TEST BANK for Financial Accounting in an Economic Context 9e Jamie Pratt by digitaldownload87

Chapter 1 Financial Accounting and Its Economic Context

MULTIPLE CHOICE QUESTIONS 1.

The balance sheet communicates a. proof to the investor that the company is profitable. b. assets, liabilities, and shareholders’ equity with all transactions reflected through the year. c. assets, liabilities, and shareholders’ equity as of a certain date. d. operating, investing, and financing activities. Ans: C KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

The income statement communicates a. assets, liabilities, and shareholders’ equity as of a certain date. b. how much cash the owner received during the period. c. information about dividends the company paid to its owners. d. revenues less expenses during a period of time. Ans: D KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Who prepares financial reports for a particular company? a. The Securities and Exchange Commission b. The Board of Directors c. The company’s management d. The company’s auditors Ans: C KP 5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

To run a company effectively, which one of the following might be a source from which management might acquire capital? a. Customers b. FASB c. Debt and equity investors d. Auditors Ans: C KP 4 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

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Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

Considering and understanding how business decisions affect the financial statements is a. the sole responsibility of the Securities and Exchange Commission. b. provided in the auditor’s report. c. referred to as an economic consequence perspective. d. interpreted strictly by the company’s suppliers. Ans: C KP 1,2,5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

A Certified Public Accountant a. reviews every transaction that a company conducts during any given year. b. performs a company’s audit. c. is one of the investors of a company. d. is responsible for the preparation and integrity of a company’s financial statements. Ans: B KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Footnotes to financial statements a. more fully explain certain items in the financial statements. b. reflect financial notes personalized by the company’s executive team. c. show the detail of salaries of every employee. d. justify fraudulent business practices. Ans: A KP 2,3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

An internal control system a. is maintained to ensure that transactions of a company are properly recorded and reported and the assets are safeguarded. b. is included in the set of footnotes to the financial statements. c. is an estimate of the profits a company expects to earn in the future. d. measures how much control management has over its staff. Ans: A KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Where would you find information on the amount of net income for the year? a. Factory production reports on units produced b. Auditor’s report c. Income statement d. Internal Revenue Service Ans: C KP 3 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

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The statement of cash flows communicates a. assets, liabilities, and owners’ equity at a point of time. b. operating, investing, and financing activities. c. beginning balance plus income less dividends. d. how much cash the company owes its employees. Ans: B KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

11.

The retained earnings section of the statement of shareholders’ equity communicates a. beginning balance plus income less dividends. b. revenues less expenses during a period of time. c. how much cash that management has paid for bonuses. d. operating, investing, and financing activities. Ans: A KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

12.

An investor wants to find the amount of cash and land that a company has. Where will the investor look? a. Statement of shareholders’ equity b. Income statement c. Balance sheet d. Statement of cash flows Ans: C KP 3 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

13.

Dividends declared and paid to the owners are found in the a. management letter. b. income statement. c. dividends statement. d. statement of shareholders’ equity. Ans: D KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

14.

Cash received by a company from its regular operations during the year is found in its a. balance sheet. b. statement of cash flows. c. statement of shareholders’ equity. d. auditor’s report. Ans: B KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

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Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

15.

A company’s profits during its most recent year are found in its a. balance sheet and income statement. b. statement of cash flows only. c. statement of shareholders’ equity only. d. income statement and statement of shareholders’ equity. Ans: D KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

16.

The cash paid during the year to satisfy a company’s debt is found in its a. statement of cash flows. b. income statement. c. statement of shareholders’ equity. d. auditor’s report. Ans: A KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

17.

The amount which a company’s customers owe the company for products delivered or services rendered is found in the a. footnotes only. b. income statement. c. balance sheet. d. statement of cash flows. Ans: C KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

18.

Solvency may be described as a. an amount owed that must be paid in the future. b. amounts that can be distributed to owners only. c. the amount invested in the firm by its owners. d. the ability to generate enough cash to pay its debt as the amounts become due. Ans: D KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

19.

Retained earnings may be described as a. the total past profits retained in the business. b. a company’s future growth. c. the amount invested in the firm by its owners. d. amounts retained for payments to vendors. Ans: A KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

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Liabilities may be described as a. amounts that will be used for future growth. b. the amounts owed that must be paid in the future. c. the total measured past growth of a firm less the amount distributed to the owners. d. amounts the company paid during the past year. Ans: B KP 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

21.

Public stock exchanges a. are operated by managers of a company. b. are markets that sell annual reports. c. provide a forum for buying and selling of equity interests in other companies. d. are used to evaluate debt and equity investments. Ans: C KP 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

22.

A statement that “the financial statements were prepared in accordance with generally accepted accounting principles” is found in the a. collateral. b. stock market. c. footnotes to the balance sheet. d. auditor’s report. Ans: D KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

23.

A statement that financial statement information “is the responsibility of the company” issuing the statements is found in the a. footnotes to the financial statements. b. loan contract. c. management letter. d. board of directors’ report. Ans: C KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

24.

CPA is an abbreviation for a. Certified Public Accountant. b. Certified Production Accountant. c. Consumer Protection Agency. d. Certified Permissible Accounting. Ans: A KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

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Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

25.

An equity investor is a. a person who provides money to a company with the expectation that it will be paid back with interest. b. a creditor that has a regular trade relationship. c. a person who provides money to a company as a gift with a stipulation that it will be used as agreed. d. a person who provides money to a company, though the original money never has to be repaid, and who may be entitled to receive periodic cash payments. Ans: D KP 4 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

26.

An explanation about the assumptions, estimates, and choices of alternative accounting methods used in the financial statements is found in the a. footnotes to the balance sheet. b. auditor’s report. c. statement of shareholders’ equity. d. president’s letter to the shareholders. Ans: A KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

27.

A debt investor is a. a person who provides money to a company with the expectation that it will be paid back with interest. b. a person who provides money to a company and expects periodic cash payments in return, though the original money never has to be repaid. c. a person who provides money to a company as a gift with a stipulation that it will be used as agreed. d. often referred to as a stockholder. Ans: A KP 4 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

28.

The board of directors a. provides money to a company with the expectation that it will be paid back with interest. b. makes corporate decisions such as hiring and firing management and setting company policy. c. is responsible for the future profits of a company. d. is in charge of accounting and human resources on a daily basis. Ans: B KP 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

29.

As a potential creditor, you are interested in a company’s ability to pay loan interest and principal as they come due. Which of the following would be of the greatest interest to you in your analysis? a. statement of shareholders’ equity. b. income statement. c. statement of cash flows. d. Statement of Financial Accounting Standards. Ans: C KP 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

30.

Which one of the following statements is true? a. Financial accounting is the only accounting used in the United States. b. Companies that have a profit objective use not-for-profit accounting. c. Managerial accounting targets operating decisions. d. Financial and tax accounting are virtually the same. Ans: C KP App1A BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

31.

A bank that loans money to a company is called a. a supplier. b. a creditor. c. an equity investor. d. a shareholder. Ans: B KP 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

32.

Which one of the following is an equity investor? a. A supplier of inventory waiting for payment b. A person who purchases common stock of a corporation c. A bank that loans money to a firm d. A person who has a savings account in a bank e. An employee that plans on investing in the company 10 years from now Ans: B KP 4 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

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As used in accounting, SEC is an abbreviation for a. Securities and Exchange Commission. b. South Eccentric Commissioners. c. Shareholders’ Equity Commission. d. Southeastern Conference. Ans: A KP 5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

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Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

34.

The independence of the auditor is subject to question when the a. auditor is paid by the management of the company being audited. b. auditor is independent. c. audit firm is also responsible for preparing the tax return. d. auditor is paid 1% of the company’s profits for the audit services provided. Ans: D KP 5 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

35.

Which of the following statements is true? a. Shopping for favorable audit opinions is permitted by the SEC. b. No formal reporting of auditor switches is required by the SEC. c. The SEC has enacted rules to help ensure financial literacy among audit committee members. d. Since management constructs the financial statements, auditors have no legal liability to those who rely upon these reports. Ans: C KP 5 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

36.

The advantage to the user of financial accounting statements that are audited by independent certified public accountants is assurance that the a. statements are produced in accordance with generally accepted accounting principles. b. company will be solvent for at least one more year. c. company cannot remain profitable for more than 2 to 3 years. d. company pays its fair share of income taxes. Ans: A KP 5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

37.

GAAP is an acronym for a. General Asset Accounting Procedures. b. Government Agency Accounting Procedures. c. Generally Accepted Accounting Principles. d. Global Accounting Activity Principles. Ans: C KP 5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

38.

