Accounting Final Exam Online Study Guide

True or False:
The objectives of financial reporting for nonbusiness entities focus on providing information for resource providers rather than investors.
True False

The owners' equity portion of a firm's balance sheet represents the amount the firm has available in assets after subtracting its expenses for the period.
True False

Liabilities represent the amounts an organization owes, and can be defined as "probable future sacrifices of economic benefits, arising from present obligations to transfer assets or provide services in the future".
True False

Assets are divided into the current and noncurrent categories based upon when the organization received it assets.
True False

Dividends are expenses of doing business and reduce net income on the income statement.
True False

Because of the objectivity concept in financial accounting, the expected future value of services to be provided to an organization by its employees is not included as an asset on the balance sheet.
True False

The cost/benefit constraint in financial reporting means that information should not be reported if it costs the organization more to report the information than the disclosure of the information would benefit investors and creditors.
True False

The balance sheet equation will remain in balance if a entry is recorded to increase Cash and decrease accounts Payable.
True False

When a company operates at a profit during the year, either assets increased or liabilities decreased during the year, or both.
True False

Some assets on the balance sheet become expenses on the income statement as they are used up.
True False

When Merchandise Inventory is sold at a price above its cost to the selling organization, two entries are required: one to record the sale as revenue, and another to record the reduction in Merchandise Inventory as expense.
True False

Adjusting entries are required in order to achieve a better matching of revenues and expenses on the income statement.
True False

All adjusting entries affect both the balance sheet and the income statement, but never the cash account.
True False

A proposed adjusting entry that debits an expense account and credits a revenue account is appropriate because these effects will show up as adjustments to net income.
True False

In the context of adjusting entries, accrue means to increase and defer means to decrease.
True False

Since assets and expenses are both increased with debits, and since assets represent future economic benefits to an entity, so do expenses.
True False

Dividends represent a distribution of profits to the owners of the firm rather than an expense, and are treated as a direct reduction of Retained Earnings.
True False

Debit means left and credit means right, and nothing more.
True False

Assets and revenues are increased with debits, while owners' equities, liabilities, and expenses are increased with credits.
True False

When the bank credits your savings account, you debit your account, because savings are an asset to you and a liability to the bank.
True False

Since interest expense on notes payable accrues as a function of principal, rate, and time, interest expense is recorded at the same time that the cash is received from the lender.
True False

Some transactions can be originally recorded as debits to either assets or expenses, as long as the accountant remembers to make an adjusting entry at the end of the fiscal period to reflect the appropriate amount of expense on the income statement.
True False

Current assets can be defined as cash or those assets that are immediately collectible on account.
True False

The bank reconciliation is a process of comparing the most recent balances shown on the bank statement and in the cash account in order to verify that all differences have been identified and properly accounted for.
True False

All reconciling differences between the bank (statement) and book (cash account) balances result from timing difference and errors made by the bank.
True False

When a firm receives notice on their bank statement that a customer has bounced a check (an NSF check on the bank statement), that account should be written off as a bad debt.
True False

Since a 2/10, n30 cash discount offered by a seller of merchandise allows the purchaser to save 2 percent, the cost of the discount taken by the purchaser should be reported as an expense on the books of the seller.
True False

The Allowance for Cash Discounts account is reported on the balance sheet as a contra account to Accounts Receivable, and is included with the balance of the Allowance for Bad Debts account for financial reporting purposes.
True False

The adjusting entry to accrue interest earned on a note receivable increases in both assets and liabilities.
True False

In inflationary times, ROI can be increased more dramatically by reducing inventory levels under LIFO than under FIFO because the oldest, lowest dollar-value layers of costs would be eliminated during the inventory liquidation.
True False

FIFO is often criticized for reporting "phantom profits" during inflationary times because replacement costs of inventory items are higher than the costs assigned to cost of goods sold on the income statement.
True False

FIFO achieves the most appropriate balance sheet valuation during inflationary times because the most current costs are shown as ending inventory.
True False

Depreciation expense must be recorded to achieve a proper matching between revenues and expenses for a period of time.
True False

The declining balance methods of depreciation ignore the asset's salvage value until the year in which net book value would otherwise fall beneath the estimated salvage value.
True False

Fully depreciated assets that are scrapped or otherwise discarded result in reporting losses on the income statement.
True False

Although depreciation does not directly affect cash, it does reduce taxable income because it is a tax-deductible expense.
True False

Liabilities referred to as "accrued expenses" result from adjusting entries required to match current period expenses with current period revenues.
True False

The "current maturities of long-term debt" caption is reported separately from long-term debt in current liability section of the balance sheet in order to highlight its significance.
True False

Straight and discounted interest computations differ in terms of the way in which they are computed, but the resulting annual percentage rates are the same under either method.
True False

When interest on a loan is computed on the discount basis the amount available to the borrower (called the loan proceeds) is the principal amount minus the interest that was discounted.
True False

Gross pay represents the total earnings of an employee for a payroll period, and is reflected in the employer's Wages Expense account.
True False

Owners' Equity s comprised of two principal components: paid-in capital and retained earnings.
True False

