Credit entries are used to
a. increase asset accounts.
b. increase liability accounts.
c. increase expense accounts.
d. increase dividends.
Presented below are selected data from the accounting records for 2013:
A) Calculate the net income or loss for the year.
B) Did the company’s financial position improve or deteriorate during the year?
Explain.
C) Is the company profitable? Explain.
Which of the following transactions is not a significant noncash investing and financing
activity?
a. Land is purchased by issuing a 20-year mortgage note payable.
b. Bonds are issued to purchase a building.
c. Cash equivalents are purchased.
d. Buildings are acquired by issuing common stock.
Which of the following would report the market price of the company’s stock?
a. balance sheet.
b. income statement.
c. statement of cash flows.
d. Item 5 in Form 10-K.
Fitness Depot purchased a building on a tract of land and allocated the entire cost of the
purchase to building. Normally the company depreciates buildings over 40 years using
the straight-line method with zero residual value and does not depreciate land. Because
of the improper accounting treatment of the purchase, the company’s income for the
next 20 years will be
a. overstated.
b. understated.
c. unaffected.
d. cannot be determined from the information provided.
With the Effective Interest Method of Amortization, the amortization of a bond discount
results in a(n)
a. increase in stockholders’ equity.
b. decrease in liabilities.
c. increase in interest expense.
d. decrease in interest expense.
Adjusting journal entries are made at the end of the period when
a. The cash basis of accounting is used for all accounting periods.
b. Cash receipts and payments occur before or after the point in time when revenues
and expenses should be recognized under the accrual basis of accounting.
c. Management reports its adjustments on the statement of cash flows.
d. The company reports revenue in the same period cash is collected.
Refer to the information for Gainesville Truck Center. Which of the following
statements is true regarding the entry to record wages and the related liabilities?
a. FICA tax expense will be debited in the amount of $765.
b. Social security tax payable will be debited in the amount of $620.
c. Medicare tax payable will be credited in the amount of $145.
d. Federal income taxes payable will be credited in the amount of $2,100.
An investor expects to receive 10 payments of $5,000 each made at the end of each
period. If interest is compounded at 5% annually, what is the future value of these
payments?
a. $3,069.55
b. $7,387.30
c. $38,608.65
d. $62,889.45
Which one of the following is an example of an accrued liability?
a. Rent that has been incurred, but have not been paid at the end of the period.
b. Equipment that will benefit several periods has been purchased.
c. An insurance policy that expires in a future period has been acquired.
d. Supplies are purchased and used over several months.
Which of the following statements is most likely to be right?
a. The method of preparing the operating activities section of a statement of cash flows
which adjusts net income to remove the effects of deferrals and accruals for revenues
and expenses is the direct method.
b. The method of preparing the operating activities section of a statement of cash flows
which reports major classes of gross cash receipts and cash payments for revenues and
expenses is the indirect method.
c. The FASB prefers the indirect method of preparing the operating activities section of
the statement of cash flows.
d. Most companies use the indirect method of preparing the operating activities section
of the statement of cash flows.
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.
Action Signs recorded credit sales of $10,000 on the gross method. Terms are 2/20,
n/30. Select the correct statement about the entry to record this sale.
a. Accounts receivable increases $10,000.
b. Sales increase $9,800
c. Sales discounts increase $200
d. All of the above are correct
A law firm purchased supplies at a cost of $20,000 during 2013. At January 1, 2013, the
beginning balance in the supplies account was $1,300. For 2013, supplies expense was
$11,200. How much “Supplies” are on hand as of December 31, 2013?
a. $10,100
b. $10,400
c. $20,000
d. $21,300
HVAC Service
The following transactions occurred during November:
Nov. 1 Sent bills to clients for services provided in August in the amount of $12,000.
Nov. 9 Purchased office equipment of $4,000 and office supplies of $150 from Office
Depot receiving an invoice for $4,150. None of the office supplies were used during
November.
Nov. 15 Paid for the office furniture and supplies purchased from Office Depot.
Nov. 23 Received a $350 bill from WKRP Radio for advertising. The bill will be paid
next month.
Nov. 30 Paid salaries of $2,500 to employees.
Refer to HVAC Service. The journal entry to record the bills sent to clients will include
a debit of $12,000 to
a. service revenue.
b. cash.
c. accounts receivable.
d. retained earnings.
