________.
84. The fundamental accounting equation is ____________________ = ____________________ + ____________________.
85. Both net income and dividends can be found on the financial statement called the ____________________.
86. Net income from the income statement increases ____________________.
87. The statement of cash flows classifies cash flow into ____________________, ____________________ and ____________________ activities.
88. The type of business activity that relates to obtaining funds from either issuing stock or borrowing money is called ____________________.
89. The names of the four basic financial statements are the ____________________, the ____________________, the ____________________, and the ____________________
90. The three financial statements in which net income can be found are the ____________________, the ____________________ and the ____________________.
91. Each of the situations in A through C below applies to one of the assumptions or principles included in the conceptual framework of accounting. Identify which assumption or principles applies and explain why that assumption or principle applies.
A)
Globall Inc. is a U.S. company that has divisions in several countries around the world. Each country has a currency different than the U.S. dollar. Globall must include the financial data of its worldwide divisions in its financial statements.
B)
Cheetum & Howell operate a security business as a partnership. The partners are considering a change to the corporate form of business organization.
C)
Yum Shops, Inc. is a locally owned and operated confectionary. The owners have decided to expand into nearby cities. Expansion will require more capital, but management does not expect it will stay in business for more than one year or so regardless of its expansion plans.
92. What is the purpose of an income statement?
93. List the four financial statements. Explain the connection between these four statements.
94. Paige Company claims that its financial information is useful. Mention any four qualities that must be present in order to have "useful" accounting information? Explain these four qualities.
95. What is the difference between comparability and consistency?
Chapter 1--Financial Accounting Key
1. Which of the following underlying assumptions for the conceptual framework is the reason the dollar is used in the preparation of financial statements?
A. Economic entity
B. Continuity
C. Time period
D. Monetary unit
2. Which of the following is an assumption made in the preparation of the financial statements?
A. Financial statements are prepared for a specific entity that is distinct from the entity's owners.
B. The current market value is assumed to be less relevant than the original cost paid.
C. The preparation of financial statements for a specific time period assumes that the balance sheet covers a designated period of time.
D. Financial statements are prepared assuming that inflation has a distinct effect on the monetary unit.
3. The time period assumption is necessary because:
A. inflation exists and causes confusing swings in financial statement amounts over time.
B. external users of financial statements want accurately-reported net income for a specific period of time.
C. financial statements users expect full disclosure of all events throughout the entire time period translated in dollars.
D. it is required by the federal government.
4. The going concern assumption is concerned with:
A. the company's ability to continue operations long enough to carry out its existing obligations.
B. any information that is capable of influencing the decisions of anyone using the financial statements.
C. measuring ongoing business activities at their exchange price at the time of the initial external transaction.
D. offsetting management's natural optimism by providing a prudent approach to uncertainty in financial statement items.
5. Which of the following concepts relates to separating the reporting of business and personal economic transactions?
A. Cost principle
B. Monetary unit assumption
C. Economic entity assumption
D. Objectivity assumption
6. "Revenues" are best described as:
A. decreases in resources resulting from the purchase of goods for the provision of services.
B. increases in resources resulting from the sale of goods or the provision of services.
C. assets used or consumed in the sale of products or services.
D. an increase in the financing activities section of the statement of cash flows.
7. Which of the following best describes the term "expenses"?
A. The cost of assets used in the investing activities of a business.
B. The amount of interest or claim that the owners have in the business.
C. The future economic resources of a business entity.
D. A decrease in resources resulting from the sale of goods or provision of services.
8. Which statement demonstrates the financial success or failure of the company over that specific period of time?
A. Statement of changes in stockholders’ equity
B. Statement of retained earnings
C. Balance sheet
D. Income statement
9. The resources used to generate revenues during a period are called:
A. net income.
B. expenses.
C. revenues.
D. dividends.
10. Which of the following is the correct date format for the financial statement heading?
A. Balance Sheet for the Year Ended June 30, 2012
B. Statement of Retained Earnings as of December 31, 2012
C. Income Statement for the Year Ending December 31, 2012
D. Statement of Retained Earnings at December 31, 2012
11. Which financial statement would you analyze to determine its operating performance for the past year?
A. Balance sheet
B. Statement of retained earnings
C. Income statement
D. Statement of cash flows
12. Doughtry's Pet Shop reported a net loss of $1,500,000 and total expenses of $2,900,000. How much were the total sales?
