Exam 1 Review with answer PDF

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Exam Review Chapter 1 Main Concepts:  What are the two common sources of financial resources and what do the parties expect in return for investing the company?  What are the four basic financial statements, why are the necessary, and what accounts are commonly seen on each? o Balance Sheet => Assets = Liabilities + Stockholder’s Equity o Income Statement => Revenues – Expenses = Net Income o Statement of Cash Flows => Cash flow from operating, financing and investing activities o Statement of Stockholder’s Equity => Retained Earnings, Dividends and Common Stock  How do the four financial statements relate with one another? Chapter 2 Main Concepts:  In a balance sheet, assets and liabilities are classified into two categories: current and noncurrent. Current assets are those that can be turned into cash within the upcoming year, whereas noncurrent assets are those that will last longer than one year. Similarly, current liabilities are obligations due within one year (e.g., accounts payable), whereas noncurrent liabilities are settled after one year (notes payable owed to a bank).  What is the current ratio and how is it useful to investors?  Know the steps of a transaction analysis o Step 1: Identify each account affected o Step 2: Classify each account as Assets, Liability or Stockholder’s Equity o Step 3: Determine the direction of the effect o Step 4: Verify the accounting equation is still balanced  Half the battle of a journal entry is the transaction analysis. Then, when you understand how debits and credits affect assets, liabilities and stockholder’s equity, you can complete a journal entry. Some key things to remember of a journal entry: o Debits go first in the journal entry, then credits o Make sure it is clear which number is being debited, and which is credited. If the numbers are in the same line or column, then I cannot tell which is the debit and which is the credit. A good example of a journal entry is below: Debits go first Credits go second and are tabbed 

Debit Credit

The purpose of a trial balance is to ensure debits equals credits before we start to build the financial statements. This ensures that assets equals liabilities plus stockholder’s equity. Why? Because assets naturally have a debit balance, whereas liabilities and stockholder’s equity naturally have a credit balance.

Chapter 3 Main Concepts:  Understand how revenues are different from gains and how expenses are different from losses.  Furthermore, understand that an income statement generally has two classifications for accounts: operating and other. Operating revenues and expenses are generated from the core focus of the business (e.g., Sales Revenue and Cost of Goods Sold), whereas other items are peripheral items towards the business (e.g., interest income or gains on sale of investments).  What is the net profit margin ratio and how do investors use it?  Understand the differences between cash and accrual accounting. Cash accounting is simple and generally used by smaller businesses, but GAAP does not allow cash basis for publicly traded firms. Why? Because cash basis does not give an adequate interpretation of the future of the company.  Revenue and expense recognition principle. In summary, a company records revenue after it is earned, and records expenses when they are incurred to generate revenues. Understand when a company records unearned revenues or accounts receivables, as well as when a company records prepaid expense or accounts payables.  In a journal entry, revenues go up with credits, whereas expenses go up with debits. Why? Revenues increase net income, whereas expenses decrease net income. Net income is closed into retained earnings each year, which is a part of stockholder’s equity. From chapter 2, we know that credits increase stockholders’ equity, but debits decrease it. So, to stay consistent, we see that revenues are credits because it eventually increases stockholder’s equity, whereas expenses are debits because it eventually decreases stockholder’s equity.  Continue to practice journal entries. Chapter 4 Main Concepts:  At the end of the period, generally a year, a company prepares a trial balance, adjusts and closes the income statement and necessary balance sheet accounts, and creates the financial statements.  Closing net income means we calculate net income on the income statement, post it to retained earnings in the statement of stockholder’s equity, and post the ending retained earnings on the balance sheet. Other accounts that are generally closed are prepaid expenses, unearned revenues, supplies, and accumulated depreciation (covered later in course).  Adjusting entries are necessary in accrual accounting to portray the financial condition of the firm at the end of the period.  There are two types of accounts in the financial statements: permanent or temporary. Permanent accounts are balance sheet accounts, whereas temporary accounts are revenues, expenses and dividends. This is because net income is calculated per period, whereas the balance sheet contains accounts that are not zeroed out at the end of the period.

