For a company that uses the allowance method, the write-off of an uncollectible account
receivable is an asset use transaction.
Preparing a bank reconciliation is a requirement to obtain an unqualified audit opinion,
but is not an important internal control for a business.
When a company receives payment from a customer whose account was previously
written off, the customer’s account should be reinstated.
In preparing the operating activities section of the statement of cash flows by the
indirect method, decreases in current liabilities are added to net income.
During a period of rising prices, a company’s cost of goods sold would be higher using
the LIFO cost flow method than with FIFO.
Accounts that are closed include expenses, dividends, and unearned revenues.
With a perpetual inventory system, assets and equity increase by the amount of the
gross margin when inventory is sold.
The amount of revenue a company recognizes on the income statement normally differs
from the amount of cash collected from customers.
In terms of solvency, the smaller the number of times interest is earned, the better.
The usual form for a bank reconciliation begins with the ending cash balance shown on
the bank statement and reconciles it to the ending cash balance on the company’s books.
Contingent liabilities are only recognized if they arise from past events.
A company that uses the direct write-off method of accounting for uncollectible
accounts must still prepare a year-end adjusting entry to estimate its uncollectibles.
The matching concept leads accountants to select the recognition alternative that
produces the lowest amount of net income.
Rapid growth of a company can cause it to be short of cash.
Expenditures that extend the useful life of a plant asset are debited to the asset account.
During a period of rising prices, the amount of ending inventory reported on the balance
sheet will be lower using the LIFO cost flow method than with FIFO.
Melbourne Company sold merchandise that it had purchased with a list price of $3,300
and subject to terms of 2/10, n/30. Assuming that Melbourne paid for the merchandise
during the discount period, the cost of goods sold for this transaction would be $2,970.
If a company has issued bonds at a premium, the amount of interest expense reported
on the income statement each year will be greater than the amount of cash paid to
bondholders for interest.
A company may recognize a revenue or expense without a corresponding cash
collection or payment in the same accounting period.
The best estimate for the amount of cash a company expects to collect from its accounts
receivable is the face value of the receivables.
The after-tax interest cost of debt equals total interest expense multiplied by the tax
rate.
A company’s general ledger provides a chronological record of its business transactions.
Warner Company purchased two units of a product for $36 and later purchased one
more for $40. If the company uses the weighted average cost flow method, and it sold
one unit of the product for $60, its gross margin would be $22.00.
Accumulated Depreciation is a temporary account that is closed each year.
The left side of a T-account is the debit side.
A limitation of financial statement analysis stems from the discretion of management to
choose accounting procedures that cast the best light on the firm’s performance.
Double entry accounting requires that every entry must include at least one debit and at
least one credit.
The four financial statements prepared by a business bear no relationship to each other.
If a company estimates uncollectible accounts based on a percentage of receivables, the
resulting estimate will be presented on the balance sheet as the ending balance in
Allowance for Doubtful Accounts.
A bank statement debit memo describes a transaction that increases a customer’s
account balance.
If a company applies the lower-of-cost-or-market rule on an aggregate basis, its
write-down of inventory is likely to be greater than if it applies the rule to individual
items of inventory.
Amortization of a discount on bonds payable is an asset use transaction.
The term “accrual” describes an earnings event that is recognized before cash is paid or
received.
A business’s chart of accounts is prepared to verify the equality of debits and credits.
On October 1, 2015, Harrison Company borrowed money by issuing a $24,000 face
value discount note to its bank. The note had an 8% discount rate and had a term of 1
year. The amount of cash that Harrison received on that date was $22,080.
Many companies choose to end their fiscal years during a part of the year when they
expect low activity.
On January 1, 2016, the balance of Jacobs Corporation’s Accounts Receivable was
$40,000. Sales on account for 2016 amounted to $320,000 and the ending balance of
Accounts Receivable was $64,000. What is the amount of cash collected from
customers?
A.$296,000
B.$256,000
C.$344,000
D.$360,000
What is the effect of an entry to record the purchase of inventory on account under the
perpetual inventory method?