A. $4,400,000
B. $1,400,000
C. $2,900,000
D. $1,500,000
13. The income statement shows:
A. how much profit the company has earned since it began operations.
B. net income equal to the amount of cash on the balance sheet.
C. a summary of the results of operations for a period of time.
D. the liquidity of the company on an annual basis
14. Expenses can be matched against revenues:
A. if the earnings process is not complete.
B. when cash is collected from the sale of products.
C. in the same period as the revenue that it helped to generate.
D. when payment is made for costs related to revenue.
15. What does the phrase, "Revenue is recognized when earned" mean?
A. Revenue is recorded in the accounting records when the goods are received from a supplier, and reported on the income statement when sold to the customer.
B. Revenue is recorded in the accounting records and reported on the income statement when the cash is received from the customer.
C. Revenue is recorded in the accounting records when the goods are sold to a customer, and reported on the income statement when the cash payment is received from the customer.
D. Revenue is recorded in the accounting records and reported on the income statement when goods are sold and delivered to a customer.
16. "Matching principle" is best described as:
A. the principle that a revenue should be recorded when a resource has been earned.
B. an increase in resources resulting from the sale of goods or the provision of services.
C. the principle that expenses should be recorded in the period resources are used to generate revenues.
D. an increase in the financing activities.
17. Monaco Lawn Service Company used $250 of fuel to mow customer lawns in June. The fuel was purchased on account and due in July. Fuel Expense should be recorded in:
A. July.
B. June.
C. August.
D. April.
18. Monaco Lawn Service Company creates revenue each time:
A. it is scheduled for service.
B. amount is paid in full.
C. a lawn is mowed.
D. money is received in advance.
19. IPOD CORPORATION
IPOD Corporations' end-of-year Balance Sheet consisted of the following amounts.
Cash
$ 180,000
Accounts receivable
$700,000
Property, plant & equipment
950,000
Long-term debt
600,000
Capital stock
1,000,000
Accounts payable
350,000
Retained earnings
?
Inventory
540,000
Refer to the information provided above for IPOD Corporation.What amount should IPOD report on its balance sheet for total assets?
A. $1,420,000
B. $1,830,000
C. $2,370,000
D. $2,190,000
20. IPOD CORPORATION
IPOD Corporations' end-of-year Balance Sheet consisted of the following amounts.
Cash
$ 180,000
Accounts receivable
$700,000
Property, plant & equipment
950,000
Long-term debt
600,000
Capital stock
1,000,000
Accounts payable
350,000
Retained earnings
?
Inventory
540,000
Refer to the information provided above for IPOD Corporation. What is IPOD’s retained earnings balance at the end of the current year?
A. $ 420,000
B. $1,420,000
C. $1,950,000
D. $2,370,000
21. Peck Company
The Peck Company reported the following items on its financial statements for the year ending December 31, 2012.
Sales
$1,560,000
Cost of sales
$1,400,000
Selling, general and
Other expense
30,000
administrative expense
40,000
Dividends
10,000
Income tax expense
25,000
Refer to the information provided above for Peck Company. The Income Statement of Peck will report net income for the current year in the amount of:
A. $ 55,000.
B. $ 65,000.
C. $ 85,000.
D. $120,000.
22. Peck Company
The Peck Company reported the following items on its financial statements for the year ending December 31, 2012.
Sales
$1,560,000
Cost of sales
$1,400,000
Selling, general and
Other expense
30,000
administrative expense
40,000
Dividends
10,000
Income tax expense
25,000
Refer to Peck Company. How much will be reported as retained earnings on its balance sheet at December 31, 2012, if this is the first year of operations?
A. $45,000
B. $55,000
C. $85,000
D. Not enough information is provided.
23. Ponzi Corporation
Ponzi Corporation reported the following information for the year ended December 31, 2012.
Net income
$100,000
Dividends
6,000
Retained earnings at December 31, 2012
$120,000
Refer to the information provided above for Ponzi Corporation. What was the balance of retained earnings at January 1, 2012?
A. $ 21,000
B. $ 26,000
C. $106,000
D. $214,000
24. Ponzi Corporation
Ponzi Corporation reported the following information for the year ended December 31, 2012.
