Accounting Exam 1 example #69449

true

false

financial accounting.

false

3 reporting entities

remain constant

A resource that will be used to produce revenue

Borrowing from Creditors Common Stock from Investors Earnings from Operations

liabilities, common stock, or retained earnings must increase.

represent obligations to repay debts. may increase when assets increase. have priority in business liquidations.

Assets = Liabilities + Common Stock + Retained Earnings

is an economic benefit that will cause assets and retained earnings to increase.

is an economic sacrifice that will cause assets and retained earnings to decrease.

is a transfer of assets from a business to its owners that will cause the assets and retained earnings of the business to decrease.

an asset source transaction.

an asset source transaction.

Received cash from the issue of stock Borrowed cash from creditors Earned cash revenue

an asset exchange transaction.

an asset use transaction.

There was an asset exchange.

Assets decrease, Capabilities are N/A, Equity decreases, Revenue is N/A, Expenses increase, and Net Income decreases.

a list of a company's assets and the sources of those assets.

a comparison of the benefits and the sacrifices a company experiences from its operations.

an explanation of the changes in the beginning and ending balances of stockholders' equity.

1, 2, 4, 6, 8, 10, 11, and 14

Net income is $800 (Revenue of $3,000 - Expenses of $2,200).

Total assets are $5,400 ($1,400 cash + $4,000 land).

Total Assets Total Liabilities Retained Earnings $17,000 $3,500 $10,500

Cash flow from operating activities

There was a 6000 net increase. 1000 was from investing and financing so the other 5000 must be operating.

information in three categories including operating, investing, and financial activities.

Financing activities include cash flows that result from transactions between a business and its stockholders. Since dividends are paid to stockholders, the associated cash outflow is classified as resulting from financing activities.

Investing activities include the purchase or sale of long-term assets. The only transaction affecting investing activities is the purchase of land. Therefore, there was a $4,000 cash outflow for investing activities shown on the statement of cash flows for the purchase of land.

The amount of net income is $2,000 (Revenue $5,000 - Expenses $3,000). The only transaction affecting investing activities is the purchase of land. Therefore, there was a $7,000 cash outflow for the purchase of land shown on the statement of cash flows. Liabilities are $6,000 ($2,000 beginning balance + $4,000 borrowed).

true.

false. Information in temporary accounts is transferred to the retained earnings account not the common stock account.

All of them. Temporary accounts (revenue, expense, and dividend) are used to capture data that occurs during a single accounting cycle

zero because the temporary accounts haven't been transferred yet.

Since this is the first year of operation, the beginning balance in the retained earnings account is zero. At the end of Year 1 the balances in the revenue, expense, and dividend accounts is transferred (closed) to the retained earnings account. Accordingly, the Year 1 after closing balance in the retained earnings account would be $1,000 ($5,000 revenue - $3,000 expenses - $1,000 dividends).

5500. Revenue, expense, and dividend accounts are temporary accounts that are independent from the retained earnings account. The balances in these temporary accounts are transferred (closed) to the retained earnings account at the end of the accounting period, in this case December 31, Year 2. Therefore, the balance in retained earnings on January 31, Year 2 is the same as the $5,500 beginning balance.

Collecting cash from the issue of common stock is an asset source transaction. It causes assets (cash) and equity (common stock) to increase. Since the company did not engage in operations to generate earnings or pay expenses, there is no effect on the income statement. Since the cash inflow is from investors, it is a financing activity.

Borrowing cash from creditors is an asset source transaction. It causes assets (cash) and liabilities (notes payable) to increase. Since the company did not engage in operations to generate earnings or pay expenses, there is no effect on the income statement. Since the cash inflow is from creditors, it is a financing activity.

Cash generated through earnings is an asset source transaction. It causes assets (cash) and equity (retained earnings) to increase. Since the company engaged in operations to generate revenue, there is an effect on the income statement. Specifically, revenue and net income increase. Since the cash inflow is from customers, it is an operating activity.

A cash payment for expenses is an asset use transaction. It causes assets (cash) and equity (retained earnings) to decrease. Since the company incurred expenses to generate revenue, there is an effect on the income statement. Specifically, expenses increase and net income decreases. Since the cash outflow is for expenses, it is an operating activity.

A cash payment for dividends is an asset use transaction. It causes assets (cash) and equity (retained earnings) to decrease. Since the company is transferring wealth (cash) to its owners, there is no effect on the income statement. Since the cash is transferred to the investors, it is a financing activity.

