Financial Accounting Midterm Review

Chapter 1

Q1-43. The primary objective of financial reporting is to provide information Answer:C

1. on the cash flows of the company.
2. to the federal government.
3. useful for making investment and credit decisions.
4. about the profitability of the enterprise.

Q1-44. Which type of business organization provides the least amount of protection for bankers and other creditors of the company? Answer:C

1. Proprietorship
2. Corporation
3. Partnership
4. Both a and c

Q1-45. Assets are usually reported at their Answer:B

1. current market value.
2. historical cost.
3. appraised value.
4. none of the above (fill in the blank) .

Q1-46. During February, assets increased by $87,000 and liabilities increased by $31,000. Stockholders’ equity must have Answer:A

1. increased by $56,000.
2. decreased by $56,000.
3. increased by $118,000.
4. decreased by $118,000.

note:

Q1-47. The amount a company expects to collect from customers appears on the Answer:C

1. balance sheet in the stockholders’ equity section.
2. income statement in the expenses section.
3. balance sheet in the current assets section.
4. statement of cash flows.

Q1-48. All of the following are current assets except Answer:A

1. accounts payable.
2. inventory.
3. accounts receivable.
4. prepaid expenses.

Q1-49. Revenues are Answer:B

1. increases in paid-in capital resulting from the owners investing in the business.
2. increases in retained earnings resulting from selling products or performing services.
3. decreases in liabilities resulting from paying off loans.
4. all of the above.

Q1-50. The financial statement that reports revenues and expenses is called the Answer:A

1. income statement.
2. balance sheet.
3. statement of retained earnings.
4. statement of cash flows.

Q1-51. Another name for the balance sheet is the Answer:A

1. statement of financial position.
2. statement of earnings.
3. statement of operations.
4. statement of profit and loss.

Q1-52. Dobson Corporation began the year with cash of $143,000 and land that cost $41,000. During the year, Dobson earned service revenue of $230,000 and had the following expenses: salaries, $185,000; rent, $83,000; and utilities, $26,000. At year-end, Dobson’s cash balance was down to $56,000. How much net income (or net loss) did Dobson experience for the year? Answer:D

1. $45,000
2. ($38,000)
3. ($151,000)
4. ($64,000)

note:

Q1-53. Thompson Instruments had retained earnings of $340,000 at December 31, 2015. Net income for 2016 totaled $185,000, and dividends declared for 2016 were $85,000. How much retained earnings should Thompson report at December 31, 2016? Answer:D

1. $425,000
2. $340,000
3. $525,000
4. $440,000

note:

Q1-54. Net income appears on which financial statement(s)? Answer:D

1. Balance sheet
2. Statement of retained earnings
3. Income statement
4. Both b and c

Q1-55. Cash paid to purchase a building appears on the statement of cash flows among the Answer:D

1. stockholders’ equity.
2. operating activities.
3. financing activities.
4. investing activities.

Q1-56. The stockholders’ equity of Voronsky Company at the beginning and end of 2016 totaled $119,000 and $138,000, respectively. Assets at the beginning of 2016 were $144,000. If the liabilities of Voronsky Company increased by $74,000 in 2016, how much were total assets at the end of 2016? Use the accounting equation. Answer:C

1. $218,000
2. $51,000
3. $237,000
4. $208,000

Q1-57. Smith Company had the following on the dates indicated: Answer:C

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Smith had no stock transactions in 2016; thus, the change in stockholders’ equity for 2016 was due to net income and dividends. If dividends were $70,000, how much was Smith’s net income for 2016? Use the accounting equation and the statement of retained earnings. a. $220,000 b. $150,000 c. $290,000 d. $360,000

Chapter 2

Q2-40. An investment of cash by stockholders into the business will Answer:A

1. increase stockholders’ equity.
2. decrease total liabilities.
3. have no effect on total assets.
4. decrease total assets.

Q2-41. Purchasing a laptop computer on account will Answer:C

1. increase total assets.
2. have no effect on stockholders’ equity.
3. increase total liabilities.
4. All of the listed choices are correct.

Q2-42. Performing a service on account will Answer:D

1. increase total assets.
2. increase stockholders’ equity.
3. increase total liabilities.
4. accomplish both a and b.

Q2-43. Receiving cash from a customer on account will Answer:B

1. decrease liabilities.
2. have no effect on total assets.
3. increase stockholders’ equity.
4. increase total assets.

Q2-44. Purchasing computer equipment for cash will Answer:C

1. decrease both total liabilities and stockholders’ equity.
2. increase both total assets and total liabilities.
3. have no effect on total assets, total liabilities, or stockholders’ equity.
4. decrease both total assets and stockholders’ equity.