A.Total assets increase
B.Total liabilities increase
C.Total assets are unaffected
D.Total assets and total liabilities both increase
The accounting concept or principle that is perhaps the greatest single culprit in
distorting the results of financial statement analysis is the:
A.Historical cost concept.
B.Matching principle.
C.Conservatism principle.
D.Time value of money concept.
On March 1, Bartholomew Company purchased a new stamping machine with a list
price of $34,000. The company paid cash for the machine; therefore, it was allowed a
5% discount. Other costs associated with the machine were: transportation costs, $550;
sales tax paid, $1,360; installation costs, $450; routine maintenance during the first
month of operation, $500. The cost recorded for the machine was:
A.$34,210.
B.$32,300.
C.$35,160.
D.$34,660.
Assume the perpetual inventory method is used.
1) The company purchased $12,500 of merchandise on account under terms 2/10, n/30.
2) The company returned $1,200 of merchandise to the supplier before payment was
made.
3) The liability was paid within the discount period.
4) All of the merchandise purchased was sold for $18,800 cash.
The net cash flow from operating activities as a result of the four transactions is:
A.$5,100.
B.$7,726.
C.$6,550.
D.$11,074.
Clayton Corporation made the following entry in its general journal on 12/31/16:
Which of the following answers describes the above transaction?
A.Clayton records interest expense and amortization of discount on bonds payable.
B.Clayton issues bonds with a face value of $5,400 for $5,000 cash.
C.Clayton records annual interest and amortization of premium on bonds.
D.Clayton redeems callable bonds when the carrying value is $5,400.
Indicate whether each of the following statements is true or false.
_____ a) The amount of federal tax withheld from an employee’s salary depends on the
employee’s gross pay and the number of withholding allowances the employee claims.
_____ b) Withheld taxes are recorded in the payroll tax expense account.
_____ c) An employer will submit $8,250 in FICA taxes for an employee who earns
$55,000 annually.
_____ d) A voluntary deduction, such as a charitable contribution, creates a liability
when it is withheld from employee pay.
_____ e) If an employer records gross pay of $2,400 and withholds $700 of that
amount, then the employer will recognize $1,700 in salary expense.
The Marvin Company reported net income of $18,400 on gross sales of $80,000. The
company has total average assets of $115,200, of which $100,000 is property, plant and
equipment. The company’s return on investment is closest to:
A.69.4%
B.16.0%
C.23.0%
D.18.4%
Which form of business organization is established as a legal entity separate from its
owners?
A.Sole proprietorship
B.Partnership
C.Corporation
D.None of these
Warren Enterprises had the following events during 2016:
The business issued $40,000 of common stock to its stockholders.
The business purchased land for $24,000 cash.
Services were provided to customers for $32,000 cash.
Services were provided to customers for $10,000 on account.
The company borrowed $32,000 from the bank.
Operating expenses of $24,000 were incurred and paid in cash.
Salary expense of $1,600 was accrued.
A dividend of $8,000 was paid to the stockholders of Warren Enterprises.
Assuming the company began operations during 2016, the amount of retained earnings
as of December 31, 2016 would be:
A.$10,000
B.$8,400
C.$16,400
D.$42,000
What documentation issued by a bank increases a company’s checking account balance
at the bank?
A.Credit memo
B.Debit memo
C.Balance sheet
D.Certified check
Which of the following account titles is normally used in a periodic inventory system?
A.Transportation-in.
B.Purchases.
C.Purchase Returns and Allowances.
D.All of these answer choices are normally used.
Broward Company estimated that its warranty expense would be $6,250 for the current
year. During the year Broward paid $3,920 to repair merchandise that was returned by
customers.
a) What is the amount of warranty expense for the current year?
b) If this is the first year of operations, what is the amount of warranty liability that will
be shown on the balance sheet at the end of the year?
Indicate whether each of the following statements about markets is true or false.
_______ a) Financial resources can be provided to a business by conversion agents.
_______ b) Resource owners are the businesses that transform resources into products
that satisfy consumer desires.
