Generally Accepted Accounting Principles and Assets

 Test #1 will consist of 50-60 of the questions below.

(Finding the “answers” to these questions is part of the review)

True or False

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1. The owner's equity represents the number of assets that can be claimed by creditors.

2. The right-hand side of an account is always the increase side.

3. A ledger is a chronological record of a business’s transactions.

4. The chart of accounts proves that all transactions were correctly journalized and posted.

5. In the accrual basis of accounting, revenues are recorded when a service is performed.

6. Current liabilities are expected to be paid off or eliminated in the next 12 months.

7. Each time a business records revenue the account Cash is increased.

8. Accumulated depreciation of an asset – its depreciation expense = book value.

9. Financial accounting provides information for people inside the company while managerial accounting focuses on information for people outside the company.

10. Every adjusting entry affects one account on the income statement and one account on the balance sheet.

11. Financial statements will be inaccurate if they are prepared before the adjusting entries are completed.

12. The “current ratio” is calculated by dividing the Total Assets by Total Liabilities.

13. During the closing process, ALL revenue and expense accounts are closed.

14. “Liquidity” is a measure of how quickly an asset can be converted into cash.

15. Revenues and expenses are also classified as “current” or “long-term” on a classified Income Statement.

16. Cash-basis accounting results in a more accurate measurement of net income than does the accrual basis of accounting.

17. Financial statements will be inaccurate if they are prepared before the adjusting entries are completed.

18. Risk is the amount of uncertainty about the return we expect to earn in the future.

19. Accounting records are also referred to as books.

20. Source documents provide evidence of business transactions and are the basis for accounting entries.

21. As prepaid expenses are used up, the costs of these assets become expenses

22. An account balance is a difference between the debits and credits for an account including any beginning balance.

23. The debt ratio reflects the risk of a company to both its owners and creditors.

24. The higher the debt ratio, the higher risk of a company not being able to meet its obligations.

25. The debt ratio is calculated by dividing total assets by total liabilities.

26. A company that finances a relatively large portion of its assets with liabilities is said to have a high degree of financial leverage.

27. If a company is highly leveraged, this means that it has a relatively low risk of not being able to repay its debt.

28. A company's fiscal year must correspond with the calendar year.

29. Adjusting entries are made after the preparation of financial statements.

30. Current assets and current liabilities are expected to be used up or come due within one year or the company's operating cycle whichever is longer.

31. For a corporation, the equity section is divided into two main accounts: Common Stock and Retained Earnings.

32. Profit margin can also be called return on sales.

33. The Income Summary account is closed to the retained earnings account.

34. The primary objective of financial accounting is:

• A. To serve the decision-making needs of internal users
• B. To provide financial statements to help external users analyze and interpret an organization's activities
• C. To monitor and control company activities
• D. To provide information on both the costs and benefits of managing products and services

35. A corporation:

• A. Is a legal entity separate and distinct from its owners
• B. Must have many owners
• C. Has shareholders who have unlimited liability for the acts of the corporation
• D. Does not have to pay taxes

36. Net Income:

• A. Decreases equity
• B. Equals assets minus liabilities
• C. Is the excess of revenues over expenses
• D. Represents the owners' claims against assets

37. Return on assets is:

• A. Also called the rate of return
• B. Computed by dividing net income by beginning assets plus ending assets divided by two
• C. Computed by multiplying net income by total assets
• D. Used in helping evaluate expenses

38. Risk is:

• A. Net income divided by average total assets
• B. The reward for investment
• C. The uncertainty about the expected return that will be earned from an investment
• D. Unrelated to the expected return

39. The statement of retained earnings:

• A. Reports how retained earnings changes at a point in time
• B. Reports how retained earnings changes over a period of time
• C. Reports on cash flows for operating, financing and investing activities over a period of time
• D. Reports on amounts for assets, liabilities, and equity at a point in time

40. A written promise to pay a definite sum of money on a specific future date is a(n):

• A. Unearned revenue
• B. Credit account
• C. Note payable
• D. Account receivable

41. On September 30, the Cash account of Value Company had a normal balance of $5,000. During September, the account was debited for a total of $12,200 and credited for a total of $11,500. What was the balance in the Cash account at the beginning of September?