Paying cash to reduce obligations to creditors is an asset use transaction. It causes assets (cash) and liabilities (notes payable) to decrease. Since the company did not engage in operations to generate earnings or pay expenses, there is no effect on the income statement. Since the cash outflow is to reduce long-term debt, it is a financing activity.

Paying cash to purchase land is an asset exchange transaction. It causes one asset (cash) to decrease and another asset (land) to increase. The amount of total assets is not affected. Since the company did not engage in operations to generate earnings or pay expenses, there is no effect on the income statement. Since the cash outflow occurred to acquire a long-term asset, it is an investing activity.

Paying off long-term debt causes assets (cash) and liabilities (notes payable) to decrease. Since the company did not engage in operations to generate earnings or pay expenses, there is no effect on the income statement. Since the cash outflow is to reduce long-term debt, it is a financing activity. Among other reasons, the other answers are wrong because borrowing money and earning cash revenue would cause assets to increase. Further, purchasing land with cash would have no effect on total assets.

Cash revenue causes assets (cash) and equity (retained earnings) to increase. Since the company engaged in operations to generate revenue, there is an effect on the income statement. Specifically, revenue and net income increase. Since the cash inflow is from customers, it is an operating activity. Among other reasons, the other answers are wrong because borrowing money, issuing common stock, and buying land would have no effect on the income statement.

True. Accrual accounting requires the recognition of revenue in the period in which the work is done regardless of when cash is collected.

the asset account, accounts receivable, increases. a revenue account increases. liabilities are not affected. When a company earns revenue but does not get paid, it receives a promise from the customer to collect cash in the future. This promise is shown on the balance sheet as an account titled account receivable. Since the company has already done the work, it will recognize the revenue even though no cash has been collected. Liabilities are not affected. The company does not owe the customers anything. Indeed, the customer owes the company for the work the company has performed.

Under accrual accounting the full amount of revenue is recognized in Year 1 regardless of the amount of cash collected. Acc. Recievable and Retained Earnings increase 2000

Recognizing revenue on account causes the accounts receivable (an asset) and revenue accounts to increase. Recognizing the revenue causes net income to increase which causes retained earnings (equity) to increase. When a company earns revenue on account, cash is not collected at the time of recognition therefore the statement of cash flows is not affected.

When a company collects an account receivable one asset (cash) increases and another asset (accounts receivable) decreases. The amount of total assets is not affected.

The full amount of revenue earned on account ($2,000) is placed in the accounts receivable account at the time revenue is recognized. Later when cash is collected ($1,800), the amount of the cash collected is removed from the accounts receivable account and placed in the cash account.

Collecting receivables results in an increase in one asset account (cash) and a decrease in another asset account (accounts receivable) leaving total assets unaffected. The income statement is not affected because the revenue was recognized when the receivable was created. The increase in cash is an operating activity.

a balance of $600 in accounts receivable at the beginning Year 2. As stated in the problem, cash collected in Year 1 is $6,300. The remaining $600 ($6,900 - $6,300) is collected in Year 2. The balance of accounts receivable at the end of Year 1 would be $600 ($6,900 total account receivable generated from revenue minus the $6,300 cash collected). The Year 2 beginning balance is the same as the Year 1 ending balance as determined previously as $600.

The Company will recognize $5,000 of revenue in Year 1 and $5,000 of cash flow from operations in Year 2. Accrual accounting requires that revenue be recognized in the year in which the service is provided. The cash flow is recognized in the year in which it is collected. In this case $5,000 of revenue is recognized in Year 1 when the work was done (service was provided) and $5,000 of cash flow from customers would be recognized in Year 2 when Guadalupe collected the cash.

By the end of Year 2 all of the accounts receivables have been collected leaving a remaining balance of zero. The Year 2 net income is zero because all of the revenue was recognized in Year 1. The cash flow from operations for Year 2 is $500. More specifically, the accounts receivable balance at the end of Year 1 is equal to the total amount of accounts receivable generated in Year 1 minus the amount of the receivable collected in Year 1 ($4,000 - $3,500 = $500). The $500 amount of the accounts receivable at the end of Year 1 is collected in Year 2.

the employees have completed work but have not been paid. By definition an accrued expense occurs when the expense is recognized before the cash is paid. In the case of an accrued salary expense, the employees would have completed their work and the company would recognize an obligation to pay them in the future. Specifically, the company would recognize an expense (accrued salary expense) and a liability (accrued salaries payable). The accrued salaries payable recognizes the obligation to pay the employees in the future. As a result, recognizing accrued salary expense meets the definition of recognizing an expense before cash is paid.

the balance sheet. Accounts payable is an obligation to pay cash in the future and is therefore a liability account. It is a permanent account that is not closed and is carried forward from one accounting period to the next. The ending balance of the account appears on the balance sheet.

