Chapter 1Accounting as a Form of Communication

MULTIPLE CHOICE 1. Which one of the following business decisions will least likely require financial information? a. Bank of USA is reviewing a loan application from Lawn Doctor Corp. b. Lawn Doctor Corp. attempts to sell its stock to the public. c. The labor union representing Lawn Doctor employees is negotiating a pay raise for employees with the company. d. Lawn Doctor is deciding whether to wash its vans today or tomorrow. ANS: D OBJ: 1 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 15-17 MSC: AACSB Analytic

2. Which one of the following is not an external user of financial information? a. Company management b. Stockholders c. The Internal Revenue Service d. Creditors ANS: A OBJ: 1 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 15-16 MSC: AACSB Analytic

3. Dell Company is ready to sell its bonds. Which one of the following financial questions will investors most likely want answered before the purchase? a. How much did Dell Company earn last year? b. What will be Dell Company's cost to start operations in another city? c. How much debt does Dell Company already have? d. Will Dell Company pay dividends? ANS: C OBJ: 1 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 15-17 MSC: AACSB Analytic

4. What is the name of the branch of accounting concerned with providing managers and administrators with information to facilitate the planning and control of business operations? a. Management accounting b. Auditing c. Financial accounting d. Bookkeeping ANS: A OBJ: 1 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 15 MSC: AACSB Communication

5. Which of the following would be classified as external users of financial statements? a. Stockholders and management of the company b. The controller of the company and a company's stockholders c. The company's marketing managers d. The creditors and stockholders of the company ANS: D OBJ: 1 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 15-16 MSC: AACSB Communication

6. Which of the following invests funds into a business and is considered an owner? a. A stockholder b. A creditor c. A bank d. A lender e. More than one of these ANS: A OBJ: 1 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 15-17 MSC: AACSB Communication

7. Which one of the following is not one of the three activities included in the definition of accounting? a. Communicating b. Identifying c. Operating d. Measuring ANS: C OBJ: 1 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 15 MSC: AACSB Communication

8. Which one of the following is not an external user of financial statements? a. Suppliers b. Creditors c. Financial analysts d. The controller ANS: D OBJ: 1 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 15-16 MSC: AACSB Communication

9. Which of the following sentences is true regarding the concept of Accounting? a. Accounting helps users make informed decisions. b. Accounting rules are created by the Securities and Exchange Commission.

c. Accounting is a type of organization authorized by the federal government. d. Accounting is also known as bookkeeping. ANS: A OBJ: 1 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 14-15 MSC: AACSB Communication

10. Which one of the following is least likely to be a user of financial information of a grocery store? a. Manager of the grocery store b. Supplier of milk c. Stock broker d. Customer ANS: D OBJ: 1 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 15-16 MSC: AACSB Analytic

11. Which of the following statements would be true if you own stock in a company? a. You are an owner of retained earnings and capital stock. b. You have a claim to the assets of the business. c. You have the right to receive interest on an annual basis. d. You are entitled to a portion of the company's revenues every accounting period. ANS: B OBJ: 1 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 18 MSC: AACSB Communication

12. Which one of the following groups is considered an internal user of financial statements? a. A bank reviewing a loan application from IBM Corporation b. The labor union representing employees of General Motors Company in labor negotiations c. The financial analysts for Merrill Lynch who are preparing recommendations for firm brokers on companies in the auto industry d. Factory managers supervising production line workers for Westinghouse ANS: D OBJ: 1 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 15 MSC: AACSB Communication

13. Which of the following is an organization that lends funds to a business entity and expects repayment of the funds? a. A partner b. A stockholder c. An owner d. A creditor

ANS: D OBJ: 1

PTS: 1 DIF: 1 TOP: AICPA FN-Reporting

REF: p. 16 MSC: AACSB Communication

14. You are a potential stockholder and are concerned that a particular company you are ready to invest in might have too much debt. Which financial statement would provide you information needed in order to evaluate your concern? a. Balance sheet b. Income statement c. Statement of retained earnings d. Statement of public accounting ANS: A OBJ: 2 PTS: 1 DIF: 1 TOP: AICPA FN-Measurement REF: p. 15-21 MSC: AACSB Analytic

15. Which financial statement would you analyze to determine if a company distributed any of its profits to its shareholders? a. Balance sheet b. Statement of retained earnings c. Income statement d. Both the balance sheet and income statement ANS: B OBJ: 2 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 15-21 MSC: AACSB Communication

16. Which financial statement would you refer to in order to determine whether a company owed funds to creditors? a. Balance sheet b. Statement of retained earnings c. Income statement d. Both the balance sheet and income statement ANS: A OBJ: 2 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 15-21 MSC: AACSB Analytic

17. Which of the following statements best describes the term revenues? a. Revenues represent an outflow of assets resulting from the sale of goods or services. b. Revenues represent assets received from selling products or services. c. Revenues represent assets used or consumed in selling products or services. d. Revenues represent the dollar amount of bonds sold to the public. ANS: B OBJ: 2 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 9 | p. 19-20 MSC: AACSB Analytic

18. Which one of the following events involves a liability for a business? a. Loans to be repaid to banks b. Inventories purchased for cash c. Amounts invested by owners d. Stock sold to the general public ANS: A OBJ: 2 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 8 | p. 18-19 MSC: AACSB Analytic

19. Which one of the following is an economic obligation for a business entity? a. Salaries paid to employees for services provided b. Amounts owed to creditors c. Materials used in manufacturing products d. Payment of rent for next year ANS: B OBJ: 2 PTS: 1 DIF: 3 TOP: AICPA FN-Measurement REF: p. 18-19 MSC: AACSB Analytic

20. Which one of the following is a correct expression of the accounting equation? a. Assets + Liabilities = Stockholders' Equity b. Assets = Liabilities - Stockholders' Equity c. Assets + Stockholders' Equity = Liabilities d. Assets = Liabilities + Stockholders' Equity ANS: D OBJ: 2 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 18 MSC: AACSB Communication

21. How is the balance sheet linked to the other financial statements? a. The amount of retained earnings reported on the balance sheet is equal to net income. b. Retained earnings is added to total assets and reported on the balance sheet. c. Net income increases retained earnings on the statement of retained earnings, which ultimately increases retained earnings on the balance sheet. d. There is no link between the balance sheet and the other statements, as each contains different accounts and provides different information. ANS: C OBJ: 2 PTS: 1 DIF: 3 TOP: AICPA FN-Reporting REF: p. 22-23 MSC: AACSB Communication

22. Which one of the following is the correct date format for the financial statement heading? a. Balance sheet - Year ended December 31, 2008

b. Income statement - December 31, 2008 c. Balance sheet - December 31, 2008 d. Statement of retained earnings - December 31, 2008 ANS: C OBJ: 2 PTS: 1 DIF: 3 TOP: AICPA FN-Reporting REF: p. 19-21 MSC: AACSB Communication

23. Which of the following best describes the term retained earnings? a. The amount of total profits earned by a business since it began operations. b. The amount of interest or claim that the owners have on the assets of the business. c. The future economic resources of a business entity. d. The cumulative profits earned less all dividends distributed. ANS: D OBJ: 2 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 18 MSC: AACSB Communication

24. Which of the following best describes the term assets? a. The amount of total profits earned by a business since it began operations. b. The amount of interest or claim that the owners have in the business. c. The economic resources of a business entity. d. The sacrifice of economic benefits to earn profits. ANS: C OBJ: 2 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 18 MSC: AACSB Communication

25. From the following list, select the best description of the term expenses. a. The amount of total profits earned by a business since it began operations. b. The amount of interest or claim that the owners have in the business. c. The future economic resources of a business entity. d. The sacrifice of economic benefits to earn profits. ANS: D OBJ: 2 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 9 | p. 19-20 MSC: AACSB Analytic

26. Which one of the following is correct concerning the time element of financial statements? a. The balance sheet covers a period of time. b. The statement of retained earnings explains changes during a particular period. c. An income statement lists amounts at a specific point in time. d. Both the income statement and the balance sheet cover a period of time.