Q2-45. Purchasing a building for $80,000 by paying cash of $25,000 and signing a note payable for $55,000 will Answer:B

1. decrease total assets and increase total liabilities by $25,000.
2. increase both total assets and total liabilities by $55,000.
3. increase both total assets and total liabilities by $80,000.
4. decrease both total assets and total liabilities by $25,000.

note:

Q2-46. What is the effect on total assets and stockholders’ equity of paying the telephone bill as soon as it is received each month?Total assets Stockholders’ equity Answer:A

1. Decrease Decrease
2. No effect Decrease
3. Decrease No effect
4. No effect No effect

Q2-47. Which of the following transactions will increase an asset and increase a liability? Answer:D

1. Payment of an account payable
2. Purchasing office equipment for cash
3. Issuing stock
4. Buying equipment on account

Q2-48. Which of the following transactions will increase an asset and increase stockholders’ equity? Answer:C

1. Performing a service on account for a customer
2. Borrowing money from a bank
3. Collecting cash from a customer on an account receivable
4. Purchasing supplies on account

Q2-49. Where do we first record a transaction? Answer:C

1. Ledger
2. Account
3. Journal
4. Trial balance

Q2-50. Which of the following is not an asset account? Answer:D

1. Salary Expense
2. Common Stock
3. Service Revenue
4. None of the listed accounts is an asset.

Q2-51. Which statement is false? Answer:A

1. Dividends are increased by credits.
2. Liabilities are decreased by debits.
3. Assets are increased by debits.
4. Revenues are increased by credits.

Q2-52. The journal entry to record the receipt of land and a building and issuance of common stock Answer:D

1. debits Land and Building and credits Common Stock.
2. debits Land, Building, and Common Stock.
3. debits Common Stock and credits Land and Building.
4. debits Land and credits Common Stock.

Q2-53. The journal entry to record the purchase of supplies on account Answer:D

1. debits Supplies Expense and credits Supplies.
2. credits Supplies and debits Cash.
3. credits Supplies and debits Accounts Payable.
4. debits Supplies and credits Accounts Payable.

Q2-54. If the credit to record the purchase of supplies on account is not posted, Answer:A

1. liabilities will be understated.
2. assets will be understated.
3. stockholders’ equity will be understated.
4. expenses will be overstated.

Q2-55. The journal entry to record a payment on account will Answer:D

1. debit Accounts Payable and credit Retained Earnings.
2. debit Cash and credit Expenses.
3. debit Expenses and credit Cash.
4. debit Accounts Payable and credit Cash.

Q2-56. If the credit to record the payment of an account payable is not posted, Answer:D

1. expenses will be understated.
2. cash will be understated.
3. liabilities will be understated.
4. cash will be overstated.

Q2-57. Which statement is false? Answer:D

1. A trial balance can verify the equality of debits and credits.
2. A trial balance lists all the accounts with their current balances.
3. A trial balance can be taken at any time.
4. A trial balance is the same as a balance sheet.

Q2-58. A business’s receipt of a $115,000 building, with a $75,000 mortgage payable, and issuance of $40,000 of common stock will Answer:C

1. increase assets by $40,000.
2. increase stockholders’ equity by $115,000.
3. increase stockholders’ equity by $40,000.
4. decrease assets by $75,000.

note:

Q2-59. NextTalk, a new company, completed these transactions. Answer:B

1. Stockholders invested $51,000 cash and inventory with a fair value of $30,000.
2. Sales on account, $22,000. What will NextTalk’s total assets equal?

1. $51,000
2. $103,000
3. $81,000
4. $73,000

note:

Chapter 3

Questions 42–44 are based on the following facts: Kelsey Allerton began a music business in July 2016. Allerton prepares monthly financial statements and uses the accrual basis of accounting. The following transactions are Allerton Company’s only activities during July through October:

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Q3-42. In which month should Allerton record the cost of the music as an expense? Answer:A

1. August
2. July
3. September
4. October

Q3-43. In which month should Allerton report the $40 revenue on its income statement? Answer:D

1. July
2. September
3. October
4. August

Q3-44. If Allerton Company uses the cash basis of accounting instead of the accrual basis, in what month will Allerton report revenue and in what month will it report expense? Answer:B

Revenue Expense a. August August b. September October c. September July d. August October

Q3-45. Using the accrual basis, in which month should revenue be recorded? Answer:A

1. In the month that goods are shipped to the customer
2. In the month that the invoice is mailed to the customer
3. In the month that goods are ordered by the customer
4. In the month that cash is collected from the customer

Q3-46. On January 1 of the current year, Bamber Company paid $1,500 rent to cover six months (January–June). Bamber recorded this transaction as follows: Answer:D

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Bamber adjusts the accounts at the end of each month. Based on these facts, the adjusting entry at the end of January should include

1. a debit to Prepaid Rent for $250.
2. a credit to Prepaid Rent for $1,250.
3. a debit to Prepaid Rent for $1,250.
4. a credit to Prepaid Rent for $250.