All of the above. When a company recognizes an accrued expense it also recognizes an obligation (accrued liability) that will be paid in a subsequent accounting period. As a result the liability (accounts payable) increases. The expense recognition also lowers net income which causes stockholders' equity (retained earnings) to decrease. The event is a claims exchange transaction that does not affect assets.

A 600 increase in accounts payable and 600 decrease in retained earnings Under accrual accounting the full amount of the expense is recognized in Year 1 regardless of the fact that cash was not paid until Year 2.

Recognizing an accrued expense means that the company recognizes the expense in the current accounting period and will pay for the expense is a subsequent accounting period. As a result, liabilities increase. The expense recognition causes expenses to increase and thereby net income to decrease. The decrease in net income causes stockholders' equity (retained earnings) to decrease. There is no effect on cash flow in the current period because the cash is paid in a subsequent accounting period.

350 decrease in cash and 350 decrease in accounts payable. While the expense was incurred and recognized in Year 1, the cash payment occurred in Year 2. The Year 2 cash payment would cause the asset account (cash) and the liability account (accounts payable) decrease.

When an accrued liability is paid the asset account (cash) decreases and the associated liability account (salaries payable) decreases. Expenses in the current period are not affected because they were recognized in a subsequent accounting period. The since the cash outflow was caused by previous period expense recognition it is classified as an operating activity.

All correct. The recognition of the accrued salary expense on December 31, Year 1 would cause the Accrued Salaries Expense account to increase and the Accrued Salaries Payable account to increase by $5,000. At the end of the Year 1 accounting cycle the expense account would be closed to retained earnings resulting in a zero balance in the account on January 1, Year 2. The Accrued Salaries Payable account is a permanent account that is not closed at the end of accounting cycle. Therefore the balance in the Accrued Salaries Payable account on January 1, Year 2 would be the same as it was on December 31, of Year 1 which is $5,000. Recognizing an accrued expense does not affect the cash account at the time the expense is recognized on December 31, Year 1. Recall that the definition of an accrued expense is that the cash is paid after the expense is recognized.

Recognizing an accrued expense means that the company recognizes the expense in the current accounting period and will pay for the expense is a subsequent accounting period. As a result, liabilities increase. The expense recognition causes expenses to increase and thereby net income to decrease. The decrease in net income causes stockholders' equity (retained earnings) to decrease. There is no effect on cash flow in the current period because the cash is paid in a subsequent accounting period.

After the accrued revenue and expense has been recognized total assets amount to $4,000, net income is $500, and there is no effect on cash flow.

Accounts receivable appears in the asset section of the balance sheet.

Accounts payable appears in the liabilities section of the balance sheet.

Income statement and the balance sheet Recognizing revenue on account will cause an increase in an asset account (accounts receivable) that appears on the balance sheet. The recognition will also cause an increase in the revenue account that appears on the income statement. Since cash was not collected or paid, the statement of cash flows is not affected.

Income statement and the balance sheet Recognizing accrued salary expense will cause an increase in a liability account (salaries payable) that appears on the balance sheet. The recognition will also cause an increase in the salaries expense account that appears on the income statement. Since cash was not collected or paid, the statement of cash flows is not affected.

Balance sheet and the statement of cash flows Collecting an account receivable is an asset exchange event. The balance in the cash account will increase and the balance in the accounts receivable account will decrease. These changes will affect the amount of the balances show on the balance sheet. Since the revenue was recognized when it was earned, it will not be recognized again when the cash is collected. Therefore the income statement is not affected. The cash inflow will be shown in the operating section of the statement of cash flows.

Cash inflows from accounts receivable and cash outflows from accounts payable are classified as operating activities.

true. The amount of revenue shown on the income statement depends on when the work is done while the amount of cash flow for operating activities shown on the statement of cash flows depends on when cash is collected. As an example, assume a company earns $400 of revenue on account in Year 1 but collects the associated cash in Year 2. In this case, the Year 1 income statement would show $400 of revenue while the operating activities section of the Year 1 statement of cash flows would show zero.