Net income
$100,000
Dividends
6,000
Retained earnings at December 31, 2012
$120,000
Refer to the information provided above for Ponzi Corporation. What was the economic effect of the payment of Ponzi's dividends?
A. The dividend reduced net income for 2012.
B. The dividend should be added to net income if the company's accounting equation is in balance.
C. The dividend reduced total retained earnings.
D. The dividends must be paid whenever Ponzi Corporation reports net income.
25. Which of the following terms best describes a distribution of the net income of a corporation to its owners?
A. Retained earnings
B. Dividends
C. Liquidation of assets
D. Revenue
26. You are a potential creditor and are concerned that a particular company you are ready to give a loan to might have too much debt. Which financial statement would provide you information needed in order to evaluate your concern?
A. Balance sheet
B. Income statement
C. Statement of retained earnings
D. Statement of cash flows
27. Which financial statement would you refer to in order to determine how many resources (assets) the company owns?
A. Balance sheet
B. Statement of retained earnings
C. Income statement
D. Statement of cash flows
28. Which one of the following events creates a liability for a business?
A. An obligation to pay for goods purchased on credit from a supplier
B. Inventories purchased for cash
C. Amounts invested by the owners
D. Stock sold to the general public
29. Which of the following is a correct fundamental accounting equation?
A. Assets + Liabilities = Equity
B. Assets + Retained Earnings = Equity
C. Assets + Equity = Liabilities
D. Assets = Liabilities + Equity
30. On January 1, 2012, Blackstone Company reported assets of $1,000,000 and liabilities of $600,000. During 2012 assets decreased by $200,000 and Equity decreased $250,000. What is the amount of Equity on December 31, 2012.
A. $650,000
B. $150,000
C. $400,000
D. $800,000
31. Which one of the following items appears on a balance sheet?
A. Retained earnings
B. Sales revenue
C. Utilities expense
D. Dividends
32. Who among the following generally lends funds to a business entity and expects repayment of the funds?
A. A partner
B. A stockholder
C. An owner
D. A creditor
33. Who among the following invest funds into a business and are considered owners?
A. Stockholders
B. Creditors
C. Bankers
D. Lenders
34. Which one of the following financial statements reports an entity's financial position at a specific date?
A. Balance sheet
B. Statement of retained earnings
C. Income statement
D. Statement of cash flows
35. Ranger Company has assets of $5,000,000, liabilities of $3,000,000, and retained earnings of $1,200,000. How much is total equity?
A. $8,000,000
B. $2,000,000
C. $3,800,000
D. $1,800,000
36. "Economic resources" are known as:
A. assets.
B. liabilities.
C. owners' equity.
D. retained earnings.
37. The assets and liabilities of the company are $175,000 and $40,000, respectively. Equity should equal:
A. $215,000.
B. $135,000.
C. $175,000.
D. $40,000.
38. Liabilities are reported on the:
A. income statement.
B. statement of retained earnings.
C. statement of cash flows.
D. balance sheet.
39. Which of the following is not an asset?
A. Investments
B. Cash
C. Inventory
D. Equity
40. How is the balance sheet linked to the other financial statements?
A. The amount of retained earnings is reported on the balance sheet as a liability.
B. Retained earnings is added to total assets and reported on the balance sheet.
C. Retained earnings from the statement of retained earnings is reported on the balance sheet.
D. There is no link between the balance sheet and other statements, as each contains different accounts and provides different information.
41. Which of the following best describes the term "retained earnings" of a company?
A. The amount of total profits earned by a company since it began operations.
B. The amount of claim that the owners have on the assets of the company.
C. The future economic resources of a company.
D. The accumulated net income of a company that has not been distributed to owners in the form of dividends.
42. Which one of the following equations represents the statement of retained earnings activity?
A. Beginning retained earnings + net income + dividends = ending retained earnings
B. Beginning retained earnings + cash inflows - cash outflows = ending retained earnings
C. Beginning retained earnings + dividends - net income = ending retained earnings
D. Beginning retained earnings + net income - dividends = ending retained earnings
43. Four financial statements are usually prepared for a business. The statement of cash flows is usually prepared last. The retained earnings statement (RE), the balance sheet (B), and the income statement (I) are prepared in a certain order to obtain information needed for the next statement. In what order are these three statements prepared?