_______ c) Labor resources include the both the physical and intellectual labor of a
business’s employees.
_______ d) Conversion agents purchase their resources from resource owners.
_______ e) Consumers are the main providers of resources in any market.
Chico Company paid $950,000 for a basket purchase that included office furniture, a
building and land. An appraiser provided the following estimates of the market values
of the assets if they had been purchased separately: Office furniture – $190,000;
Building – $740,000, Land – $132,000. Based on this information, and rounding
allocations to two decimal places, the amount of cost that would be allocated to the
office furniture is closest to:
A.$171,000.
B.$190,000.
C.$316,667.
D.$105,000.
During 2016 the El Paso Company had the following changes in account balances:
1) The Accumulated Depreciation account had a beginning balance of $25,000 and an
ending balance of $35,000. The increase was due to depreciation expense.
2) The Long-Term Notes Payable account had a beginning balance of $40,000 and an
ending balance of $15,000. The decrease was due to repayment of debt.
3) The Equipment Account had a beginning balance of $25,000 and an ending balance
of $92,500. The increase was due to the purchase of other operational assets.
4) The Long Term Investments Account (Marketable Securities) had a beginning
balance of $18,000 and an ending balance of $12,500. The decrease was due to the sale
of investments at cost.
5) The Dividends Payable account had a beginning balance of $12,000 and an ending
balance of $10,000. There were $20,000 of dividends declared during the period.
6) The Interest Payable account had a beginning balance of $2,250 and an ending
balance of $1,250. The difference was due to the payment of interest.
What is the net cash flow from financing activities?
A.$22,000 inflow
B.$25,000 inflow
C.$25,000 outflow
D.$47,000 outflow
Vanguard Company uses accrual accounting. Indicate whether each of the following
statements regarding Vanguard’s accounting system is true or false.
_____ a) The recognition of accounting events and the realization of cash consequences
must occur in different accounting periods.
_____ b) The cash consequence of a transaction sometimes precedes its accounting
recognition.
_____ c) Expenses may either be matched to revenues they produce or to periods in
which they are incurred.
_____ d) Vanguard may record accrual transactions, but may not record deferral
transactions.
_____ e) Vanguard is not permitted to make cash sales.
On September 1, 2016, the Laredo Company purchased equipment making a down
payment of $15,500 cash and signing a one-year note payable on the $22,500 balance.
The note carried an interest rate of 6%, and all interest was to be paid on the maturity
date. Which of the following correctly shows the combined effect of the purchase as
well as the accrual of interest on December 31, 2016?
A.
B.
C.
D.
The Jackson Company issued a one-year $80,000 face value interest-bearing note with
a stated interest rate of 9%. The note was issued to the Galaxy Bank on August 1, 2016.
The amount of interest expense and total cash outflows related to the note shown on the
December 31, 2017 financial statements would be:
A.
B.
C.
D.
Riley Company borrowed $36,000 on April 1, 2016 from the Titan Bank. The note
issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash
revenue of $1,700 in 2016 and $1,400 in 2017. Assume no other transactions.
The amount of cash flow from operating activities that would appear on the 2017
statement of cash flows would be:
A.$770 inflow
B.$1,400 inflow
C.$38,520 outflow
D.$1,120 outflow
The following information is available for Blankenship Company for the most recent
year.
What was Blankenship’s operating cycle for the most recent year? (rounded)
A.30 days
B.50 days
C.80 days
D.120 days
Which of the following accounts normally has a debit balance?
A.Prepaid insurance
B.Unearned service revenue
C.Accounts payable
D.Common Stock
Ervin Company began the accounting period with $64,000 in accounts receivable. The
ending balance in accounts receivable was $40,000. If the credit sales during the period
were $588,000, what is the amount of cash received from customers?
A.$564,000
B.$612,000
C.$24,000
D.$548,000
While preparing its bank reconciliation, Maynard Company determined that its bank
had collected a $650 account receivable for the company and deducted a $25 collection
fee. Which of the following shows the effect of this transaction on the financial
statements?