ANS: B OBJ: 2

PTS: 1 DIF: 2 TOP: AICPA FN-Reporting

REF: p. 18-21 MSC: AACSB Communication

27. What business events cause liabilities to decrease? a. Assets are transferred. b. Investments are incurred. c. Cash is received. d. Expenses are incurred. ANS: A OBJ: 2 PTS: 1 DIF: 3 TOP: AICPA FN-Measurement REF: p. 18-19 MSC: AACSB Analytic

28. Which one of the following appears on a balance sheet? a. Accounts payable b. Sales revenue c. Utilities expense d. Cost of goods sold ANS: A OBJ: 2 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 18-19 MSC: AACSB Communication

29. Which one of the following financial statements reports an entity's financial position at a specific date? a. Balance sheet b. Retained earnings statement c. Income statement d. Both the income statement and balance sheet ANS: A OBJ: 2 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 20 MSC: AACSB Communication

30. Which one of the following correctly represents one of the basic financial statement models? a. Assets - Liabilities = Net income b. Assets + Liabilities = Stockholders' Equity c. Revenues + Expenses = Net income d. Beginning retained earnings + Net income - Dividends = Ending retained earnings ANS: D OBJ: 2 PTS: 1 DIF: 3 TOP: AICPA FN-Reporting REF: p. 18-21 MSC: AACSB Communication

31. Which one of the following statements is true? a. Profits distributed to the creditors are called dividends. b. The balance sheet shows the assets, liabilities, and profits of a company.

c. Dividends are an expense and are reported on the income statement as a deduction from net income. d. The income statement reports the revenues and expenses of a company. ANS: D OBJ: 2 PTS: 1 DIF: 3 TOP: AICPA FN-Reporting REF: p. 18-22 MSC: AACSB Communication

32. Which of the following terms describes a distribution of the net income of a business to its owners? a. Revenue b. Dividends c. Earnings d. Monetary unit ANS: B OBJ: 2 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 20 MSC: AACSB Communication

33. Which statement summarizes the income earned and the dividends paid? a. Statement of cash flows b. Statement of retained earnings c. Balance sheet d. Income statement ANS: B OBJ: 2 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 20-21 MSC: AACSB Communication

34. The costs of doing business through the sale of goods and services are called a. Net income b. Expenses c. Revenues d. Dividends ANS: B OBJ: 2 Brown Corp. Brown Corporations end-of-year balance sheet consisted of the following amounts. Cash $ 15,000 Accounts receivable $ 50,000 Property, plant & equipment 70,000 Long-term debt 40,000 Capital stock 100,000 Accounts payable 20,000 Retained earnings ? Inventory 35,000 35. Refer to Brown Corp. What amount should Brown report on its balance sheet for Total Assets? a. $110,000 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 19-20 MSC: AACSB Communication

b. $155,000 c. $170,000 d. $190,000 ANS: C $15,000 + $70,000 + $50,000 + $35,000 = $170,000 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 18-19, 22 OBJ: 2 MSC: AACSB Analytic

36. Refer to Brown Corp. What is Brown 's Retained Earnings balance at the end of the current year? a. $ 10,000 b. $110,000 c. $160,000 d. $170,000 ANS: A Assets = $15,000 + $70,000 + $50,000 + $35,000 = $170,000 Liabilities = $40,000 + $20,000 = $60,000 Stockholders' equity = $170,000 - $60,000 = $110,000 Retained earnings = $110,000 - $100,000 = $10,000 PTS: 1 DIF: 3 TOP: AICPA FN-Measurement Rickers Company Rickers Company reported the following items on its financial statements for the year ending December 31, 2008: Sales Salary expense Dividends $560,000 40,000 20,000 Cost of goods sold Interest expense Income tax expense $400,000 30,000 25,000 REF: p. 18-22 OBJ: 2 MSC: AACSB Analytic

37. Refer to Rickers Company. The income statement for Rickers will report Net Income for the current year in the amount of a. $ 45,000 b. $ 65,000 c. $ 85,000 d. $465,000 ANS: B $560,000 - $40,000 - $400,000 - $30,000 - $25,000 = $65,000 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 19-20, 22 OBJ: 2 MSC: AACSB Analytic

38. Refer to Rickers Company. How much will be reported as Retained Earnings on its balance sheet at December 31, 2008 if this is its first year of operations? a. $45,000 b. $65,000 c. $85,000 d. Not enough information is provided. ANS: A Net income = $560,000 - $40,000 - $400,000 - $30,000 - $25,000 = $65,000 Retained earnings = $65,000 - $20,000 = $45,000 PTS: 1 DIF: 3 TOP: AICPA FN-Measurement Knapik Corp. Knapik Corp. reported the following information for the year ending December 31, 2008: Net income Dividends Retained earnings at December 31, 2008 $10,000 6,000 25,000 REF: p. 20-21 OBJ: 2 MSC: AACSB Analytic

39. Refer to Knapik Corp. How much was the balance of Retained Earnings at January 1, 2008? a. $21,000 b. $29,000 c. $31,000 d. $35,000 ANS: A $10,000 - $6,000 - $25,000 = $21,000 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 20 OBJ: 2 MSC: AACSB Analytic

40. Refer to Knapik Corp. What was the economic effect of the payment of Knapik's dividends? a. The dividends reduced net income for 2008. b. The dividends should be equal to net income if the company's accounting equation is in balance. c. The dividends reduce total retained earnings for the year. d. The dividends must be paid whenever Knapik Corp. reports net income. ANS: C OBJ: 2 Niasi Corp. PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 20 MSC: AACSB Communication

Niasi Corp. reported the following information for the year ending December 31, 2008: Revenues Expenses Retained Earnings at December 31, 2007 Retained earnings at December 31, 2008 $50,000 $20,000 $100,000 $105,000

41. Refer to Niasi Corp. How much was paid out in dividends in 2008? a. $20,000 b. $25,000 c. $30,000 d. $50,000 ANS: B $100,000 + $50,000 - 20,000 - X = $105,000 X = $25,000 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 20 OBJ: 2 MSC: AACSB Analytic

42. Shalomar Corp. reported the following information for the year ending December 31, 2008: Revenue Expenses Dividends Retained earnings at December 31, 2008 $40,000 $23,000 $10,000 $175,000

Calculate the retained earnings balance at December 31, 2007. a. $165,000 b. $168,000 c. $182,000 d. $192,000 ANS: B $X + 17,000 - 10,000 = $175,000 X = $168,000 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 20 OBJ: 2 MSC: AACSB Analytic

43. CFO Consultants had the following balance sheet amounts at the beginning of the year: Total assets Total stockholders' equity $400,000 150,000

During the year, total assets increased by $100,000 and total liabilities increased by $40,000. The company also paid $30,000 in dividends. No other transactions occurred except revenues and expenses. How much is net income for the year? a. $30,000

b. $60,000 c. $70,000 d. $90,000 ANS: D Assets = $400,000 + $100,000 = $500,000 Liabilities = $250,000 + $40,000 = $290,000 Stockholders' equity at year end = $500,000 - $290,000 = $210,000 Net income = $210,000 - $150,000 + $30,000 = $90,000 PTS: 1 DIF: 3 TOP: AICPA FN-Measurement REF: p. 18-20 OBJ: 2 MSC: AACSB Analytic

44. On January 1, 2008, Zukierski Company's balance in retained earnings was $70,000. At the end of the year, December 31, 2008, the balance in retained earnings was $94,000. During 2008, the company earned net income of $40,000. How much were dividends? a. $16,000 b. $24,000 c. $40,000 d. $64,000 ANS: A $70,000 + $40,000 - $94,000 = $16,000 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 20 OBJ: 2 MSC: AACSB Analytic

45. On January 1, 2008, Clay Company's balance in retained earnings was $70,000. During 2008, the company earned net income of $43,000 and paid $15,000 in dividends. Calculate the retained earnings balance at December 31, 2008. a. $42,000 b. $90,000 c. $98,000 d. $123,000 ANS: C $75,000 + 43,000 - $15,000 = $108,000 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement Music Box Corporation The following information is provided by the Music Box Corporation: Beginning Retained Earnings $50,000 Ending Retained Earnings $70,000 REF: p. 20 OBJ: 2 MSC: AACSB Analytic