Dividends can be declared at any time by the board of directors (even in a net loss year), so long as there is: 1) a sufficient balance in the Retained Earnings account to absorb the dividend without creating a deficit, and 2) sufficient cash to pay the dividend.
True False

The number of shares issued and outstanding will be the same if no treasury stock is held by the corporation.
True False

The preemptive right gives individual stockholders veto power over proposed mergers and acquisitions.
True False

Retained Earnings represents the amount of cash available to pay dividends.
True False

Retained Earnings is decreased by net losses, cash dividends, and stock splits.
True False

Dividends become a liability to the corporation on the date of record, at which time it is determined to whom they are payable.
True False

Which of the following is not an objective of financial reporting described in FASB Concept Statements No. 1?
A) To provide information about how management of an enterprise has discharged its stewardship responsibility to owners.
B) To measure the current market value of the business enterprise.
C) To provide information so potential investors or creditors can make their own predictions of future earnings.
D) To focus primarily on information about earnings and its components.
E) All of the above are objectives of financial reporting.

Which of the following is not an example of a decision or informed judgment that a potential investor would make from accounting information?
A) Future profitability based on past profitability.
B) A forecast of dividends.
C) Probability of success of a new product development.
D) Assessment of the risk that the company may become bankrupt in the near future.
E) Assessment of risk that a company may have more debt than it can repay if the economy enters a recession.

The principle stating that all expenses incurred while earning revenues should be identified with the revenues when they are earned, and reported for the same time period is the:

The balance sheet is sometimes referred to as the:

The distinction between a current asset and other assets:
A) is based on the ability to determine the current fair market value of the asset.
B) is based upon whether the asset is tangible or intangible.
C) is based on how long the asset has been owned.
D) is based on when the asset is expected to be converted to cash, or used to benefit the entity.
E) is based on amounts that will be paid to other entities within a year.

The purpose of the income statement is to show the:
A) change in the fair market value of the assets from the prior income statement.
B) market value per share of stock at the date of the statement.
C) revenues collected during the period covered by the statement.
D) net income or net loss for the period covered by the statement.
E) all of the above.

The going concern concept refers to a presumption that:
A) the entity will be profitable in the coming year.
B) the entity will not be involved in a merger within a year.
C) the entity will continue to operate in the foreseeable future.
D) top management of the entity will not change in the coming year.
E) none of the above.

The principle of consistency means that:
A) the same accounting methods are used by all firms in an industry.
B) there are no alternative methods of accounting for the same transaction.
C) the accounting methods used by an entity never change.
D) the balance sheet must always balance.
E) the effect of any change in an accounting method will be disclosed in the financial statements or notes thereto.

Retained Earnings is not:
A) decreased by expenses.
B) increased by revenues.
C) increased by net income.
D) decreased by dividends declared.
E) decreased by gains and losses.

Which of the following lists of accounts all have debit balances?
A) Land, Equipment, and Paid-in Capital.
B) Accounts Receivable, Merchandise Inventory, and Salary Expense.
C) Notes Receivable, Dividends Payable, and Interest Expense.
D) Accounts Receivable, Accumulated Depreciation, and Buildings.
E) None of the above.

Credits are used to record:
A) increases to assets and expenses and decreases to revenues, liabilities, and owners' equity.
B) decreases to assets and expenses and increases to liabilities, revenues, and owners' equity.
C) increases to assets, and decreases to expenses, liabilities, and owners' equity.
D) decreases to assets and owners' equity and increases to liabilities, expenses and revenues.
E) decreases to assets and increases to expenses, liabilities, revenues, and owners' equity.

In the buyer's records, the purchase of merchandise on account would:
A) increase assets and increase expenses. B) increase assets and increase liabilities. C) increase liabilities and increase paid-in capital.
D) increase liabilities and decrease assets. E) have no effect on total assets.

Arch Co. has a note payable to its bank. An adjusting entry is likely to be required on Arch's books at the end of every month that the loan is outstanding to record the:
A) amount of interest paid during the month.
B) amount of total interest to be paid when the note is paid off.
C) amount of principal payable at the maturity date of the note.
D) accrued interest expense for the month. E) all of the above.

The current assets of most companies are usually made up of:
A) cash, marketable securities, and accounts and notes receivable.
B) assets that are currently used in the operations of the company.
C) cash and assets expected to be converted to cash within a year.
D) a very small proportion (less than 10%) of the total assets of the entity.
E) all assets that can be converted into cash.

A cash equivalent is a current asset that:
A) will be converted to cash within one year.
B) will be converted to cash within one month.
C) is readily convertible into cash with a minimal risk.
D) is readily convertible into cash with a substantial risk.
E) none of the above.

Internal control systems involve a series of checks and balances that separate each of the functional duties involved in processing a transaction, and are normally designed to do all of the following except:
A) Provide an environment that is conducive to efficient operation of the organization.
B) Prevent groups of employees from committing collusive acts of fraud.
C) Promote accuracy and reliability of the company's records and financial statements.
D) Safeguard and protect a company's assets against improper or unauthorized use.
E) Encourage employees to adhere to the company's prescribed policies and procedures.