Which of the following statements is false?
a. The method of preparing the operating activities section of a statement of cash flows
which adjusts net income to remove the effects of deferrals and accruals for revenues
and expenses is the indirect method.
b. The method of preparing the operating activities section of a statement of cash flows
which reports major classes of gross cash receipts and cash payments for revenues and
expenses is the direct method.
c. The FASB prefers the direct method of preparing the operating activities section of
the statement of cash flows.
d. Most companies use the direct method of preparing the operating activities section of
the statement of cash flows.
Memorial Corporation
Information from the financial records is presented below:
Retained earnings, December 31, 2014 $400,000
Retained earnings, December 31, 2013 250,000
Dividends payable, December 31, 2014 20,000
Dividends payable, December 31, 2013 30,000
Net income for 2014 200,000
Refer to Memorial Corporation. Assume that there were no retained earnings
transactions other than those dealing with dividends and net income. Dividends
declared during 2014 totaled
a. $150,000.
b. $350,000.
c. $ 30,000.
d. $ 50,000.
The process of transferring amounts from the book of original entry into specific
account records is referred to as
a. journalizing.
b. posting.
c. analyzing.
d. classifying.
Which of the following results is generally considered favorable?
a. a large decrease in the accounts receivable turnover ratio
b. an increase in the inventory turnover ratio
c. an increase in sales along with a larger decrease in the gross profit percentage.
d. a decrease in the operating cash flow ratio
Time series (or trend) analysis is analysis in which
a. dollar changes and percentage changes in a company’s financial statement lines are
compared over several years.
b. all items are presented as a percentage of one selected item on a financial statement.
c. a statistic is calculated for the relationship between two items on a single financial
statement or for two items on different financial statements.
d. ratio increases and decreases are presented for the past two accounting periods.
Plant assets are depreciated because
a. the accrual basis of accounting requires matching of costs to revenues.
b. cash basis of accounting requires depreciation.
c. the book values equal market values.
d. the replacement cost of plant assets may fluctuate over time.
Parlato Corp. has an inventory turnover rate of 8 times. If its cost of goods sold is
$150,000, then the company
a. will report sales of $1,200,000.
b. will report gross margin of $1,200,000.
c. will have average inventory of $18,750.
d. sells its inventory 1,200 times per year.
A marine company pays its sales personnel 6% commission of the selling price of each
yacht. During November 2013, yacht sales totaled $20,400,000. During December
2013, sales totaled $25,100,000. Because its policy is to pay commissions only in the
month after the sales, the company paid commissions during December for November
2013. During January 2014, the company paid its sales people commissions on
December 2013 sales.
Which of the following operating activities results in a cash outflow?
a. paying creditors for merchandise
b. collecting accounts receivable
c. making cash sales
d. receiving deposits recorded as unearned revenue
Failure to record the earned portion of unearned revenue would result in which of the
following?
a. Net income being understated.
b. No effect on total liabilities.
c. Stockholders’ equity being overstated.
d. Total assets being understated.
Several terms which represent components of an accounting system are listed below.
For each term, write a brief explanation of how that component is used in the
accounting cycle.
A) Accounts
B) Chart of Accounts
C) Double-entry system with debits and credits
D) Journal
E) General Ledger
F) Trial Balance
Which of the following activities is most likely to have a cash flow effect?
a. investing in money market funds
b. declaring cash dividends
c. reissuing treasury stock
d. issuing stock to acquire a patent
During 2013, the accounts receivable turnover rate for Adaptive Equipment increased
from 10 to 15 times per year. Which one of the following statements is the most likely
explanation for the change?
a. The company’s credit department has followed up with customers whose account
balances are past due in order to generate quicker collections.
b. The company has decreased sales to its most credit worthy customers.
c. The company has increased the amount of time customers have to pay their accounts
before they are past due.
d. The company has extended credit to more risky customers in order to increase sales.
Designs on You
The following information relates to the company’s May bank reconciliation:
Bank statement balance $5,000
Unadjusted cash balance from the company records ?
Deposit in transit 1,000
Outstanding checks 500
Bank service charges 50
Interest earned on the bank account 10
Customer’s NSF check returned by the bank 25
In addition, a check was recorded in the accounting records as $1,200 but the correct
amount as recorded by the bank was only $1,000.
Refer to Designs on You. What is the unadjusted cash balance according to the
company’s records May 31st?
a. $5,365
b. $5,500
c. $5,000
d. $4,865
Refer to the information presented above for La Paz Restaurants. The 2015 dividend
payout ratio is reported as
a. 0.9%.
b. 1.1%.
c. 18.2%.
d. 19.1%.