• A. $4,300 debit balance
• B. a $4,300 credit balance
• C. a $5,700 debit balance
• D. a $5,700 credit balance

42. The Fireside Country Inn is a very popular destination for tourists. The Inn requires guests to make reservations at least two months in advance of their stay.A twenty percent down payment is required at the time the reservation is made. When should this inn recognize room rental revenue?

• A. On the date, the reservation is received
• B. On the date, the money for the reservation is received
• C. On the date, the guests stay in the inn
• D. On the date, the guests pay the remaining eighty percent due

43. Stride Rite has total assets of $425 million. Its total liabilities are $110 million. Its equity is $315 million. Calculate the debt ratio.

• A. 38. 6%
• B. 13. 4%
• C. 34. 9%
• D. 25. 9%

44. Listed below are two pieces of information. Where is the best place to locate this information, in the journal or the ledger? Details of a transaction which took place on October 3rd All of the sales activity which took place during the current month

• A. 1. Journal 2. Journal
• B. 1. Journal 2. Ledger
• C. 1. Ledger 2. Journal
• D. This information is only available on the financial statements

45. Interim financial statements refer to financial reports:

• A. That cover less than one year, usually pning one, three or six-month periods
• B. That is prepared before any adjustments have been recorded
• C. That shows the assets above the liabilities and the liabilities above the equity
• D. Where revenues are reported on the income statement when cash is received and expenses are reported when cash is paid

46. Profit margin is defined as:

• A. Revenues divided by net sales
• B. Net income divided by net sales
• C. Net income divided by assets
• D. Assets divided by net sale

47. A company earned $2,000 in net income for October. Its net sales for October were $10,000. Its profit margin is:

• A. 2%
• B. 20%
• C. 200%
• D. 500%

48. Which of these shows a company’s financial position as of a specific date?

• A. Income Statement
• B. Statement of Owners Equity
• C. Balance Sheet
• D. Chart of Accounts

49. GAAP stands for:

• A. generally accepted auditing practices
• B. generally accrued auditing procedures
• C. generally accrued accounting principles
• D. generally accepted accounting principles

50. Liabilities are expenses incurred by the business increases in owner's equity earned by delivering goods or services economic resources of a business creditor's claims to the business's assets.

51. Which of these have a remaining balance after the closing process is completed?

• A. service revenue
• B. accumulated depreciation.
• C. withdrawals
• D. depreciation expense.

52. A $250 payment on account was recorded as a debit to accounts receivable and a credit to accounts payable. This error will cause:

• A. owner's equity to be overstated
• B. accounts payable to be understated
• C. ash to be understated
• D. accounts receivable to be overstated

53. Receiving a payment from a customer on account would:

• A. have no effect on total assets or owner's equity
• B. increase net income and decrease liabilities
• C. increase both assets and owner's equity
• D. decrease liabilities and increase owner's equity

54. The entry for depreciation has what effect on the financial statements:

• A. increases expenses and decreases assets
• B. decreases net income and increases assets
• C. increases assets and decreases liabilities
• D. decreases assets and increases liabilities

55. Equipment with a cost of $120,000 has a useful life of 4 years and no salvage value. Using straight-line depreciation, what is the book value after 1 year?

• A. $28,750
• C. $103,000
• B. $86,250
• D. $ 38,333

56. The balance in accumulated depreciation after adjustment represents:

• A. a contra liability on the balance sheet
• B. a contra asset on the balance sheet
• C. a liability on the balance sheet
• D. a contra account on the income statement

57. A list of all of the accounts (without balances) used by a business is called:

• A. trial Balance
• B. account master
• C. chart of accounts
• D. adjusted trial balance

58. Which of these shows the results of a company’s operations over a period of time?

• A. income statement
• C. statement of owners equity
• B. balance sheet
• D. chart of accounts

59. These “types” of accounts appear on the Income Statement?

• A. assets and liabilities.
• B. all owners equity accounts
• C. revenues, expenses
• D. all accounts of business appear

60. These “types” of accounts appear on the Balance Sheet?

• A. assets and liabilities.
• B. all owners equity accounts
• C. revenues, expenses
• D. ll accounts of a business appear

61. If Assets = $150,000 and Liabilities = $60,000, Owners Equity = _____________.

• a) $ 240,000
• b) $ 150,000
• c) $ 90,000
• d) $ 210,000

62. A business bought land paying $100,000 (paying $25,000 cash and owing $75,000). The land had an asking price of $115,00 and an appraised value of $125,000. What amount should the business use to record the purchase in the accounting “books”.