Bad debt expense is recognized in the same accounting period as the revenue that is related to the receivable because:
A) revenues should be stated at realizable value.
B) the exact amount of the losses from bad debts is known.
C) all costs incurred in the current period should be subtracted from current period revenues.
D) the accounts receivable asset should be stated at original cost.
E) write-offs are always recorded in the period during which the sale takes place.

When comparing its effects to LIFO during an inflationary time, the effects of FIFO are to:
A) decrease net income and decrease total assets.
B) decrease net income and increase total assets.
C) increase net income and decrease total assets.
D) increase net income and increase total assets.
E) none of the above.

Prepaid expenses classified as current assets represent:
A) cash that has been segregated to pay for future expenses.
B) current year cash payments that will not be matched against revenues until the next year.
C) cash collected in advance for revenues that will be earned in the next year.
D) current year expenses that have been accrued.
E) expenses of the current year that have been paid in advance.

When a firm buys land on which there is a building, and the building is torn down so that an appropriate new building can be constructed on the land:
A) any of the purchase cost allocated to the old building is reported as a loss.
B) the cost assigned to the land excludes the cost of the old building.
C) the total cost of the land and old building are capitalized as land cost.
D) any of the purchase cost allocated to the old building is capitalized as part of the cost of the new building.
E) any of the above are generally acceptable accounting alternatives.

Expenditures capitalized as noncurrent assets generally include those expenditures that:
A) are made for normal repairs to maintain the usefulness of the asset over a number of years.
B) are for items that have a physical life of more than a year, regardless of their cost. C) are material and that have an economic benefit to the entity only in the current year.
D) are material and that have an economic benefit to the entity that extends beyond the current year.
E) are immaterial.

Which of the following statements best describes the process of accounting depreciation?
A) A process for setting aside cash so funds will be available to replace the asset.
B) A process for recognizing all of the economic cost associated with using an asset in a revenue generating activity.
C) A process for recognizing the cost of an asset that should be matched against revenue earned as a result of using the asset.
D) A process that measures the physical wear and tear of an asset.
E) A process that attempts to recognize loss in economic value over a period of time.

The recognition of liabilities often results in:
A) the recognition of expenses.
B) a more conservative representation of financial position.
C) a decrease in net income.
D) a decrease in ROI.
E) all of the above.

Interest on a note payable is most appropriately accrued:
A) when the note is signed.
B) when the interest is paid.
C) when principal payments on the note are made.
D) as of the end of each accounting period during which the note is a liability.
E) at the maturity date of the note.

Which of the following is (are) a true statement(s) pertaining to bonds?
A) Bonds can be sold at a discount, par, or premium.
B) The SEC sets the market price of a bond. D) The issuing firm sets the price of a bond.
C) Bonds can be sold at a discount, par, or payable.
E) None of the above.

Which of the following is not usually a right or attribute of preferred stock?
A) Having a claim to dividends in excess of the annual dividend requirement if dividends on common stock exceed dividends on preferred stock.
B) Having a priority claim to dividends relative to the common stock's claim to dividends.
C) Having a priority claim in liquidation relative to the common stock's claim in liquidation.
D) Having a claim to dividends that is cumulative over time if the annual dividend requirement is not satisfied.
E) All of the above are usually rights or attributes of preferred stock.

A stock dividend is similar to a cash dividend in that:
A) retained earnings and the amount of potential future dividends is reduced by each.
B) the stockholder's cash is increased by each.
C) the stockholder's equity in the firm's net assets is increased by each.
D) the stockholder's equity in the firm's net assets is reduced by each.
E) each is an application of the return on investment concept.

Similarities between preferred stock and bonds include all of the following, except:
A) Each has a fixed claim to annual income (dividends and interest, respectively).
B) Each has a fixed claim on assets (liquidating value and principal amount, respectively).
C) Each allows the corporation a tax deduction (dividends and interest, respectively).
D) Each may be callable and/or convertible. E) All of the above are similarities between preferred stock and bonds.

Managerial accounting, as opposed to financial accounting, is primarily concerned with:
A) Providing data for investors and creditors.
B) Meeting the requirements of generally accepted accounting principles.
C) The financial condition of the organization as a whole.
D) Determining exact results.
E) Emphasizing the future.

Activities included in a generally accepted definition of the management process include:
A) Planning, organizing, and controlling.
B) Planning, operating, and reporting.
C) Preparing, operating, and creating.
D) Preparing, organizing, and converting.
E) None of the above.

The contribution margin income statement:
A) Reports expenses based upon cost behavior pattern rather than cost function. B) Unitizes fixed costs.
C) Shows contribution margin rather than operating income as the bottom line.
D) Is sometimes used for financial reporting purposes.
E) None of the above.

Which of the following is the correct calculation for the contribution margin ratio?
A) Revenue divided by variable costs.
B) Revenue divided by contribution margin. C) Contribution margin divided by variable costs.
D) Contribution margin divided by fixed costs.
E) Contribution margin divided by revenue.