47. Flores Realty Corporation had the following balance sheet accounts and balances:
Accounts Payable
$6,000
Common Stock
?
Accounts Receivable
1,000
Equipment
$7,000
Building
?
Land
7,000
Cash
3,000
Retained Earnings
2,000
If the balance of the Building account were $14,000 and $3,000 of Accounts Payable were paid in
cash, what would be the balance of the Common Stock account?
a.
$24,000
b.
$21,000
c.
$32,000
d.
$34,000
48. Flores Realty Corporation had the following balance sheet accounts and balances:
Accounts Payable
$6,000
Common Stock
?
Accounts Receivable
1,000
Equipment
$7,000
Building
?
Land
7,000
Cash
3,000
Retained Earnings
2,000
If the balance of the Building account were $8,000 and $3,000 of Accounts Payable were paid in cash,
what would be the total liabilities and stockholders’ equity?
a.
$14,000
b.
$23,000
c.
$18,000
d.
$19,000
49. Following is the balance sheet for Abbot Box Company, Inc.:
Assets
Liabilities
Cash
$ 8,000
Accounts payable
$16,000
Accounts receivable
1,000
Land
14,000
Stockholders’ Equity
Building
44,000
Common stock
$40,000
Equipment
13,000
Retained earnings
24,000
Total stockholders’ equity
64,000
Total assets
$80,000
Total liabilities and stockholders’
equity
$80,000
If the balance in the Cash account were used to pay part of Accounts Payable, then total liabilities and
stockholders’ equity would
a.
decrease by $8,000.
b.
increase by $8,000.
c.
increase by $16,000.
d.
decrease by $16,000.
50. Use this information to answer the following question.
Here is the balance sheet for Abbot Box Company, Inc.:
Abbot Box Company, Inc.
Balance Sheet
December 31, 20xx
Assets
Liabilities
Cash
$ 8,000
Accounts payable
$16,000
Accounts receivable
1,000
Land
14,000
Stockholders’ Equity
Building
44,000
Common stock
$40,000
Equipment
13,000
Retained earnings
24,000
Total stockholders’ equity
64,000
Total assets
$80,000
Total liabilities and stockholders’
equity
$80,000
If the equipment were sold for $13,000, then the Retained Earnings account would
a.
increase by $37,000.
b.
increase by $13,000.
c.
decrease by $13,000.
d.
stay the same.
51. Use this information to answer the following question.
Here is the balance sheet for Abbot Box Company, Inc.:
Assets
Liabilities
Cash
$ 8,000
Accounts payable
$16,000
Accounts receivable
1,000
Land
14,000
Stockholders’ Equity
Building
44,000
Common stock
$40,000
Equipment
13,000
Retained earnings
24,000
Total stockholders’ equity
64,000
Total assets
$80,000
Total liabilities and stockholders’
equity
$80,000
If the balance in the Cash account were used to buy more equipment, then the total assets would
a.
remain unchanged.
b.
increase by $8,000.
c.
decrease by $8,000.
d.
increase by $21,000.
52. The net income figure appears in all the following financial statements except the
a.
statement of cash flows.
b.
income statement.
c.
statement of retained earnings.
d.
balance sheet.
53. The statement of cash flows would disclose the payment of a dividend
a.
in the financing activities section.
b.
in the investing activities section.
c.
in the operating activities section.
d.
nowhere on the statement.
54. The statement of cash flows would disclose the purchase of a building for cash
a.
nowhere on the statement.
b.
in the operating activities section.
c.
in the investing activities section.
d.
in the financing activities section.
55. Which of the following represents the proper order of financial statement preparation?
a.
Statement of cash flows, balance sheet, income statement, statement of retained earnings
b.
Statement of retained earnings, income statement, statement of cash flows, balance sheet
c.
Balance sheet, statement of cash flows, statement of retained earnings, income statement
d.
Income statement, statement of retained earnings, balance sheet, statement of cash flows
56. All of the following items would appear on the balance sheet except
a.
Dividends
b.
Common Stock
c.
Accounts Receivable
d.
Retained Earnings
57. Which of the following is a regulatory agency?
a.
IASB
b.
SEC
c.
FASB
d.
GASB
58. The authoritative body currently responsible for establishing accounting practice is the
a.
Internal Revenue Service.
b.
Financial Accounting Standards Board.
c.
American Institute of Certified Public Accountants.
d.
Federal Reserve Board.
59. Generally accepted accounting principles
a.
are changing continually.
b.
are sound in theory but rarely used in practice.
c.
have eliminated all the weaknesses in accounting practice.
d.
are accounting rules formulated by the Internal Revenue Service.
60. Standards for state and local governments are established by the
a.
IRS.
b.
IASB.
c.
GASB.
d.
AICPA.
61. The purpose of an audit is to
a.
determine whether or not a company is a good investment.
b.
comply with income tax regulations.
c.
determine whether or not a company is a good credit risk.
d.
ascertain that the financial statements follow GAAP.
62. An auditor maintains no direct financial interest in the company he or she is auditing. The principle
being followed is
a.
independence.
b.
integrity.
c.
objectivity.
d.
due care.
63. Carrying out professional responsibilities with competence and diligence is called
a.
integrity.
b.
independence.
c.
objectivity.
d.
due care.
64. Which of the following is not one of the broad principles underlying the accountant’s code of
professional ethics?
a.
Objectivity
b.
Integrity
c.
Loyalty
d.
Independence
65. The development of international accounting standards is the primary function of the
a.
IRS.
b.
AICPA.
c.
IASB.
d.
PCOAB.
66. The Public Company Accounting Oversight Board was created by the
a.
Sarbanes-Oxley Act.
b.
GASB.
c.
IRS.
d.
IASB.
SHORT ANSWER
1. Distinguish between profitability and liquidity.
2. Explain why each of the following persons or groups would be interested in seeing the financial
statements of a company. Also state whether each has a direct or indirect financial interest.
a. Potential investor
b. Internal Revenue Service
c. A labor union
d. Securities and Exchange Commission
e. Potential creditor
f. Management
g. Economic planners
3. List five possible users of these statements and state what each would be interested in learning from its
review.
4. How do the balance sheets of corporations illustrate the accounting concept of separate entity?
5. In which form of business does CVS operate? List two places where this is revealed in the financial
statements.
6. Why would it be less risky for a wealthy individual to incorporate his or her business rather than to
operate it as a sole proprietorship or partnership?
7. Indicate by letter whether each statement below applies to a sole proprietorship (S), partnership (P), or
corporation (C). You may use more than one business organization for an answer.
________ a. Separate economic unit
________ b. Life limited by death of owner(s)
________ c. Separate legal entity
________ d. Unlimited liability of owner(s)
________ e. Separation of ownership and control
________ f. Transfer of ownership does not affect the continuity of business.
________ g. Ownership evidenced by stock certificates
8. Barrett Company’s stockholders’ equity equals one-fourth of the company’s total assets. The company’s
liabilities are $360,000. What is the amount of the company’s stockholders’ equity?
9. Kalis Corporation’s stockholders’ equity equals one-third of the company‘s total assets. The company’s
liabilities are $120,000. What is the amount of the company’s stockholders’ equity?
10. Dougan Corporation’s stockholders’ equity equals one-half of the company’s total assets. The
company’s liabilities are $173,000. What is the amount of the company’s stockholders’ equity?
11. Following are the total assets and liabilities at the beginning and end of the year for Maren
Corporation:
Assets
Liabilities
Beginning of the year
$70,000
$45,000
End of the year
130,000
40,000
Determine the net income or loss for the year in each of the following situations:
a. The stockholders made no investments in the business and no dividends were paid during the year.
b. The stockholders made an investment of $20,000 and a dividend of $12,000 was paid during the
year.
12. At the beginning of the year, Peters Corporation’s assets were $150,000 and its stockholders’ equity
was $100,000. During the year, assets decreased $30,000 and liabilities increased $15,000. What was
the stockholders’ equity at the end of the year?
13. At the beginning of the year, Fourman Corporation’s assets were $270,000 and its stockholders’ equity
was $243,000. During the year, assets decreased $35,000 and liabilities increased $10,000. What was
the stockholders’ equity at the end of the year?
14. Which three types of transactions affect retained earnings, and how do they affect it?
15. Upshaw Corporation had a balance in Retained Earnings on December 31, 2009, of $260,000. During
2010, the company reported a net income of $112,000 after taxes. During 2010, the company declared
and paid cash dividends totaling $16,000. Prepare the company’s statement of retained earnings for the
year ended December 31, 2010.
16. Lin Wo Corporation had a balance in Retained Earnings on December 31, 2009, of $360,000. During
2010, the company reported a net income of $24,000 after taxes. During 2010, the company declared
and paid cash dividends totaling $18,000. Prepare the company’s statement of retained earnings for the
year ended December 31, 2010.
17. Indicate by letter whether each item below would appear on the income statement (IS), balance sheet
(BS), or statement of retained earnings (E).
________ a. Common Stock
________ b. Dividends
________ c. Wages Expense
________ d. Commissions Earned
________ e. Buildings
________ f. Accounts Payable
________ g. Utilities Expense
________ h. Beginning Retained Earnings
________ i. Accounts Receivable
________ j. Notes Payable
18. How does the statement of retained earnings relate to the income statement and the balance sheet?
19. Match each organization with its definition by indicating the corresponding letter in the spaces below.
a. AICPA
b. FASB
c. GASB
d. IASB
e. IRS
f. IMA
g. SEC
________ 1. Responsible for interpreting and enforcing tax laws
________ 2. Establishes standards for state and local governments
________ 3. Developer of international accounting standards
________ 4. Consists mainly of industrial accountants
________ 5. Protector of the investing public
________ 6. Current authoritative body for developing GAAP
________ 7. The accounting profession’s main organization of certified public accountants
20. What is the responsibility of the auditing firm? Who is responsible for the content of the financial
statements?
21. What is independence, and why is it important for a CPA to maintain it when conducting an audit?
22. Use the following accounts and information to prepare, in good form, an income statement, statement
of retained earnings, and balance sheet for Cray Enterprises for the year ended December 31, 2010.
Accounts Payable
$4,800
Land
$39,000
Accounts Receivable
600
Notes Payable
6,000
Buildings
52,000
Rent Expense
3,600
Cash
26,200
Retained Earnings,
December 31, 2009
84,400
Commissions Earned
19,000
Salaries Expense
8,400
Common Stock
20,000
Supplies
400
Dividends
3,000
Insurance Expense
1,000
Accounts
receivable
Notes payable
23. Use the following accounts and information to prepare, in good form, an income statement, statement
of retained earnings, and balance sheet for Hometown Industries for the month ended July 31, 2010.
Accounts Payable
$3,100
Land
$35,000
Accounts Receivable
1,400
Notes Payable
3,300
Buildings
22,000
Rent Expense
2,400
Cash
15,600
Retained Earnings, June
30, 2010
57,900
Commissions Earned
12,700
Salaries Expense
10,000
Common Stock
20,000
Supplies
400
Dividends
8,000
Insurance Expense
2,200
Revenues
Expenses
Net loss for the month
Subtotal
Total assets
Total liabilities and stockholders’
equity
24. Use the following information to calculate at, or for the year ended, December 31, 2010 (a) net
income, (b) retained earnings, (c) total liabilities and stockholders’ equity, and (d) accounts receivable.
Supplies
$ 1,000
Cash
$32,000
Wages Expense
14,000
Dividends
16,000
Accounts Payable
22,000
Notes Payable
4,000
Retained Earnings, December 31,
2009
8,000
Patents
7,000
Retained Earnings,
December 31, 2010
?
Accounts Receivable
?
Rent Expense
6,000
Common Stock
20,000
Commissions Earned
30,000
25. Use the following information to calculate at, or for the year ended, December 31, 2010, (a) net
income, (b) retained earnings, (c) total assets, and (d) cash.
Salaries Expense
$4,000
Commissions Earned
$20,000
Accounts Payable
7,000
Retained Earnings, December 31,
2010
?
Dividends
6,000
Utilities Expense
2,000
Accounts Receivable
8,000
Retained Earnings, December 31,
2009
16,000
Inventories
22,000
Common Stock
10,000
Total assets
Total liabilities and Stockholders’
Cash
?
Salaries Payable
1,000
26. Mara Bolton, an attorney, bills her clients at a rate of $100 per hour. At the beginning of July, clients
owed her $8,000, of which she collected $5,600 during the month. In July, Mara billed clients for 160
hours of work. By the end of July, 60 of these hours were unpaid.
Mara has one employee, Lloyd Medvid, who is paid $20 per hour. During July, Lloyd worked 170
hours, of which 16 hours will be paid in August. The rest were paid in July along with wages for 8
hours worked the last day of June.
Show calculations determining for the month of July:
a. Amount of revenue earned
b. Wages expense incurred
c. Cash received from clients
d. Cash paid to Lloyd Medvid
27. Selected amounts from the condensed financial statements of Timson Corporation for 2009 and 2010
are presented below with several amounts missing. The 2008 year-end balance of retained earnings is
$82,883.
Income Statement
2010
2009
Revenues
$490,304
$ a
Costs and expenses
h
(501,295)
Income taxes
(853)
(3,603)
Net income
$__i___
$______
Statement of Retained Earnings
Beginning-of-year balance
$ j
$ c
Net income
3,747
d
Dividends
k
(3,845)
End-of-year balance
$ l
$__e__
Balance Sheet
Total assets
$ m
$246,481
Total liabilities
$110,192
$102,239
Common stock
57,968
56,800
Retained earnings
n
$ f
Total liabilities and stockholders’ equity
$255,473
$ g
a. Determine the missing amounts indicated by the letters. (Hint: You should not try to find them in
alphabetical order.)
b. Given the data presented, did the company’s profitability improve from 2009 to 2010? Would you
characterize the company as a “growth” company? Why or why not?
Income Statement
Revenues
(a)
Costs and expenses
(h)
Income taxes
Net income
$ 3,747
$ 8,404
(b)
Statement of Retained Earnings
Beginning-of-year balance
(c)
Net income
3,747
(d)
Dividends
(3,876)
(k)
End-of-year balance
(e)
Balance Sheet
Total assets
(m)
Total liabilities
Common stock
57,968
Retained earnings
87,313
(n)
Total liabilities and stockholders’ equity
(g)
28. Use the following accounts and balances to prepare a balance sheet for Havrilla Company at December
31, 2010.
Accounts Payable
$10,000
Common Stock
12,000
Cash
4,800
Retained Earnings
2,400
Equipment
13,200
Accounts Receivable
6,400