Chapter 1-4

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Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's business activities.

true

Bookkeeping is the recording of transactions and events and is only a part of accounting.

true

An accounting information system communicates data to help businesses make better decisions.

True

The primary objective of financial accounting is to provide general purpose financial statements to help external users analyze and interpret an organization's activities.

true

The primary objective of financial accounting is to provide general purpose financial statements to help external users analyze and interpret an organization's activities.

t

External auditors examine financial statements to verify that they are prepared according to generally accepted accounting principles.

t

Internal users include lenders, shareholders, brokers and managers.

f

Opportunities in accounting include auditing, consulting, market research, and tax planning

t

Identifying the proper ethical path is always easy.

f

Good ethics generally translates to good business

t

The Sarbanes-Oxley Act (SOX) does not require public companies to apply both accounting oversight and stringent internal controls.

f

The Financial Accounting Standards Board is the private group that sets both broad and specific accounting principles.

t

Specific accounting principles are basic assumptions, concepts, and guidelines for preparing financial statements and arise out of long-used accounting practice.

f

Understanding generally accepted accounting principles is not necessary to use and interpret financial statements.

f

A limited liability company offers the limited liability of a partnership or proprietorship and the tax treatment of a corporation

f

The three common forms of business ownership include sole proprietorship, partnership, and non-profit.

f

Planning is defining an organization's ideas, goals, and actions.

t

Strategic management is the process of determining the right mix of operating activities for the type of organization, its plans, and its markets

t

Planning activities are the means an organization uses to pay for resources like land, buildings, and equipment to carry out its plans.

f

Owner financing refers to resources contributed by creditors or lenders.

f

Revenues are increases in equity from a company's earning activities.

t

Owner's withdrawals are expenses.

f

The accounting equation implies that: Assets + Liabilities = Equity.

f

Every business transaction leaves the accounting equation in balance.

t

From an accounting perspective, an event is a happening that affects the accounting equation, but cannot be measured.

f

Technology

Has closely linked accounting with consulting, planning, and other financial services.

Accounting is an information and measurement system that does all of the following

Identifies business activities.
Records business activities.
Communicates business activities.
Helps people make better decisions

External users of accounting information include

Shareholders.
Customers.
Government regulators.
Creditors.

Ethical behavior requires:

That auditors' pay not depend on the success of the client's business.

Social responsibility:

s a concern for the impact of our actions on society.

All of the following are True regarding ethics

Ethics are beliefs that separate right from wrong.
Ethics rules are often set for CPAs.
Are critical in accounting.
Ethics can be hard to apply.

The accounting assumption that requires every business to be accounted for separately from other business entities, including its owner or owners is known as the:

business entity assumption

The accounting principle that requires accounting information to be based on actual cost and requires assets and services to be recorded initially at the cash or cash-equivalent amount given in exchange, is the:

cost principle

The question of when revenue should be recognized on the income statement (according to GAAP) is addressed by the

Revenue recognition principle

A limited partnership

Includes a general partner with unlimited liability

A partnership:

Has unlimited liability for its partners.

Which of the following accounting principles prescribes that a company record its expenses incurred to generate the revenue reported?

Matching principle.

Resources that are expected to yield future benefits are:

Assets

Revenue is properly recognized:

When cash is received, even if it is before providing goods or services.

Creditors' claims on the assets of a company are called:

liabilities

Decreases in equity that represent costs of assets or services used to earn revenues are called:

expenses

Revenues are:

The increase in equity from a company's earning activities.

f assets are $99,000 and liabilities are $32,000, then equity equals:

$67,000.

The assets of a company total $700,000; the liabilities, $200,000. What are the claims of the owners?

$500,000.

Assets created by selling goods and services on credit are:

Accounts receivable.

How would the accounting equation of Boston Company be affected by the billing of a client for $10,000 of consulting work completed?

+$10,000 accounts receivable, +$10,000 revenue.

If a parcel of land that was originally purchased for $85,000 is offered for sale at $150,000, is assessed for tax purposes at $95,000, is recognized by its purchasers as easily being worth $140,000, and is sold for $137,000. What is the effect of the sale on the accounting equation for the seller?

Assets increase $52,000; owner's equity increases $52,000.

A company's balance sheet shows: cash $22,000, accounts receivable $16,000, office equipment $50,000, and accounts payable $17,000. What is the amount of owner's equity?

$71,000.

A company's balance sheet shows: cash $24,000, accounts receivable $30,000, equipment $50,000, and equity $72,000. What is the amount of liabilities?

$32,000.

An example of a financing activity is:

Obtaining a long-term loan.