Chastain Park Entertainment paid salaries expense of $350,000 during 2013. However,
additional salaries of $20,000 had been earned by employees, but not paid or recorded
at December 31, 2013.
A) What adjusting entry is necessary at December 31, 2013?
B) Under which basis, cash, accrual, or both, would the adjustment in part A be
prepared? Explain.
C) Under the accrual basis of accounting, what is the total amount of salaries expense
for the year ended December 31, 2013?
D) Under the accrual basis of accounting, what is the total amount of salaries payable to
be reported at December 31, 2013?
E) Under the cash basis of accounting, what is the total amount of salaries expense for
the year ending December 31, 2013?
F) Under the cash basis of accounting, what is the total amount of salaries payable at
December 31, 2013?
High Point Furniture Company manufactures furniture. The company has applied for a
sizeable loan to expand its operations. Based on the company’s annual report, the loan
officer concludes that High Point is very profitable and appears to have a strong
financial position. However, watching the nightly news on television that evening, the
banker discovers that High Point is a defendant in a class action lawsuit related to
defective products. Serious injuries were allegedly caused by the company’s infant high
chairs overturning. The television news report is an example of financial information
that is
a. predictable.
b. conservative.
c. relevant.
d. comparable.
A landscaping company operates five days per week with a daily payroll of $16,000.
Employees are paid every Saturday for the workweek just completed (Monday through
Friday). The last day of the month is Wednesday, March 31. What is the amount of
Wages Expense recorded on the next payday, Saturday, April 3?
a. $ -0-
b. $48,000
c. $32,000
d. $80,000
Which of the following is not a requirement of a company’s top managers under the
Sarbanes-Oxley Act?
a. They must give an opinion about the effectiveness of the company’s internal control
over financial reporting.
b. They must certify that they are primarily responsible for the company’s internal
controls over financial reporting.
c. They must certify that the company’s financial statements are fairly presented.
d. They may deny responsibility for certain financial reporting matters if they are not
knowledgeable about the proper accounting procedures for those transactions.
Which of the following statements regarding the statement of cash flows is true?
a. The statement of cash flows analyzes the changes in consecutive balance sheets in
conjunction with the income statement.
b. The statement of cash flows is organized to present classifications for total cash
inflows and cash outflows.
c. The statement of cash flows analyzes only the changes in current assets and current
liabilities.
d. The statement of cash flows is an optional financial statement.
Par value is adjusted annually to reflect the current market value of the stock.
In the independent auditors’ report included with the annual report, management
discusses the financial statements and provides the shareholders with explanations for
certain amounts reported in the statements.
What is the difference between authorized, issued, and outstanding shares?
What are the criteria the SEC uses to determine if revenue is realized or realizable and
earned?
A liability must be recognized when a business is required to transfer assets or provide
services to another entity at some point in the future for activities that have already
occurred.
The net profit margin percentage reflects the amount of income for each dollar of sales.
If a law firm provides services on account for its clients, both ____________________
and retained earnings will increase.
Refer to the partial balance sheet presented above for Gibraltar, Inc. Compute the
following liquidity ratios for 2013 and 2012:
Current Ratio
Quick Ratio
Cash Ratio
Comment on the direction and significance of the change in the ratios from 2012 to
2013.
The statement of cash flows summarizes the operating, investing, and financing
activities of a business for a period of time.
Under a periodic inventory system, the Purchases account accumulates the cost of the
inventory acquired during the period.
A corporate charter is sometimes called the articles of incorporation.
The accountant prepared the firm’s bank reconciliation and noted several reconciling
items as listed below. Indicate whether the firm should add or subtract each item below
on its balance of cash or on its bank balance.
Bank Company
Reconciling Items Balance Balance
1. Deposits in Transit
2. NSF checks
3. Check recorded twice by the company
4. Interest earned
5. Outstanding checks
6. Bank service charges
7. Bank debit memos
8. Bank credit memos
The first step in preparing the classified balance sheet is to list the assets in order of
liquidity.
Investing is the business activity that measures the company’s ability to generate cash
from its revenue and expense activities.
When accrual basis accounting matches an expense to a period before it is actually paid,
an adjusting entry is necessary to record the accrued expense and corresponding
liability.
Accounts payable represent amounts owed to outside suppliers of goods and services;
whereas ____________________ reflect amounts owed in which a formal agreement or
contract has been signed.