Dividends Paid Revenue

$10,000 $50,000

46. Refer to Music Box Corporation. Calculate net income. a. $20,000 b. $30,000 c. $40,000 d. Cannot tell by the information provided ANS: B $50,000 + x - $10,000 = $70,000 x = $30,000 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 20-21 OBJ: 2 MSC: AACSB Analytic

47. Refer to Music Box Corporation. Calculate expenses. a. $20,000 b. $30,000 c. $40,000 d. Cannot tell by the information provided ANS: A $50,000 + x - $10,000 = $70,000 x = $30,000 Net Income $50,000 Revenue - $30,000 Net Income = $20,000 Expense PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 20-21 OBJ: 2 MSC: AACSB Analytic

48. If a company has $152,000 of revenues, declares and pays $55,000 in dividends, and has net income of $89,000, how much were expenses for the year? a. $ 63,000 b. $ 8,000

c. $144,000 d. Unable to determine due to incomplete information ANS: A $152,000 - $89,000 = $63,000 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 19-21 OBJ: 2 MSC: AACSB Analytic

49. Sweetie Company reports the following information at 12/31/08:

Revenue Cash Accounts Payable Dividends Expenses

$150,000 $ 30,000 $ 40,000 $ 10,000 $ 85,000

Calculate Sweetie Companys Net Income. a. $65,000 b. $55,000 c. $45,000 d. $15,000 ANS: A $150,000 - $85,000 = $65,000 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 19-20 OBJ: 2 MSC: AACSB Analytic

50. Smith Company has assets of $350,000, liabilities of $130,000, and retained earnings of $180,000. How much is total stockholders' equity? a. $ 40,000 b. $170,000 c. $220,000 d. $350,000 ANS: C $350,000 - $130,000 = $220,000 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 18-19 OBJ: 2 MSC: AACSB Analytic

51. Peters Pet Shop reported a net loss of $15,000 and total expenses of $80,000. How much are total revenues? a. $15,000 b. $65,000 c. $95,000 d. The answer is not determinable without more information. ANS: B $80,000 + ($15,000) = $65,000 PTS: 1 DIF: 1 TOP: AICPA FN-Measurement REF: p. 19-20 OBJ: 2 MSC: AACSB Analytic

52. Which concept is the reason the 'dollar' is used in the preparation of financial statements?

a. Monetary unit b. Time period c. Going concern d. Legal entity ANS: A OBJ: 3 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 26 MSC: AACSB Communication

53. Which one of the following is an assumption made in the preparation of financial statements? a. Financial statements are prepared for a specific entity that is distinct from the entity owners. b. Financial statements are prepared assuming that inflation has a distinct effect on the monetary unit. c. Preparation of financial statements for a specific time period assumes that the balance sheet covers a period of time. d. The current market value is assumed to be more relevant than the original cost paid. ANS: A OBJ: 3 PTS: 1 DIF: 3 TOP: AICPA FN-Reporting REF: p. 26-27 MSC: AACSB Communication

54. Why is the time period assumption required? a. Inflation exists b. Users demand information about the entity on a regular basis c. The federal government requires it d. The dollar is the monetary unit in the U.S. ANS: B OBJ: 3 PTS: 1 DIF: 3 TOP: AICPA FN-Reporting REF: p. 27 MSC: AACSB Communication

55. Which one of the following statements is true concerning assets? a. They are recorded at market value and adjusted for inflation. b. They are recorded at market value for financial reporting because historical cost is arbitrary. c. Accounting principles require that companies report assets using the cost concept. d. Assets are measured using the time period approach. ANS: C OBJ: 3 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 26 MSC: AACSB Communication

56. Hess Enterprises purchased a building for $2,000,000 in 1995. In 2008, an independent appraiser assessed the value at $4,400,000. At what amount should the building appear on the financial statements in 2008?

a. $2,000,000 b. $2,400,000 c. $4,400,000. d. whichever amount the company believes is the best indicator of the true value of the building. ANS: A OBJ: 3 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 26 MSC: AACSB Communication

57. Which of the following organizations is primarily responsible for establishing GAAP today? a. FASB (Financial Accounting Standards Board) b. SEC (Securities and Exchange Commission) c. IRS (Internal Revenue Service) d. Federal government ANS: A OBJ: 3 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 27 MSC: AACSB Communication

58. Which of the following organizations is responsible for setting auditing standards followed by public accounting firms in conducting independent audits of financial statements? a. FASB (Financial Accounting Standards Board) b. SEC (Securities and Exchange Commission) c. AICPA (American Institute of Certified Public Accountants) d. PCAOB (Public Company Accounting Oversight Board) ANS: D OBJ: 3 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 28 MSC: AACSB Communication

59. Which organization, in addition to the FASB (Financial Accounting Standards Board), occasionally issues authoritative rules for financial statements? a. IASC (International Accounting Standards Committee) b. Accounting profession c. IRS (Internal Revenue Service) d. AICPA (American Institute of Certified Public Accountants) ANS: D OBJ: 3 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 28 MSC: AACSB Communication

60. The SEC is concerned with a. All United States companies regardless of size b. United States companies that issue securities to the general public

c. Accounting reports issued by government entities d. All domestic and international companies that issue accounting reports ANS: B OBJ: 3 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 28 MSC: AACSB Communication

61. To which of the following entities must a company report if it sells its stock on the organized stock market? a. AICPA (American Institute of Certified Public Accountants) b. AAA (American Accounting Association) c. IASC (International Accounting Standards Committee) d. SEC (Securities and Exchange Commission) ANS: D OBJ: 3 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 28 MSC: AACSB Communication

62. Which of the following titles describes the chief accounting officer in a business organization? a. Controller b. Director c. Treasurer d. CEO ANS: A OBJ: 5 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 33 MSC: AACSB Communication

63. Which of the following is a generally the responsibility of the treasurer of a company? a. Payroll b. Operations c. Safeguarding the assets and efficient use of the liquid assets d. Human resources ANS: C OBJ: 5 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 33 MSC: AACSB Communication

64. The reliability of the information in the financial statements is the responsibility of which of the following? a. The Securities and Exchange Commission b. The Certified Public Accountant c. Management d. Stockholders

ANS: C OBJ: 4

PTS: 1 DIF: 2 TOP: AICPA FN-Reporting

REF: p. 31 MSC: AACSB Communication

65. Public accounting firms usually provide services in three broad areas as follows: a. Financial auditing, tax services, and operational management b. Operational auditing, management consulting, and financial services c. Management consulting, auditing, and tax services d. Management consulting, tax services, and operational management ANS: C OBJ: 4 PTS: 1 DIF: 3 TOP: AICPA FN-Reporting REF: p. 33-35 MSC: AACSB Communication

66. U.S. auditors who are licensed to render opinions on the fairness of an entity's financial statements are called a. Certified Practicing Auditors b. Certified Government Auditors c. Certified Public Accountants d. Certified Management Accountants ANS: C OBJ: 5 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 33-35 MSC: AACSB Communication

67. Which of the following statements best describes the services of CPAs who provide auditing services? a. CPAs are employed by the government and prepare various governmental financial reports. b. CPAs create accounting principles and follow up with companies to ensure the principles are being followed. c. CPAs render opinions that financial statements fairly present an entity's financial position, operating results, and cash flows. d. CPAs are responsible for the preparation of financial statements as well as for conducting audits on the same statements. ANS: C OBJ: 5 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 33-35 MSC: AACSB Communication

68. Which one of the following activities can be performed only by certified public accountants (CPAs)? a. Preparation of tax returns b. Making financial decisions c. Rendering an opinion on the fairness of financial statements d. Preparation of financial statements ANS: C PTS: 1 DIF: 1 REF: p. 33-35

OBJ: 5

TOP: AICPA FN-Reporting

MSC: AACSB Communication

69. Why are ethical decisions by accountants an issue for financial statement users? a. Most accounting information is used by management for internal decision-making. b. External parties rely on financial statement information on which to base their decisions. c. The work of accountants in providing information is routine. d. The accountant is required to make objective judgments about what information to present. ANS: B OBJ: 4 TRUE/FALSE 1. Financial accounting is the branch of accounting concerned with communication with internal management. ANS: F OBJ: 1 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 15 MSC: AACSB Communication PTS: 1 DIF: 3 TOP: AICPA FN-Reporting REF: p. 32 MSC: AACSB Communication