An example of an operating activity is:

Paying wages.

Operating activities

Involve using resources to research, develop, purchase, produce, distribute and market products and services

An example of an investing activity is:

Purchase of land.

The statement of owner's equity:

Reports how equity changes over a period of time.

The financial statement that reports whether the business earned a profit and also lists the revenues and expenses is called:

An Income statement.

Cash investments by owners are listed on which of the following statements?

Statement of owner's equity and statement of cash flows.

The income statement reports all of the following

Revenues earned by a business.
Expenses incurred by a business.
Net income or loss earned by a business.
The time period over which the earnings occurred.

A company borrows $125,000 from the Eastside Bank and receives the loan proceeds in cash. This represents a(n):

Financing activity.

A company acquires equipment for $75,000 cash. This represents a(n)

Investing activity

Rent expense that is paid with cash appears on which of the following statements?

Income statement and statement of cash flows.

If equity is $220,000 and liabilities are $152,000, then assets equal:

68,000.

On June 30 of the current year, the assets and liabilities of Phoenix, Inc. are as follows: Cash $21,500; Accounts Receivable, $7,750; Supplies, $750; Equipment, $17,000; Accounts Payable, $10,300. What is the amount of owner's equity as of July 1 of the current year?

$36,700

If the assets of a business increased $89,200 during a period of time and its liabilities increased $66,600 during the same period, equity in the business must have:

Increased $22,600.

If assets are $373,500 and equity is $103,000, then liabilities are:

270500

if assets are $372,000 and equity is $106,000, then liabilities are:

$266,000.

A company reported total equity of $145,000 at the beginning of the year. The company reported $210,000 in revenues and $165,000 in expenses for the year. Liabilities at the end of the year totaled $92,000. What are the total assets of the company at the end of the year?

$282,000.

Flash had cash inflows from operations $61,900; cash outflows from investing activities of $47,600; and cash inflows from financing activities of $25,600. The net change in cash was:

$39,900 increase.

Della's Donuts had cash inflows from operating activities of $36,500; cash outflows from investing activities of $31,500, and cash outflows from financing activities of $21,500. Calculate the net increase or decrease in cash.

$16,500 decrease.

A journal gives a complete record of each transaction in one place, and shows the debits and credits for each transaction.

t

An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

t

Withdrawals by the owner are a business expense.

f

The chart of accounts is a list of all the accounts used by a company and includes an identification number assigned to each account.

t

Credits always increase account balances.

f

Accounts are normally decreased by debits.

f

Asset accounts normally have credit balances and revenue accounts normally have debit balances.

f

A debit entry is always favorable.

f

If insurance coverage for the next three years is paid for in advance, the amount of the payment is debited to an asset account called Prepaid Insurance.

t

The purchase of supplies on credit should be recorded with a debit to Supplies and a credit to Accounts Payable.

t

When a company bills a customer for $600 for services rendered, the journal entry to record this transaction will include a $600 debit to Services Revenue.

f

Posting is the transfer of journal entry information to the ledger.

t

Generally, the ordering of accounts in a trial balance typically follows their identification number from the chart of accounts, that is, assets first, then liabilities, then owner's capital and withdrawals, followed by revenues and expenses.

t

The trial balance can serve as a replacement for the balance sheet, since debits must equal with credits.

f

An income statement reports the revenues earned less expenses incurred by a business over a period of time.

t

Both U.S. GAAP and IFRS prepare the same four basic financial statements.

t

The following transactions occurred during July:

1. Received $910 cash for services provided to a customer during July.
2. Received $2,300 cash investment from Barbara Hanson, the owner of the business.
3. Received $760 from a customer in partial payment of his account receivable which arose from sales in June.
4. Provided services to a customer on credit, $380.
5. Borrowed $6,100 from the bank by signing a promissory note.
6. Received $1,260 cash from a customer for services to be rendered next year.

What was the amount of revenue for July?

Revenues = $910 (1) + $380 (4) = $1,290

At the beginning of January of the current year, Thomas Law Center's ledger reflected a normal balance of $52,200 for accounts receivable. During January, the company collected $15,000 from customers on account and provided additional services to customers on account totaling $12,600. Additionally, during January one customer paid Thomas $5,100 for services to be provided in the future. At the end of January, the balance in the accounts receivable account should be:

$52,200 beginning balance - $15,000 of collections + $12,600 of additional services on credit = $49,800.