Q3-47. Assume the same facts as in question 3-46. Bamber’s adjusting entry at the end of February should include a debit to Rent Expense in the amount of Answer:D

1. $0.
2. $1,500.
3. $500.
4. $250.

Q3-48. What effect does the adjusting entry in question 3-47 have on Bamber’s net income for February? Answer:C

1. Decrease by $500
2. Increase by $500
3. Decrease by $250
4. Increase by $250

Q3-49. An adjusting entry recorded June salary expense that will be paid in July. Which statement best describes the effect of this adjusting entry on the company’s accounting equation? Answer:D

1. Assets are not affected, liabilities are increased, and stockholders’ equity is increased.
2. Assets are decreased, liabilities are not affected, and stockholders’ equity is decreased.
3. Assets are decreased, liabilities are increased, and stockholders’ equity is decreased.
4. Assets are not affected, liabilities are increased, and stockholders’ equity is decreased.

Q3-50. On April 1, 2016, Jiminee Insurance Company sold a one-year insurance policy covering the year ended March 31, 2017. Jiminee collected the full $1,800 on April 1, 2016. Jiminee made the following journal entry to record the receipt of cash in advance:

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Nine months have passed, and Jiminee has made no adjusting entries. Based on these facts, the adjusting entry needed by Jiminee at December 31, 2016, is Answer:B

Q3-51. The Unearned Revenue account of Berry Incorporated began 2016 with a normal balance of $3,000 and ended 2016 with a normal balance of $19,000. During 2016, the Unearned Revenue account was credited for $22,000 that Berry will earn later. Based on these facts, how much revenue did Berry earn in 2016? Answer:C

1. $38,000
2. $22,000
3. $6,000
4. $0

note:

Q3-52. What is the effect on the financial statements of recording depreciation on equipment? Answer:B

1. Net income is not affected, but assets and stockholders’ equity are decreased.
2. Net income, assets, and stockholders’ equity are all decreased.
3. Net income and assets are decreased, but stockholders’ equity is not affected.
4. Assets are decreased, but net income and stockholders’ equity are not affected.

Q3-53. For 2016, Nestor Company had revenues in excess of expenses. Which statement describes Nestor’s closing entries at the end of 2016 (assume there is only one closing entry for both revenue and expenses)? Answer:B

1. Revenues will be debited, expenses will be credited, and retained earnings will be debited.
2. Revenues will be debited, expenses will be credited, and retained earnings will be credited.
3. Revenues will be credited, expenses will be debited, and retained earnings will be credited.
4. Revenues will be credited, expenses will be debited, and retained earnings will be debited.

Q3-54. Which of the following accounts would not be included in the closing entries? Answer:D

1. Retained Earnings
2. Depreciation Expense
3. Service Revenue
4. Accumulated Depreciation

Q3-55. A major purpose of preparing closing entries is to Answer:D

1. zero out the liability accounts.
2. adjust the asset accounts to their correct current balances.
3. close out the Supplies account.
4. update the Retained Earnings account.

Q3-56. Selected data for the Dublin Company follow: Answer:B

Based on these facts, what are Dublin’s current ratio and debt ratio? Current ratio Debt ratio a. 1.213 0.206 b. 1.200 0.614 c. 1.628 0.614 d. 9.533 0.833 note:

Q3-57. Unadjusted net income equals $5,000. Calculate what net income will be after the following adjustments: Answer:

1. Salaries payable to employees, $700
2. Interest due on note payable at the bank, $130
3. Unearned revenue that has been earned, $750
4. Supplies used, $175

Q3-58. Salary Payable at the beginning of the month totals $28,000. During the month, salaries of $126,000 were accrued as expense. If ending Salary Payable is $12,000, what amount of cash did the company pay for salaries during the month? Answer:D

1. $166,000
2. $139,000
3. $86,000
4. $142,000 note:

Consider the unadjusted trial balance of Princess, Inc., at December

Adjustment data at December 31, 2020: a. Accrued service revenue at December 31, $2,980. b. Prepaid rent expired during the month. The unadjusted prepaid balance of $1,200 relates to the period December 1, 2020, through February 28, 2021. c. Supplies used during December, $2,160. d. Depreciation on furniture for the month. The estimated useful life of the furniture is five years. e. Accrued salary expense at December 31 for Monday, Tuesday, and Wednesday. The five-day weekly payroll of $15,000 will be paid on Friday. Requirements 1. Prepare the adjusted trial balance of Princess, Inc., at December 31, 2020. Key each adjusting entry by letter. 2. Prepare the single-step monthly income statement, the statement of retained earnings, and the classified balance sheet. Draw arrows linking the three statements.

Answer: