LO 1-6 Flashcards
Accounting is a collection of _____ and reporting to ____
data
external users
creditors or stockholders
investors
employees
regulators
are examples of
external users
formal reports are known as
financial statements
financial statements are
a collection of reports so external users can easily evaluate them
balance sheet
shows equality or balance between assets and source of assets
another name for claims is
source of assets
a quarter is
1/4 of the year
the final row on balance sheet is
the end of the year
Liquidity is
how quickly we can turn assets into cash
Liquidity is measured by flipping the balance sheet
vertically
cash, land, liabilities, stockholder’s equity and retained earnings are ordered by
most liquid to least liquid
total assets reflects _____________ and not total _______.
worth
cash
end of year balance is the
next year beginning balance
total assets must equal
liabilities + stockholder’s equity
The balance sheet presents
A. an explanation of the changes in the beginning and ending balances of stockholders’ equity.
B. a comparison of the benefits and the sacrifices a company experiences from its operations.
C. information in three categories including operating, investing, and financial activities.
D. a list of a company’s assets and the sources of those assets.
D. a list of a company’s assets and the sources of those assets.
The following items were drawn from the financial statements of Rogers Company. Which items would appear on Rogers Company’s balance sheet?
Assets Stockholders' Equity Salary expense Land Rent revenue Notes payable Cash collected from the issue of stock Common stock Cash paid for dividends Cash Liabilities Dividends Cash paid to purchase land Retained earnings
A. 1, 2, 4, 6, 8, 10, 11, and 14
B. 1, 2, 4, 6, 9, 10, 11, and 13
C. 2, 3, 4, 6, 8, 10, 11, and 14
D. 1, 2, 4, 6, 8, 11, 12, and 14
A. 1, 2, 4, 6, 8, 10, 11, and 14
The balance sheet shows a company’s assets, liabilities, and stockholders’ equity. Accordingly, items 1, 2, and 11 are categories of accounts that would be shown on the balance sheet; items 4 and 10 are specific asset accounts that would appear on the balance sheet. Item 6 is a liability account that would appear on the balance sheet. Items 8 and 14 are stockholders’ equity accounts that will appear on the balance sheet.
Kilgore Company experienced the following events during its first accounting period.
Issued common stock for $5,000 cash. Earned $3,000 of cash revenue. Paid a $4,000 cash to purchase land. Paid cash dividends amounting to $400. Paid $2,200 of cash expenses. The market value of the land at the end of the accounting period was $4,300. Based on this information the amount of total assets appearing on the year-end balance sheet is
A. $800.
B. $1,400.
C. $2,200.
D. $5,400.
D. $5,400.
Kilgore has two assets at the end of the accounting period. The amount of cash is $1,400 ($5,000 from stock issue + $3,000 from revenue − $4,000 to buy land − $400 to pay dividends − $2,200 to pay expenses). Land is shown on the balance sheet at its historical cost. The amount of the market value would not be shown on the balance sheet. Therefore, the amount of land is $4,000. Total assets are $5,400 ($1,400 cash + $4,000 land).
At the end of Year 1, Clayton Company had $6,000 of cash, $7,000 land, $2,000 of liabilities, $3,000 of common stock, and $8,000 of retained earnings. During Year 2, Clayton experienced the following events.
Borrowed $1,500 cash.
Earned $6,500 of cash revenue.
Paid $4,000 of cash expenses.
Paid $5,000 cash to purchase land.
Based on this information the amount of total assets, total liabilities, and retained earnings appearing on the Year 2 financial statements is
Total Assets Total Liabilities Retained Earnings A.$5,000 $5,500 $8,500 B.$17,000 $3,500 $10,500 C.$11,000 $2,000 $10,500 D.$11,000 $2,500 $5,500
A. Option A
B. Option B
C. Option C
D. Option D
B. Option B
Clayton has two assets at the end of the accounting period. The amount of cash is $5,000 ($6,000 beginning balance + $1,500 borrowed + $6,500 from revenue − $4,000 to pay expenses − $5,000 to purchase land). Land shown on the balance sheet is $12,000 ($7,000 beginning balance + $5,000 purchased). Total assets is $17,000 ($5,000 cash + $12,000 land). Liabilities amount to $3,500 ($2,000 beginning balance + $1,500 borrowed). Retained earnings is $10,500 ($8,000 beginning balance + $6,500 revenue − $4,000 expenses).
The following accounting equation represents the financial position of Qualtro Company.
Assets = Liabilities + Stockholders’ Equity
Cash + Land = Notes Payable + Common Stock + Retained Earnings
400 + 2,200 = 800 + 1,200 + 600
Based on this equation, Qualtro
A. can pay a $600 cash dividend.
B. can pay off its note payable.
C. can pay a $300 cash dividend.
D. can pay only $600 of its note payable.
C. can pay a $300 cash dividend.
According to the accounting equation the total amount of cash in the business is $400. Therefore, the company cannot pay a $600 dividend. Note there is no cash in the retained earnings account. Retained earnings represents a source of assets not an amount of cash. Also, the $400 of cash is insufficient to pay the total liabilities of $800 or even a $600 partial payment of them.
Alexis Company was started in Year 1. At the end of Year 1 the Company had the following accounting equation.