Debt investments a. require payments to the shareholders for periodic dividends. b. are found on a company’s income statement. c. may be secured with collateral. d. return payments at the discretion of the board of directors. Ans: C KP 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

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Annual reports of public companies a. are published once per year. b. include financial statements adjusted for inflation. c. are also known as Form 10-K. d. are published by companies 4 times per year. Ans: A KP 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

40.

Equity investments are bought and sold a. only on the first day of each year. b. in stock exchanges such as the NASDAQ. c. by a company’s independent auditors. d. from and to the SEC. Ans: B KP 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

41.

Generally accepted accounting principles are determined by a. annual voting by all certified public accountants. b. a privately financed body known as the FASB. c. the SEC. d. a congressional committee that passes laws governing accounting practice. Ans: B KP 5 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

42.

Shareholders a. and employees are the owners of a company. b. receive repayment of the cash they have invested in a business. c. receive payment from a company regardless if the company is profitable or not. d. may benefit from increases in the value of their investment of a company. Ans: D KP 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

43.

When management goes beyond ethical boundaries in its attempt to make financial statements appear attractive, management a. should be commended for its creativity. b. will not need an annual audit. c. should pay its employees larger bonuses. d. is perpetrating fraud or possible criminal activity. Ans: D KP 5 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

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Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

Generally accepted accounting principles a. are laws created and enacted by Congress. b. define the standards for internal management reporting. c. increase the level of credibility in financial statements. d. are created by the Securities and Exchange Commission. Ans: C KP 5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

45.

Financial accounting practices and standards used in other countries a. are the same as practices used by United States companies. b. have different systems of financial accounting. c. are more progressive than those used by United States companies. d. will often have common practices similar to U.S. GAAP. Ans: D KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

46.

International Financial Reporting Standards (IFRS) are recognized as acceptable by major stock exchanges throughout the world except in a. England. b. Japan. c. The United States. d. France. Ans: C KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

47.

International Financial Reporting Standards (IFRS) are promulgated by a. the United Nations. b. the World Bank. c. the Big Four accounting firms. d. the IASB. Ans: D KP 6 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

48.

Which one of the following is true concerning the International Accounting Standards Board? a. It is the international accounting standards setting body that is attempting to bring greater uniformity to worldwide accounting practices. b. It approves all financial statements before they are distributed to users. c. It consistently disagrees with the FASB on its rulemaking. d. It requires both national and international companies around the world apply the same accounting principles. Ans: A KP 6 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

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The auditors are charged with responsibility a. to detect financial fraud committed by employees during the course of their audit b. to conduct a thorough and independent audit c. to correct all errors in the financial statements d. for the accuracy and completeness of the financial statements Ans: B KP 1 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

50.

Select the name that doesn’t fit with the others on the list. a. PricewaterhouseCoopers b. Sarbanes-Oxley c. Deloitte & Touche d. KPMG Peat Marwick Ans: B KP 5 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

51.

What encourages management to refrain from pressuring auditors too strongly? a. Possible legal liability b. Outside investors and creditors c. Prospects of higher net income d. Economic incentives from outsiders Ans: A KP 5 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

52.

Which of the following best describes the two perspectives of the financial reporting process that managers need to understand in investing decisions? a. Economic consequences and user orientation. b. Corporate governance and user orientation. c. User orientation and debt covenants. d. Economic consequences and corporate governance. Ans: A KP 1 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

53.

All of the following might be found in the auditor's report except: a. A statement about conformity with GAAP. b. A statement about the fair presentation of the financial conditions and operations of the audited company. c. A statement about the effectiveness of the company's internal control system. d. A statement about the function of the company's board of directors. Ans: D KP 3 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

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54.

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

Which of the following best describes assets paid to owners of a company as a return for their initial investment? a. payables b. compensation contracts c. dividends d. interest Ans: C KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

55.

Where would you most likely find a detailed explanation about estimates used in the financial statements of a company? a. management letter b. financial footnotes c. debt restrictions d. debt contracts Ans: B KP 3 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

56.

All of the following would likely be part of a loan contract except: a. maturity date b. earning power c. collateral d. annual interest Ans: B KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

57.

Which of the following statements is true? a. Dividend payments are determined by management. b. Dividend payments are specified by a contract. c. Dividend payments are based on company collateral. d. Dividend payments are paid at the board of director's discretion. Ans: D KP 4 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

58.

All of the following are functions of the board of directors except: a. Attending quarterly meetings. b. Conducting performance review for management. c. Declaring dividends. d. Firing staff personnel. Ans: D KP 5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

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Which of the following is a measure of past profits that have been retained in a business? a liabilities b. common stock. c. retained earnings. d. assets Ans: C KP 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

60.

Which of the following is least likely to be a by-product of ethical business practices? a. fewer lawsuits. b. higher profits. c. higher audit fees. d. public trust. Ans: C KP 5 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

61.

Which of the following factors is least likely to encourage managers and auditors to act professionally? a. professional reputation. b. tax structure c. legal liability d. ethics Ans: B KP 5 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

62.

Ownership of an equity security entitles the holder to which basic right? a. The right to management outstanding loans. b. The right to pay dividends. c. The right to vote for company directors at the annual shareholders' meeting. d. The right to certify financial report reviews. Ans: C KP 4 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

63.

Which of the following is a public exchange for equity and debt securities? a. The Federal Trade Commission. b. The New York Stock Exchange. c. The Securities and Exchange Commission. d. The Financial Accounting Standards Board. Ans: B KP 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

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Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

Which of the following groups make up a company’s audit committee? a. Auditors. b. Outside directors from the Board. c. Company officers. d. All of the individuals in (a), (b), and (c) are included in the audit committee. Ans: B KP 5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

65.

Which of the following groups enacted the Sarbanes Oxley Act? a. FASB b. AICPA c. U.S. Congress d. PCAOB Ans: C KP 5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

66.

All of the following are false regarding international accounting standards (IAS) except which of the following? a. The SEC requires all companies to use IAS. b. There are no substantive differences between U.S. GAAP and IFRS. c. The SEC prohibits U.S. stock exchanges from listing non-U.S. companies who follow IFRS. d. All public companies in the European Union are required to report using IFRS and IAS. Ans: D KP 6 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

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MATCHING QUESTIONS 1.

Identify which of the users of financial statement information listed in A through E would most likely desire and/or benefit from the economic aspects listed in items 1 through 5 below. You may use each letter more than once or not at all. A. B. C. D. E.

Users bankers potential investors government agencies customers managers

_______

Want to choose a company to earn returns potentially higher than fixed income instruments

_______

Need to predict future cash flows necessary for repayment

_______

Want to determine how much tax a company must pay

_______

Want the best product possible for the money

_______

Want to maintain a level of compensation

Solution: 1. B 2. A 3. C 4. D 5. E KP 1,2,4 BT: C Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

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Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

For each description listed in items 1 through 4 below, select the letter of the accounting term (A through F) it best describes. You may use each letter more than once. Accounting Terms A. Asset B. Liability C. Retained earnings D. Revenue E. Expenses F. Equity investment _______

1. Total measured past growth less the amount distributed to owners

_______

2. A measure of assets generated from the products and services sold

_______

3. Owed and must be paid in the future

_______

4. Amount invested in the firm by its owners

Solution: 1. C 2. D 3. B 4. F KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

For each financial statement listed in 1 through 4 below, place the letter (A through D) of the best description in the space provided. You may use each letter more than once or not at all. A. B. C. D.

Descriptions Assets, liabilities, and shareholders’ equity Increased by net income and decreased by dividends Operating, investing, and financing activities Revenues less expenses

_______

1. Balance sheet

_______

2. Income statement

_______

3. The retained earnings section of the statement of shareholders’ equity

_______

4. Statement of cash flows

Solution: 1. A 2. D 3. B 4. C KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

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Identify which accounting document(s) listed in A through D would always provide the information indicated in items 1 through 5 below. You may use each letter more than once or not at all. Some items may require more than one answer. Accounting Documents A. Auditor’s report B. Management letter C. Financial statements D. Footnotes _______

1. Represents that the financial statements are stated fairly, in all material respects

_______

2. Indicates that financial statements were prepared in conformity with GAAP

_______

3. Contains assets, liabilities, and equity, as well as income from operations

_______

4. Explains certain items on the balance sheet

_______

5. An acceptance of responsibility of financial information provided

Solution: 1. A 2. A, B, D 3. C 4. D 5. B KP 2,3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting SHORT ANSWER QUESTIONS 1.

Which financial statement would you review to determine the amount of cash a company received from an issue of capital stock during the year? Solution:

statement of cash flows

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 2.

Which financial statement would you review to determine a company’s interest expense? Solution:

income statement

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

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Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

What independent party attests that the balance sheet and income statement present fairly the financial position of the company? Solution:

auditor

KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 4.

