Deck 2: The Basics of Record Keeping and Financial Statement Preparation: Balance Sheet

Question 1

The date of the balance sheet appears at the bottom of the balance sheet.

Answer 1

False

Question 2

Total liabilities plus shareholders' equity shows the sources of all the firm's financing, and the assets show how the firm holds or has invested those funds.

Answer 2

True

Question 3

The balance sheet equation provides the analytical framework to understand the effects of transactions and events on the financial statements.

Answer 3

True

Question 4

The T-account looks like the letter T, with a horizontal line bisected by a vertical line.Increases in assets appear on the left side, and decreases in assets appear on the right side of T-accounts.

Question 5

The balance sheet equation underlies the recording of transactions and events.It captures the financial statement effects of operating, investing, and financing transactions-three key activities of business firms.

Question 6

The balance sheet equation shows the equality of assets with liabilities plus shareholders' equity. This equation requires that an entity's assets exactly balance, or offset, an equal amount of financing provided by creditors and owners of the corporation.

Question 7

The balance sheet equation maintains equality by reporting the financial statement effects of each event and transaction in a dual manner, or what are termed the dual effects of transactions.

Question 8

The balance sheet groups individual accounts by type (asset, liability, or shareholders' equity) and lists these accounts with their balances as of the balance sheet date.

Question 9

The T-account looks like the letter T, with a horizontal line bisected by a vertical line.Increases in liabilities appear on the right side, and decreases in liabilities appear on the left side of T-accounts.

Question 10

The beginning balance of the shareholders' equity account Retained Earnings plus net income from the income statement less dividends equals the ending balance of Retained Earnings.

Question 11

The T-account looks like the letter T, with a horizontal line bisected by a vertical line.Increases in shareholders' equity appear on the right side, and decreases in shareholders' equity appear on the left side of T-accounts.

Question 12

The equation that describes the relationship between the balance sheet and the income statement through the Retained Earnings account is as follows:
Retained Earnings (beginning) + Net Income - Dividends = Retained Earnings (ending)

Question 13

The asset and liability categories group individual accounts by the expected timing of cash receipts (for assets) or cash payments (for liabilities).

Question 14

Under IFRS, assets and liabilities appear in the statement of financial position in order of decreasing closeness-to-cash.

Question 15

Under U.S.GAAP, assets and liabilities in the balance sheet appear in order of increasing closeness-to-cash.

Question 16

Both U.S.GAAP and IFRS require firms to report balance sheet accounts for the prior year in addition to the current year.

Question 17

The balance sheet begins with a list of assets and then lists liabilities and shareholders' equity.

Question 18

If the firm expects to collect or pay more than one year after the balance sheet date, the balance sheet classifies these as noncurrent assets and noncurrent liabilities, respectively.

Question 19

A T-account is a device or convention for organizing and accumulating the accounting entries of transactions that affect an individual account, such as cash, accounts receivable, bonds payable, or additional paid-in capital.

Question 20

Common terminology describes items whose cash receipts or payments the firm expects will occur within one year as current assets or current liabilities, respectively.

Question 21

To maintain the balance sheet equality, it is necessary to report every event and transaction in a dual manner. If a transaction results in an increase in the left hand side of the balance sheet, dual transactions recording requires that which of the following must occur, to maintain the balance sheet equation?

A)decrease another asset
B)increase a liability
C)increase shareholders equity
D)all of the above will maintain the balance sheet equation
E)none of the above

Question 22

Firms that use International Financial Reporting Standards (IFRS) may, but need not, list their assets from least liquid to most liquid, with the same ordering used to list liabilities.

Question 23

A balance sheet prepared according to U.S.GAAP lists assets from most liquid to least liquid, where liquid refers to the ease of converting the asset into cash.

Question 24

A balance sheet account with a credit balance requires a closing entry that debits that account, because a debit closing entry will result in a zero ending balance in the account.

Question 25

Shareholders' equity is a residual interest or claim-that is, the owners (shareholders) of a firm have a claim on assets not required to meet the claims of creditors.

Question 26

A balance sheet account with a debit balance requires a closing entry that credits that account, because a credit closing entry will result in a zero ending balance in the account.

Question 27

The balance sheet provides all the information an analyst wants or needs about a firm's resources and the claims on those resources.

Question 28

The balance sheet amount of shareholders' equity does not, and is not intended to, provide the user of the financial reports with a measure of the market value of common equity.

Question 29

A potential investor can easily ascertain market value of common equity for a given publicly traded firm by looking up the most recent share price (as reported in various online services) and then multiplying this share price times the number of common shares outstanding, as reported on the balance sheet.

Question 30

Income statement accounts are temporary accounts and, as such, will have beginning and ending balances of zero.

Question 31

The amounts that firms report as received from owners are equal to the amounts the firm received when it originally issued the shares of stock.

Question 32

The first step in the accounting record-keeping process is recording each transaction in a file or other record in the form of a journal entry.

Question 33

The closing process involves reducing to zero the balance in each income statement account by debiting the revenue accounts and crediting the expense accounts, and transferring to Retained Earnings the differences between total revenues and total expenses.

Question 34

In computerized systems, posting occurs instantly and automatically after journalizing.

Question 35

A balance sheet prepared according to U.S.GAAP lists liabilities starting with those that the firm will discharge soonest (the most current or closest to maturity liabilities) and ending with those that it will pay latest (the most noncurrent or distant to maturity liabilities).

