Test and answer for chapter 1-3 PDF

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these are questions and answers from chapter 1-3 for accounting 2101...

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1. Which of the following describes the effects of an asset use transaction on the accounting equation? Assets + − + − NA

A. B. C. D. Ans- B

= = = = =

Liabilities + NA NA +

+ + + + +

Stockholders’ Equity NA − NA NA

2. The Heritage Company is a manufacturer of office furniture. Which term best describes Heritage's role in society? Multiple Choice Ans- Business

3. Chico Company experienced an accounting event that affected its accounting equation as indicated below:

Assets +

= =

Liabilities NA

+ Common Stock + + + +

Retained Earnings NA

Which of the following accounting events could have caused these effects on Chico's accounting equation? Ans -Issued common stock.

4. Yi Company provided services to a customer for $5,500 cash. Based on this information alone, which of the following statements is true? -Total assets increased and net income increased.

5. Reynolds Company experienced an accounting event that affected its financial statements as indicated below: Assets +

= =

Liabilities NA

+ +

Stockholders’ Equity +

Which of the following accounting events could have caused these effects on Reynolds' accounting equation? Multiple Choice. Ans - Earned cash revenue.

6. Perez Company paid a $300 cash dividend. Which of the following accurately reflects how this event affects the company's financial statements? Retained Assets = Liabilities + Common Stock + Earnings A. 300 = 300 + NA + NA B. (300) = NA + (300) + NA C. (300) = NA + NA + (300) D. 300 = NA + NA + 300 Ans- C

7. Lexington Company engaged in the following transactions during Year 1, its first year in operation: (Assume all transactions are cash transactions.) 1. 2. 3. 4. 5.

Acquired $4,500 cash from issuing common stock. Borrowed $2,950 from a bank. Earned $3,850 of revenues. Incurred $2,550 in expenses. Paid dividends of $550.

Lexington Company engaged in the following transactions during Year 2: (Assume all transactions are cash transactions.) 1. 2. 3. 4. 5.

Acquired an additional $1,250 cash from the issue of common stock. Repaid $1,825 of its debt to the bank. Earned revenues, $5,250. Incurred expenses of $3,050. Paid dividends of $1,540.

What was the amount of liabilities on Lexington's balance sheet at the end of Year 2?

Ans- $1,125 Explanation

$2,950 beginning balance − $1,825 loan repayment = $1,125 8. Packard Company engaged in the following transactions during Year 1, its first year of operations: (Assume all transactions are cash transactions.) 1. 1) Acquired $1,800 cash from the issue of common stock. 2. 2) Borrowed $1,270 from a bank.

3. 3) Earned $1,500 of revenues. 4. 4) Paid expenses of $420. 5. 5) Paid a $220 dividend. During Year 2, Packard engaged in the following transactions: (Assume all transactions are cash transactions.) 1. 2. 3. 4. 5.

1) Issued an additional $1,175 of common stock. 2) Repaid $815 of its debt to the bank. 3) Earned revenues of $1,600. 4) Incurred expenses of $700. 5) Paid dividends of $270.

The amount of assets on Packard’s Year 2 balance sheet is Ans- $4,920

Explanation

Total assets at end of Year 1 = $1,800 + $1,270 + $1,500 − $420 − $220 = $3,930 Total assets at end of Year 1 becomes the beginning balance of total assets for Year 2. $3,930 beginning balance + $1,175 − $815 + $1,600 − $700 − $270 = $4,920

9. The financial statements of Calloway Company prepared at the end of the current year contained the following elements and corresponding amounts: Assets = $29,000; Liabilities = ?; Common Stock = $5,900; Revenue = $12,800; Dividends = $1,200; Beginning Retained Earnings = $4,200; Ending Retained Earnings = $7,900. Based on this information, what was the amount of expenses reported on Calloway's income statement for the current year? Ans- $7,900

Explanation

Beginning retained earnings + Revenue − Expenses − Dividends = Ending retained earnings $4,200 + $12,800 − Expenses − $1,200 = $7,900 Expenses = $7,900 10. Retained earnings at the beginning and ending of the accounting period were $1,050 and $2,200, respectively. Revenues of $4,100 and dividends paid to stockholders of $950 were reported during the period. What was the amount of expenses reported for the period? Ans- $2,000

Explanation

Beginning retained earnings + Revenues − Expenses − Dividends = Ending retained earnings $1,050 + $4,100 − Expenses − $950 = $2,200 Expenses = $2,000 Packard Company engaged in the following transactions during 11. Year 1, its first year of operations: (Assume all transactions are cash transactions.) 1. 2. 3. 4. 5.