Identify the financial statement in which revenues less expenses are reported. Solution:

income statement

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

What financial shareholders? Solution:

statement

communicates

profits

retained

and

distributions

statement of shareholders’ equity

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting 6.

What financial statement communicates cash flows from operating activities? Solution:

statement of cash flows

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

What financial statement lists and measures assets, liabilities, and shareholders’ equity at a certain date? Solution:

balance sheet

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

What financial statement shows where the money came from and where it went? Solution:

statement of cash flows

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

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Identify which financial statement you would review to determine the amount of cash a company paid to retire its debt. Solution:

statement of cash flows

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

10.

Which source would you review to determine that the financial statements are fairly stated in accordance with GAAP? Solution:

auditor’s report

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

11.

Which financial statement would you review to determine if a company’s operating cash flow is sufficient to pay day-to-day obligations? Solution:

statement of cash flows

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

12.

Which financial statement would best help you understand the increases and decreases in cash over a period of time? Solution:

statement of cash flows

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

13.

What financial statement would you review to determine if a company’s payroll exceeds $1,000,000? Solution:

income statement

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

14.

What financial statement would you review to determine the profitability ratio? Solution:

income statement

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

1-20

15.

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

What financial statement would you review to determine whether or not dividends were distributed during the year? Solution:

statement of shareholders’ equity and the statement of cash flow

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

16.

On which financial statement would you find the amount invested by a company’s owners? What is the name of this amount? Solution: equity

balance sheet; equity investment (stock), also statement of shareholders’

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

17.

On which financial statement(s) would you find the accumulation of total profits and losses less distributions to owners since the company began operations? What is the name of this amount? Solution:

balance sheet and statement of shareholders’ equity; retained earnings

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

18.

What accounting name is given to one who provides money to a company with the expectation that it will be paid back with interest? Solution:

debt investor or creditor and lender

KP 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

19.

What is the name of a person who provides money to a company who never has to be paid back but expects periodic cash payments? Solution:

equity investor or owner

KP 4 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

20.

1-21

Identify the responsibilities of the board of directors. Solution:

Sets company policies; declares dividends; sets management compensation; hires and fires management; appoints the audit committee

KP 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

21.

Who assesses whether the financial statements fairly represent the financial position and results of operations? Solution:

independent auditor

KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

22.

Where would you most likely find statements revealing the assumptions, estimates, and choices of alternative accounting methods used in the balance sheet? Solution:

footnotes to the financial statements

KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

23.

List the names of the financial statements that appear in an annual report. Solution:

balance sheet, income statement, statement of cash flows, statement of shareholders’ equity

KP 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

1-22

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

SHORT PROBLEMS 1.

Bricklin Company has $700 in its checking account. A customer owes Bricklin $1,100. The company has store equipment that cost $1,600 and a truck that cost $5,200. Bricklin Company owes the bank $3,600 on the truck loan of which one payment of $900 is due in one week, and owes $4,200 to creditors for its monthly operating expenses, including rent, all of which is due in the next 30 days. A. List Bricklin Company’s assets and the dollar amount of each. B. List Bricklin Company’s liabilities and the dollar amount of each. C. Is Bricklin Company solvent? Explain. Solution: A. ASSETS Cash Accounts receivable Truck Store equipment Total

$ 700 1,100 5,200 1,600 $8,600

B. LIABILITIES Note payable (truck loan) Accounts payable Total

$3,600 4,200 $7,800

C. Solvency is the ability of a company to generate cash in order to meet its debts as they come due. While Bricklin Company’s assets exceed its liabilities by $800, the company is not solvent. A truck payment of $900 is due in one week, but only $700 of cash is available. Bricklin cannot be sure when the customer will pay the $1,100 amount owed. Bricklin Company appears to have a cash flow problem. KP 3 BT: AN Difficulty: Moderate TOT: 7 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

1-23

Matura, Inc. reported the following activities for the year: • Borrowed $350,000 from the bank to be repaid in 5 years • Issued stock to investors for $40,000 cash • Paid dividends to shareholders totaling $10,000 • Purchased equipment by promising to pay $150,000 to a creditor over the next 3 years A. Identify which activities are debt investments. B. Identify which activities are equity investments. Solution: A. Debt investments:

B. Equity investments:

Borrowed $350,000 from the bank to be repaid in 5 years Promising to pay $150,000 to a creditor over the next 3 years Issued stock to investors for $40,000 cash

KP 4 BT: AN Difficulty: Moderate TOT: 3 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Sonnan Company showed profits for the last two years totaling $120,000 and $260,000, respectively. Sonnan Company paid a total of $90,000 to its owners over the two-year period. A. How much remains in Sonnan Company as retained earnings at the end of the second year of business? B. Briefly explain the concept of ‘earning power’ as it pertains to Sonnan Company. Solution: A. Total profits ($120,000 + $260,00) Distributions to owners

$380,000 ( 90,000) $280,000

B. Earning power is the ability to grow and provide a substantial return to its owners. Sonnan Company demonstrates earning power given by the fact that it paid a portion of its earnings to its owners, yet retained a sizable portion to finance the business for future income production. KP 3 BT: AN Difficulty: Moderate TOT: 3 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

1-24

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

SHORT ESSAY QUESTIONS 1.

What is the role of the Securities and Exchange Commission? Solution: The Securities and Exchange Commission is an agency of the federal government that was commissioned to implement and enforce the Securities Act of 1933 and the Securities Exchange Act of 1934. KP 5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Veronica Ingram is the CEO of a small corporation whose stock is traded on public stock exchange. She has been concerned with the high cost of producing and distributing annual financial statements. She has proposed that the corporation stop producing these financial reports which would save the company $240,000 annually. Briefly explain to Ms. Ingram why her proposal cannot be adopted. Solution: Although the $240,000 savings is significant, failure to comply with the Securities Exchange Act of 1934 is a violation of regulatory practices for publicly held companies. This Act requires companies with equity securities that are listed on public security markets to (1) annually file a Form 10-K (audited financial reports), (2) quarterly 10-Qs (unaudited quarterly financial statements) and (3) annually provide audited financial reports to the shareholders. Violations lead to being barred from public trading. KP 1 BT: AP Difficulty: Moderate TOT: 3 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Why might corporate management want to lobby the FASB? Solution: Corporate management and other interested parties wish to influence generally accepted accounting principles (GAAP). Because financial statements are prepared by management using GAAP, management is very concerned that accounting principles used provide benefits to investors, creditors, and the others associated with financial reporting. KP 5 BT: AP Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

1-25

Describe the three components of the statement of cash flows. Solution: The three components of the statement of cash flows are operating, investing, and financing activities. Operating activities are associated with the actual products and services provided by a company. Investing activities include the purchase and sale of assets, such as equipment and land. Financing activities refer to the collections and payments related to a company’s capital resources, such as cash borrowings, loan payments, cash from owners, and payment of dividends to owners. KP 3 BT: K Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

The Sarbanes-Oxley Act was passed by Congress in 2002 in response to a series of financial and accounting scandals. The purpose of the Act was to bolster corporate governance and restore confidence in the financial reporting system. Describe one of the new things that the management of a US public corporation is required to do under this act. Solution: • • • •

certification that the financial statements have been reviewed by the CEO and CFO, or file an annual report on internal controls over financial reporting, or additional responsibilities to ensure that adequate internal controls and in place, or provide reasonable assurance that financial records are complete and accurate.

KP 5 BT: K Difficulty: Moderate TOT: 4 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Frank Smithson, chief operating officer for Star Master Corporation, has discovered that two separate and distinct sets of financial statements are being provided—one to the Internal Revenue Service and the other to its shareholders. He objected to this policy and is insisting that one set of financial statements be provided to all interested parties. Provide examples of the needs of the two parties. Solution: Although one might initially react favorably to Frank’s proposal of one set of financial statements for all users, it would be impossible. Various rules for determining income and financial position are specified by each user. These rules reflect different uses of accounting information. The IRS raises money to support government operations and has codified rules designed to accomplish this task. The public information provided to shareholders and other outside parties is governed by generally accepted accounting principles that are designed to provide the general users with information required for investment decisions. KP 5 BT: AP Difficulty: Moderate TOT: 4 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

1-26

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

Describe the two components of the income statement. Solution: The two components of the income statement are revenues and expenses, the difference of which represents net income or loss for a period of time. Revenues are a measure of the assets generated from the products sold and services provided. Expenses are a measure of the asset outflows or costs associated with selling the products and providing the services. KP 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Why must managers understand financial reporting? Solution: Managers often use financial statements to assess the financial condition and performance of their own company, its competitors, and other companies of which investments in stocks and bonds of other companies might be undertaken. Managers must understand how business decisions affect the financial statements and how capital providers and other outsiders use financial statements to evaluate and control their actions. KP 1 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

What information is provided in a management letter? Who signs it? Solution: The CEO and CFO provide a management letter that acknowledges responsibility for the financial information provided in the financial statements and notes. KP 2 BT: K Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

10.

What powers does the Securities and Exchange Commission have? Solution: The Securities and Exchange Commission has the power to prescribe the accounting practices and standards to be employed by companies within its jurisdiction—public companies. However, the SEC has chosen to delegate the responsibility for establishing accounting practices and standards to the Financial Accounting Standards Board (FASB). The SEC also is responsible for ensuring that listed companies prepare and file registration statements before they issue new securities, and file periodic quarterly and annual reports. KP 5 BT: K Difficulty: Moderate TOT: 3 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

11.

1-27

What are the two fundamental economic reasons why investors and creditors demand financial accounting information? Solution: Creditors need financial information to monitor and enforce the debt and compensation contracts written with management, and investors need financial information to help decide where to invest their funds. KP 1 BT: K Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

12.

What methods of controlling the ethical decisions by managers are common? Why are these methods necessary? Solution: The methods of controlling the quality of management decisions are financial statements, debt and compensation contracts, the board of directors, auditors, and the audit committee. These methods are necessary in order to protect the investments of shareholders and creditors. KP 5 BT: C Difficulty: Moderate TOT: 3 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Chapter 2 The Financial Statements

MULTIPLE CHOICE QUESTIONS 1.

Current assets are: a. all assets except inventory. b. all assets that provide benefits extending beyond one year. c. cash, accounts receivable, and buildings. d. all assets that are expected to be converted to cash in the near future. Ans: D KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Intangible assets are: a. goodwill, patents, copyrights, and trademarks. b. property, plant, and equipment. c. all assets except current assets. d. those assets that an owner can purchase with cash only. Ans: A KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Long-term investments can include all of the following except: a. notes receivable maturing in nine months. b. equity securities of another company to be held for more than a year. c. ten-year debt securities of another company. d. land to be held beyond one year. Ans: A KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Which one of the following is an asset? a. A patent of a company’s secret formula for reverse osmosis. b. Retained earnings. c. Notes payable. d. Accounts payable. Ans: A KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

2-1

2-2

Test Bank – Chapter 2 – The Financial Statements

Which one of the following groups of accounts contains only assets? a. Equipment, patents, accounts receivable. b. Accounts receivable, building, retained earnings. c. Accounts payable, notes payable, contributed capital. d. Retained earnings, goodwill, and accounts payable. Ans: A KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Which one of the following groups of accounts contains only assets? a. Contributed capital, retained earnings, revenues. b. Cash, contributed capital, retained earnings. c. Prepaid expenses, land, accounts receivable. d. Building, equipment, depreciation expense. Ans: C KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Which one of the following is a liability? a. Interest receivable. b. Contributed capital. c. Retained earnings. d. Wages payable. Ans: D KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Which one of the following groups of accounts contains only current assets? a. Inventory, accounts receivable, equipment. b. Cash, equipment, copyrights. c. Cash, accounts receivable, merchandise inventory. d. Patents, copyrights, and trademarks. Ans: C KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Which one of the following creates a decrease in retained earnings? a. Prepaid assets. b. Equipment. c. Dividends. d. Merchandise inventory not sold. Ans: C KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Test Bank – Chapter 2 – The Financial Statements

10.

At the end of 2014, Campbell Company has total assets and liabilities at $42,000 and $11,000, respectively. Campbell reported net income for 2015 in the amount of $12,000. How much is shareholders’ equity at the end of 2015? a. $30,000 b. $22,000 c. $31,000 d. $43,000 Ans: D KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Solution:

11.

$452,000  $11,000 + $12,000 = $43,000

Which account is associated with the sale of inventory? a. Cost of goods sold. b. Depreciation. c. Inventory expense. d. Equipment. Ans: A KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

12.

Which account is associated with borrowing money? a. Interest expense. b. Goodwill. c. Cost of goods sold. d. Depreciation. Ans: A KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

13.

Which expense is associated with long-term assets? a. Dividends. b. Depreciation. c. Cost of goods sold. d. Interest. Ans: B KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

14.

2-3

Which expense is associated with the use of patents? a. Interest. b. Amortization. c. Cost of goods sold. d. Depreciation. Ans: B KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

2-4

Test Bank – Chapter 2 – The Financial Statements

15.

The major accounting difference between interest expenses for creditors and dividends declared and paid to shareholders is that interest expenses: a. decrease retained earnings and dividends increase retained earnings. b. impact cash flows, while dividends do not. c. are not on the income statement while dividends declared and paid are. d. are on the income statement and dividends declared and paid are not. Ans: D KP 2 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

16.

Desert Company has retained earnings of $11,000, total assets totaling $41,000, and total liabilities of $20,000. How much is total shareholders’ equity? a. $8,000 b. $19,000 c. $21,000 d. $27,000 Ans: C KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Solution:

17.

$41,000 − $20,000 = $21,000

Valley Company has cash, current liabilities, and long-term liabilities of $120,000, $30,000, and $31,000, respectively. Valley has no current assets other than cash. How much cash can Valley use to acquire equipment so that amount of current assets is double the amount of current liabilities? a. $30,000 b. $60,000 c. $15,000 d. $90,000 Ans: B KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Solution:

18.

$120,000 − [2 x $30,000] = $60,000

Favre Company has current assets, shareholders’ equity, current liabilities, and longterm liabilities of $10,000, $27,000, $4,000, and $8,000, respectively. How much are long-term assets? a. $12,000 b. $29,000 c. $32,000 d. $46,000 Ans: B KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Test Bank – Chapter 2 – The Financial Statements

Solution:

19.

2-5

$10,000 + LTA = $4,000 _+ $8,000 + $27,000 LTA = $29,000

Which one of the following equations represents retained earnings activity for a year? a. Beginning balance + expenses – dividends = ending balance. b. Beginning balance + cash receipts – cash payments = ending balance. c. Beginning balance + dividends – net income = ending balance. d. Beginning balance + net income – dividends = ending balance. Ans: D KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

20.

Which one of the following appears on the income statement? a. Inventory. b. Retained earnings. c. Dividends. d. Interest revenue. Ans: D KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

21.

Which one of the following groups of accounts contains only liabilities? a. Accounts payable, retained earnings, notes payable. b. Supplies expense, cost of goods sold, interest expense. c. Wages payable, mortgage payable, taxes payable. d. Contributed capital, accounts payable, retained earnings. Ans: C KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

22.

When an entrepreneur wishes to start a business, capital must be attracted in the form of: a. net income. b. cost of goods sold. c. operating activities. d. equity or debt financing. Ans: D KP 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking, Industry AICPA FN: Measurement

23.

If the beginning and ending balances in retained earnings are $15,000 and $10,000, respectively, and dividends during the year are $8,000, then net income for the year is: a. $10,000. b. $3,000. c. $18,000. d. $32,000. Ans: B KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

2-6

Test Bank – Chapter 2 – The Financial Statements

Solution:

24.

$15,000 + NI − $8,000 = $10,000 NI = $3,000

Kelly Company has total assets, liabilities, and shareholders’ equity of $32,000, $17,000, and $15,000, respectively at the beginning of 2015. If Kelly reports revenues of $130,000, expenses of $80,000, and pays dividends of $30,000, how much is shareholders’ equity at the end of 2015? a. $35,000 b. $53,000 c. $44,000 d. Not enough information to determine. Ans: A KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Solution:

25.

$15,000 + [$130,000 − $80,000] − $30,000 = $35,000

Sanchez Corporation has total assets, current liabilities, and long-term liabilities of $40,000, $2,000, and $13,000, respectively. If Sanchez purchases equipment for $5,000 for cash, how much would shareholders’ equity be? a. $25,000 b. $10,000 c. $29,000 d. $11,000 Ans: A KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Solution:

26.

$40,000 − $2,000 − $13,000 + $5,000 − $5,000 = $25,000

The acquisition of equity and debt financing is considered: a. a financing activity. b. net income. c. an investing activity. d. an operating activity. Ans: A KP 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

27.

Which one of the following is considered an operating activity? a. Payment to a vendor for supplies. b. Purchase of company trucks for cash. c. Payment of dividends to shareholders. d. Issuing stock to investors. Ans: A KP 1 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 2 – The Financial Statements

28.