Assets = Liabilities + Stockholders’ Equity
Cash + Land = Notes Payable + Common Stock + Retained Earnings
600 + 2,200 = 1,000 + 1,400 + 400
During Year 2, the company experienced the following accounting events.
Paid off $500 of its notes payable.
Earned $700 of cash revenue.
Paid $400 of cash expenses.
Paid a $100 cash dividend.
Based on this information alone, what percent of the company’s assets at the end of Year 2 were provided by creditors?
A. 20%
B. 24%
C. 56%
D. Some other percentage
A. 20%
Begin by recording the events in the accounting equation and then determine the amount of the account balances as of December 31, Year 2. The correct result is as follows:
Assets = Liabilities + Stockholders’ Equity Cash + Land = Notes Payable + Common Stock + Retained Earnings
600 + 2,200 = 1,000 + 1,400 + 400
(500) + 0 = (500) + 0 + 0
700 +0 = 0+ 0 + 700
(400) + 0 = 0 +0 + (400)
(100) +0 = 0 + 0 + (100)
TOTAL => 300 + 2,200 = 500 + 1,400 + 600
Finally, divide the ending balance of notes payable by the total amount of assets $500 ÷ ($300 + $2,200) = 20%
Be sure you understand the following terminology. When a business acquires assets from a creditor, the company is said to have incurred a liability. Normally, the company has to sign an agreement that specifies, among other things, when the liability must be repaid. The agreement is frequently called a note payable.
Alexis Company was started in Year 1. At the end of Year 1 the Company had the following accounting equation.
Assets = Liabilities + Stockholders’ Equity
Cash + Land = Notes Payable + Common Stock + Retained Earnings
600 + 2,200 = 1,000 + 1,400 + 400
During Year 2, the company experienced the following accounting events.
Paid off $500 of its note payable
Earned $700 of cash revenue.
Paid $400 of cash expenses.
Paid a $100 cash dividend.
Based on this information alone, what percent of the company’s assets at the end of Year 2 were provided by earnings?
A. 20%
B. 24%
C. 56%
D. Some other percentage
B. 24%
Begin by recording the events in the accounting equation and then determine the amount of the account balances as of December 31, Year 2. The correct result is as follows:
Assets = Liabilities + Stockholders’ Equity Cash + Land = Notes Payable + Common Stock + Retained Earnings
600 + 2,200 = 1,000 + 1,400 + 400
(500) + 0 = (500) + 0 + 0
700 + 0 = 0 + 0 + 700
(400) + 0 = 0 + 0+ (400)
(100) +0 = 0 + 0 + (100)
TOTAL => 300 + 2,200 = 500 1,400 600
Finally, divide the ending balance of retained earnings by the total amount of assets $600 ÷ ($300 + $2,200) = 24%
Alexis Company was started in Year 1. At the end of Year 1 the Company had the following accounting equation.
Assets = Liabilities + Stockholders’ Equity
Cash + Land = Notes Payable + Common Stock + Retained Earnings
600 + 2,200 = 1,000 + 1,400 + 400
If at the end of Year 1 an appraiser provides a certified opinion that the market value of the land is $2,800 the company would continue to list the land on its books at $2,200. This statement is
True
False
True
Generally Accepted Accounting Principles (GAAP) requires businesses to follow the historical cost concept which dictates that assets be maintained in the accounting records at the amount of their original cost. This means that assets are presented at the amount a company originally pays for them regardless of changes in the market value. There are exceptions to the historical cost rule. Some of these exceptions will be discussed in subsequent chapters. However, at this point you should assume that assets are maintained in the accounting records at their historical costs which is the amount that they originally cost.
Companies maintain accounting records that show assets at the amount of their market value because that information is more relevant than the historical cost. This statement is
True
False
False
While market values may be more relevant. In other words, when making decisions, people may find that knowing the current market value of an asset is more useful than knowing what it cost years ago. Even so, accountants favor a conservative path of maintaining asset amounts at their original (historical) cost. The reason for this is that historical costs are verifiable while market values are subjective. More specifically, you can validate the cost of an asset by referring to the receipts showing its cost. In contrast, the market value of an asset is an opinion. No one knows exactly what the market value of an asset is until it is actually sold.
The following accounting equation represents the financial position of Bentley Company.
Assets = Liabilities + Stockholders’ Equity
Cash + Land = Notes Payable + Common Stock + Retained Earnings
600 + 2,200 = 1,000 + 1,400 + 400
Based on this equation, Bentley
A. can pay a $600 cash dividend.
B. can pay off its note payable.
C. can pay only $400 of its note payable.
D. None of the answers is correct.
D. None of the answers is correct.
Retained earnings represents the portion of assets that have been generated through earnings. Since dividends are a distribution of assets that have been generated through earnings, the company cannot pay more than $400 of dividends, regardless of the fact that it has $600 cash. Since the company has $600 cash it cannot pay off its $1,000 note payable. However, it can make a $600 partial payment on the $1,000 note payable. The repayment of debt is limited by the $600 amount of cash the company has, not the $400 amount of its retained earnings.
stewardship is
the duty to protect/use assets for the benefit of the owners (as a commitment to investors )
liabilities/equity is measured in $$ but does not represent
CASH
liabilities and equity represent dollars but its dollars of ____ and not _____
“backed by assets, not necessarily cash”
asset
cash
% of assets is determined by dividing
liabilities and equity by total assets
