Problem Material | Test Bank – Statements – 10e

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Student name:__________

FILL IN THE BLANK. Write the word or phrase that best completes each statement or answers the question.
1) __________________ is an information and measurement system that identifies, records and communicates an organization’s business activities.

2) A ____________________ is a business that is owned by only one person and has unlimited liability.

3) ______________ users of accounting information do not directly run an organization and have limited access to its accounting information.

4) ______________ is the area of accounting that focuses on the needs of external users by providing them with general-purpose financial statements.

5) ______________________ are procedures to protect assets, ensure reliable accounting, promote efficiency, and uphold company policies.

6) _________ are beliefs that separate right from wrong and are considered accepted standards of good and bad behavior.

7) The assumption that requires that a business be accounted for separately from other business entities and its owner(s) is the __________________ assumption.

8) The ______________ assumption assumes that a business will continue operating instead of being closed or sold.

9) The ________________ assumption states that transactions and events are expressed in monetary, or money, units.

10) The principle that requires that accounting information be based on actual cost is the ______________________________.

11) A disadvantage of a sole proprietorship is the fact that the owner has ______________.

12) There are three sections of the statement of cash flows. ________________ activities involve the long-term borrowing and repaying of cash from lenders.

13) There are three sections of the statement of cash flows. ________________ activities involve buying and selling assets such as land and equipment that are held for long-term use.

14) There are three sections of the statement of cash flows. ______________ activities include payments for salaries, insurance, and rent.

15) Outflows of cash and other assets to owners that reduce equity are ____________.

16) ____________ are the increases in equity from a company’s sales of products and services to customers.

17) A common characteristic of __________ is the expectation that they will yield future benefits.

18) Creditors’ claims on assets that reflect company obligations to provide assets, products, or services to others are called ____________________.

19) The stockholders’ claim on assets, also known as net assets, is called __________________.

20) The accounting equation is ______________________________.

21) The term ___________ refers to a liability that promises a future outflow of resources.

22) Using the accounting equation, equity is equal to ________________________.

23) ______________________ is the recording of transactions and events.

24) _________________ is net income divided by average total assets.

25) Return on assets is_________________ divided by average total assets.

26) ________________________________ reports changes in the stockholders’ claim on the business’s assets from net income or loss and dividends over a period of time.

27) The ____________________ describes a company’s revenues and expenses along with the resulting net income or net loss over a period of time due to earnings activities.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
28) Explain the role of accounting in the information age.

29) What is the balance sheet? What is its purpose?

30) Identify the users and uses of accounting information.

31) Identify several opportunities in accounting and distinguish between private accounting and public accounting.

32) Explain why ethics are an integral part of accounting.

33) Describe the two important guidelines for revenue recognition.

34) Identify the four basic forms of business organizations and their key attributes.

35) Identify and describe the two main groups involved in establishing generally accepted accounting principles.

36) How does the going-concern principle affect reporting asset values of a business?

37) Describe the income statement and the relation between revenues, expenses, and net income or loss.

38) Explain the accounting equation and define its terms.

39) What distinguishes liabilities from equity?

40) What is the purpose of return on assets as an analytical tool?

41) Explain the cost-benefit constraint.

42) Describe the three types of activities reported on the statement of cash flows.

43) Identify and describe the four basic financial statements:

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
44) The characteristics below apply to at least one of the forms of business organization.

a. Is a separate legal entity.
b. Is allowed to be owned by one person only.
c. Owner or owners are personally liable for debts of the business.
d. Is subject to an additional business income tax.
e. Has an unlimited life

Use the following format to indicate (with a “yes” or “no”) whether or not a characteristic applies to each type of business organization.

45) A parcel of land is offered for sale at $600,000, is recognized by its purchasers as easily being worth $575,000 and is sold for $570,000. At what amount should the land be recorded in the purchaser’s books? What accounting principle supports your answer?

46) You are reviewing the accounting records of Buddy’s Foreign Automotive, owned by a Bruce Jones. You have uncovered the following situations. List the appropriate accounting principle or assumption related to each independent scenario and suggest a correct action for each.

1. In August, a check for $500 was written to Community Sports. This amount represents soccer camp for his daughter Cassie.
2. Bruce plans a Going Out of Business Sale for June, since he will be closing the business for a month-long vacation in July. He plans to reopen August 1 and will continue operating Buddy’s Foreign Automotive indefinitely.
3. Buddy received a shipment of tools from Ontario, Canada. The invoice was stated in Canadian dollars.
4. Customer Sandy Lane paid $1,500 to Buddy for a major repair services. The amount was recorded by Buddy as revenue. The parts for the repair must be ordered from overseas and the service won’t be complete until the following month.

47) At the beginning of the year, a company had $120,000 worth of liabilities. During the year, assets increased by $160,000 and at year-end they equaled $360,000. Liabilities decreased $20,000 during the year. Calculate the beginning and ending values of equity.

48) At the beginning of the period, a company had $350,000 worth of assets, $110,000 worth of liabilities, and $240,000 worth of equity. Assume the only change during the period was a $30,000 purchase of equipment by issuing a note payable. Show the accounting equation with the appropriate amounts at the end of the period.

49) The accounts of Odie Company had the following increases and decreases during the past year:

Except for net income, an investment of $3,000 by stockholders, and a cash dividend of $11,000 to stockholders, no other items affected stockholders’ equity. Using the balance sheet equation, compute net income for the past year.

50) The accounts of Mason Company at the end of the past year report the following amounts:

If the beginning equity for the year was $173,000, calculate the ending equity for Mason Company.

51) Cornelia’s Closet has the following assets and liabilities for the dates given:

Also, its net income, for October 1 through October 31 was $20,000 and there were no stock issuances or dividends. Determine the equity at both October 1 and October 31.

52) If the liabilities of a company increased $92,000 during a period of time and equity in the business decreased $30,000 during the same period, did the assets of the company increase or decrease? By what amount?

53) Soo Lin, the sole owner, began Internet Consulting and completed these transactions during April of the current year:

Show the effects of the above transactions on the components of the accounting equation. Use the following format for your answers. The first item is shown as an example.
Increase = I Decrease = D No effect = N

54) For each of the following transactions, identify the effects as reflected in the accounting equation. Use “+” to indicate an increase and “−” to indicate a decrease. Use “A”, “L”, and “E” to indicate assets, liabilities, and equity, respectively. Part A has been completed as an example.

55) The following schedule reflects shows the first month’s transactions of the Green Construction Company, owned by Jennifer Green, its sole stockholder:

Provide descriptions for each transaction.

56) The accountant of Action Adventure Games prepared a balance sheet after every 10-day period. The only resources invested by the stockholder were at the start of the company on June 1. During June, the first month of operation, the following balance sheets were prepared:

Required: Describe the nature of each of the four transactions that took place between the balance sheet dates shown. Assume only one transaction affected each account.

57) Compute the return on assets (ROA) for each of the following separate examples.

a. Net income equals $5,000; Average total assets equals $25,000.
b. Net income equals $1,200; Average total assets equals $12,000.
c. Net income equals $8,000; Average total assets equals $160,000.

58) Prepare an April 30 balance sheet in proper form for Two Rivers Vending Service from the following alphabetical list of the accounts at April 30:

59) Prepare a December 31 balance sheet in proper form for Smokey River Supplies from the following list of the accounts:

60) Prepare a December 31 balance sheet in proper form for Cane Property Management using the following accounts and amounts (some accounts may not be used):

61) From the information given below, prepare a November income statement, a November statement of retained earnings, and a November 30 balance sheet. On November 1 of the current year, Victoria Garza, the sole owner, began Garza Décor with an initial investment of $50,000 cash. On November 30, her records showed the following (alphabetically arranged) items and amounts.

62) Data for Kennedy Realty are as follows:

Dividends of $30,000 were paid during the year. There were no stockholder investments. Using the above data, prepare Kennedy Realty’s Statement of Retained Earnings for the year ended December 31.

63) Jet Styling has the following beginning cash balance and cash transactions for the month of January. Using this information prepare a statement of cash flows.

64) At the end of its first year of operations, the records of Roadmaster Auto Rentals show the following information. $52,000 of cash dividends were paid during the year. Prepare a December income statement, a December statement of retained earnings, and a December 31 balance sheet.