2-7

Smith Corp. earned $300,000 profit during 2015. On which financial statement(s) will the exact dollar amount of the profit be clearly stated? a. Statement of shareholders’ equity and income statement. b. Income statement only. c. Balance sheet and income statement. d. Statement of shareholders’ equity, income statement, and the balance sheet. Ans: A KP 1 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

29.

On which financial statements will you find a company’s financial position at a specific point in time? a. All financial statements combined. b. Income statement and balance sheet. c. Balance sheet and statement of shareholders’ equity. d. Balance sheet only. Ans: D KP 2 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

30.

Why are liabilities separated into current and long-term? a. Users want to know which amounts will be paid using current assets. b. Because current and long-term classifications are just common sense. c. This format helps a company determine how much profit was made. d. The SEC requires companies to do so. Ans: A KP 2 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

31.

Which one of the following statements is true? a. A company’s own stock is its most liquid asset. b. Profits are normally kept in a company’s retained earnings until distributed as dividends. c. Long-term investments will be used to pay current liabilities. d. Current assets have no physical substance. Ans: B KP 2 BT: K Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

32.

Cash reported on a company’s balance sheet represents a. the profit a company made during the current year. b. the amount the President of the Company has in his or her personal account. c. the amount collected from customers during the current year less the amount paid for expenses. d. the currency a company has access to at the balance sheet date. Ans: D KP 2 BT: K Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

2-8

Test Bank – Chapter 2 – The Financial Statements

33.

The amount a company expects to collect from its customers is: a. accounts receivable. b. short-term equity securities. c. inventory. d. accounts payable. Ans: A KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

34.

As used in accounting, “notes” may be reported: a. only as company debt offerings. b. only as assets on the balance sheet. c. as either assets or liabilities. d. on the income statement or the balance sheet. Ans: C KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

35.

Property, plant and equipment may include which of the following? a. Intangible assets and land. b. Inventory and equipment. c. Buildings and cash. d. Land and office buildings. Ans: D KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

36.

On the balance sheet, a company should report the cost of intangible assets: a. in the current assets section. b. as an amount owed to shareholders. c. as an amount that is estimated by the CFO. d. at acquired cost less any accumulated amortization. Ans: D KP 2 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

37.

A partnership and a corporation differ in that: a. a partnership is a legal entity, while a corporation is not. b. the equity sections of partnership and corporation balance sheets report different items. c. partnerships always have more cash than corporations. d. a corporation has an income statement and a partnership does not. Ans: B KP 2 BT: K Difficulty: Difficult TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 2 – The Financial Statements

38.

2-9

Below are several accounts from Norel Company’s accounting records. Total assets, end of year Total liabilities, end of year Contributed capital, end of year Retained earnings, beginning of year Dividends for the period Net income

$110,000 36,000 12,000 18,000 31,000 75,000

The amount of retained earnings at the end of the year is: a. $34,000. b. $40,000. c. $62,000. d. $64,000. Ans: C KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Solution:

39.

$18,000 + 75,000 − $31,000 = $62,000 or $110,000 − $36,000 − $12,000 = $62,000

The most common revenue account is: a. cash. b. sales. c. shareholders’ equity. d. liabilities. Ans: B KP 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

40.

Your bank loaned ten million dollars to Hamilton Stores to finance the construction of a manufacturing plant. In which section of Hamilton’s statement of cash flows would you be able to determine whether the company used the cash to build the new plant? a. Operating activities b. Owner activities c. Financing activities d. Investing activities Ans: D KP 1 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

41.

Most investors believe that the statement of cash flows is a. a useful source of information regarding the cash flow of an entity. b. the only statement in an annual report whose results correlates to stock price value. c. too complicated. d. a useful measure of a company’s profit. Ans: A KP 2 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

2-10

42.

Test Bank – Chapter 2 – The Financial Statements

The amount reported on a company’s balance sheet as retained earnings is the same as the amount reported on the company’s: a. income statement as net income. b. statement of shareholders’ equity as beginning retained earnings. c. statement of cash flows as cash received from operating activities. d. statement of shareholders’ equity as ending retained earnings. Ans: D KP 2 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

43.

Which one of the following is not an asset? a. A company’s equity in the common stock of another company. b. A company’s trademarked name for a process. c. Retained earnings. d. Notes receivable. Ans: C KP 2 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

44.

Given below are several accounts from Caterpillar Company’s accounting records. Cash Accumulated depreciation Retained earnings, beginning of year Contributed capital Patents Dividends

$ 15,000 7,000 22,000 25,000 2,000 5,000

Net income for the year was $40,000. How much is total shareholders’ equity at the end of the year? a. $86,000. b. $88,000. c. $87,000. d. $82,000. Ans: D KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Solution: 45.

$22,000 + $25,000 – $5,000 + $40,000 = $82,000

Seuss Company determined its total sales were $500,000, salaries expense was $210,000, dividends paid were $15,000, rent expense was $25,000, other operating expenses were $13,000, and customers still owed $4,000 at the end of the year. How much is net income for the year? a. $267,000. b. $252,000. c. $263,000. d. $530,000. Ans: B KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Solution: $500,000 – $210,000 – $25,000 – $13,000 = $252,000

Test Bank – Chapter 2 – The Financial Statements

46.

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The information below was taken from the 2015 annual report of Jena Corporation. 2015 2014 2013 Beginning cash balance $ 12,000 ? $7,000 Net cash flow from operating activities 7,987 ? 9,100 Net cash flow from investing activities 2,450 4,330 ? Net cash flow from financing activities ? (9,612) (7,500) Ending cash balance $13,000 ? $12,500 Which of the following is the missing amount for the net cash flow from investing activities for 2013? a. $3,900 b. $9,950 c. $19,830 d. $2,450 Ans: A KP 1,2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

47.

The information below was taken from the 2015 annual report of Jena Corp. 2015 2014 2013 Beginning cash balance $ 12,000 ? $7,000 Net cash flow from operating activities 7,987 ? 9,100 Net cash flow from investing activities 2,450 4,330 ? Net cash flow from financing activities ? (9,612) (7,500) Ending cash balance $13,000 ? $12,500 Which of the following is the missing amount for the beginning cash balance for 2014? a. $5,925 b. $8,741 c. $12,500 d. $5,282 Ans: C KP 1,2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

2-12

48.

Test Bank – Chapter 2 – The Financial Statements

The information below was taken from the 2015 annual report of Jena Corp. 2015 2014 Beginning cash balance $ 12,500 ? Net cash flow from operating activities 7,987 ? Net cash flow from investing activities 2,450 4,330 Net cash flow from financing activities ? (9,612) Ending cash balance $13,000 ?

2013 $7,000 9,100 ? (7,500) $12,500

Which of the following is the missing amount for the net cash flow from operating activities for 2014? a. $8,110 b. $4,782 c. $8,475 d. $3,874 Ans: B KP 1,2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

49.

The information below was taken from the 2015 annual report of Jena Corp. 2015 2014 Beginning cash balance $12,000 ? Net cash flow from operating activities 7,987 ? Net cash flow from investing activities 2,450 4,330 Net cash flow from financing activities ? (9,612) Ending cash balance $13,000 ?

2013 $7,000 9,100 ? (7,500) $12,500

Which of the following is the missing amount for the ending cash balance for 2014? a. $2,759 b. $7,158 c. $12,703 d. $12,000 Ans: D KP 1,2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

50.

2013 $7,000 9,100 ? (7,500) $12,500

Which of the following is the missing amount for the net cash flow from financing activities for 2015? a. ($21,994) b. ($9,437) c. ($1,120) d. ($14,085)

Test Bank – Chapter 2 – The Financial Statements

Ans: B KP 1,2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

51.

Garrison Corporation has the following transactions: 1. 2. 3. 4. 5. 6. 7. 8.

Dividends are paid to the shareholders. A utility bill for July is paid in August. A new warehouse facility is purchased Principal payments on outstanding debt are paid. Employee wages are paid. Forty-five units of inventory are sold for $100 each Common stock is issued for $230,000 in cash. A delivery van used for 5-years is sold for $12,000, which is its book value.

Which of the above transaction(s) are examples of financing activities? a. 1,4,7 b. 1,7,8 c. 3,8 d. 1,3,4,7,8 Ans: A KP 1,2 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

52.

Garrison Corporation has the following transactions: 1. 2. 3. 4. 5. 6. 7. 8.

Which of the above transaction(s) are examples of investing activities? a. 3,4,7,8 b. 1,4,7 c. 4,7 d. 3,8 Ans: D KP 1,2 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

53.

Garrison Corporation has the following transactions: 1. 2. 3. 4. 5. 6.

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Test Bank – Chapter 2 – The Financial Statements

7. Common stock is issued for $230,000 in cash. 8. A delivery van used for 5-years is sold for $12,000, which is its book value. Which of the above transaction(s) are examples of operating activities? a. 2,3,5 b. 5,6,8 c. 2,3,5,6,8 d. 2,5,6 Ans: D KP 1,2 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

54.