A. I, RE, and B
B. B, I, and RE
C. RE, I, and B
D. RE, B, and I
44. Bailout Corporation
Bailout Corporation reported the following information for the year ended December 31, 2012.
Revenues
$2,500,000
Expenses
2,000,000
Retained earnings at December 31, 2011
100,000
Retained earnings at December 31, 2012
450,000
Refer to the selected information provided for Bailout Corporation. How much was paid out in dividends in 2012?
A. $500,000
B. $150,000
C. $350,000
D. $250,000
45. Jetson Corporation
Jetson Corporation reported the following information for the year ended December 31, 2012.
Revenue
$14,000,000
Expenses
11,500,000
Dividends
1,000,000
Retained earnings at December 31, 2012
1,750,000
Refer to the selected information provided for Jetson Corporation. What was the retained earnings balance on December 31, 2011?
A. $ 250,000
B. $2,500,000
C. $1,500,000
D. $ 350,000
46. On January 1, 2012, Money Company's balance in retained earnings was $10,000,000. At the end of the year, December 31, 2012, the balance in retained earnings was $9,400,000. During 2012, the company earned net income of $440,000. How much were dividends?
A. $1,040,000
B. $1,000,000
C. $ 600,000
D. $ 440,000
47. The statement of cash flows has which of the following economic activity categories?
A. Financing, investing, and operating
B. Cash, credit, and noncash
C. Financing, credit, and operating
D. Financing, management, and operating
48. Which one of the following is not one of the three business activities as shown in statement of cash flows?
A. Financing
B. Operating
C. Investing
D. Measuring
49. Which one of the following is not one of the activities on the statement of cash flows?
A. Operating activities
B. Investing activities
C. Business activities
D. Financing activities
50. Which of the following best describes a company's operating activities?
A. Operating activities are cash flows directly related to earning income.
B. Operating activities are necessary to provide the money to start a business.
C. Operating activities are needed to provide the valuable assets required to run a business.
D. Operating activities represent the right to receive a benefit in the future.
51. If stockholders want to know how money flowed into and out of the company, what financial statement would they use?
A. Income statement
B. Statement of cash flows
C. Balance sheet
D. Statement of retained earnings
52. Cash investments made by stockholders in exchange for capital stock in a business are reported on the statement of cash flows in the:
A. financing activities section.
B. investing activities section.
C. operating activities section.
D. supplemental section.
53. Which one of the following is a correct basic structure of the cash flow statement?
A. Cash flows provided (used) by operating activities + / - cash flows provided (used) by business activities + / - cash flows provided (used) by financing activities = net increase (decrease) in cash
B. Cash flows provided (used) by operating activities + / - cash flows provided (used) by investing activities + / - cash flows provided (used) by business activities = net increase (decrease) in cash
C. Cash flows provided (used) by operating activities + / - cash flows provided (used) by financing activities + / - net change in working capital = net increase (decrease) in cash
D. Cash flows provided (used) by operating activities + / - cash flows provided (used) by investing activities + / - cash flows provided (used) by financing activities = net increase (decrease) in cash
54. Cash received from customers for mowing their lawns is reported on the statement of cash flows in the:
A. financing activities section.
B. investing activities section.
C. operating activities section.
D. supplemental section.
55. Cash used to purchase a truck to transport lawn mowers and other tools to customer locations is reported on the statement of cash flows in the:
A. financing activities section.
B. investing activities section.
C. operating activities section.
D. supplemental section.
56. Which one of the following financial statements shows the end of the year cash balance for a business entity?
A. Income statement and statement of retained earnings
B. Balance sheet and statement of cash flows
C. Statement of retained earnings and statement of cash flows
D. Balance sheet and statement of retained earnings
57. Tarp Corporation
Beginning retained earnings
$550,000
Ending retained earnings
700,000
Dividends paid
100,000
Revenue
525,000
Refer to the selected information provided for Tarp Corporation. What is the net income for Tarp Corporation?
A. $150,000
B. $250,000
C. $525,000
D. $350,000
58. Tarp Corporation
Beginning retained earnings
$550,000
Ending retained earnings
700,000
Dividends paid
100,000
Revenue
525,000
Refer to the selected information provided for Tarp Corporation. The company's expenses are:
A. $100,000.
B. $150,000.
C. $450,000.
D. $275,000.
59. If a company has $10,500,000 of revenues, declares and pays $550,000 in dividends, and has net income of $1,600,000, how much were expenses for the year?