65) Verity Siding Company, owned by S. Verity, its sole stockholder, began operations in May and completed the following transactions during that first month of operations. Show the effects of the transactions on the accounts of the accounting equation by recording increases and decreases in the appropriate columns in the table below. Do not determine new account balances after each transaction. Determine the final total for each account and verify that the equation is in balance.

Answer Key

Test name: John Wild Ch01 Problem Material

1) Accounting

2) Sole proprietorship

3) External

4) Financial accounting

5) Internal controls

6) Ethics

7) business entity

8) going-concern

9) monetary unit

10) Measurement (Cost) principle

11) unlimited liability

12) Financing

13) Investing

14) Operating

15) dividends

16) Revenues

17) assets

18) liabilities

19) equity

20) Assets = Liabilities + Equity

21) payable

22) assets minus liabilities

23) Record-keeping or Bookkeeping

24) Return on assets

25) net income

26) The statement of retained earnings

27) income statement

28) Accounting is an information and measurement system. It identifies, records, and communicates relevant, reliable and comparable information about business activities. Accounting also includes the crucial process of analysis and interpretation. It is part of our everyday lives, through such activities as banking, paying taxes, and receiving payroll checks. Technology plays a major role in accounting by reducing the time effort and cost or recordkeeping while improving clerical accuracy.

29) The balance sheet is one of the four required financial statements a company prepares periodically. It describes a company’s financial position by listing the types and amounts of assets, liabilities, and equity of a business at a specified point in time. The statement’s purpose is to provide information that helps users assess the financial condition of the business.

30) There are two general types of users of accounting information. Internal users are managers and officers of businesses. They require information about business activities in order to make decisions about planning, monitoring, and control. External users rely on financial statements to make business decisions. These users include lenders, and shareholders. Lenders need information for measuring the risk and return of loans. Shareholders need information for assessing the risk and return in owning shares.

31) The four broad areas of accounting are financial accounting, managerial accounting, taxation and other accounting related employment. The majority of the employment opportunities are in private accounting where employees work for businesses. Private sector jobs would include general accounting, taxation, budgeting, and cost accounting activities. Public accounting offers opportunities to perform work such as auditing, tax services, and consulting.

32) The purpose of accounting is to provide useful information for decision makers. For information to be useful, it must be trusted. This requires ethical behavior by accountants and managers in all phases of gathering, analyzing and reporting financial information so that good decisions are made.

33) The two important guidelines for revenue recognition include: Revenue is recognized (1) when goods or services are provided to customers and (2) at the amount expected to be received from the customer. Assets received from selling products and services do not need to be in cash. Revenue recognized is measured by cash received plus the cash equivalent of other assets received.

34) The four basic forms of business organizations are sole proprietorships, partnerships, corporations, and limited liability companies (LLC). Sole proprietorships are businesses owned by one person. They are separate entities for accounting purposes but are not separate from the owner legally or for tax purposes. Partnerships are businesses owned by two or more people who are jointly liable for tax and other obligations. Corporations are businesses legally separate from their owners, making them responsible for their own acts and own debts. They are also subject to an additional corporate tax. Corporations conduct business with the rights, duties and responsibilities of a person. Limited liability companies owned by one or more ‘members’. LLCs are legally separate from their owners; the owners have limited liability and do not pay taxes.

35) The Financial Accounting Standards Board (FASB) is the private-sector group that has been delegated the task to set both the broad and specific principles of GAAP. The Securities and Exchange Commission (SEC) is a government agency that has the legal authority to set GAAP and oversees proper use of GAAP by companies that issue stock and debt to the public.

36) The going-concern principle means that financial statements reflect an assumption that the business continues in operation instead of being closed or sold. Assets are therefore reported at cost rather than at liquidation value.

37) The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. Revenues are the increases in equity from sales of products and services to customers. Expenses are the costs of providing products and services to customers. When revenues exceed expenses, net income occurs. When expenses exceed revenues, a net loss occurs.

38) The accounting equation is stated as: Assets = Liabilities + Equity. Assets are resources owned or controlled by a business that are expected to provide future benefit. Creditors’ claims on assets are called liabilities. Stockholders’ claims on assets are called equity. The accounting equation shows that the resources (assets) of the business equal the source of funds to acquire and the claims against those resources.

39) Liabilities are creditors’ claims on assets. They reflect obligations to transfer assets or provide products or services to others in a future outflow of resources. Equity is stockholders’ claim to assets. It includes the investments of stockholders and what the company earns on the stockholders’ behalf. Equity is also called net assets or residual interest.

40) Return on assets is useful in evaluating management, analyzing and forecasting profits, and planning activities. It shows the effectiveness of using assets to earn profit.

41) The cost-benefit constraint says that information disclosed by an entity must have benefits to the user that are greater than the costs of providing it.

42) The three types of activities reported in the statement of cash flows are (1) operating, which involve using cash to research, develop, purchase, produce, distribute, and market products and services as well as receiving cash from selling products and services; (2) investing, which represent the cash inflows and outflows from the purchase and sale of long-term assets, and (3) financing, which are the cash inflows and cash outflows related to stockholder investments and dividends and long-term borrowing and repaying cash from lending.

43) The four basic financial statements are the balance sheet, income statement, statement of retained earnings, and statement of cash flows. The balance sheet describes the company’s financial position and lists the types and amounts of assets, liabilities, and equity at a point in time. The income statement describes the company’s revenues, expenses, and net income over a period of time. The statement of retained earnings explains changes in equity from net income or loss, and dividends over a period of time. The statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time.

44)

45) $570,000. The Measurement (Cost) principle requires the acquisition of an asset to be recorded in the accounting records at cost.

46) 1. Business entity assumption. Buddy should refund the $500 to the business or record it as a dividend. In the future, he should use a personal check to pay for soccer camp.
2. Going-concern assumption. Buddy’s Foreign Automotive is not going out of business. The business is just closing for vacation. He could hold an appropriate sale to generate extra business before going on vacation.
3. Monetary unit assumption. The invoice should be restated in U.S. dollars for accounting purposes.
4. Revenue recognition principle. Since the service has not been completed, revenue should not be recognized. The $1,500 should be placed in an account such as Deposits Received from Customers (a type of unearned revenue) until the service is completed.

47) Beginning equity = $80,000; Ending equity = $260,000<br> <br> Beginning Assets = Beginning Liabilities + Beginning Equity<br> $200,000 = $120,000 + $80,000<br> <br> Ending Assets = Ending Liabilities + Ending Equity<br> $360,000 = $100,000 + $260,000

48) $380,000 = $140,000 + $240,000<br> <br> Ending assets = $350,000 + $30,000<br> Ending liabilities = $110,000 + $30,000<br> Ending equity = $240,000 (no change)

49) Assets = Liabilities + Stockholders’ Equity
Assets Increased by $20,000; Liabilities Increased by $5,000; Therefore, Equity needs to Increase by $15,000.

Change in Equity = Contributed Capital + Net Income − Dividends
Increase of $15,000 = $3,000 + Net Income − $11,000
$15,000 = Net Income − $8,000
Net Income = $23,000

50) Beginning Equity + Stock issuances − Dividends + Revenues − Expenses = Ending Equity
$173,000 + $2,000 − $15,500 + $97,000 − $43,800 = $212,700

51) October 1^st Equity = $74,000; October 31^st Equity = $94,000

Total assets:

<br>At October 1:<br>Assets = Liabilities + Equity<br>$80,000 = $6,000 + Equity<br>Equity = $74,000<br><br>At October 31:<br>

<br>At October 31:<br>Assets = Liabilities + Equity<br>$98,000 = $4,000 + $94,000<br>Liabilities = $4,000

52) Assets increased by $62,000.

Change in Assets = Change in Liabilities + Change in Equity
$62,000 = $92,000 − $30,000

53)

54) a. +A +E
b. +A +L
c. +A +E
d. +A −A
e. +A −A
f. −A −E
g. −A −L

55) 1. Investment of cash in business by stockholder or performed services for cash.<br> 2. Purchased equipment for cash.<br> 3. Purchased supplies on credit.<br> 4. Investment of cash in business by stockholder or performed services for cash.<br> 5. Performed services for both cash and on credit.<br> 6. Paid accounts payable.<br> 7. Received cash for an account receivable.<br> 8. Purchased supplies for cash.<br> 9. Paid cash dividends or paid expense of business.

56)

57) a. 20%<br> b. 10%<br> c. 5%

58)

59)

60)

61)

62)

63)

64)

65)