2. External users of accounting information include present and potential stockholders, bankers and other creditors, and management. ANS: F OBJ: 1 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 15-16 MSC: AACSB Communication

3. The balance sheet is a statement that summarizes revenues and expenses for a period. ANS: F OBJ: 2 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 19 MSC: AACSB Communication

4. Assets may be used to satisfy business obligations and to carry on business operations. ANS: T OBJ: 2 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 18 MSC: AACSB Communication

5. The amount of earnings distributed to stockholders can be found in the income statement. ANS: F OBJ: 2 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 20 MSC: AACSB Communication

6. Profits from operating activities distributed to business owners are called dividends. ANS: T OBJ: 2 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 20 MSC: AACSB Communication

7. An entity's assets come from three primary sources: creditors, investors, and profits retained in the business. ANS: T PTS: 1 DIF: 2 REF: p. 18

OBJ: 2

TOP: AICPA FN-Reporting

MSC: AACSB Communication

8. The balance sheet is linked to the retained earnings statement by the ending retained earnings balance. ANS: T OBJ: 2 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 22-23 MSC: AACSB Communication

9. A balance sheet provides information at one specific point in time, while the other basic financial statements provide information on activities that occur over a period of time. ANS: T OBJ: 2 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 18-21 MSC: AACSB Communication

10. When an entity's revenues exceed its expenses for a period of time, the entity will report a net loss. ANS: F OBJ: 2 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 19-20 MSC: AACSB Communication

11. Stockholders' equity is the residual interest that remains after deducting liabilities from stockholders' equity. ANS: F OBJ: 2 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 18 MSC: AACSB Communication

12. If a company prepares a statement of stockholders' equity, net income is added to retained earnings on this statement. ANS: T OBJ: 2 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 20-21 MSC: AACSB Communication

13. Stockholders equity is owners equity in a corporation. ANS: T OBJ: 2 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 18 MSC: AACSB Communication

14. The time period assumption assumes a company prepares financial statements every month. ANS: F OBJ: 3 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 27 MSC: AACSB Communication

15. GAAP stands for Generally Accepted Auditing Procedures. ANS: F OBJ: 3 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 27 MSC: AACSB Communication

16. The International Accounting Standards Committee was created in order to develop worldwide accounting standards that must be used for all financial statements prepared regardless of country. ANS: F OBJ: 3 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 28 MSC: AACSB Communication

17. Because market values are subjective, many assets are carried on the balance sheet at their acquisition cost.

ANS: T OBJ: 3

PTS: 1 DIF: 2 TOP: AICPA FN-Reporting

REF: p. 26 MSC: AACSB Communication

18. The term used to refer to an assets original cost is historical cost. ANS: T OBJ: 3 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 26 MSC: AACSB Communication

19. The going concern assumption infers that a company will continue to operate indefinitely. ANS: T OBJ: 3 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 26 MSC: AACSB Communication

20. A company in the process of liquidation is considered to be under the going concern assumption. ANS: F OBJ: 3 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 26 MSC: AACSB Communication

21. The primary objective of external auditors is to provide assurance to stockholders and other users that the statements are fairly presented. ANS: T OBJ: 4 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 28 MSC: AACSB Analytic

22. Business entities and non-business entities are both organized to earn a profit. ANS: F OBJ: 4 PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 28-31 MSC: AACSB Communication

23. The independent auditor's report conveys whether or not the business is a good investment. ANS: F OBJ: 5 PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 34-35 MSC: AACSB Communication

24. Public accounting firms provide audit, tax, and management consulting services to clients. ANS: T OBJ: 5 COMPLETION 1. Owners of corporations are called ____________________. ANS: Shareholders stockholders PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 15 OBJ: 1 MSC: AACSB Communication PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 28-31 MSC: AACSB Communication

2. The process of identifying, measuring, and communicating economic information to various users is called ____________________.

ANS: Accounting PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 15 OBJ: 1 MSC: AACSB Communication

3. The names of the four financial statements are:

ANS: Income Statement, Balance Sheet, Statement of Retained Earnings (or Stockholders' Equity), Statement of Cash Flows PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 18-21 OBJ: 2 MSC: AACSB Communication

4. Another name for profits or earnings of a business is ____________________. ANS: Net income PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 19-20 OBJ: 2 MSC: AACSB Communication

5. The various methods, rules, practices, and other procedures that have evolved over time in response to the need to regulate the preparation of financial statements are called _____________________________________________. ANS: Generally accepted accounting principles PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 27 OBJ: 3 MSC: AACSB Communication

6. The federal government agency with the ultimate authority to determine the rules in preparing statements for companies whose stock is sold to the public is the ________________________________________. ANS: Securities and Exchange Commission PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 28 OBJ: 3 MSC: AACSB Communication

7. The concept that assumes that assets are recorded at the amount to acquire them is called the ____________________. ANS: Cost principle PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 26 OBJ: 3 MSC: AACSB Communication

8. The concept that assumes that an entity is not in the process of liquidation is ____________________.

ANS: Going concern PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 26 OBJ: 3 MSC: AACSB Communication

9. The private sector group with authority to set accounting standards is ________________________________________. ANS: Financial Accounting Standards Board PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 28 OBJ: 3 MSC: AACSB Communication

10. The chief accounting officer of a corporation is ____________________. ANS: Controller PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 33 OBJ: 5 MSC: AACSB Communication

11. A CPA is the one who can render a(n) ____________________ concerning the fairness of the presentation of the financial statements. ANS: Opinion PTS: 1 DIF: 1 TOP: AICPA FN-Reporting MATCHING Provided below are a number of important users of accounting information. Below the list are descriptions of a major need of each of the various users. Fill in the blank with the one user group that is most likely to have the need described to the right of the blank. Some user groups may be used more than once or not at all. a. Stockholder b. Company management c. Supplier d. Banker e. Internal Revenue Service f. Securities and Exchange Commission REF: p. 33 OBJ: 5 MSC: AACSB Communication

g. Labor union 1. 2. 3. 4. 5. 6. The prospects for future dividend payments The financial status of a company issuing securities to the public for the first time The profitability of the company based on the tax code The profitability of each division in the company The exact amount of profit on each product The ability of the company to pay its debts when they come due

7. The company's profitability since the last work force contract was signed 1. ANS: OBJ: 2. ANS: OBJ: 3. ANS: OBJ: 4. ANS: OBJ: 5. ANS: OBJ: 6. ANS: OBJ: NOT: 7. ANS: OBJ: A PTS: 1 DIF: 3 1 TOP: AICPA FN-Reporting F PTS: 1 DIF: 3 1 TOP: AICPA FN-Reporting E PTS: 1 DIF: 3 1 TOP: AICPA FN-Reporting B PTS: 1 DIF: 3 1 TOP: AICPA FN-Reporting B PTS: 1 DIF: 3 1 TOP: AICPA FN-Reporting C PTS: 1 DIF: 3 1 TOP: AICPA FN-Reporting Note: D (banker) is also correct G PTS: 1 DIF: 3 1 TOP: AICPA FN-Reporting REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: p. 15-17 AACSB Analytic p. 15-17 AACSB Analytic p. 15-17 AACSB Analytic p. 15-17 AACSB Analytic p. 15-17 AACSB Analytic p. 15-17 AACSB Analytic

REF: p. 15-17 MSC: AACSB Analytic

For each statement provided, choose the letter of the appropriate term from the list that each statement best describes. Some terms may be used more than once, while others are not used at all. a. Capital stock b. Asset c. Stockholders' equity d. Time period e. Dividends f. Economic entity concept

g. Expense h. Retained earnings i. j. Cost principle Creditor

k. Liability l. Revenue

m. Going concern n. Monetary unit o. Corporation 8. The part of stockholders' equity that represents the income earned less dividends paid over the life of an entity 9. The owners' claims on the assets of an entity 10. A distribution of the net income of a business to its owners 11. The sale of goods or performance of services

12. 13. 14. 15. 16. 17. 18. 19.