• a) $ 25,000
• b) $ 115,000
• c) $ 100,000
• d) $ 125,000

63. In May a business had: Revenue of $15,000, Accounts Receivable of $25,000; Liabilities of $8,000; Expenses of $11,000 and a balance in the Cash account of $5,000. The “Net Income” (or net loss) for May was _______________.

• a) $ 64,000
• b) $ 11,000
• c) $ 16,000
• d) $ 4,000

64. Company buys Supplies paying $500 in Cash. Company buys more Supplies for $1,000, on account. Company pays $500 of the amount it owes for supplies. The balance in the Supplies account is:

• a. $ 500
• b. $ 1,500
• c. $ 1,000 d. $ 2,000

65. The “accounting” term that refers to copying transaction information from the journal to the ledger is termed:

• a. increase
• b. ebit
• c. decrease
• d. credit

66. Unearned revenue is always a(n) ______________ type of account:

• a) revenue.
• b) owners' equity.
• c) contra-revenue.
• d) liability.

67. Accrued expenses are expenses that have:

• a) been paid.
• b) not been paid nor incurred
• c) been incurred and paid.
• d) not been paid but incurred

68. Accrued revenue is which of the following?

• a) Revenue that has been earned and collected.
• b) Revenue that has been collected but not yet earned.
• c) Revenue that has been earned but not yet collected.
• d) Revenue that has not been collected or earned.

69. On a classified balance sheet, assets that are expected to be converted to cash, sold, or consumed during the next 12 months are referred to as:

• A. current assets.
• B. leveraged assets.
• C. market assets.
• D. liquid assets.

70. What accounts may have balances (that are not -0-), on a post-closing trial balance?

• A. assets, liabilities & revenues.
• B. revenues, expenses & capital
• C. sets, liabilities & expenses
• D. assets, liabilities & capital

71. Which of these would have no effect on TOTAL assets or TOTAL liabilities?

• a) payment of a liability
• b) buying supplies on account
• c) payment of an expense
• d) buying supplies and paying cash

72. The accountant for BobCo did not make any adjusting entry for depreciation expense. What is the effect of this error on TOTAL liabilities?

• a) liabilities are understated
• b) liabilities are overstated
• c) liabilities are not affected
• d) I don’t have a clue!

73. Buying a $300,000 building by signing a $300,000 note payable results in:

• a) owner's equity increasing.
• b) no change to owner's equity.
• c) owner’s equity decreases.
• d) no clue on this one either!

74. The “Matching Principle” directs accountants to:

• a) match total debits to the total credits.
• b) match Assets to the (Liabilities – Owners Equity).
• c) match expenses against revenues of the period.
• d) once again, I have no clue!

75. A $75 payment for Rent Expense was mistakenly posted as a: debit to Supply Expense (the credit was correct). What is the impact on the Trial Balance

• a) the credit total is off by $75.
• b) the debit total is off by $75.
• c) no impact on the Trial Balance
• d) nothing has changed - no clue!

76. If a company is using the accrual method of accounting, when is revenue recorded?

• a) when cash is received, regardless of when the work is done.
• b) when the work or services are begun.
• c) when the work or services are completed.
• d) when the expenses to pay for the job, or services, are incurred.

77. Assets are ____________________.

78. Liabilities are _________________.

79. Equity is _____________________.

80. Revenues are__________________.

81. Expenses are __________________.

82. How do you INCREASE these accounts ... by a DR (debit) or a CR (credit)? ______

• Assets ______
• Expenses ______
• Revenues _____
• Liabilities ______
• Capital ______
• Withdrawals Unearned Accumulated ______
• Revenue ______
• Depreciation_____

83. Indicate whether these accounts appears on the: IS (Income Statement only), the BS (Balance Sheet only) or BOTH (Income Statement and Balance Sheet) ______

• Cash ______
• Furniture ______
• Revenue ______
• Supply ______
• Accounts ______
• Unearned Interest _____
• Revenue ______

84. Cost of assets or services used up or consumed to generate revenues. They decrease retained earnings.

85. Resources generated from a company’s earnings activities. They increase retained earnings.

86. Assets = Liabilities + Equity

87. The results when revenues are larger than expenses.

88. A company records the expenses incurred to generate the revenues reported.

89. Every business is accounted for separately from its owner or owners. Revenues LiabilitiesEquity ExpensesNet IncomeGAAP Net Loss AssetsAccounting equation

90. A list of all ledger accounts and includes an identification number assigned to each account (does NOT include account balances).

91. A record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

92. The accounting “book of original entry” where transactions are first recorded in chronological order. Identifies and describes transactions and events entering the accounting process (either in hard copy or electronic form).

93. A record containing all accounts used by a company, a collection of all accounts and their balances. Post from the journal to the __________.

94. A list of accounts, and their account identification numbers, (without any dollar amounts or balances) that may be used by a company.

95. The process of transferring journal entry information to the ledger.

• A. Debit
• B. Credit
• C. Account
• H. Ledger (general ledger)
• D. Posting
• I. Source documents
• E. Journal
• J. Account Balance

96. a method or technique of accounting that “recognizes revenues when cash is received and records expenses when cash is paid”.

97. this is “a list of accounts and balances prepared after adjustments (adjusting entries) are recorded”.

98. this is “the process of allocating the costs of these (plant) assets over their expected useful life”.

99. these are “costs that are incurred in a period but are both unpaid and unrecorded”.

100. an “account linked with another account, it has an opposite normal balance and is reported as a subtraction from the other (linked) account’s balance”

101. this “refers to revenues earned in a period that are both unrecorded and not yet received in cash (or other assets)’

• A. Accrued Expenses
• F. Contra Account
• B. Accrued Revenue
• G. Cash Basis Accounting
• C. Depreciation
• H. Unearned (deferred) Revenue
• D. Adjusting Entry
• I. Prepaid (deferred) Expenses
• E. Adjusted Trial Balance
• J. Matching Principle (expense recognition)

102. Bill starts a business by investing $10,000 in cash in the business.

103. The business completes work for a customer and collects $1,000 from him.

104. The business receives this month’s phone bill in the amount of $ 100. The business will pay the bill NEXT month.

105. The business does work for a Customer and sends Joe a bill for $ 750.

106. On Jan 1, BobCo received $3,000 from a customer to provide landscape services for Jan, Feb, and Mar. (BobCo made the correct entry on Jan 1 to record the receipt of the Cash). Prepare BobCo’s adjusting entry for JAN 31.

107. Bobko pays Salaries of $5,000 per week. Mon, Tues, Wed are in JAN while Thurs and Fri fall into FEB. Prepare the adjusting entry as of JAN 31

108. A machine was purchased for $24,000 on JAN 1. Its estimated useful life is 48 months. Prepare the entry for depreciation on JAN 31.

109. In JAN, interest revenue of $100 has been earned but not yet received. It will be received in MAY). Prepare the adjusting entry for JAN 31.

110. On JAN 1 the Supplies account balance was $3,000. On JAN 31 there were $ 1,000 of Supplies remaining (unused). Prepare the adjusting entry for JAN 31

111. On JAN 1 BobCo bought $500 in Supplies on the account. On JAN 31 only $200 of the Supplies remain. Prepare the adjusting entry.

112. On JAN 1 Bobko. paid, in advance, $3,000 for 6 months of Insurance (Jan thru June) Prepare the adjusting entry for JAN 31. ONE MORE PAGE On the next page, IF you close ONLY the correct accounts, you will receive one bonus point.

Note: Prepare the closing journal entries using whatever data above that you need.

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