A. $8,350,000
B. $1,050,000
C. $2,150,000
D. $8,900,000
60. Davis Construction Inc.
Davis Construction began operation on January 1, 2012, with an initial investment of $100,000 from each of its three stockholders. During the year ending 2012 Davis Construction had net income of $125,000 and paid dividends of $50,000.
Refer to the information provided for Davis Construction, Inc. and calculate its retained earnings balance at December 31, 2012.
A. $175,000
B. $ 75,000
C. $150,000
D. $275,000
61. Davis Construction Inc.
Davis Construction began operation on January 1, 2012, with an initial investment of $100,000 from each of its three stockholders. During the year ending 2012 Davis Construction had net income of $125,000 and paid dividends of $50,000.
Refer to the information provided for Davis Construction, Inc. The dividends for the year:
A. increases the amount of capital stock reported by the company.
B. are part of Davis Construction's operating expense.
C. are reported on the statement of retained earnings.
D. are reported on the income statement.
62. Davis Construction Inc.
Davis Construction began operation on January 1, 2012, with an initial investment of $100,000 from each of its three stockholders. During the year ending 2012 Davis Construction had net income of $125,000 and paid dividends of $50,000.
Refer to Davis Construction. If Davis Construction's revenues were $500,000 for the year ended December 31, 2012, how much were total expenses?
A. $450,000
B. $375,000
C. $325,000
D. $625,000
63. In order for accounting information to be useful in making informed decisions, it must be:
A. internal.
B. relevant.
C. reliable.
D. both relevant and reliable.
64. Which of the following qualitative characteristic of useful accounting information implies that only items that meet or exceed certain thresholds will affect decisions?
A. Conservatism
B. Materiality
C. Relevance
D. Comparability
65. The principle of conservatism is concerned with:
A. the avoidance of overstating assets or income in the preparation of financial statements.
B. the minimization of costs associated with providing financial information.
C. the company's ability to carry out its existing commitments.
D. the company's procedures for recording activities at their initial exchange price.
66. Mullins, Inc. manufactures furniture. Mullins has given you its most recent annual report in an effort to obtain a sizeable loan. The company is very profitable and appears to have a strong financial position. However, based on a news report you saw on television last night, you are aware that Mullins is a defendant in a class action lawsuit related to defective products. Serious injuries were allegedly caused by Mullins' infant high chairs overturning. The television news report is an example of financial information that is:
A. predictable.
B. conservative.
C. relevant.
D. comparable.
67. If an investor can use accounting information for two different companies to evaluate the types and amounts of expenses, the information is said to have the quality of:
A. comparability.
B. consistency.
C. neutrality.
D. materiality.
68. PTG Enterprises purchases many small pieces of office furniture, such as trash cans, that cost less than $100 each. PTG accounts for these items as expenses when acquired rather than reporting them as property, plant, and equipment on its balance sheet. The company's accountant states that no accounting principle has been violated. Justification for PTG's policy of expensing these furniture items is based on cost vs. benefit considerations as well as qualitative characteristic of accounting information of:
A. conservatism.
B. materiality.
C. reliability.
D. verifiability.
69. Scott Brothers, Inc. follows the qualitative characteristic of consistency. This means that:
A. for expenses, Scott uses the same account titles as used by its competitors.
B. Scott has elected certain accounting principles that can never be changed.
C. Scott applies the same accounting methods each period.
D. Scott applies the same accounting principles as its competitors.
70. Information that is material means that an error in recording the dollar amount of a transaction would:
A. likely affect the judgment of someone relying on the financial statements.
B. not affect the decisions of financial statement users.
C. not impact a business decision of a creditor.
D. result in the overstatement of assets or income.
71. An accountant is uncertain about the best estimate of an amount for a business transaction. If there are two possible amounts that could be recorded, the amount least likely to overstate assets and earnings is selected. Which of the following qualities is characterized by this action?
A. Comparability
B. Conservatism
C. Materiality
D. Neutrality
72. One of the qualitative characteristics of accounting information include:
A. reliability.
B. cash flow information.
C. all accounting information.
D. assets reported on the balance sheet.
73. Times Corporation
The accountant for the Times Corporation prepared the following list from the company's accounting records for the year ended December 31, 2012.
