Quiz 1 Flashcards
The SEC exerts a continuing influence on the establishment of accounting standards. It does so primarily by:
A) Allying with the AICPA to lobby the efforts of the FASB.
B) Providing auxiliary funding to the FASB.
C) Monitoring the development of
GAAP within the accounting profession and using its stature to influence that development.
D) Exercising its statutory authority to prescribe external financial reporting requirements.
C
The SEC has the final authority on accounting standards but has delegated the task of setting accounting standards to the private sector.
Consistency and feedback relate most closely to which two of the following accounting concepts, respectively?
A) Recognition and matching
B) Conservatism and cost/benefit
C) Predictive value and confirmatory value
D) Recognition and full disclosure
C
Consistency is associated with predictive value since, when items are accounted for consistently from one year to another, users can identify trends and use this information to anticipate what might be expected to occur in the future. Feedback is associated with confirmatory value as feedback, such as actual results, provides information as to the degree to which predictions made in the past were accurate. Recognition relates to when items will appear on financial statements and full disclosure relates to the completeness of information provided. Cost/benefit refers to the fact that an entity should not incur a cost to obtain or provide information which exceeds the benefit of having that information.
Net sales $10,743
Total assets $4,450
End of year balance in cash $1,108
Total stockholders’ equity $351
Gross profit (Sales - Cost of Sales) $2,602
Net increase in cash for the year $24
Operating expenses $2,053
Net operating cash flow $678
Other income (expense), net $(16)
Compute Orinoco’s total liabilities at the end of the year.
Total assets (4,450)= Total liabilities (?) - Total Sths’ equity (351)
4,450-351= $4099
Under accounting principles generally accepted in the United States, in order for an item to qualify for recognition in the financial statements of a company, the item must
I. Be measurable in monetary terms
II. Reflect the consensus expectations of investors
III. Meet the definition of an element of the financial statements
A) I & III only
B) I only
C) I, II, & III
D) II & III only
A
In order for an item to qualify for recognition on the financial statements, it should meet the definition of an element of financial statements; be measurable with reasonable reliability; be relevant to users; and should be based on information that is representationally faithful, verifiable, and neutral. It is not required to meet the consensus expectations of investors.
An element of financial statements may be an element of the balance sheet or the income statement.
The underlying assumption that presumes a company will continue indefinitely is:
A) economic entity
B) monetary unit
C) periodicity
D) going concern
D
Going concern assumes the company will continue to operate indefinitely.
Which of the following adjusting entries causes an increase in liabilities?
A) Recording depreciation expense
B) Accruing unrecorded interest
revenue
C) Recording the amount of expired prepaid insurance
D) Accruing unrecorded interest expense
D
The adjusting entry for unrecorded interest includes a debit to interest expense and a credit to interest payable (a liability).
A prepaid expense:
A) occurs when an expense is recorded in the current period but not paid until a future period.
B) occurs when a company receives cash from customers prior to providing goods and services to those customers.
C) occurs when an asset is acquired in the current period but not expensed until a future period.
D) All of these answer choices are incorrect.
C
For the year, a company reports revenues of $800,000, expenses of $600,000, and dividends of $50,000. By how much will the balance of retained earnings increase for the year?
A) $250,000
B) $50,000
C) $200,000
D) $150,000
D
$800k-$600k-$50k=$150k
Revenues, expenses, and dividends are closed to retained earnings. The closing entry for revenues includes an increase to retained earnings ($800,000), while the closing entries for expenses and dividends include a decrease to retained earnings ($600,000 and $50,000, respectively).
Somerset received $45,600 from a customer for 12 months’ rent in advance of the rental period. How should Somerset record this transaction?
A) Debit: cash $45,600 Credit: rent revenue $45,600
B) Debit: rent revenue $45,600 Credit: deferred rent revenue $45,600
C) Debit: cash $45,600 Credit: deferred rent revenue $45,600
D) Debit: deferred rent revenue $45,600 Credit: rent revenue $45,600.
C
The correct amount of prepaid insurance shown in a company’s December 31, 2023, balance sheet was $900. On July 1, 2024, the company paid an additional insurance premium of $600. In the December 31, 2024, balance sheet, the amount of prepaid insurance was correctly shown as $500. The amount of insurance expense that should appear in the company’s 2024 income statement is:
A) $1,500
B) $1,000
C) $600
D) $1,400
B
[$900 (beginning balance) + $600 (additional payment) - $500 (ending balance)]
An item not generally classified as a current liability is:
A) Bonds payable.
B) Accounts payable.
C) Revenue received in advance.
D) Accrued interest payable.
A
Current liabilities are obligations that are expected to be satisfied within one year or the operating cycle, whichever is longer. Bonds are generally payable several years later.
The section of a company’s annual report that provides management’s views on significant events, trends and uncertainties pertaining to the company’s operations, liquidity, and capital resources is:
A) Compensation of Directors and
Top Executives.
B) Management’s Responsibilities.
C) Management’s Discussion and
Analysis.
D) Summary of Significant
Accounting Policies.
C
The management’s discussion and analysis (MD&A) section may embody management’s biased perspective, but it can offer an informed insight that might not be available elsewhere.
Long-lived assets used in the operations of the business refer to property, plant, and equipment, and:
A) Intangible assets.
B) Investments.
C) Inventories.
D) Receivables.
A
Receivables and inventories are generally classified as current assets.
Investments are assets that are not used directly in the operations of the business. Intangible assets are used in the operations of the business and provide long-term benefits, but have no physical substances (such as patents, franchises, trademarks, and copyrights).
Included in the category of current assets would be:
A) the portion of long-term equipment expected to be depreciated over the next year.
B) investment in debt securities that mature in five years but which management intends to sell within one year.
C) cash restricted for the purpose of repaying debt in three years.
D) the portion of a long-term operating lease that will be used over the next year.
D
Current assets include cash and other assets that are reasonably expected to be converted to cash or consumed within one year from the balance sheet date, or within the normal operating cycle of the business if that’s longer than one year. Investments that the company has the ability and intent to sell within one year (or operating cycle, if longer) are reported as current assets.
A company purchased a building for $900,000 by obtaining a 30-year mortgage payable. Assume the lending arrangement specifies that the company will pay $20,000 of the principal over the first year, $30,000 in the second year, and the remainder evenly over the final 28 years. What amount of the $900,000 would be classified as a long-term liability at the time the mortgage payable is obtained?
A) $880,000
B) $900,000
C) $850,000
D) $0
A
Current liabilities are obligations that are expected to be satisfied within one year or the operating cycle, whichever is longer The current portion of long-term debt is classified as a current liability. The remainder of the mortgage payable is initially reported as a long-term liability.