Andrea Conaway opened Wonderland Photography on January 1 of the current year. During January, the following transactions occurred and were recorded in the company's books:

1. Conaway invested $15,000 cash in the business.
2. Conaway contributed $21,500 of photography equipment to the business.
3. The company paid $2,400 cash for an insurance policy covering the next 24 months.
4. The company received $6,300 cash for services provided during January.
5. The company purchased $6,500 of office equipment on credit.
6. The company provided $2,900 of services to customers on account.
7. The company paid cash of $1,650 for monthly rent.
8. The company paid $3,250 on the office equipment purchased in transaction #5 above.
9. Paid $290 cash for January utilities.

Based on this information, the balance in the cash account at the end of January would be:

(1) $15,000 - (3) $2,400 + (4) 6,300 - (7) $1,650 - (8) $3,250 - (9) $290 = $13,710.

A $30 credit to Sales was posted as a $250 credit. By what amount is Sales in error?

$220 overstated.

An accountant has debited an account for $4,200 and credited a liability account for $2,800. Which of the following would be an incorrect way to complete the recording of this transaction?

Debit another asset account for $1,400.

Rocky Industries received its telephone bill in the amount of $300, and immediately paid it. Rocky's general journal entry to record this transaction will include a

Debit to Telephone Expense for $300

Wisconsin Rentals purchased office supplies on credit. The general journal entry made by Wisconsin Rentals will include a:

Credit to Accounts Payable.

If Tim Jones, the owner of Jones Hardware proprietorship, uses cash of the business to purchase a family automobile, the business should record this use of cash with an entry to:

Debit Tim Jones, Withdrawals and credit Cash.

A trial balance taken at year-end showed total credits exceed total debits by $5,760. This discrepancy could have been caused by:

The balance of $6,400 in the Office Equipment account being entered on the trial balance as a debit of $640.

A trial balance taken at year-end showed total credits exceed total debits by $5,400. This discrepancy could have been caused by:

The balance of $6,000 in the Office Equipment account being entered on the trial balance as a debit of $600.

All of the following statements regarding a sales invoice are tru

A sales invoice is a type of source document.
A sales invoice gives rise to an entry in the accounting process.
A sales invoice is used by buyers to record purchases.
A sales invoice is used by sellers to record the sale.

Source documents include all of the following

Checks.
Bank statements.
Sales tickets.
Purchase orders.

Source documents

Are the sources of accounting information.

An account used to record the owner's investments in the business is called a(n):

Capital account.

Unearned revenues are:

Liabilities created when a customer pays in advance for products or services before the revenue is earned.

Prepaid expenses are:

Assets that represent prepayments of future expenses.

A collection of all accounts and their balances used by a business is called a:

ledger

The numbering system used in a company's chart of accounts:

Typically begins with balance sheet accounts.

A credit entry:

Decreases asset and expense accounts, and increases liability, owner's capital, and revenue accounts.

The general journal provides a place for recording all of the following

The amount of each debit and credit.
The names of the accounts involved.
The transaction date.
An explanation of the transaction.

A report that lists accounts and their balances, in which the total debit balances should equal the total credit balances, is called a(n):

trial balance

f the following errors, which one by itself will cause the trial balance to be out of balance?

A $100 cash receipt from a customer in payment of his account posted as a $100 debit to Cash and a $10 credit to Accounts Receivable.

A general journal is:

A complete record of any transaction and the place from which transaction amounts are posted to the ledger accounts.

If the totals of a trial balance are equal, then

The total of debit column and total of credit column is equal.

The time period assumption assumes that an organization's activities can be divided into specific time periods.

t

A fiscal year refers to an organization's accounting period that spans twelve consecutive months or 52 weeks.

t

Two main accounting principles used in accrual accounting are matching and full disclosure.

f

Since the revenue recognition principle requires that revenues be recorded when earned, there are no unearned revenues in accrual accounting.

f

The accrual basis of accounting recognizes expenses when cash is paid.

f

Adjusting entries are necessary so that asset, liability, revenue, and expense account balances are correctly reported.

t

Before an adjusting entry is made to recognize the cost of expired insurance for the period, Prepaid Insurance and Insurance Expense are both overstated.

false

Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries Payable are both understated.

t

Profit margin can also be called return on sales.

t

If a company reporting on a calendar year basis, paid $18,000 cash on January 1 for one year of rent in advance and adjusting entries are made at the end of each month, the balance of Prepaid Rent as of December 1 should be $1,500.

t,$18,000 x 1/12 = $1,500

Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its related asset.