A.
B.
C.
D.
Which of the following is a claims exchange transaction?
A.Accrued interest on a note payable.
B.Issued a note to purchase equipment.
C.Repaid principal on a note payable.
D.Paid interest on a note payable.
On December 31, 2015, the Loudoun Corporation estimated that 3% of its credit sales
of $112,500 would be uncollectible. Loudoun uses the allowance method of accounting
for uncollectible accounts. In February 2016, one of Loudoun’s customers failed to pay
his $1,050 account and the account was written off. On April 4, 2016, this customer
paid Loudoun the $1,050.
Which of the following answers correctly states the effect of Loudoun Company’s
February 2016 entry to write off the customer’s account?
A.
B.
C.
D.
Which of the following accounts are permanent?
A.Retained earnings.
B.All income statement accounts.
C.Dividends.
D.All balance sheet accounts including dividends.
On September 10, 2016, Farmer Company sold a piece of equipment for $6,000. The
equipment had an original cost of $34,000 and accumulated depreciation of $31,000 at
the time of the sale. Which of the following correctly shows the effect of the sale on the
2016 financial statements?
A.
B.
C.
D.
Unsecured bonds are called:
A.discount bonds.
B.coupon bonds.
C.debenture bonds.
D.par value bonds.
If a $200 credit to Interest Payable was instead recorded in error as a $200 credit to
Cash:
A.the trial balance would be out of balance by $200.
B.cash flows from operating activities would be understated by $200.
C.cash flows from investing activities would be understated by $200.
D.liabilities would be overstated by $200.
The closing entry for the Dividends account would involve which of the following?
A.A credit to Retained Earnings
B.A credit to Dividends
C.A credit to Common Stock
D.A credit to Cash
The bank statement for Raymond Company included a debit memo for a bank service
charge of $50.
Required: a) Show the effects of recognizing the bank service charge on the financial
statements by recording appropriate amounts in the financial statements model
provided. Include dollar amounts of increases and decreases; for cash flow, indicate
whether it is an operating activity, investing activity, or financing activity.
b) Is the recognition of the bank service charge an asset source, use, or exchange
transaction?
c) Prepare the journal entry that Raymond should make to recognize the effects of the
service charge.
Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer
over the addictive nature of the company’s french fries. Burger Barn’s attorneys have
advised them that the likelihood of a future obligation from the suit is remote. As a
result of the lawsuit, Burger Barn should:
A.Disclose the lawsuit in the notes to the financial statements.
B.Recognize a $5 million liability on its balance sheet for the contingency.
C.Ignore the lawsuit in its financial statements.
D.Settle with the customer immediately for $5 million to avoid harmful publicity.
Schubert Co. owned equipment that originally cost $48,000. The company sold the
equipment on January 1, 2016 for $16,000 cash. Accumulated depreciation on the day
of sale amounted to $34,000. Based on this information, indicate whether each of the
following statements is true or false.
_____ a) The sale will increase Schubert’s net income, but it will not affect the
company’s operating income.
_____ b) Schubert would show a $16,000 cash inflow in the operating activities section
of the cash flow statement.
_____ c) The sale would result in a decrease in total assets.
_____ d) The sale would increase Schubert’s equity by $2,000.
_____ e) The sale would be recorded as a debit to cash for $16,000, a credit to
equipment for $14,000, and a credit to gain on sale of equipment for $2,000.
On December 31, 2014, Ortiz Company’s total current assets were $350,000 and its
total current liabilities were $200,000. On January 1, 2015, Ortiz issued a long-term
note to a bank for $15,000 cash.
Required:
(a) Compute Ortiz’s working capital before and after issuing the note payable.
(b) Compute Ortiz’s current ratio before and after issuing the note payable.
In 2016, Hinkle Corporation Co. acquired a patent from a competitor for $275,000. At
the time of purchase, it had 12 years of its legal life remaining; however, due to
competition, Hinkle believes that the patent will only be useful for 8 years. Prepare the
general journal entry to recognize amortization expense for 2016.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts. Enter only one letter for each element.
