Financial Statements and Accounting + Test Bank Chapter 2

Accounting - What the Numbers Mean, 12e (Marshall)

Chapter 2 Financial Statements and Accounting Concepts/Principles

1) Which of the following is not a transaction to be recorded in the accounting records of an entity?

A) Investment of cash by the owners.

B) Sale of product to customers.

C) Receipt of a plaque recognizing the firm's encouragement of employee participation in the United Way fund drive.

D) Receipt of services from a "quick-print" shop in exchange for the promise to provide advertising design services of equivalent value.

2) The balance sheet might also be called:

A) Statement of Financial Position.

B) Statement of Assets.

C) Statement of Changes in Financial Position.

D) Statement of Equity.

3) Transactions are summarized in:

A) the notes for the financial statements.

B) the independent auditor's report.

C) the entity's accounts.

D) the Accounting Standards Updates (ASUs).

4) A fiscal year:

A) is always the same as the calendar year.

B) is frequently selected based on the firm's operating cycle.

C) must always end on the same date each year.

D) must end on the last day of a month.

5) Which of the following is not a principal form of business organization?

A) Partnership.

B) Sole proprietorship.

C) Limited unregistered business.

D) Corporation.

6) The time frame associated with a balance sheet is:

A) a point in time in the past.

B) a one-year past period of time.

C) a single date in the future.

D) a function of the information included in it.

7) Current U.S. Generally Accepted Accounting Principles and auditing standards require the financial statements of an entity for the reporting period to include:

A) earnings and gross receipts of cash for the period.

B) projected earnings for the subsequent period.

C) financial position at the end of the period.

D) current fair values of all assets at the end of the period.

8) The balance sheet equation can be represented by:

A) Assets = Liabilities + Stockholders' Equity

B) Assets – Liabilities = Stockholders' Equity

C) Net Assets = Stockholders' Equity

D) All of the answers are correct.

9) Stockholders' equity refers to which of the following?

A) A listing of the organization's assets and liabilities.

B) The ownership right of the stockholder(s) of the entity.

C) Probable future sacrifices of economic benefits.

D) The amount of resources controlled by the entity.

10) Accumulated depreciation on a balance sheet:

A) is part of stockholders' equity.

B) represents the portion of the cost of an asset that is assumed to have been "used up" in the process of operating the business.

C) represents cash that will be used to replace worn out equipment.

D) recognizes the economic loss in value of an asset because of its age or use.

11) The distinction between a current asset and other assets is based on:

A) how long the asset has been owned.

B) amounts that will be paid to other entities within a year.

C) the ability to determine the current fair value of the asset.

D) when the asset is expected to be converted to cash, or used to benefit the entity.

12) The income statement shows amounts for:

A) revenues, expenses, losses, and liabilities.

B) revenues, expenses, gains, and fair value per share.

C) revenues, assets, gains, and losses.

D) revenues, gains, expenses and losses.

13) The time frame associated with an income statement is:

A) a point in time in the past.

B) a past period of time.

C) a future period of time.

D) a function of the information included in it.

14) Revenues are:

A) cash receipts.

B) increases in net assets from selling products or providing services.

C) increases in net assets from occasional sales of equipment.

D) increases in net assets from selling common stock.

15) Expenses are:

A) cash disbursements.

B) decreases in net assets from uninsured accidents.

C) decreases in net assets from dividends to stockholders.

D) decreases in net assets resulting from usual operating activities.

16) The purpose of the income statement is to show the:

A) change in the fair value of the assets from the prior income statement.

B) market value per share of stock at the date of the statement.

C) revenues collected during the period covered by the statement.

D) net income or net loss for the period covered by the statement.

17) The Statement of Changes in Stockholders' Equity shows:

A) the change in cash during a year.

B) revenues, expenses, and liabilities for the period.

C) net income and dividends for the period.

D) paid-in capital and long-term debt at the end of the period.

18) Paid-in Capital represents:

A) earnings retained for use in the business.

B) the amount invested in the entity by the stockholders.

C) fair value of the entity's common stock.

D) net assets of the entity at the date of the statement.

19) Retained Earnings represents:

A) the amount invested in the entity by the stockholders.

B) cash that is available for dividends.

C) cumulative net income that has not been distributed to stockholders as dividends.

D) par value of common stock outstanding.

20) Additional paid-in capital represents:

A) the difference between the total amounts invested by the stockholders and the par or stated value of the stock.

B) distributions of earnings that have been made to the stockholders.

C) distributions of earnings that have not been made to the stockholders.

D) the summation of the total amount invested by the stockholders and the par or stated value of the stock.

21) The Statement of Cash Flows:

A) shows how cash changed during the period.

B) is an optional financial statement.

C) shows the change in the fair value of the entity's common stock during the period.

D) shows the dividends that will be paid in the future.

22) On January 31, an entity's balance sheet showed total assets of $2,250 and liabilities of $750. Stockholders' equity at January 31 was:

A) $1,500

B) $3,000

C) $1,250

D) $750

23) On January 31, an entity's balance sheet showed net assets of $3,075 and liabilities of $675. Stockholders' equity on January 31 was:

A) $2,400

B) $3,075

C) $3,750

D) $675

24) At the end of the year, retained earnings totaled $5,100. During the year, net income was $750, and dividends of $360 were declared and paid. Retained earnings at the beginning of the year totaled:

A) $6,210

B) $3,990

C) $3,690

D) $4,710

25) The balance sheet shows the following accounts and amounts:

Cash $13,000; Short-term Debt $21,000; Buildings and Equipment $420,000; Inventory, $44,000; Notes Payable $60,000; Accumulated Depreciation $110,000; Common Stock $80,000; Accounts Receivable $38,000; Retained Earnings $237,000; Accounts Payable $17,000.

Total assets on the balance sheet are:

A) $367,000

B) $405,000

C) $515,000

D) $625,000

26) The balance sheet shows the following accounts and amounts:

Cash $13,000; Short-term Debt $21,000; Buildings and Equipment $420,000; Inventory, $44,000; Notes Payable $60,000; Accumulated Depreciation $110,000; Common Stock $80,000; Accounts Receivable $38,000; Retained Earnings $237,000; Accounts Payable $17,000.

Total liabilities on the balance sheet are:

A) $77,000

B) $98,000

C) $178,000

D) $208,000

27) The balance sheet shows the following accounts and amounts:

Inventory, $84,000; Long-term Debt 125,000; Common Stock $60,000; Accounts Payable $44,000; Cash $132,000; Buildings and Equipment $390,000; Short-term Debt $48,000; Accounts Receivable $109,000; Retained Earnings $204,000; Notes Payable $54,000; Accumulated Depreciation $180,000.

Total current assets on the balance sheet are:

A) $216,000

B) $325,000

C) $535,000

D) $715,000

28) The balance sheet shows the following accounts and amounts:

Inventory, $84,000; Long-term Debt 125,000; Common Stock $60,000; Accounts Payable $44,000; Cash $132,000; Buildings and Equipment $390,000; Short-term Debt $48,000; Accounts Receivable $109,000; Retained Earnings $204,000; Notes Payable (six-month) $54,000; Accumulated Depreciation $180,000.

Total current liabilities on the balance sheet are:

A) $98,000

B) $146,000

C) $271,000

D) $326,000

29) At the beginning of the fiscal year, the balance sheet showed assets of $2,728 and stockholders' equity of $1,672. During the year, assets increased $148 and liabilities decreased $76.

Stockholders' equity at the end of the year totaled:

A) $1,672

B) $1,744

C) $1,896

D) $2,876

30) At the beginning of the fiscal year, the balance sheet showed assets of $2,728 and stockholders' equity of $1,672. During the year, assets increased $148 and liabilities decreased $76.

Liabilities at the end of the year totaled:

A) $980

B) $1,056

C) $1,672

D) $1,820

31) At the beginning of the year, paid-in capital was $164 and retained earnings was $94. During the year, the stockholders invested $48 and dividends of $12 were declared and paid. Retained earnings at the end of the year were $104.

Total stockholders' equity at the end of the year was:

A) $164

B) $188

C) $212

D) $316

32) At the beginning of the year, paid-in capital was $164 and retained earnings was $94. During the year, the stockholders invested $48 and dividends of $12 were declared and paid. Retained earnings at the end of the year were $104.

Net income for the year was:

A) $20

B) $22

C) $30

D) $40

33) The going concern concept refers to a presumption that:

A) the entity will be profitable in the coming year.

B) the entity will not be involved in a merger within a year.

C) the entity will continue to operate in the foreseeable future.

D) top management of the entity will not change in the coming year.

34) Consolidated financial statements report financial position, results of operations, and cash flows for:

A) a parent corporation and its subsidiaries.

B) a parent corporation alone.

C) two corporations that are owned by the same individual.

D) a parent corporation and its 100% owned subsidiaries only.

35) A concept or principle that relates to transactions is:

A) materiality.

B) full disclosure.

C) original cost.

D) consistency.

36) Matching revenues and expenses refers to:

A) having revenues equal expenses.

B) recording revenues when cash is received.

C) accurately reflecting the results of operations for a fiscal period.

D) recording revenues when a product is sold or a service is rendered.

37) Accrual accounting:

A) is designed to match revenues and expenses.

B) results in the balance sheet showing the fair value of the entity's assets.

C) means that expenses are recorded when they are paid.

D) cannot result in the entity having net income unless cash is received from customers.

38) Which of the following accounting methods accomplishes much of the matching of revenues and expenses?

A) Match accounting.

B) Cash accounting.

C) Accrual accounting.

D) Full disclosure accounting.

39) The principle of consistency means that:

A) the accounting methods used by an entity never change.

B) the same accounting methods are used by all firms in an industry.

C) the effect of any change in an accounting method will be disclosed in the financial statements or notes thereto.

D) there are no alternative methods of accounting for the same transaction.

40) The principle of full disclosure means that the reporting entity must fully disclose:

A) all client data.