True

Depreciation expense is an example of an accrued expense.

f

A company performs 20 days work on a 30-day contract before the end of the year. The total contract is valued at $6,000 and payment is not due until the contract is fully completed. The adjusting entry includes a $4,000 credit to unearned revenue.

f

A company entered into a 2-month contract for $50,000 on April 1. It earned $25,000 of the contract services in April and billed the customer. The company should recognize the revenue when it receives the customer's check.

false

An unadjusted trial balance is a list of accounts and balances prepared before adjustments are recorded.

true

Financial statements can be prepared directly from the information in the adjusted trial balance.

true

Revenue and expense balances are transferred from the adjusted trial balance to the income statement.

t

It is acceptable to record prepayment of expenses as debits to expense accounts, if the unused or unexpired portions at the end of an accounting period are transferred to prepaid expense (asset) accounts.

t

It is acceptable to record cash received in advance of providing products or services as credits to revenue accounts, if revenues that are unearned at the end of an accounting period are transferred to unearned revenue (liability) accounts.

t

A company records the fees for legal services paid in advance by its clients in an account called Unearned Legal Fees. If the company fails to make the end-of-period adjusting entry to record the portion of these fees that has been earned, one effect will be:

An understatement of equity.

Profit margin is defined as:

Net income divided by net sales.

A company earned $2,000 in net income for October. Its net sales for October were $10,000. Its profit margin is:

20%

A broad principle that requires identifying the activities of a business with specific time periods such as months, quarters, or years is the:

Time period assumption.

The 12-month period that ends when a company's sales activities are at their lowest level is called the:

Natural business year.

The broad principle that requires expenses to be reported in the same period as the revenues that were earned as a result of these expenses is the:

Matching principle.

adjustments

Adjustments to prepaid expenses, depreciation, and unearned revenues involve previously recorded assets and liabilities.
Prepaid expenses, depreciation, and unearned revenues often require adjusting entries.
Accrued expenses and accrued revenues involve assets and liabilities that had not previously been recorded.
Adjusting entries can be used to record both accrued expenses and accrued revenues.

Prior to recording adjusting entries, the Office Supplies account had a $359 debit balance. A physical count of the supplies showed $105 of unused supplies available. The required adjusting entry is:

Debit Office Supplies Expense $254 and credit Office Supplies $254.

If throughout an accounting period the fees for legal services paid in advance by clients are recorded in an account called Unearned Legal Fees, the end-of-period adjusting entry to record the portion of those fees that has been earned is:

Debit Unearned Legal Fees and credit Legal Fees Earned.

On April 1, a company paid the $1,350 premium on a three-year insurance policy with benefits beginning on that date. What will be the insurance expense on the annual income statement for the year ended December 31? (Round your answer to 1 decimal places.)

$1,350 x 9/36 = $337.5

Which of the following does not require an adjusting entry at year-end?

Cash invested by owner.

The adjusting entry to record the earned but unpaid salaries of employees at the end of an accounting period is:

Debit Salaries Expense and credit Salaries Payable.

What is the proper adjusting entry at December 31, the end of the accounting period, if the balance in the prepaid insurance account is $7,750 before adjustment, and the unexpired amount as per analysis of policies is, $3,250?

Debit Insurance Expense, $4,500; credit Prepaid Insurance, $4,500.

On March 31, Phoenix, Inc. paid Melanie Publishing Company $15,480 for a 3-year subscription for five different magazines. The subscriptions started immediately. What is the adjusting entry that should be recorded by Melanie Publishing Company on December 31 of the first year if the credit to record the collection was made to Unearned Fees

Debit Unearned Fees, $3,870; credit Fees Earned, $3,870

On October 1, Haslip Company rented warehouse space to a tenant for $2,500 per month. The tenant paid five months' rent in advance on that date. The payment was recorded to the Unearned Rent account. The company's annual accounting period ends on December 31. The adjusting entry needed on December 31 is:

Debit Unearned Rent, $7,500; credit Rent Earned, $7,500.$2,500 x 3 = $7,50

A trial balance prepared after adjustments have been recorded is called a(n)

Adjusted trial balance

The adjusted trial balance contains information pertaining to

All general ledger accounts.

Two accounting principles that are relied on in the adjusting process are

Revenue recognition and matching.

A company earned $3,000 in net income for October. Its net sales for October were $30,000. Its profit margin is:

10%

A company earned $3,910 in net income for October. Its net sales for October were $23,000. Its profit margin is:

$3,910/$23,000 = 17%

On June 30 of the current calendar year, Apricot Co. paid $8,600 cash for management services to be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 for Apricot would include:

A debit to an expense for $2,150

On April 30, a three-year insurance policy was purchased for $27,900 with coverage to begin immediately. What is the amount of insurance expense that would appear on the company's income statement for the year ended December 31?

$27,900 x 8/36 = $6,200

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