Practice problems: 1) Which of the following statements is correct? A) Assets on the balance sheet include retained earnings. B) Retained earnings includes common stock. C) The balance sheet equation states that assets equal liabilities. D) A corporation's net income does not necessarily equal its net cash flow from operations. 2) Which of the following best describes liabilities and stockholders' equity? A) They are the sources of financing an entity's assets. B) They are the economic resources owned by a business entity C) They are reported on the income statement. D) They both increase when assets increase. 3) Willie Company's retained earnings increased $20,000 during the current year. What was Willie's current year net income or loss given that Willie declared $25,000 of dividends during this year? A) Net income was $5,000. B) Net income was $45,000. C) Net loss was $45,000. D) Net loss was $5,000. 4) Which financial statement would you use to determine a company's earnings performance during an accounting period? A) Balance sheet. B) Statement of stockholders' equity. C) Income statement. D) Statement of cash flows. 5) Lena Company has provided the following data for its 2019 operations (ignore income taxes): 2019 revenues were $99,000. 2019 expenses were $47,800. Dividends declared and paid during 2019 totaled $9,500. Total assets at December 31, 2019 were $177,000. Total liabilities at December 31, 2019 were $89,000. Common stock at December 31, 2019 was $28,000. Which of the following is correct? A) 2019 net income was $41,700. B) Total stockholders' equity at December 31, 2019 was $236,000. C) Retained earnings at December 31, 2019 were $60,000. D) Retained earnings at December 31, 2019 were $41,700.

6) Madrid Company has provided the following data (ignore income taxes): 2019 revenues were $77,500. 2019 net income was $33,900. Dividends declared and paid during 2019 totaled $5,700. Total assets at December 31, 2019 were $217,000. Total stockholders' equity at December 31, 2019 was $123,000. Retained earnings at December 31, 2019 were $83,000. Which of the following is not correct? A) 2019 expenses were $43,600. B) Total liabilities at December 31, 2019 were $94,000. C) Retained earnings increased $33,900 during 2019. D) Common stock at December 31, 2019 was $40,000. 7) On January 1, 2019, Miller Corporation had retained earnings of $8,000,000. During 2019, Miller reported net income of $1,500,000, declared dividends of $500,000, and issued common stock for $1,000,000. What were Miller's retained earnings on December 31, 2019? A) $7,000,000. B) $9,000,000. C) $9,500,000. D) $7,500,000. 8) Which of the following best describes the balance sheet? A) It includes a listing of assets at their market values. B) It includes a listing of assets, liabilities, and stockholders' equity at their market values. C) It provides information pertaining to a company's economic resources and the sources of financing for those resources. D) It provides information pertaining to a company's liabilities for a period of time. 9) True or false: The primary objective of financial reporting is to provide useful information to external decision makers. 10) True or false: Due to the relationships among financial statements, the statement of stockholders' equity links the income statement to the balance sheet. 11) Which of the following correctly describes retained earnings? A) It is the cumulative earnings of a company. B) It represents the investments by stockholders in a company. C) It equals total assets minus total liabilities. D) It is the cumulative earnings of a company less dividends declared.

12) Which of the following liability accounts does not usually require a future cash payment? A) Accounts payable. B) Unearned revenues. C) Taxes payable. D) Notes payable. 13) Which of the following reflects the impact of a transaction where $200,000 cash was invested by stockholders in exchange for stock? A) Assets and retained earnings each increased $200,000. B) Assets and revenues each increased $200,000. C) Stockholders' equity and revenues each increased $200,000. D) Stockholders' equity and assets each increased $200,000. 14) Which of the following is a result of equipment purchased with cash? A) Total assets decrease. B) Current assets do not change. C) Current assets increase. D) Stockholders' equity does not change. 15) Which of the following statements is incorrect? A) Stockholders' equity accounts normally have credit balances. B) Liability accounts are decreased by credits. C) Stockholders' equity accounts are increased by credits. D) Asset accounts are increased by debits. 16) Which of the following describes the impact on the balance sheet of paying a current liability using cash? A) Current assets will decrease. B) Current liabilities will increase. C) Stockholders' equity will decrease. D) Total assets will remain the same.