Baron Company has six major headings in its income statement, which include Sales, Fees earned, Other Revenues, Cost of Goods Sold, Operating Expenses, and Other Expenses. Below are some of the income statement accounts for Baron: 1. 2. 3. 4. 5. 6.

Sales of inventories Depreciation expense Income from interest on savings account Income from dividends on investments Advertising expense. Loss on sale of building

7. 8. 9. 10. 11. 12.

Salespeople commission expense Office salary expense Gain on sale of short-term investments Sales of services provided Cost of sold inventories Interest expense on outstanding loans

Which of these would be found under the heading “Other Revenues”? a. 1,10 b. 1,3,4 c. 3,4,10 d. 3,4,9 Ans: D KP 2 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

55.

Sales of inventories Depreciation expense Income from interest on savings account Income from interest on investments Advertising expense. Loss on sale of building

7. 8. 9. 10. 11. 12.

Salespeople commission expense Insurance expense Gain on sale of short-term investments Sales of services provided Cost of sold inventories Interest expense on outstanding loans

Which of these would be found under the heading “Operating Expenses”?

Test Bank – Chapter 2 – The Financial Statements

a. b. c. d.

2-15

2,8,12 2,7,8,12 2,5,7,8,11 2,5,11

Ans: C KP 2 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

56.

Hsu Company has eight major section headings in its balance sheet, which include Current Assets, Long-term investments, Property, Plant, and Equipment, Intangible Assets, Current Liabilities, Long-Term Liabilities, and Shareholders’ Equity. Below are some of the balance sheet accounts for Hsu: 1. 2. 3. 4. 5. 6.

Dividends Payable Prepaid Rent Trademarks Bonds Payable Investment Funds for Plant Expansion Inventories

7. 8. 9. 10. 11.

Wages Payable Deferred Revenues Accumulated Depreciation Building Accounts Receivable Accounts Payable

Which of these would be found under the heading “Current Assets”? a. 2,10 b. 2,6,8,10 c. 2,6,10 d. 2,5,10 Ans: C KP 2 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

57.

Dividends Payable Prepaid Rent Trademarks Bonds Payable Investment Funds for Plant Expansion Inventories

7. 8. 9. 10. 11.

Wages Payable Deferred Revenues Accumulated Depreciation Building Accounts Receivable Accounts Payable

Which of these would be found under the heading “Property, Plant, and Equipment”? a. 5,9 b. 5,6,9 c. 3,5,6,9 d. 9 Ans: D KP 2 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

2-16

Test Bank – Chapter 2 – The Financial Statements

MATCHING QUESTIONS 1. For items 1 through 3, select the appropriate section of the balance sheet in which the item would be reported. A B C D E Section

Sections Long-term Investments Property, Plant, & Equipment Current Liabilities Long-term Liabilities Shareholders’ Equity

Balance Sheet Item 1. Amounts owed for purchasing inventory from creditors (due next month). 2. Cumulative profits retained by the company since operations began. 3. Cost of a building expected to be used by the company for ten more years.

Solution:

1. C

2. E

3. B

KP 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

For each item numbered 1 through 6 below, identify which accounting element(s) listed in A through H each statement describes. You may use each letter more than once or not at all. Accounting Elements A. Assets E. Revenues B. Liabilities F. Expenses C. Contributed capital G. Net income D. Retained earnings H. Dividends 1.

Total past earnings not distributed to the owners

Inflow of assets from the regular operating activities

Obligations which must be met at some future date

That which will be used to generate future economic benefits

The net growth during a period of time measured as revenues less expenses

Amount invested by equity investors

Solution: 1. D

2. E

3. B

4. A

5. G

KP 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

6. C

Test Bank – Chapter 2 – The Financial Statements

2-17

For each financial statement item listed in 1 through 5 below, identify the best description by selecting from items a through f below. You may use each letter more than once or not at all. Write the letter ‘X’ for each item for which no description is listed.

a. b. c. d. e. f.

Descriptions Amount of net income or loss less distributions to the owners of the company Must be settled within one year Converted to cash within one year Amount of owners’ investment Portion of equity to which dividends reduce Land used as a site for production

Current liability

The property part of property, plant, and equipment

Retained earnings

Contributed capital

Current asset

Solution: 1. b

2. f

3. a, e

4. d

5. c

KP 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

For each statement listed in 1 through 5 below, state whether it is correct or not by writing ‘Yes’ or ‘No’ in the space provided. 1. Property differs from plant and equipment in that property has no physical substance, while plant and equipment does. 2. Current assets of a major retailer, such as Sears, typically exceed 50 percent of total assets because of merchandise inventory. 3. Goodwill is common on many major U.S. companies’ balance sheets because of the numerous mergers and acquisitions that occur. 4. Yard Mart Company owes $4,700. If Yard Mart uses assets listed in the current asset section of the balance sheet to pay off this debt next year, Yard Mart must report the $4,700 in the current liability section of its balance sheet. 5. Haloid, Inc. issued common stock for cash. This is an investing activity.

. Solution: 1. No

2. Yes

3. Yes

4. Yes

5. No

KP 1,2 BT: C Difficulty: Moderate TOT: 3 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

2-18

Test Bank – Chapter 2 – The Financial Statements

For each financial statement item listed in 1 through 5 below, identify in which balance sheet category (listed in a through h) it should be reported. You may use each letter more than once or not at all.

a. b. c. d. e. f. g. h.

Solution: 1. g

2. a

Financial Statement Categories Current assets Long-term investments Property, plant, and equipment Intangible assets Current liabilities Long-term liabilities Shareholders’ equity Not disclosed on the balance sheet

Contributed capital

Prepaid insurance

Accounts payable

Sales revenue

Delivery truck

3. e

4. h

5. c

KP 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

For each statement listed in 1 through 5 below, state whether it is correct or not by writing ‘Yes’ or ‘No’ in the space provided. 1. Financing activities involve the sale of goods and services of a business. 2. The income statement is often referred to as a statement of financial condition. 3. The most liquid of all assets is cash. 4. The asset sections found on a classified balance sheet include current assets, current liabilities, and owners’ equity. 5. Dividends payable, Inventories, Contributed capital, and Accumulated Depreciation all appear on a company’s balance sheet.

. Solution:

1. No

2. No

3. Yes

4. No

5. Yes

KP 2 BT: C Difficulty: Moderate TOT: 3 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 2 – The Financial Statements

2-19

For each financial statement item listed in 1 through 7 below, identify in which balance sheet category (listed in a through h) it should be reported. You may use each letter more than once or not at all.

a. b. c. d. e. f. g. h.

Solution: 1. c

2. a

Accumulated depreciation

Accounts receivable

Trademarks

Investment in bonds

Retained earnings

Short-term investments

Prepaid insurance

3. d

4. b

5. g

KP 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

6. a

7. a

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Test Bank – Chapter 2 – The Financial Statements

SHORT PROBLEMS 1.

Given below are several accounts from Kramer Company’s accounting records. Cash Accumulated depreciation Retained earnings, beginning of year Contributed capital Patents Dividends

$12,500 8,000 17,000 14,000 3,000 3,000

Net income for the year was $30,000. How much is total shareholders’ equity at the end of the year? Solution: $14,000 + 17,000 – $3,000 + $30,000 = $58,000 KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Below are several amounts from Netcom Company’s accounting records. Answer the questions that follow. Total assets, end of year Total liabilities, end of year Contributed capital, end of year Retained earnings, beginning of year Dividends for the period Net income

$190,000 88,000 20,000 65,000 15,000 32,000

A. Calculate the amount of retained earnings at the end of the year. B. If revenue amounts to $200,000, how much is ‘total expenses’? C. How do you know the company has been profitable since it began operations? Solution: A. $65,000 + $32,000 –$15,000 = $82,000 B. $200,000 – X = $32,000 Expenses = X = $168,000 C. Retained earnings, which represents the total profits since the company began operations, less all amounts distributed as dividends, has a positive balance. KP 2 BT: AN Difficulty: Moderate TOT: 5 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Measurement

Test Bank – Chapter 2 – The Financial Statements

2-21

Following are several items from Arbor Company’s financial statements. Use this information to calculate the amounts for the questions that follow. Cost of goods sold Sales revenue Operating expenses Income taxes Dividends Accounts receivable

$2,400 8,600 500 600 400 800

Calculate the dollar amount of net income.

How much is inventory expense?

Was the company profitable during the current year? How do you know?

Solution: a. $8,600 – $2,400 – $500 – $600 = $5,100 b. $2,400 c. Yes. The amount of expenses is less than the amount of revenue.