1) Acquired $1,300 cash from the issue of common stock. 2) Borrowed $770 from a bank. 3) Earned $1,000 of revenues. 4) Paid expenses of $320. 5) Paid a $120 dividend.

During Year 2, Packard engaged in the following transactions: (Assume all transactions are cash transactions.) 1. 2. 3. 4. 5.

1) Issued an additional $675 of common stock. 2) Repaid $465 of its debt to the bank. 3) Earned revenues of $1,100. 4) Incurred expenses of $500. 5) Paid dividends of $170.

What is the net cash inflow from operating activities that will be reported on Packard’s statement of cash flows for Year 1? Ans- $680

Explanation

$1,000 inflow from revenue − $320 outflow for expenses = $680 inflow 12. Jackson Company had a net increase in cash from operating activities of $9,600 and a net decrease in cash from financing activities of $3,400. If the beginning and ending cash balances for the company were $4,600 and $14,200, what was the net cash change from investing activities? Ans-An inflow or increase of $3,400.

Explanation

13. Beginning cash balance + Increase from operating activities − Decrease from financing activities +/− Increase or decrease from investing activities = Ending cash balance $4,600 + $9,600 − $3,400 +/− Increase or decrease from investing activities = $14,200 $3,400 = Increase in investing activities

Perez Company paid a $300 cash dividend. Which of the following accurately reflects how this event affects the company's horizontal financial statements model? Balance Sheet

Income Statement Net Asset Liabilitie Stockholders Revenu Expens incom Statement of s = s + ' Equity e − e = e Cash Flows A . B (300) . C (300) . D (300) .

300

(300)

300

(300)

(300)

300

(300)

(300) (300)

(300 ) FA (300 ) FA (300 ) OA

Ans- C

Explanation

Paying cash dividends decreases assets (Cash) and decreases stockholders' equity (Retained Earnings) on the balance sheet. It does not affect the income statement but is reported as a cash outflow from financing activities on the statement of cash flows. Chico Company experienced an accounting event that affected 14. its financial statements as indicated below: Balance Sheet Income Statement Statement Stockholders' Net of Cash Assets=Liabilities+ Equity Revenue−Expense=income Flows + + +FA Which of the following accounting events could have caused these effects on the elements of Chico’s financial statements? Ans-

Issued common stock

Explanation

Issuing common stock would increase assets (Cash) and increase stockholders' equity (Common Stock). It would not affect net income, but would be reported as a cash inflow from financing activities on the statement of cash flows. Garrison Company acquired $23,000 by issuing common stock. Which of the following accurately reflects how this event affects the company's horizontal

financial statements model? Statement of Balance Sheet Income Statement Cash Flows Assets= Liab. +Stk. Equity Rev. −Exp.=Net Inc. A.23,000 23,000 23,000 FA B.23,000 23,000 23,000 23,000 23,000 FA C.23,000 23,000 23,000 23,000 FA D.23,000 23,000 23,000 23,000 23,000 OA

Ans-A

Explanation

Issuing common stock increases assets (Cash) and stockholders' equity (Common Stock). It does not affect the income statement but is reported as a cash inflow from financing activities on the statement of cash flows. 15. Which of the following is an asset exchange transaction? Ans-Collected cash on accounts receivable

Explanation

16. Collecting cash on accounts receivable is an asset exchange transaction that increases one asset (cash) and decreases another asset (accounts receivable). Issuing common stock is an asset source transaction. Accruing salary expense is a claims exchange transaction. Earning cash revenue is an asset source transaction.

Which of the following describes the effects of a claims exchange transaction on a company's financial statements? Balance Sheet

Statemen t of Asset Liabilitie Stockholders Net Cash s = s + ' Equity Revenue−Expense=income Flows A. +OA B. + + +OA C. + − + − D. +FA Ans- C

Explanation

Income Statement

Recognizing accrued salary expense is a claims exchange transaction. The claims of creditors increase and the claims of stockholders decrease. Total claims remain unchanged. Specifically, the liabilities account, Salaries Payable, increases. The balance in the Salaries Payable account represents the amount of cash the company is required to pay the employee in the future. Recognizing salary expense decreases net income. There is no effect on the statement of cash flows because cash was not paid. 17. In Year 1, Dale Company incurred $4,000 of utility expense on account. Dale paid cash for these expenses in Year 2. Which of the following shows how paying cash for Year 1’s utility expense will affect Dale’s accounting equation in Year 2?

Cash A.(4,000) B. 4,000 C. D.(4,000)

Assets Accounts + Receivable

(4,000)

Balance Sheet = Liabilities + Stockholders’ Equity Accounts Common Retained = Payable + stock + Earnings (4,000) (4,000) (4,000) (4,000)

Ans-A

18. Zimmerman Company sold land for $25,000 cash. The original cost of the land was $25,000. Which of the following accurately reflects how this event affects the company's horizontal financial statements model? Balance Sheet

Income Statement Net Liabilit Stockholde Expen inco Statement of Assets = ies + rs' Equity Revenue − se = me Cash Flows A 25,000 25,000 IA . (25,00 0) (25,00 (25,00 (25,00 B (25,00 0) IA 0) . 0) 0) 25,000 C 25,000 25,000 15,000 . FA 25,0 25,000 D 25,000 25,000 . 00 IA (25,00 0)

Ans- A

Explanation

Selling land for cash increases one asset (Cash) and decreases another asset (Land). It is an asset exchange transaction and total assets is unchanged. There is no effect on liabilities or stockholders’ equity. It does not affect the income statement but is reported as a cash inflow from investing activities on the statement of cash flows.

19. Revenue on account amounted to $4,800. Cash collections of accounts receivable amounted to $2,900. Expenses for the period were $2,500. The company paid dividends of $650. What was net income for the period? Ans- $2,300

Explanation

Net income = Revenue of $4,800 − Expenses of $2,500 = $2,300; dividends decrease retained earnings but do not affect net income. 20. Revenue on account amounted to $6,200. Cash collections of accounts receivable amounted to $5,900. Cash paid for operating expenses was $4,100. The amount of employee salaries accrued at the end of the year was $1,900. What was the net cash flow from operating activities? Ans- $1,800

Explanation

Cash collected on accounts receivable of $5,900 − Cash paid for operating expenses of $4,100 = $1,800. Revenue earned on account and accrued salaries are not cash flow activities.

21. Warren Enterprises began operations during Year 1. The company had the following events during Year 1:        

The business issued $40,000 of common stock to its stockholders. The business purchased land for $32,000 cash. Services were provided to customers for $36,000 cash. Services were provided to customers for $25,000 on account. The company borrowed $36,000 from the bank. Operating expenses of $32,000 were incurred and paid in cash. Salary expense of $2,800 was accrued. A dividend of $24,000 was paid to the stockholders of Warren Enterprises.

What is the balance of the Retained Earnings account as of December 31, Year 1? Ans- $2,200

Explanation

Net income = Revenues of $61,000 − Operating expenses of $34,800 = $26,200 Ending retained earnings = Beginning retained earnings of $0 + Net income of $26,200 − Dividends of $24,000 = $2,200 Warren Enterprises began operations during Year 1. The company 22. had the following events during Year 1:        

The business issued $40,000 of common stock to its stockholders. The business purchased land for $32,000 cash. Services were provided to customers for $36,000 cash. Services were provided to customers for $25,000 on account. The company borrowed $36,000 from the bank. Operating expenses of $32,000 were incurred and paid in cash. Salary expense of $2,800 was accrued. A dividend of $24,000 was paid to the stockholders of Warren Enterprises.

What is the balance of the Retained Earnings account as of December 31, Year 1? Ans- $2,200

Explanation

23. Net income = Revenues of $61,000 − Operating expenses of $34,800 = $26,200 Ending retained earnings = Beginning retained earnings of $0 + Net income of $26,200 − Dividends of $24,000 = $2,200 Nelson Company experienced the following transactions during Year 1, its first year in operation. 1. 2. 3. 4.

Acquired $6,600 cash by issuing common stock. Provided $2,900 of services on account. Paid $1,750 cash for operating expenses. Collected $2,200 of cash from customers in partial settlement of its accounts receivable. 5. Paid a $130 cash dividend to stockholders. What is the amount of total assets that will be reported on the balance sheet as of December 31, Year 1?

Ans- $7,620

Explanation

Total assets = Cash of $6,920 (calculated as $6,600 + $2,200 − $1,750 − $130) + Accounts Receivable of $700 (calculated as $2,900 − $2,200) = $7,620 Nelson Company experienced the following transactions during 24. Year 1, its first year in operation. 1. 2. 3. 4.

Acquired $9,800 cash by issuing common stock. Provided $6,100 of services on account. Paid $2,550 cash for operating expenses. Collected $3,800 of cash from customers in partial settlement of its accounts receivable. 5. Paid a $290 cash dividend to stockholders. What is the amount of net income that will be reported on the Year 1 income statement? Ans- $3,550

Explanation

25. Net income = Revenue of $6,100 − Expenses of $2,550 = $3,550 Nelson Company experienced the following transactions during Year 1, its first year in operation. 1. 2. 3. 4.