17) Which of the following journal entries is correct when a business entity purchases a building by paying cash and by signing a note payable for the balance? A) Building

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Cash

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Notes Payable

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B) Building

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Cash

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C) Cash

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Notes Payable

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Building

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D) Building

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Cash

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Notes Payable

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18) Which of the following statements is false? A) The income statement covers a period of time. B) A loss on the sale of plant and equipment is considered a peripheral activity and is not reported on the income statement. C) Rent expense is a component of operating income. D) Interest expense is not a component of operating income. 19) Which of the following best describes operating revenues? A) They are increases in assets or increases in liabilities as a result of peripheral transactions. B) They are decreases in assets or decreases in liabilities as a result of central ongoing operations. C) They are increases in assets or decreases in liabilities as a result of central ongoing operations. D) They are decreases in assets or increases in liabilities as a result of peripheral transactions.

20) Lantz Company has provided the following information: • Cash sales totaled $255,000. • Credit sales totaled $479,000. • Cash collections from customers for services yet to be provided totaled $88,000. • A $22,000 loss from the sale of property and equipment occurred. • Interest income was $7,700. • Interest expense was $19,900. • Supplies expense was $336,000. • Rent expense for the store was $36,000. • Wages expense was $49,000. • Other operating expenses totaled $79,000. • Unearned revenue was $4,000. What is the amount of Lantz's operating revenues? A) $734,000. B) $822,000. C) $826,000. D) $833,700. 21) Which of the following journal entries correctly records the receipt of a utility bill, which will be paid for in later weeks? A) Utilities payable

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Utilities expense

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B) Utilities expense

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Utilities payable

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C) Utilities expense

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Retained earnings

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D) Retained earnings Utilities payable

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22) Which of the following journal entries correctly records a transaction where services were provided to a customer on account? A) Cash

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Service revenue

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B) Unearned revenue

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Service revenue

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C) Accounts receivable

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Service revenue

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D) Service revenue Accounts receivable

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23) The CHS Company paid $30,000 cash to its landlord on November 1, 2019 for rent covering the six-month period from November 1, 2019 through April 30, 2020. The books are adjusted only at year-end. Which of the following does not correctly describe the effect on CHS Company's financial statements of the December 31, 2019 adjusting entry? A) Net income decreases $10,000. B) Prepaid rent decreases $10,000. C) Rent expense increases $10,000. D) Stockholders' equity increases $10,000. 24) On July 1, 2019, Allen Company signed a $100,000, one-year, 6 percent note payable. The principal and interest will be paid on June 30, 2020. How much interest expense should be reported on the income statement for the year ended December 31, 2019? A) $6,000. B) $3,000. C) $1,500. D) $0.

25) Which of the following correctly describes the effects of initially recording prepaid insurance expense when cash is paid to purchase an insurance policy? A) Total assets do not change. B) Net income decreases. C) Liabilities are decreased. D) Stockholders' equity increases. 26) Which of the following does not correctly describe the following adjusting journal entry? Wages expense Wages payable A) Total assets do not change. B) The transaction is an example of an accrual. C) Stockholders' equity decreases. D) Net income is not affected.

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Solutions: 1) D 2) A 3) B 4) C 5) C 6) C 7) B 8) C 9) True 10) True 11) D 12) B 13) D 14) D 15) B 16) A 17) A 18) B 19) C 20) A 21) B 22) C 23) D 24) B 25) A 26) D...