B) all proprietary information.

C) all necessary information to prevent a reasonably astute user of financial statements from being misled.

D) all necessary information to prevent all users of financial statements from being misled.

41) The balance sheet of an entity:

A) shows the fair value of the assets at the date of the balance sheet.

B) reflects the impact of inflation on the replacement cost of the assets.

C) reports plant and equipment at its opportunity cost.

D) shows amounts that are not adjusted for changes in the purchasing power of the dollar.

42) Which of the following is not a limitation of financial statements?

A) Financial statements report quantitative economic information; they do not reflect qualitative economic variables.

B) The cost principle requires assets to be recorded at their original cost; thus, the balance sheet does not generally reflect the fair values of most assets and liabilities.

C) Net income from the income statement is added to the Retained Earnings account balance in the balance sheet.

D) Estimates are used in many areas of accounting; when the estimate is made, about the only fact known is that the estimate is probably not equal to the "true" amount.

43) Which of the following is not a limitation of financial statements?

A) It is possible that two firms operating in the same industry may follow different accounting methods for the exact same transaction.

B) Full disclosure requires that the financial statements and notes include all necessary information to prevent a reasonably astute user of the financial statements from being misled.

C) Financial statements are not adjusted to show the impact of inflation.

D) Financial statements do not reflect opportunity cost, which is an economic concept relating to income forgone because an opportunity to earn income was not pursued.

44) Which of the following is not included in a corporation's annual report?

A) The reporting firm's financial statements for the fiscal year.

B) The report of the external auditor's examination of the financial statements.

C) Notes to the financial statements and key financial data for at least the past five years.

D) A detailed Management's Discussion and Analysis section.

E) All of the answers are included in a corporation's annual report.

45) Listed below are a number of financial statement captions. Indicate in the spaces to the right of each caption (1) the category of each item, and (2) the financial statement on which the item can usually be found.

46) Listed below are a number of financial statement captions. Indicate in the spaces to the right of each caption (1) the category of each item, and (2) the financial statement on which the item can usually be found.

47) Listed here are a number of accounts: Merchandise Inventory, Land, Common Stock, Accounts Payable, Insurance Expense, Equipment, Cash, Cost of Goods Sold, Buildings, Retained Earnings, Supplies, Long-term Debt, Sales, Accounts Receivable.

Required:

Which of the accounts listed above are not assets? How would you categorize each of these nonasset accounts?

48) Total assets were $24,000 and total liabilities were $13,500 at the beginning of the year. Net income for the year was $4,000, and dividends of $1,500 were declared and paid during the year.

Required:

Calculate total stockholders' equity at the end of the year.

49) Stockholders' equity totaled $41,000 at the beginning of the year. During the year, net income was $6,000, dividends of $1,500 were declared and paid, and $5,000 of common stock was issued at par value.

Required:

Calculate total stockholders' equity at the end of the year.

50) During the year, net sales were $750,000; gross profit was $300,000; net income was $120,000; income tax expense was $30,000; and selling, general, and administrative expenses were $132,000.

Required:

Calculate cost of goods sold, income from operations, income before taxes, and interest expense.

51) During the year, cost of goods sold was $320,000; income from operations was $304,000; income tax expense was $64,000; interest expense was $48,000; and selling, general, and administrative expenses were $176,000.

Required:

Calculate net sales, gross profit, income before taxes, and net income.

52) From the data given below, calculate the Retained Earnings balance of December 31, 2019.

53) From the data given below, calculate the Retained Earnings balance as of December 31, 2020.

54) Volunteer, Inc. is in the process of liquidating and going out of business. The firm has $69,820 in cash, inventory totaling $214,000, accounts receivable of $144,000, plant and equipment with a $384,000 book value, and total liabilities of $614,000. It is estimated that the inventory can be disposed of in a liquidation sale for 75% of its cost, all but 15% of the accounts receivable can be collected, and plant and equipment can be sold for $420,000.

(a.) Calculate the amount of cash that would be available to the stockholders if the accounts receivable are collected, the other assets are sold as described, and the liabilities are paid in full.

(b.) Describe how the difference between book value and liquidation value would be treated on the final income statement for Volunteer, Inc. with respect to the following assets: inventory, accounts receivable, and plant and equipment. What income statement accounts would be affected when these assets are sold or collected as described above?

55) Ann Kimber is thinking about going out of business and retiring. Her firm has $50,000 in cash, other assets totaling $71,400, and total liabilities of $51,000. The other assets can be sold for an estimated $68,000 cash in a liquidation sale. Calculate the amount of cash that would be available upon Ann's retirement if the other assets were sold and the liabilities were paid.

56) Presented below is a statement of cash flows for Plum, Inc., for the year ended December 31, 2020. Also shown is a partially completed comparative balance sheet as of December 31, 2020 and 2019.

Required:

(a.) Complete the December 31, 2020 and 2019 balance sheets.

(b.) Prepare a Statement of Changes in Retained Earnings for the year ended December 31, 2020.