KP 2 BT: AN Difficulty: Moderate TOT: 4 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Measurement

At the beginning of 2015, Kristol Company sold stock and began operations. Information from Kristol’s accounting records for the year ending December 31, 2015, follows: Sales Selling expenses Cost of goods sold Dividends General and administrative expenses Contributed capital

$510,000 220,000 190,000 100,000 50,000 60,000

Circle the names of any accounts above that would not be reported on the income statement.

Determine the amount of net income.

Solution: a. Circled accounts should be: Dividends and Contributed Capital b. $510,000 – $220,000 – $190,000 – $50,000 = $50,000 KP 2 BT: AN Difficulty: Moderate TOT: 4 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

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Test Bank – Chapter 2 – The Financial Statements

The following are account balances of Phineas Company on 12/31/15. Accounts payable Accounts receivable Buildings and equipment Contributed capital Bonds payable Cash Retained earnings Accumulated depreciation Inventory Patents

$ 2,000 7,000 54,000 20,000 15,300 8,800 17,000 (24,000) 5,500 3,000

Prepare a classified balance sheet for Phineas Company on December 31, 2015. Solution: Phineas Company Classified Balance Sheet December 31, 2015 Assets Current assets: Cash Accounts receivable Inventory Total current assets Property, plant, and equipment: Buildings and equipment Less: Accumulated depreciation Total property, plant, and equipment Intangible assets: Patents Total assets Liabilities & Shareholders’ Equity Current liabilities: Accounts payable Total current liabilities Long-term liabilities: Bonds payable Total long-term liabilities Shareholders’ equity: Contributed capital Retained earnings Total shareholders’ equity Total liabilities & shareholders’ equity

$ 8,800 7,000 5,500 $21,300 $54,000 24,000 30,000 3,000 $54,300

$ 2,000 $ 2,000 15,300 15,300 $20,000 17,000 37,000 $54,300

KP 2 BT: AP Difficulty: Difficult TOT: 10 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 2 – The Financial Statements

2-23

The following is the balance sheet of Able Corporation immediately prior to deciding how to finance the purchase of a $300 addition to its building. Able Corporation Balance Sheet December 31, 2015 Assets Cash Accounts receivable Building Land Total assets

$ 310 260 380 370 $1,320

Liabilities and Shareholders’ Equity Accounts payable Long-term bonds payable Contributed capital Retained earnings Total liabilities & shareholders’ equity

$ 190 620 340 170 $1,320

The bonds payable contract agreement requires current assets to be twice as much as current liabilities. Assume the $300 addition to the building is to be paid in cash and financed by issuing more stock. Calculate and explain the maximum cash that Able can pay and still honor its debt agreement. Solution: Able’s current liabilities are $190. Under the bond agreement, its current assets must be at least $380. If Almond used $190 of cash to purchase the building addition, then it would have the $380 of current assets required by the debt covenant ($190 × 2). Therefore, Able can pay $190 and issue stock for $110 in order to finance the building project. KP 2 BT: AN Difficulty: Difficult TOT: 8 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Measurement, Decision modeling Use the information that follows concerning Ulrich Computer for the year ending December 31, 2015 for problems 7 through 10. Several accounts and amounts from the financial statements of Ulrich Computer appear below for the year ending December 31, 2015. Cash Sales Revenue Notes Receivable, 6-month Cost of goods sold Taxes Payable Salaries Expense Accounts Receivable Dividends Equipment Accounts Payable Contributed Capital Retained Earnings Rent and Utilities Expense Income Tax Expense Inventory

$ 11,000 140,000 90,000 65,000 31,000 8,000 34,000 42,000 150,000 8,000 30,000 40,000 4,000 20,000 21,000

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Test Bank – Chapter 2 – The Financial Statements

What is the total amount owed to Ulrich by its customers at the end of 2015? Solution:

$34,000

KP 2 BT: AN Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Calculate total expenses for Ulrich. Solution: $65,000 + $8,000 + $4,000 + $20,000 = $97,000 KP 2 BT: AN Difficulty: Moderate TOT: 3 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Calculate Ulrich’s total current assets. Solution: $11,000 + $34,000 + $90,000 + $21,000 = $156,000 KP 2 BT: AN Difficulty: Moderate TOT: 3 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

10.

How much must Ulrich pay out during its next accounting period for amounts owed? Solution: $8,000 + $31,000 = $39,000 KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

11.

Below is all of the account information from Chamber Company’s balance sheet, with the exception of Retained Earnings. Cash Inventory Equipment Accounts Payable Long-term Payable Contributed capital

$13,000 16,000 51,000 17,000 10,000 30,000

Using this information, please calculate the following: A.

The total amount of retained earnings for Chamber Company.

The total amount of shareholders’ equity for the company at the end in the year.

Solution: A. ($13,000 + $16,000 + $51,000) – $17,000 – $10,000 – $30,000 = $23,000 B. $30,000 + $23,000 = $53,000 KP 2 BT: AN Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Test Bank – Chapter 2 – The Financial Statements

12.

2-25

The following information is shown on Morris Company’s balance sheet. Answer the questions that follow. Cash Inventory Equipment Accounts Payable Bonds Payable Contributed capital

$12,000 15,000 60,000 15,000 35,000 25,000

How much did debt investors provide to Morris Company?

What is the amount of money provided by equity investors to Morris Company?

How much would be classified as property, plant, and equipment?

Solution: A. $35,000 B. $25,000 C. $60,000

KP 2 BT: AN Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

13.

Autry Company determined its total sales were $400,000, salaries expense was $110,000, dividends paid were $8,000, rent expense was $14,000, other operating expenses were $20,000, and customers still owed $2,000 at the end of the year. How much is net income for the year? Solution:

$400,000 – $110,000 – $14,000 – $20,000 = $256,000

KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

14.

If cash inflows from operating activities were $2,000, cash outflows for financing activities were $2,500, and the net increase in cash was $4,000, how much are cash flows from investing activities? Solution:

$4,000 – (-$2,500) - $2,000 = $4,500

KP 2 BT: AN Difficulty: Moderate TOT: 2 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

2-26

15.

Test Bank – Chapter 2 – The Financial Statements

The following is the balance sheet of Columbus Corporation immediately prior to deciding how to finance the purchase of an additional $210,000 parcel of land. Answer the question that follows. Columbus Corporation Balance Sheet December 31, 2015 Assets Cash Accounts receivable Land Total assets

$ 180,000 60,000 270,000 $510,000

Liabilities and Shareholders’ Equity Accounts payable Contributed capital Retained earnings Total liabilities & shareholders’ equity

$ 90,000 250,000 170,000 $510,000

REQUIRED: Columbus will finance the $210,000 investment in land by issuing either $210,000 of common stock or using $210,000 of additional accounts payable that will be due in 90 days. Indicate which method of financing is preferable for Columbus. Consider the effects on short-term solvency positions. Solution: If Columbus financed the land through accounts payable, its current liabilities would exceed its current assets by $60,000. This would question Columbus’s capability to pay its current liabilities when they are due. However, if Columbus financed the investment in land by issuing common stock, its current assets would exceed its current liabilities by $150,000. This would enhance its short-term solvency position. Therefore, Columbus should issue common stock to finance the purchase of land. KP 2 BT: AN Difficulty: Difficult TOT: 8 min. AACSB: Analytic, Communication, Reflective AICPA BB: Critical Thinking AICPA FN: Measurement, Decision modeling

Test Bank – Chapter 2 – The Financial Statements

2-27

SHORT ESSAY QUESTIONS 1.

Describe operating activities. Solution: Operating activities involve the sale of goods and services and the related cost of providing the goods and services. These activities produce additional capital that can be reinvested in producing assets, used to pay debt, or distributed to the owners in the form of dividends. KP 1 BT: K Difficulty: Easy TOT: 2 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Reporting

Which business activity occurs first for a business? Why does this business activity occur first? Solution: Financing activities typically occur first in a business. A business must acquire cash or other operating capital before any investments can be made. KP 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Reporting

What business aspect does the income statement measure? Solution: period.

The income statement measures operating performance over a particular

KP 1 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Measurement

Which asset is more liquid, inventory or accounts receivable? Why? Solution: Since amounts in the Accounts Receivable account represent inventory that is already sold, this account will generate cash more quickly than inventory that has not yet been sold. Therefore, accounts receivable is more liquid than inventory. KP 2 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Measurement

What business aspect does the statement of shareholders’ equity measure? Solution: The statement of shareholders’ equity measures changes in 1) the contributed capital accounts, representing the value of owners’ investments in the business, and in 2) the retained earnings account, which measures the extent to which the business reinvests its earnings and pays dividends. KP 1 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Measurement

2-28

Test Bank – Chapter 2 – The Financial Statements

Use the information provided from Haloid Company’s accounting records to answer questions 6 and 7. For the Years Ended December 31, 2015, and 2014 Assets 2015 Cash $ 80 Accounts receivable 40 Short-term investment in property 40 Property, plant, and equipment 350 Total assets $510 Liabilities and Shareholders’ Equity Accounts payable $ 85 Contributed capital 310 Retained earnings 115 Total liabilities & shareholders’ equity $510 Income Statement: Sales revenue $850 Expenses 800 Net Income $ 50

2014 $60 40 60 310 $470 $90 300 80 $470

How is it possible that Haloid reports “property” in two different places on its balance sheet? Solution: ‘Short-term investment in property’ is property that Haloid owns with the intention of selling in the future. However, property in ‘property, plant, and equipment’ is space that is being used for “supporting” the operations in Haloid’s business. KP 2 BT: C Difficulty: Moderate TOT: 5 min. AACSB: Analytic, Communication, Reflective AICPA BB: Critical Thinking AICPA FN: Reporting

Comment on the following statement: “On December 31, 2015, Haloid’s accounts payable exceeds its cash by $5. If Haloid needs additional money to pay its accounts payable, it can use the $115 stashed in its retained earnings”. Solution: The amount in the retained earnings account does not represent stashes of money or other tangible items. This amount simply communicates that Haloid earned and retained $115 of income in its business since it began operations. The difference between assets and liabilities is total shareholders’ equity. Retained earnings is part of shareholders’ equity. It represents earnings retained in a business—a residual amount. It is not cash. KP 2 BT: E Difficulty: Difficult TOT: 8 min. AACSB: Analytic, Communication, Reflective AICPA BB: Critical Thinking AICPA FN: Decision modeling

Explain the concept of liquidity. Solution: Liquidity is a representation of how close an asset is to cash. Assets are listed in order of liquidity on the balance sheet, with the most liquid assets first. Since cash is the most liquid asset, it is presented as the first item in the asset section of the balance sheet. KP 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Measurement

Test Bank – Chapter 2 – The Financial Statements

10.

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Give an example of a prepaid expense. Why would a company use this account? Solution: Prepaid expenses may include items such as prepaid rent, prepaid insurance, and other amounts of which payment must be made up front. KP 2 BT: C Difficulty: Moderate TOT: 2 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Reporting

11.

What type of assets are included in short-term investments? Solution: Short-term investments include stock, bonds, and similar investments. Generally these securities are readily marketable and are intended by management to be sold within a short period of time, usually less than one year. KP 2 BT: K Difficulty: Moderate TOT: 2 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Reporting

12.

What is unique about the way plant and equipment appear on the balance sheet? Solution: Plant and equipment includes the actual costs of acquiring assets such as warehouses, office buildings, equipment, machinery, vehicles, etc. In the balance sheet, total accumulated depreciation is shown as a deduction from the cost of the plant and equipment. The balance in the accumulated depreciation account represents the total cost of the plant and equipment that has been transferred to the income statement (expensed) as it represented an allocation of the cost used up that related to past accounting periods. KP 2 BT: C Difficulty: Moderate TOT: 4 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Reporting

13.

Describe how the equity sections of balance sheets differ for each of the three types of business entities. Solution: The shareholders’ equity section of the balance sheet for corporations consists of two components—contributed capital and retained earnings. Partnerships have one capital account for each owner in the owners’ equity section of the balance sheet. A proprietorship has only one capital account. Neither a partnership nor a proprietorship has a retained earnings account. KP 2 BT: C Difficulty: Moderate TOT: 5 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Reporting

14.

Why would a company use a notes receivable account? Solution: A notes receivable account arises because companies accept notes in exchange for a sale with extended credit terms. Notes represent amounts that customers or employees have agreed to repay. Notes typically have an interest component. KP 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: Analytic, Communication

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Test Bank – Chapter 2 – The Financial Statements

AICPA BB: Critical Thinking AICPA FN: Reporting

15.

What is the account, Accounts Payable, used for? Solution: Accounts payable represents the amount of money a company expects to pays its vendors. The payables arise from the purchase of supplies from vendors/suppliers. KP 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Reporting

16.

Describe how the amount of net income relates to the balance sheet. Solution: The balance sheet reports an item called retained earnings that represents an accumulation of all the profits earned by the company since operations began, less all the dividends paid out to shareholders. Net income for the current period is added and dividends declared are subtracted from the beginning retained earnings amount to determine the ending balance of retained earnings, which in turn is reported on the balance sheet. KP 2 BT: C Difficulty: Moderate TOT: 4 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Reporting

17.

Where in a company’s financial statements would you locate the ‘book value’ of the company? Solution: The dollar amount reported as total shareholders’ equity represents the net book value of the company. Shareholders’ equity is found on the balance sheet. To calculate the book value, subtract liabilities from assets. KP 2 BT: C Difficulty: Moderate TOT: 3 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Reporting

18.

Which group of financial statement users would be most concerned with the amount of a company’s total current assets and current liabilities? Solution: Creditors, such as bankers in other lenders, would be very interested in the liquidity of a company. Comparing the amount of current assets with current liabilities is a common analysis tool used by those interested in liquidity. If a company has more current liabilities than current assets, it is possible the company will not be able to pay its current bills when they come due. KP 2 BT: C Difficulty: Moderate TOT: 3 min. AACSB: Analytic, Communication, Reflective AICPA BB: Critical Thinking AICPA FN: Measurement

Test Bank – Chapter 2 – The Financial Statements

19.

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Which assets on a company's balance sheet have no physical substance? Explain. Solution: Intangible assets have no physical substance. They are reported as longterm assets on the balance sheet and represent the legal right to produce and sell certain products. Like other assets, they represent a potential future benefit for the company. KP 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Reporting

20.

A company sold 10 widgets. How will the amounts the company reports as ‘Sales’ differ from amounts reported as ‘Cost of Goods Sold’? Solution: The amount reported as sales represents the dollar amount for which the widgets were sold to the customers. Cost of goods sold represents the original cost paid by the company to acquire the inventory item. The difference between the dollar amount of sales and the dollar amount of cost of goods sold represents gross profit for the company. KP 2 BT: C Difficulty: Moderate TOT: 3 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Reporting

21.

What concerns might you have if you examined a company's balance sheet and found a negative amount in retained earnings? Solution: A negative amount in retained earnings is common for young companies because it often takes several years to become profitable. Retained earnings may also decline and produce a negative balance (if allowed under the respective state laws) if a company pays large dividends. If the dollar amount in retained earnings is negative because of continual losses, there should be a cause for concern. KP 2 BT: E Difficulty: Difficult TOT: 7 min. AACSB: Analytic, Communication, Reflective AICPA BB: Critical Thinking AICPA FN: Decision modeling

22.

Distinguish between the amounts reported on the income statement compared to the amounts reported on the statement of cash flows. Solution: Amounts reported on the income statement are revenues and expenses. These amounts reflect general asset and liability inflows and outflows. The amounts reported on the statement of cash flows include only the cash received and the cash paid out. KP 2 BT: C Difficulty: Moderate TOT: 3 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Reporting

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23.

Test Bank – Chapter 2 – The Financial Statements

Explain the difference between net income and cash flow from operations. Solution: Net income, reported on the income statement, consists of revenues and expenses or more general asset and liability inflows and outflows, that may not necessarily include cash. Cash flows from operations, reported on the statement of cash flows, include only the cash inflows and outflows. KP 2 BT: C Difficulty: Moderate TOT: 4 min. AACSB: Analytic, Communication AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 2 – The Financial Statements

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IFRS QUESTIONS 1. Income statements prepared under IFRS sometimes use the term “turnover”, which in GAAP income statements would equate to the term: a. Return on investment b. Revenue c. Expenses d. Net Income Ans. B KP 3 BT: C Difficulty: Easy TOT: 1 min. AACSB: Diversity AICPA BB: Critical Thinking AICPA FN: Reporting

2. Many non-U.S. companies preparing a balance sheet present the accounts in the following order: a. Non-current assets + current assets – current liabilities = Non-current liabilities + shareholders’ equity b. Non-current assets + current assets + current liabilities = Non-current liabilities + shareholders’ equity c. Non-current assets + current liabilities + current assets = Non-current liabilities + shareholders’ equity d. Non-current assets + current assets – current liabilities = Non-current liabilities shareholders’ equity Ans. A KP 3 BT: C Difficulty: Moderate TOT: 1 min. AACSB: Diversity AICPA BB: Critical Thinking AICPA FN: Reporting