A category on the balance sheet to indicate the owners' direct investment in a corporation The cost of doing business that results from the process of generating revenues A future benefit An artificial segment on the calendar used as the basis for preparing financial statements The assumption that an entity is not in the process of liquidation and that it will continue indefinitely The rule that specifies the amount recorded for an asset upon acquisition An entity that lends a company money with the expectation of repayment Creditor claims against the assets of a company H 2 C 2 E 2 L 2 A 2 G 2 B 2 D 3 M 3 I 3 J 2 K 2 PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: p. 18 AACSB Analytic p. 18 AACSB Analytic p. 20 AACSB Analytic p. 19-20 AACSB Analytic p. 18 AACSB Analytic p. 20 AACSB Analytic p. 18 AACSB Analytic p. 26 AACSB Analytic p. 26 AACSB Analytic p. 26 AACSB Analytic p. 18 AACSB Analytic p. 18 AACSB Analytic

8. ANS: OBJ: 9. ANS: OBJ: 10. ANS: OBJ: 11. ANS: OBJ: 12. ANS: OBJ: 13. ANS: OBJ: 14. ANS: OBJ: 15. ANS: OBJ: 16. ANS: OBJ: 17. ANS: OBJ: 18. ANS: OBJ: 19. ANS: OBJ:

Several items from the financial statements of Firestone Tires are listed below. Use the following answer choices to identify the type of account for each item listed. Place your answers in the space provided. a. Asset b. Liability c. Revenue d. Expense e. Stockholders Equity 20. 21. 22. 23. 24. Plant warehouse & equipment Sales of tires Accounts payable Interest Income Selling expenses

25. 26. 27. 28. 29. 30.

Accounts receivable Capital stock Long-term debt Cash Retained earnings Inventories A 2 C 2 B 2 C 2 D 2 A 2 E 2 B 2 A 2 E 2 A 2 PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting 1 DIF: 1 AICPA FN-Reporting REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC: p. 18-22 AACSB Communication p. 18-22 AACSB Communication p. 18-22 AACSB Communication p. 18-22 AACSB Communication p. 18-22 AACSB Communication p. 18-22 AACSB Communication p. 18-22 AACSB Communication p. 18-22 AACSB Communication p. 18-22 AACSB Communication p. 18-22 AACSB Communication p. 18-22 AACSB Communication

20. ANS: OBJ: 21. ANS: OBJ: 22. ANS: OBJ: 23. ANS: OBJ: 24. ANS: OBJ: 25. ANS: OBJ: 26. ANS: OBJ: 27. ANS: OBJ: 28. ANS: OBJ: 29. ANS: OBJ: 30. ANS: OBJ:

Three organizations important to accounting are listed below. Select the organization that most closely achieves the role described. a. American Institute of Certified Public Accountants (AICPA) b. Securities and Exchange Commission (SEC) c. Financial Accounting Standards Board (FASB). 31. 32. 33. 34. 35. 36. 37. Issues financial accounting concepts that are used as a guide to accounting standard setting Has the ultimate authority to set accounting standards, but has allowed the profession to do so Sets the auditing standards to be followed by public accountants Prepares and grades the CPA examination Is a professional organization of certified public accountants Primarily responsible for setting accounting standards today Requires that publicly traded companies file annual and quarterly financial statements on a timely basis C 3 B 3 PTS: TOP: PTS: TOP: 1 DIF: 2 AICPA FN-Reporting 1 DIF: 2 AICPA FN-Reporting REF: MSC: REF: MSC: p. 28 AACSB Communication p. 28 AACSB Communication

31. ANS: OBJ: 32. ANS: OBJ:

33. ANS: OBJ: 34. ANS: OBJ: 35. ANS: OBJ: 36. ANS: OBJ: 37. ANS: OBJ:

A 3 A 3 A 3 C 3 B 3

PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP: PTS: TOP:

1 DIF: 2 AICPA FN-Reporting 1 DIF: 2 AICPA FN-Reporting 1 DIF: 2 AICPA FN-Reporting 1 DIF: 2 AICPA FN-Reporting 1 DIF: 2 AICPA FN-Reporting

REF: MSC: REF: MSC: REF: MSC: REF: MSC: REF: MSC:

p. 28 AACSB Communication p. 28 AACSB Communication p. 28 AACSB Communication p. 28 AACSB Communication p. 28 AACSB Communication

PROBLEM Farly Corporation The accountant for Farly Corporation prepared the following list from the company's accounting records for the year ended December 31, 2008: Sales revenue Accounts receivable Equipment Accounts payable Salaries and wages expense Inventories Income taxes payable Notes payable $165,000 14,000 42,000 12,000 40,000 22,000 5,000 20,000 Cash Selling expenses Common stock Interest income Cost of sales Prepaid expenses Income taxes expense Retained earnings $ 30,000 44,000 17,000 3,000 51,000 2,000 18,000 ?

1. Determine the following amounts for Farly Corporation: A. B. C. Total assets at the end of 2008 Total liabilities at the end of 2008 $__________ $__________

What parties have a claim on Farly's assets? Explain this in terms of the accounting equation.

ANS: A. $14,000 + $42,000 + $22,000 + $30,000 + $2,000 = $110,000 B. $12,000 + $5,000 + $20,000 = $37,000 C. Both the creditors and the owners have a claim on the assets of the company. The creditors have a claim through the liabilities, and the owners have a claim through owners' (stockholders') equity. PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 18-19 OBJ: 2 MSC: AACSB Analytic

2. Determine the following amounts for Farly Corporation: A. B. C. Retained earnings at the end of 2008 Total stockholders' equity at the end of 2008 Name the two events that might cause stockholders' equity to increase. $__________ $__________

ANS: A. $110,000 - $37,000 - $17,000 = $56,000 B. $110,000 - $37,000 = $73,000 C. The first way is through issuance of stock to investors, called common or capital stock. The second way is through retained earnings, or the earned capital of the business. Shareholders have a claim to cumulative amounts that have been earned but not yet paid out as dividends. REF: p. 18-21 OBJ: 2 MSC: AACSB Analytic

PTS: 1 DIF: 3 TOP: AICPA FN-Measurement

3. Determine the following amounts for Farly Corporation: A. B. C. D. E. Total revenues for 2008 Total expenses for 2008 What is the purpose of the income statement? Is Farly profitable? Explain. Is this the first year of operations for the Farly Corp.? Explain. $__________ $__________

ANS: A. $165,000 + $3,000 = $168,000 B. $40,000 + $44,000 + $51,000 + $18,000 = $153,000 C. The income statement provides information on the revenues and expenses of a business. The difference shows the profitability of the company for a period of time. D. E. Farly earned net income of $15,000 ($168,000 - $153,000) for the year. Since revenues exceed expenses, the company is considered profitable. No, this is not the first year of operations. Net income is not equal to the ending retained earnings balance. At year-end, stockholders' equity is $73,000, of which $17,000 is common stock. The balance of retained earnings at year-end is $56,000. Net income is only $15,000. The difference between $56,000 and $15,000 is the beginning balance of retained earnings. REF: p. 18-21 OBJ: 2 MSC: AACSB Analytic

PTS: 1 DIF: 2 TOP: AICPA FN-Measurement

4. Prepare an income statement for Farly Corp. in good form. ANS: Farly Corporation Income Statement Year Ended December 31, 2008 Revenues: Sales revenue $165,000

Interest income Expenses: Cost of sales Salaries and wages expense Selling expenses Income taxes expense Net income PTS: 1 DIF: 2 TOP: AICPA FN-Measurement

3,000 $168,000 $ 51,000 40,000 44,000 18,000 153,000 $ 15,000 REF: p. 19-20 OBJ: 2 MSC: AACSB Analytic

5. Prepare a balance sheet for Farly Corp. in good form. ANS: Farly Corporation Balance Sheet December 31, 2008 Assets Cash Accounts receivable Inventories Prepaid expenses Equipment Total Assets $ 30,000 14,000 22,000 2,000 42,000 $110,000 Liabilities and Stockholders' Equity Accounts payable $ 12,000 Income taxes payable 5,000 Notes payable 20,000 Common stock 17,000 Retained earnings 56,000 Total Liabilities and Stock$110,000 holders' Equity REF: p. 18-19 OBJ: 2 MSC: AACSB Analytic

PTS: 1 DIF: 3 TOP: AICPA FN-Measurement Chevy Chase Corporation

The accountant for Chevy Chase Corporation prepared the following list from the company's accounting records for the year ended December 31, 2008: Retained Earnings Cash Accounts Payable Sales Revenue Cost of Sales Land Note Payable Inventory ? 7,000 15,000 125,000 70,000 75,000 15,000 20,000 Prepaid Expense Common Stock Accounts Receivable Interest Income Salary Expense Income Tax expense Selling Expense Salaries Payable 3,000 40,000 17,000 500 4,000 200 45,000 5,000

6. Determine the following amounts for Chevy Chase Corporation: A. B. Total assets at the end of 2008. Total liabilities at the end of 2008.