Retained earnings
?
Prepaid expenses
$ 70,000
Cash
$ 97,000
Common stock
500,000
Accounts payable
70,000
Accounts receivable
260,000
Sales revenue
1,075,000
Interest income
70,000
Cost of sales
780,000
Salary expense
220,000
Land
810,000
Income tax expense
60,000
Notes payable
520,000
Selling expense
75,000
Inventory
280,000
Salaries payable
55,000
Determine the following amounts for Times Corporation.
A)
Total assets at the end of 2012.
B)
Total liabilities at the end of 2012.
C)
Total equity at the end of 2012.
A)
$97,000 (Cash) + 260,000 (Accounts receivable) + 280,000 (Inventories) + 70,000 (Prepaid expense) + 810,000 (Land) = $1,517,000
B)
$70,000 (Accounts payable) + 520,000 (Notes payable) + 55,000 (Salaries payable) = $645,000
C)
$1,517,000 (Total assets) - 645,000 (Total liabilities) = $872,000
74. Times Corporation
The accountant for the Times Corporation prepared the following list from the company's accounting records for the year ended December 31, 2012.
Retained earnings
?
Prepaid expenses
$ 70,000
Cash
$ 97,000
Common stock
500,000
Accounts payable
70,000
Accounts receivable
260,000
Sales revenue
1,075,000
Interest income
70,000
Cost of sales
780,000
Salary expense
220,000
Land
810,000
Income tax expense
60,000
Notes payable
520,000
Selling expense
75,000
Inventory
280,000
Salaries payable
55,000
Determine the following amounts for Times Corporation:
A)
Total revenues for 2012.
B)
Total expenses for 2012.
C)
Net income for 2012.
A)
$1,145,000
$1,075,000 (Sales revenue) + 70,000 (Interest income) = $1,145,000
B)
$1,135,000
$780,000 (Cost of sales) + 220,000 (Salary expense) + 60,000 (Income tax expense) + 75,000 (Selling expense) = $1,135,000
C)
$10,000
$1,145,000 (Total revenue) - $1,135,000 (Total expenses) = $10,000
75. Times Corporation
The accountant for the Times Corporation prepared the following list from the company's accounting records for the year ended December 31, 2012.
Retained earnings
?
Prepaid expenses
$ 70,000
Cash
$ 97,000
Common stock
500,000
Accounts payable
70,000
Accounts receivable
260,000
Sales revenue
1,075,000
Interest income
70,000
Cost of sales
780,000
Salary expense
220,000
Land
810,000
Income tax expense
60,000
Notes payable
520,000
Selling expense
75,000
Inventory
280,000
Salaries payable
55,000
Prepare an income statement for Times Corporation in a proper format.
Times Corporation
Income Statement
For the Year Ending December 31, 2012
Revenues:
Sales revenue
$1,075,000
Interest income
70,000
$1,145,000
Expenses:
Cost of sales
$780,000
Salary expense
220,000
Selling expense
60,000
Income tax expense
75,000
1,135,000
Net income
$ 10,000
76. Times Corporation
The accountant for the Times Corporation prepared the following list from the company's accounting records for the year ended December 31, 2012.
Retained earnings
?
Prepaid expenses
$ 70,000
Cash
$ 97,000
Common stock
500,000
Accounts payable
70,000
Accounts receivable
260,000
Sales revenue
1,075,000
Interest income
70,000
Cost of sales
780,000
Salary expense
220,000
Land
810,000
Income tax expense
60,000
Notes payable
520,000
Selling expense
75,000
Inventory
280,000
Salaries payable
55,000
Prepare a Balance Sheet for the Times Corporation in a proper format.
Times Corporation
Balance Sheet
As of December 31, 2012
Assets
Liabilities & Equity
Cash
$ 97,000
Accounts payable
$ 70,000
Accounts receivable
260,000
Salaries payable
55,000
Inventory
280,000
Notes payable
520,000
Prepaid expenses
70,000
Common stock
500,000
Land
810,000
Retained earnings
372,000
Total assets
$1,517,000
Total liabilities & equity
$1,517,000
77. Several amounts from GM Company at December 31, 2012, are listed below. Answer the questions.
Service revenue
$817,500
Salaries expense
$343,500
Dividends paid
75,000
Rent expense
129,000
Buildings
165,000
Land
150,000
Accounts payable
60,000
Accounts receivable
42,000
Capital stock
90,000
Retained earnings, Jan. 1, 2012
600,000
Utilities expense
28,500
Notes payable
45,000
Income tax payable
6,000
Income tax expense
165,000
A)
Calculate net income for 2012.
B)
How much is GM Company's retained earnings at the end of 2012?
A)
$817,500 (Service revenue) - 343,500 (Salaries expense) - 129,000 (Rent expense) - 28,500 (Utilities expense) - 165,000 (Income tax expense) = $151,500
B)
$600,000 (Retained earnings, Jan 1, 2012) + 151,500 (Net income) - 75,000 (Dividends paid) = $676,500
78. The following information comes from the records of America Corporation:
Assets
Liabilities
Equity
January 1, 2012
$750,000
$270,000
$________
December 31, 2012
905,000
_______
700,000
A)
What is the amount of equity at January 1, 2012?
B)
What is the amount of liabilities at December 31, 2012?
C)
Assume that the company paid dividends of $310,000 during the year. How much net income did it earn during the year?
D)
Assume that the company paid no dividends during the year. Without looking at the income statement, how can you tell if the company is profitable or not?
A)
$750,000 (Assets) - 270,000 (Liabilities) = $480,000
B)
$905,000 (Assets) - 700,000 (Equity) = $205,000 (Liabilities)
C)
$480,000 (Beginning equity) + X (Net income) - 310,000 (Dividend) = $700,000 (Ending equity)
(X = $530,000)
D)
Assuming that the increase in equity would come from net income, the company would have to be considered profitable. Net income will increase retained earnings which is a part of equity.
79. Cardinal Corporation reported the following information at December 31, 2012:
Accounts payable
$400,000
Dividends paid
$100,000
Cash
$100,000
Expenses
$600,000
Inventories
$700,000
Revenue
$750,000
A)
Calculate Cardinal Corporation's total assets.
B)
Calculate Cardinal Corporations' net income for 2012.
C)
Calculate Cardinal Corporation's total equity at the end of 2012.
A)
$100,000 (Cash) + 700,000 (Inventories) = $800,000
B)
$750,000 (Revenue) - 600,000 (Expenses) = $150,000
C)
$800,000 (Total assets) - 400,000 (Accounts payable) = $400,000
80. Newton Corporation began operations on January 2, 2010, with a total investment of $150,000 by its stockholders. Net loss for its first year of business was $20,000. During 2011 and 2012, net income increased to $120,000 and $150,000, respectively. Newton paid $50,000 per year in dividends to its shareholders in 2011 and 2012.
A)
Prepare a statement of retained earnings for the year ended December 31, 2011.
B)
How much is total retained earnings at December 31, 2012?
C)
Explain the link between the statement of retained earnings and the balance sheet.
A)
Newton Corporation
Statement of Retained Earnings
For the Year Ended December 31, 2011
Beginning balance, January 1, 2011
$(20,000)*
Add: Net income for 2011
120,000
Less: Dividends paid during the year
50,000
Ending balance, December 31, 2011
$ 50,000
*
$(20,000) (Net loss for 2010) - 0 (Dividends paid) = $(20,000) (Balance, January 1, 2011)
B)
Retained earnings at December 31, 2012 = $150,000
$50,000 (Beginning balance, January 1, 2012) + 150,000 (Net income for 2012) - 50,000 (Dividends paid during the year) = $150,000
C)
The ending balance of the retained earnings statement represents the cumulative earnings less all the dividends declared and paid for the life of the business. This amount appears on the balance sheet as a component of stockholders' equity.
81. The beginning balance of retained earnings was $2,400,000, and the ending balance was $1,500,000. The company paid dividends of $150,000.
A)
Determine the amount of net income (loss) for the year.
B)
What information would one find on the income statement in addition to net income?
A)
$1,500,000 (Ending retained earnings) - 2,400,000 (Beginning retained earnings) = ($900,000)
($900,000) (Decrease in retained earnings) + 150,000 (Dividends paid) = $750,000 (Loss)
B)
The Income statement will show the sources of amounts earned (revenues) as well as the amount and type of costs incurred by the company (expenses) during the period.