The Fisher Company paid $28,000 to improve the quality of a manufacturing machine.
How will this expenditure affect Fisher’s financial statements?
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. Use only one letter
for each element. You do not need to enter amounts.
Taylor Bennett began his sole proprietorship on February 28, 2016 by contributing
$25,000 of his own money to the business. Indicate the effects of this transaction on the
financial statements.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts.
A transaction recorded as a debit to Cash and a credit to Accounts Receivable.
Alexander Corporation issued 20-year bonds payable at a discount in 2016. Will
Alexander’s net income for 2016 be higher, lower, or the same as it would have been
had the bonds been issued at face value? Why?
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts. Assume that Frank Company uses a perpetual inventory system.
Whetzel Co. paid $40 of freight cost to have merchandise shipped to one of its
customers under terms FOB destination.
If a corporation issues common stock for $50,000 cash, in which section of the
statement of cash flows will this transaction be reported?
The Maryland Corporation was started on January 1, 2016, with the issuance of
$50,000 of stock. During 2016, the company provided $75,000 of services on account
and collected $68,000 of that amount. Maryland incurred $63,000 of expenses, and paid
$50,000 of that amount during 2016. On December 31, 2016, Maryland paid investors a
$2,000 cash dividend and accrued $4,000 of salary expense.
Required:
1) What is the net income for year ended December 31, 2016?
2) Prepare Maryland Corporation’s Statement of Cash Flows for the year ended
December 31, 2016. Precede a cash outflow amount with a minus sign.
3) What is the balance in Maryland’s retained earnings account after closing entries are
made on December 31, 2016?
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. Enter only one
letter for each element. You do not need to enter amounts.
On March 1, 2016, King Co. collected a note receivable and related interest from
Havilland Co. The note had been issued one year earlier. Indicate the effects of this
event on the elements of King’s financial statements.
In a company’s annual report, the reader will find a company’s income statement,
statement of changes in stockholders’ equity, balance sheet, and statement of cash flows.
These financial statements can help the reader to answer specific questions. Identify
which financial statement would be most useful in answering the following questions. If
more than one financial statement can answer the question, please identify all
applicable statements.
1) What was the ending balance of retained earnings?
2) What was the amount of cash dividends paid to the stockholders during the most
recent year?
3) What was the total amount of land owned by the company?
4) What was the total amount of cash borrowed by the company during the most recent
year?
5) What were the types of claims that the company had against its assets?
6) What was the total amount of cash received by the issuance of common stock in the
current year?
7) Was the company profitable during the most recent year?
8) How much cash was collected from accounts receivable during the current year?
9) What was the total revenue earned by the company during the most recent year?
10) What was the amount of change in the cash balance during the current year?
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts. Assume that Frank Company uses a perpetual inventory system.
Whetzel Company recorded a cash discount on goods recently purchased on account.
Describe the factors involved in communicating useful financial information.
Zirkle Company borrowed $100,000 from Plains Bank on July 31, 2016. The note
carried a 6% interest rate with a one-year term to maturity.
Required:
1) Show the effects of borrowing the money and the December 31, 2016 adjustment on
the accounting equation.
2) What is the amount of interest expense for 2016?
3) Prepare a statement of cash flows for the Zirkle Company for 2016.
Loudoun Corporation’s balance sheet reflected the following information.
Assuming all the stock was issued in a single transaction, what was the issue price per
share of the stock?
The following information was provided by Bennett Company as of December 31,
2015:
On the most recent trading date, Bennett’s common shares sold at $70 and the preferred
shares sold at $15.
The following information on industry averages is provided:
Earnings per share $6.06
Price-earnings ratio 17.2:1
Required:
1) Calculate and compare Bennett Company’s ratios with the industry averages shown
above.
2) Discuss whether you would invest in this company.
Explain the computation of the inventory amount if the lower-of-cost-or-market rule is
applied using the individual inventory item approach.
Which type of stock, common or preferred, must all corporations have?
Name and briefly describe each of the four financial statements.