Acquired $8,400 cash by issuing common stock. Provided $4,700 of services on account. Paid $2,200 cash for operating expenses. Collected $3,100 of cash from customers in partial settlement of its accounts receivable. 5. Paid a $220 cash dividend to stockholders. What is the balance of the retained earnings that will be reported on the balance sheet as of December 31, Year 1? Ans- $2,280

Explanation

Net income: 4,700 − 2,200 = 2,500 Cash: 8,400 + 3,100 − 2,200 − 220 = 9,080 Accounts receivable: 4,700 − 3,100 = 1,600 Assets: 9,080 + 1,600 = 10,680

Ending retained earnings = Beginning retained earnings of $0 + Net income of $2,500 − Dividends of $220 = $2,280 Alternatively: Assets of $10,680 = Liabilities of $0 + Common stock of $8,400 + Retained earnings Retained earnings = $2,280 26. Which of the following events would require a year-end adjusting entry? Ans- Purchasing supplies for cash during the year. 27. On January 1, Year 1, Martin Mowing Company paid $64,000 to purchase a truck. The truck was expected to have a six-year useful life and a $4,000 salvage value. If Margin uses the straight-line method, the amount of depreciation expense recognized on the Year 2 income statement is Ans- $10,000

Explanation

Depreciation expense per year = (Cost of the asset − Salvage value) ÷ Useful life Depreciation expense per year = ($64,000 Cost − $4,000 Salvage) ÷ 6 Year life = $10,000 Straight-line depreciation recognizes the same amount of expense for each year of useful life. In this case, $10,000 will be recognized in Year 1, Year 2, Year 3, Year 4, Year 5, and Year 6. 28. Chester Company started Year 2 with a $2,000 balance in its Cash account, a $500 balance in its Supplies account, and a $2,500 balance in its Common Stock account. During Year 2, the company experienced the following events: 1. (1) Paid $1,400 cash to purchase supplies. 2. (2) Physical count revealed $300 of supplies on hand at the end of Year 2. Based on this information, which of the following shows how the year-end adjusting entry required to recognize supplies expense would affect Chester’s account balances? Balance Sheet = Liabilities + Accounts Supplies Payable (1,600) 1,600 1,600 1,400 (1,400)

Assets Cash A. B. C. D.

(1,400) Ans- A

Stockholders' Equity Common Retained Earnings Stock (1,600)

(1,400)

Explanation

The amount of supplies available for use is $1,900 ($500 beginning balance in the Supplies account plus the $1,400 amount of supplies purchased). Given that there was $300 of supplies on hand at the end of the accounting period, $1,600 ($1,900 available − $300 ending balance) of supplies must have been used during the period. The amount of supplies used would be recorded as an expense. On the balance sheet, the use of supplies will decrease assets (Supplies) by $1,600 and stockholders’ equity (Retained Earnings) by $1,600. 29. On January 1, Year 1, Alabama Company purchased a machine for $26,000. The machine has an estimated useful life of 4 years and an estimated salvage value of $6,000. What is the book value of the machine reported on Alabama's balance sheet as of December 31, Year 1? Ans- $21,000

Explanation

Accumulated depreciation at end of Year 1 = (Cost of $26,000 − Salvage value of $6,000) ÷ 4 years = $5,000 Book value = Cost of $26,000 cost − Accumulated depreciation of $5,000 = $21,000 30. During Bruce Company’s first year of operations, the company purchased $3,500 of supplies. At year-end, a physical count of the supplies on hand revealed that $1,425 of unused supplies were available for future use. How will the related adjusting entry affect the company’s financial statements? Ans- Expenses will increase and assets will decrease by $2,075.

Explanation

The company used $2,075 ($3,500 − $1,425) of supplies during its first year of operations. The adjusting entry to recognize supplies expense will decrease stockholders’ equity (Retained Earnings) and decrease assets (Supplies) by $2,075. It will increase expenses and decrease net income.

31. On October 1, Year 1, Gomez Company collected $15,600 in advance from a customer for services to be provided over a one-year period beginning on that date. How much revenue would Gomez Company report related to this contract on its income statement for the year ended December 31, Year 1? How much would the company report as net cash flows from operating activities for Year 1? Ans- $3,900; $15,600

Explanation

Monthly revenue = Receipt of $15,600 ÷ 12 months = $1,300 per month Revenue (on the income statement) = $1,300 per month × 3 months (October through December) = $3,900 The company will recognize the $15,600 received as a cash i...