LO 1-6

Question 1

Accounting is a collection of _____ and reporting to ____

Answer 1

data

external users

Question 2

creditors or stockholders
investors
employees
regulators

are examples of

Answer 2

external users

Question 3

formal reports are known as

Answer 3

financial statements

Question 4

financial statements are

Answer 4

a collection of reports so external users can easily evaluate them

Question 5

balance sheet

Answer 5

shows equality or balance between assets and source of assets

Question 6

another name for claims is

Answer 6

source of assets

Question 7

a quarter is

Answer 7

1/4 of the year

Question 8

the final row on balance sheet is

Answer 8

the end of the year

Question 9

Liquidity is

Answer 9

how quickly we can turn assets into cash

Question 10

Liquidity is measured by flipping the balance sheet

Answer 10

vertically

Question 11

cash, land, liabilities, stockholder’s equity and retained earnings are ordered by

Answer 11

most liquid to least liquid

Question 12

total assets reflects _____________ and not total _______.

Answer 12

worth

cash

Question 13

end of year balance is the

Answer 13

next year beginning balance

Question 14

total assets must equal

Answer 14

liabilities + stockholder’s equity

Question 15

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.

Answer 15

D. a list of a company’s assets and the sources of those assets.

Question 16

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

Answer 16

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.

Question 17

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.

Answer 17

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).

Question 18

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

Answer 18

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).

Question 19

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.

Answer 19

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.

Question 20

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

Answer 20

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.

Question 21

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

Answer 21

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%

Question 22

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

Answer 22

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.

Question 23

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

Answer 23

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.

Question 24

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.

Answer 24

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.

Question 25

stewardship is

Answer 25

the duty to protect/use assets for the benefit of the owners (as a commitment to investors )

Question 26

liabilities/equity is measured in $$ but does not represent

Answer 26

CASH

Question 27

liabilities and equity represent dollars but its dollars of ____ and not _____

“backed by assets, not necessarily cash”

Answer 27

asset

cash

Question 28

% of assets is determined by dividing

Answer 28

liabilities and equity by total assets