C.

Total equity at the end of 2008.

ANS: A. $122,000 (7,000 + 3,000 + 17,000 + 20,000 + 75,000) B. $35,000 (5,000 + 15,000 + 15,000) C. $87,000 ($122,000 - $35,000) REF: p. 18-19 OBJ: 2 MSC: AACSB Analytic

PTS: 1 DIF: 2 TOP: AICPA FN-Measurement

7. Determine the following amounts for Chevy Chase Corporation: A. B. C. Total Revenues for 2008. Total Expenses for 2008. Net Income for 2008.

ANS: A. Sales Revenue + Interest Income = $125,500 B. C. Selling expense, cost of sales, income tax expense, salary expense = $119,200 $125,500 - $119,200 = $6,300 REF: p. 19-20 OBJ: 2 MSC: AACSB Analytic

PTS: 1 DIF: 2 TOP: AICPA FN-Measurement

8. Determine the following amounts for Chevy Chase Corporation: A. B. C. Ending Retained Earnings for 2008. Total Stockholders Equity at the end of 2008. Name two events that might cause stockholders equity to decrease.

ANS: A. Liabilities = $35,000, total equity = $87,000. Common stock = $40,000, therefore, retained earnings = $47,000. B. Liabilities = $35,000, total equity = $87,000. C. Dividends reduce stockholders equity. Expenses reduce stockholders equity REF: p. 18-19 OBJ: 2 MSC: AACSB Analytic

PTS: 1 DIF: 2 TOP: AICPA FN-Measurement

9. Using good form, prepare an income statement for Chevy Chase Corporation. ANS: Chevy Chase Corporation Income Statement

Year Ended December 31, 2008 Revenues: Sales Revenue Interest Income Expenses: Cost of Sales Selling Expense Salary Expense Income Tax Expense Net Income PTS: 1 DIF: 2 TOP: AICPA FN-Measurement $ 70,000 45,000 4,000 200 $ 119,200 6,300

$125,000 500 $125,500

REF: p. 20 OBJ: 2 MSC: AACSB Analytic

10. Using good form, prepare a balance sheet for the Chevy Chase Corporation. ANS: Chevy Chase Corporation Balance Sheet December 31, 2008 Assets Cash Accounts Receivable Inventory Prepaid Expenses Land Total Assets 7,000 17,000 20,000 3,000 75,000 $ 122,000 $ Liabilities & Stockholders Equity Accounts Payable $ 15,000 Salaries Payable 5,000 Notes Payable 20,000 Common Stock 40,000 Retained Earnings 47,000 Total Liabilities & Stockholders $ 122,000 Equity REF: p. 18-19 OBJ: 2 MSC: AACSB Analytic

PTS: 1 DIF: 2 TOP: AICPA FN-Measurement

11. Assume that you have received copies of the financial statements for Coca-Cola for the years ending December 31, 2008 and 2007. Answer each question. A. If you were a banker, why would you need information from Coca-Cola's financial statements? B. If you were a potential investor in Coca-Cola stock, what information would you want? C. If you were a labor negotiator for a union that represents a group of Coca-Cola's employees, which financial statement would provide you with the most useful information? ANS:

A. A banker wants to feel comfortable that the company will be able to make its interest payments and repay the principal of the loan. B. Investors need to know whether to invest in the company or to continue holding the stock. They also want to know the company's recent performance in the stock market, whether the company has been profitable, how the profits compare with other companies, and how much the company paid in dividends. C. A labor negotiator needs to know how much profit the company made. This information is found on the income statement. PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 15-17 OBJ: 1 MSC: AACSB Analytic

12. Forb, Inc., started the year with total assets of $400,000 and total liabilities of $240,000. Net income for the year is $120,000 and dividends declared and paid during the year are $90,000. A. What is the amount of Forb's total stockholders' equity at the end of the year? B. Could Forb have paid additional dividends during the year? Explain. ANS: A. Stockholders' equity-beginning of year: $400,000 - $240,000 = $160,000 Stockholders' equity-end of year: $160,000 + $120,000 - $90,000 = $190,000 B. Yes. Assuming the company has enough cash to do so, dividends can be paid. Net income exceeded the amount of dividends paid by $30,000 ($120,000 - $90,000), so the amount paid could have been increased. Also the company has total positive retained earnings. PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 18-21 OBJ: 2 MSC: AACSB Analytic

13. Gras Corp. started business at the beginning of the year, with assets of $600,000 and stockholders' equity of $240,000. By the end of the year, assets increased by $80,000 and liabilities increased by $60,000. Other than net income or loss, the only change in stockholders' equity was dividends of $55,000. A. What was the amount of Gras Corp.'s stockholders' equity at the end of the year? B. What was the amount of Gras Corp's net income or net loss for the year? ANS: A. Beginning of year Change during year End of year B. Change in equity

Assets $600,000 +80,000 $680,000

Liabilities $360,000 +60,000 $420,000

Stockholders' Equity $240,000 +20,000 $260,000

$20,000

Add dividends Net income PTS: 1 DIF: 3 TOP: AICPA FN-Measurement

55,000 $75,000 REF: p. 18-21 OBJ: 2 MSC: AACSB Analytic

14. Presented below are selected data from the balance sheet of McDougal Company for 2008. The figures are expressed in millions. Total current assets Property, plant & equipment Other assets Total current liabilities Long-term debt Total shareholders' equity $ 5,572 16,325 ?? 3,274 5,632 19,639

A. Determine the amount of "Other Assets" for McDougals 2008 balance sheet. (Hint: You must use the accounting equation concept to determine your answers.) B. How much of McDougal Company is financed by creditors? By owners? ANS: A. Liabilities and stockholders' equity: $3,274 + $5,632 + $19,639 = $28,545 Other Assets: $28,545 - $5,572 - $16,325 = $6,648 B. Creditors: $3,274 + $5,632 = $8,906 Stockholders: $19,639 PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 18-19 OBJ: 2 MSC: AACSB Analytic

15. Presented below are selected data from the accounting records for Auntie Em's Sewing Store for 2008. Net sales Income taxes Cost of sales Operating expenses Dividends $190,000 30,000 80,000 45,000 12,000

A. Calculate the amount of net income or loss for 2008 _______________ B. How will the amount calculated in part A affect the financial position of Auntie Em's Sewing Store? C. Is the company profitable? How do you know? ANS: A. Net income: $190,000 - $30,000 - $80,000 - $45,000 = $35,000 B. Net income increases the company's financial position.

C. Yes. The amount of revenues exceeds the amount of expenses by $35,000. PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 19-20 OBJ: 2 MSC: AACSB Analytic

16. The following information comes from the accounting records of Formosa Corporation. January 1, 2008 December 31, 2008 Assets $ 98,000 131,000 Liabilities $ 54,000 _______ Stockholders' Equity $______ 84,000

A. What is the amount of stockholders' equity on January 1, 2008? __________ B. What is the amount of liabilities on December 31, 2008? ___________ C. Assume the company paid dividends of $22,000. How much net income did it earn during the year? D. Assume the company paid no dividends during the year. Without looking at the income statement, how can you tell if the company is profitable or not? ANS: A. $98,000 - $54,000 = $44,000 B. $131,000 - $84,000 = $47,000 C. $44,000 + x - $22,000 = $84,000; x = $62,000 D. If retained earnings increased from the beginning to the end of the year, the company is considered profitable. The amount of net income for the year increases retained earnings, which is a part of stockholders' equity. PTS: 1 DIF: 1 TOP: AICPA FN-Measurement REF: p. 18-21 OBJ: 2 MSC: AACSB Analytic

17. Waldrup Corporation began the year with total assets of $800,000 and total liabilities of $620,000. Use the accounting equation to answer the following questions. A. What was the amount of Waldrup's total assets at the end of the year if liabilities decreased by $60,000 and stockholders' equity increased by $90,000? B. Was the company profitable? How do you know? ANS: A. Beginning of year Change during year End of year B.

Assets $800,000 30,000 $830,000

Liabilities $620,000 (60,000) $560,000

Stockholders' Equity $180,000 90,000 $270,000

Yes, because stockholders' equity increased from the beginning to the end of the year.

PTS: 1 DIF: 2 TOP: AICPA FN-Measurement

REF: p. 18-21 OBJ: 2 MSC: AACSB Analytic

18. The beginning balance of retained earnings was $630,000, and the ending balance was $650,000. The company paid dividends of $60,000. A. Determine the amount of net income for the year. B. What information would you find on the income statement in addition to net income? ANS: A. $630,000 - $60,000 - $650,000 = $80,000 B. The income statement shows revenues (amounts earned) and expenses (costs incurred) during the period. PTS: 1 DIF: 1 TOP: AICPA FN-Measurement REF: p. 18-21 OBJ: 2 MSC: AACSB Analytic

19. Snare, Inc. began 2008 with $390,000 in assets, $140,000 in liabilities, and $170,000 of retained earnings. Net income for the year was $120,000, and dividends of $110,000 were paid. A. Prepare a statement of retained earnings for 2008. B. What is the nature or purpose of the retained earnings account? C. What was the amount of Capital Stock at the beginning of 2008? D. Identify what business events might occur in Snare, Inc.'s business operations that would cause the two stockholders' equity items to increase. E. How do you identify whether Snare was profitable during 2008 by examining the statement of retained earnings? ANS: A. Snare, Inc. Statement of Retained Earnings Year Ended December 31, 2008 Beginning balance Add: Net income for the year Deduct: Dividends for the year Ending balance $170,000 120,000 (110,000) $180,000

B. Retained earnings represents the income earned less the amount of dividends paid to shareholders since the company began operations. C. $390,000 - $140,000 - $170,000 = $80,000 D. One way is for the company to report net income that will increase retained earnings. The stock accounts will increase if the company sells additional shares of stock. E. The statement of retained earnings shows the amount of net income that appears as an addition to beginning retained earnings. Net income implies the company was profitable, whereas if the company were not profitable, a net loss would appear.

PTS: 1 DIF: 2 TOP: AICPA FN-Measurement

REF: p. 18-22 OBJ: 2 MSC: AACSB Analytic

20. Below are several accounts from Abott Company's accounting records. Answer the questions that follow. Total liabilities, end of year Capital stock, end of year Dividends for the period $92,000 16,000 20,000 Total assets, end of year Retained earnings, beginning of year Net income $143,000 15,000 40,000

A. How much is retained earnings at the end of the year? B. Show Abott Company's accounting equation at the end of the year with the respective dollar amounts. C. If stockholders' equity increases during the year, does that mean that the company is profitable? Explain. ANS: A. $143,000 - $92,000 - $16,000 = $35,000 B. $143,000 = $92,000 + $51,000 C. No. Stockholders' equity consists of retained earnings and common stock. Increases in the common stock account consist of new sales of stock during the period, which is not a measure of profitability. PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 18-21 OBJ: 2 MSC: AACSB Analytic

21. Classify the following items according to the financial statement on which each belongs, either the income statement (IS) or the balance sheet (BS). Also indicate whether each is a revenue (R), expense (E), asset (A), liability (L), or stockholders' equity (OE) item. Appears on Which Statement? 1. Retained earnings _________________ Type of Account _________________

2.

Buildings

_________________

_________________

3.

Common stock

_________________

_________________

4.

Accounts payable

_________________

_________________

5.

Football ticket sales

_________________

_________________

6.

Salaries expense

_________________

_________________

7.

Accounts receivable

_________________

_________________

ANS: 1. BS 2. BS 3. 4. 5. 6. 7. BS BS IS IS BS

OE A OE L R E A REF: p. 18-21 OBJ: 2 MSC: AACSB Communication

PTS: 1 DIF: 1 TOP: AICPA FN-Reporting

22. Information provided below was taken from Kiat Motors accounting records: Retained earnings Operating expenses Operating income December 31, 2008 $ 50,000 550,000 80,000 January 1, 2008 $ 40,000 500,000 50,000

A. Determine the percentage change during 2008 of each of the financial statement items. B. What information can you obtain by examining these changes? C. Given unlimited resources, would you make an investment into this company based on this information? Explain. ANS: A. Retained earnings: $10,000/$40,000 = 25% Operating expenses: $50,000/$500,000 = 10% Operating income: $30,000/$50,000 = 60% B. All three amounts are indicators of profitability of the company. If operating expenses increase, the company may be concerned that expenses are too large. However, the percentage increase in operating income is much greater than the expense increase. This causes retained earnings to increase, which increases the net worth of the company. C. Yes, because the profitability of the company has increased. Since retained earnings also increased, it is probable that stockholders' equity has increased. This increase would be reflected in increased assets and/or reduced liabilities.

PTS: 1 DIF: 3 TOP: AICPA FN-Measurement

REF: p. 15-21 OBJ: 1 | 2 MSC: AACSB Analytic

23. Sud Corporation has been in the business of delivering small packages for local companies within the city of St. Augustine, Florida, since 1960. The following information concerning financial activities during 2008 is available at December 31, 2008: Delivery revenue Dividends paid Buildings Accounts payable Capital stock Water, gas, and electricity Cash $280,000 85,000 140,000 30,000 105,000 28,000 56,000 Salary and wage expense Rent expense Land Accounts payable Retained earnings, January 1, 2008 Notes payable Income tax expense $82,000 43,000 60,000 30,000 42,000 34,000 18,000

A. Prepare an income statement for the year ended December 31, 2008. B. If you were a bank loan officer and Sud Corporation wanted to borrow $100,000 from your bank, would you lend the money? Explain. C. Calculate retained earnings at December 31, 2008. ANS: A.

Sud Corporation Income Statement Year Ended December 31, 2008

Revenues: Delivery revenue Expenses: Salary and wage expense Rent expense Water, gas, and electricity Income tax expense Net income $82,000 43,000 28,000 18,000

$280,000

171,000 $109,000

B. The company appears profitable. Basing the decision solely on profitability, it appears the company can generate operating income to enable it to repay the loan. But the company also had accounts payable and notes payable of $30,000 and $34,000, respectively, for which cash may not be available to pay when these amounts become due. C. $42,000 + $109,000 - $85,000 = $66,000 PTS: 1 DIF: 3 TOP: AICPA FN-Measurement REF: p. 15-21 OBJ: 1 | 2 MSC: AACSB Analytic

24. Lang Corporation is in the business of providing dog and cat grooming services to companies within the city of Cleveland. The following information concerning financial activities during 2008 is available at December 31, 2008: Grooming revenue Dividends paid Equipment Accounts payable Capital stock Utilities expense Cash $130,000 13,000 40,000 30,000 22,000 10,000 33,000 Salary and wage expense Rent expense Furniture Accounts receivable Retained earnings, Jan. 1, 2008 Notes payable Income tax expense $44,000 24,000 60,000 23,000 21,000 88,000 7,000

A. Calculate net income for 2008. B. Prepare a statement of retained earnings for the year ended December 31, 2008. C. What information can you derive from the statement of retained earnings concerning this company? Explain. ANS: A. $130,000 - $10,000 - $44,000 - $24,000 - $7,000 = $45,000 B. Lang Corporation Statement of Retained Earnings For the Year Ended December 31, 2008 Beginning balance Add: Net income for the year Less: Dividends for the year Ending balance C. $21,000 45,000 (13,000) $53,000

The statement of retained earnings provides information on the changes in retained earnings during 2008. Net income causes retained earnings to increase, and dividends cause it to decrease. Since net income exceeded dividends paid, the ending balance is larger than the beginning balance. REF: p. 19-21 OBJ: 2 MSC: AACSB Analytic

PTS: 1 DIF: 3 TOP: AICPA FN-Measurement

25. Several amounts from Sapp Company are listed below. Answer the questions. Service revenue Dividends paid Buildings Accounts payable Capital stock Utilities expense Income tax payable $245,000 15,000 110,000 40,000 60,000 19,000 4,000 Salaries expense Rent expense Land Accounts receivable Retained earnings, Jan. 1, 2008 Notes payable Income tax expense $109,000 36,000 100,000 28,000 40,000 30,000 11,000

A. Calculate net income for 2008. B. How much is Sapp's retained earnings at the end of 2008?

C. What primary asset account is missing? ANS: A. $245,000 - $19,000 - $109,000 - $36,000 - $11,000 = $70,000 B. $40,000 + $70,000 - $15,000 = $95,000 C. Cash is missing. PTS: 1 DIF: 2 TOP: AICPA FN-Measurement REF: p. 18-21 OBJ: 2 MSC: AACSB Analytic

26. Zebra Corporation reported the following information at 12/31/05: Accounts Payable Cash Inventories Required: A. B. C. Calculate Zebras total assets. Calculate Zebras net income. Calculate Zebras total stockholders equity. $40,000 $75,000 $18,000 Dividends paid Expenses Revenue $10,000 $60,000 $75,000

ANS: A. $93,000 (75,000 + 18,000) B. C. $15,000 (75,000 + 60,000) $53,000 (93,000 - 40,000) REF: p. 18-24 OBJ: 2 MSC: AACSB Analytic

PTS: 1 DIF: 1 TOP: AICPA FN-Measurement ESSAY

1. List three different groups of users of accounting information. Indicate the type of decisions each group typically makes from accounting information. ANS: The groups and their decisions are: Stockholders: Management: Bankers: Is the company profitable enough to pay dividends? Did the company make a profit for the period? How should an item be priced? Should we continue operations? Can we give employees raises? Can the company pay interest and principal when it comes due?

Creditors: Government:

Can the company pay bills when they are due? How much did the company earn? (i.e., how much taxes should be paid?) REF: p. 15 OBJ: 1 MSC: AACSB Analytic

PTS: 1 DIF: 2 TOP: AICPA FN-Reporting

2. What is the purpose of an income statement? ANS: An income statement reports the company's revenues and expenses for a period of time and shows the company's profitability (or lack of). The income statement is sometimes called the "profit or loss statement." PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 19-20 OBJ: 2 MSC: AACSB Communication

3. List the three financial statements. Explain the connection between these three statements. ANS: 1. Balance Sheet 2. Income Statement 3. Statement of Retained Earnings Net income on the income statement increases retained earnings on the statement of retained earnings. The balance in the statement of retained earnings goes to the balance sheet. PTS: 1 DIF: 2 TOP: AICPA FN-Reporting Chocolate Factory Presented below are condensed data from the financial statements of Chocolate Factory for 2008 and 2007. The figures are expressed in thousands. Use this information to answer the questions that follow. Statement A Total current assets Property, plant & equipment (net of accumulated depreciation) Investments Other assets Total assets 2008 $ 82,309 2007 $ 80,080 REF: p. 18-22 OBJ: 2 MSC: AACSB Analytic

63,451 62,724 303 1,061 3,438 2,606

$149,501 $146,471

Total current liabilities Long-term debt

$ 33,928 $ 28,668 20,491 25,676

Deferred income taxes and contingencies Total liabilities Total stockholders' equity Total liabilities & stockholders' equity Statement B

4,174

5,208

$ 58,593 $ 59,552 90,908 $149,501 86,919 $146,471

2008 2007

Net sales Cost of sales Gross profit Selling, general and administrative expenses Other income (expense) Income (loss) before income taxes Income tax expense Net income (loss)

$209,203 136,225

$174,206 114,284 72,978 59,922 63,895 53,520 693 (118)

9,776 6,284 3,534 2,388

$ 6,242 $ 3,896

4. Refer to the Chocolate Factory. A. What is the name of statement A? _________________________________ B. What is the name of statement B?_________________________________ ANS: A. Statement A is the balance sheet. B. Statement B is the income statement. PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 18-21 OBJ: 2 MSC: AACSB Communication

5. Refer to the Chocolate Factory. Which statement indicates the financial position of the company? What information is provided on that statement that indicates the "financial position" of the company? Explain. ANS: The balance sheet provides information on the financial position of the company. It is expressed in terms of the accounting equation. When total liabilities are subtracted from total assets, the difference is stockholders' or stockholders' equity. This amount represents net worth or the financial position of a company at the balance sheet date. PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 18-19 OBJ: 2 MSC: AACSB Analytic

6. Refer to the Chocolate Factory. Was Chocolate Factory profitable both years? What are the amounts of the total revenues and total expenses, respectively, for 2008? Which financial statement provides this information to you?

ANS: The company was profitable in both 2008 and 2007. For 2008, total revenues include net sales of $209,203, and other income, $693, for a total of $209,896. Total expenses are cost of sales of $136,225, selling, general and administrative expenses of $63,895, and income tax expense of $3,534, or a total of $203,654. This information is reported on the income statement. PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 19-20 OBJ: 2 MSC: AACSB Communication

7. Refer to the Chocolate Factory. How much of Chocolate Factory is financed by owners at the end of December of 2008? ANS: The financing by owners for 2008 is the amount of stockholders' equity, $90,908. Over time, sales of stock and earnings of the company cause this amount to increase. PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 18-19 OBJ: 2 MSC: AACSB Communication

8. Refer to the Chocolate Factory. How much of Chocolate Factory is financed by creditors at the end of December of 2008? Evaluate the change from 2007 to 2008. ANS: The amount of financing by creditors for 2008 is the amount of liabilities reported on the balance sheet, $58,593. For 2007, the amount was $59,552. Total liabilities decreased by $959, or about 1.6%. The company must be keeping its debt at a steady position as stockholders' equity and assets have increased. The change must be examined relative to the entire financial position. PTS: 1 DIF: 2 TOP: AICPA FN-Reporting REF: p. 18-19 OBJ: 2 MSC: AACSB Communication

9. Refer to the Chocolate Factory. Based on the information provided, is Chocolate Factory considered a business or non-business entity? How do you know by examining the financial statements? ANS: Chocolate Factory is a business entity, because its purpose is to make a profit, not simply provide a service. Non-business entities have no owners, and Chocolate Factory has owners, as evidenced by examining the stockholders' equity section of the balance sheet. PTS: 1 OBJ: 1 | 4 DIF: 1 REF: p. 14-16 | p. 33 TOP: AICPA FN-Reporting MSC: AACSB Analytic

10. What is meant by generally accepted accounting principles? ANS: Generally accepted accounting principles (GAAP) are a set of guidelines that are based on a conceptual framework. They represent the various rules, practices, and other procedures used as a basis for accounting principles. GAAP was created in response to the need for some form of regulation over the preparation of financial statements. PTS: 1 DIF: 1 TOP: AICPA FN-Reporting REF: p. 26 OBJ: 3 MSC: AACSB Communication

11. The following accounting principles and assumptions are included in the conceptual framework of accounting: Economic entity Monetary unit Going concern Time period Cost principle

For each situation in A through C below, identify which assumption or principle applies by selecting from the list provided above, and explain why that assumption or principle applies. A. Multinational Corp. has divisions in several countries around the world. Each of these countries has a currency different from the U.S. dollar. Multinational Corp. is a U.S. company and must include the financial data of its worldwide divisions in its financial statements. B. Cheater and Sly operate a security business as a partnership. They are considering the advantages of changing over to the corporate form of business. C. Food N' Fun is a locally owned and operated fast-food business. The owners have decided to expand into nearby cities. Expansion will require more capital, but management doesn't expect it will stay in business for more than a year or so regardless if it expands or not. ANS: A. Monetary unit. Financial statement must be denominated in one currency--the standard monetary unit. In the United States, this unit is the dollar. B. Economic entity. A business can take three forms. Regardless of form, however, the unit itself is distinct from other units. C. Going concern. A business is assumed to continue forever to more accurately reflect the valuation of assets and appropriately allocate costs to accounting periods. PTS: 1 DIF: 3 TOP: AICPA FN-Reporting REF: p. 25-26 OBJ: 3 MSC: AACSB Analytic