82. President Corporation started business at the beginning of the year, with assets of $2,000,000 and equity of $1,130,000. By the end of the year, assets increased by $200,000 and liabilities decreased by $300,000. Other than net income or loss, the only change in equity was dividends of $100,000.
A)
What was the amount of President Corporation’s equity at the end of the year?
B)
What was the amount of President Corporation’s net income or net loss for the year?
A)
Stockholders'
Assets
Liabilities
Equity
Beginning of year
$2,000,000
$870,000
$1,130,000
Change during year
+200,000
-300,000
+500,000
End of year
$2,200,000
=
570,000
$1,630,000
B)
Change in equity
$ 500,000
Add: Dividends
100,000
Net income
$ 600,000
83. The financial statement in which you list revenues, starting with sales revenue (service revenue), is called the ____________________.
income statement
84. The fundamental accounting equation is ____________________ = ____________________ + ____________________.
Assets, Liabilities, Equity
85. Both net income and dividends can be found on the financial statement called the ____________________.
statement of retained earnings
86. Net income from the income statement increases ____________________.
retained earnings
87. The statement of cash flows classifies cash flow into ____________________, ____________________ and ____________________ activities.
operating, investing, financing
88. The type of business activity that relates to obtaining funds from either issuing stock or borrowing money is called ____________________.
financing
89. The names of the four basic financial statements are the ____________________, the ____________________, the ____________________, and the ____________________
income statement, balance sheet, statement of retained earnings, statement of cash flows
90. The three financial statements in which net income can be found are the ____________________, the ____________________ and the ____________________.
income statement, statement of retained earnings, statement of cash flows using the indirect method
91. Each of the situations in A through C below applies to one of the assumptions or principles included in the conceptual framework of accounting. Identify which assumption or principles applies and explain why that assumption or principle applies.
A)
Globall Inc. is a U.S. company that has divisions in several countries around the world. Each country has a currency different than the U.S. dollar. Globall must include the financial data of its worldwide divisions in its financial statements.
B)
Cheetum & Howell operate a security business as a partnership. The partners are considering a change to the corporate form of business organization.
C)
Yum Shops, Inc. is a locally owned and operated confectionary. The owners have decided to expand into nearby cities. Expansion will require more capital, but management does not expect it will stay in business for more than one year or so regardless of its expansion plans.
A)
The monetary unit assumption. Financial statements must be reported in monetary terms, and the standard monetary unit should be denominated in one currency.
B)
Economic entity assumption. A business can take three forms. Regardless of the form, however, the unit itself is distinct from its owners.
C)
Continuity (going concern) assumption. A business is assumed to continue to operate long enough to carry out its obligations, to more accurately reflect the valuation of assets and appropriately allocate costs to accounting periods.
92. What is the purpose of an income statement?
An income statement reports the company's revenues and expenses for a period of time and shows the company's profitability (or lack of). The income statement’s purpose is to demonstrate the financial success or failure of the company over a specific period of time.
93. List the four financial statements. Explain the connection between these four statements.
1.
Balance Sheet
2.
Income Statement
3.
Statement of Retained Earnings
4.
Statement of Cash Flows
Net income on the income statement increases retained earnings on the statement of retained earnings. The balance in the statement of retained earnings goes to the balance sheet. The ending balance for cash on the statement of cash flows is also shown on the balance sheet.
94. Paige Company claims that its financial information is useful. Mention any four qualities that must be present in order to have "useful" accounting information? Explain these four qualities.
Four qualitative characteristics of useful accounting information are relevance, reliability, comparability, and consistency.
Relevant information has the capacity to make a difference in a decision. It helps users predict future events or provides feedback.
Reliable information is dependable, verifiable, and free from bias.
Comparability allows comparisons to be made between or among companies.
Consistency refers to the application of the same accounting methods over time.
95. What is the difference between comparability and consistency?
Comparability allows comparisons to be made between or among companies. Even though a certain amount of freedom exists in selecting accounting techniques, when this information is disclosed in the financial statements, users can still compare the information when they know what technique is used.
Consistency refers to the application of the same accounting techniques over time. It involves the relationships between a set of numbers over several periods, but within one company only, unlike comparability that can be between or among companies.