Question 36

Accounting does not normally recognize mutually unexecuted contracts as assets or liabilities.

Question 37

Accounting is governed by the balance sheet equation, which shows the equality of

A)assets with liabilities plus shareholders' equity.
B)assets plus liabilities with shareholders' equity.
C)assets plus shareholders' equity with liabilities.
D)assets with liabilities minus shareholders' equity.
E)assets with shareholders' equity minus liabilities.

Question 38

Retained earnings measures the cumulative excess of net income over dividends for the life of a firm.Cumulative means that retained earnings aggregates all undistributed earnings.

Question 39

Both U.S.GAAP and IFRS require the disclosure, in the notes to the financial statements, of selected information about business segments.

Question 40

Depreciation allocates the asset's cost to the periods of benefit in some systematic and rational way, and it attempts to track changes in the asset's fair value.

Question 41

Current assets are expected to be converted to cash within

A)a week.
B)a month.
C)a quarter.
D)a year.
E)two years.

Question 42

Which of the following is/are true regarding the T-account?

A)Actual practice does not use this form of the account, except perhaps for memoranda or preliminary analyses
B)looks like the letter T, with a horizontal line bisected by a vertical line.
C)satisfies the requirement of an account and is easy to use.
D)all of the above
E)none of the above

Question 43

A T-account is a device or convention for organizing and accumulating the accounting entries of transactions that affect an individual account. Which of the following is/are true?

A)Increases in assets appear on the left side, and decreases in assets appear on the right side of T-accounts.
B)Increases in liabilities appear on the right side, and decreases in liabilities appear on the left side of T-accounts.
C)Increases in shareholders' equity appear on the right side, and decreases in shareholders' equity appear on the left side of T-accounts
D)all of the above are true
E)none of the above are true

Question 44

Conrad Company reports the following: $\begin{array}{ll}\text { Total Assets } & \$ 800 \\\text { Contributed Capital } & \$ 300 \\\text { Total Revenues } & \$ 600 \\\text { Beginning Retained Earnings } & \$ 200 \\\text { Total Expenses } & \$ 700 \\\text { Dividends } & \$ 100\end{array}$ What are Total liabilities?

A)$600
B)$500
C)$400
D)$300
E)$200

Question 45

T-accounts

A)summarize the effects of transactions on specific accounts.
B)show all the accounts affected by a single event or transaction.
C)provide a record of transactions.
D)all of the above
E)none of the above

Question 46

A detailed system of accounts allows the preparer of financial statements to decompose, or __________, each transaction to convey information about the effects of the transaction.

A)mixup
B)disaggregate
C)aggregate
D)share
E)combine

Question 47

Temporary accounts are for recording

A)revenues and expenses.
B)assets.
C)liabilities.
D)shareholders' equity.
E)assets, liabilities, and shareholders' equity.

Question 48

Marianne Company reports the following: $\begin{array}{lr}\text { Total Assets } & \$ 1,200 \\\text { Total Revenues } & \$ 800 \\\text { Total Liabilities } & \$ 500 \\\text { Beginning Retained Earnings } & \$ 200 \\\text { Total Expenses } & \$ 400 \\\text { Dividends } & \$ \quad 0\end{array}$ What is Contributed Capital?

A)$300
B)$200
C)$100
D)$0
E)$400

Question 49

The equation that describes the relationship between the balance sheet and the income statement through the Retained Earnings account is as follows:

A)Retained Earnings (beginning) - Net Income = Retained Earnings (ending)
B)Retained Earnings (beginning) + Net Income + Dividends = Retained Earnings (ending)
C)Retained Earnings (beginning) - Net Income - Dividends = Retained Earnings (ending)
D)Retained Earnings (beginning) - Net Income + Dividends = Retained Earnings (ending)
E)Retained Earnings (beginning) + Net Income - Dividends = Retained Earnings (ending)

Question 50

Composite, Inc., a firm specializing in building materials, engaged in the following transaction during 2013: issued 2,000 shares of common stock for $7,500 million in cash.Indicate the effects of the transaction on the balance sheet equation.(Composite Inc.applies U.S.GAAP financial reporting standards, and reports its results in millions of dollars.)

A)Liabilities +$7,500 million; Shareholders' Equity -$7,500 million
B)Liabilities +$7,500 million; Shareholders' Equity +$7,500 million
C)Assets +$7,500 million ; Liabilities +$7,500 million
D)Assets +$7,500 million ; Shareholders' Equity +$7,500 million
E)Assets -$7,500 million ; Liabilities -$7,500 million

Question 51

Brice Foods Group, a European food retailer that operates supermarkets in seven countries, engaged in the following transaction during 2013: purchased and received inventory costing €500 million on account from various suppliers. Indicate the effects of the transaction on the balance sheet equation.Brice Foods Group applies IFRS, and reports its results in millions of euros.

A)Assets + €500 million; Liabilities + €500 million
B)Assets + €500 million; Shareholders' Equity + €500 million
C)Liabilities + €500 million; Shareholders' Equity + €500 million
D)Liabilities + €500 million; Shareholders' Equity - €500 million
E)Assets + €500 million; Shareholders' Equity - €500 million

Question 52

Journal entries

A)show all the accounts affected by a single event or transaction.
B)provide a record of transactions.
C)have the characteristics presented in choices a and b.
D)summarize the effects of transactions on specific accounts.
E)none of the above

Question 53

Retained Earnings measures the cumulative excess of _____ for the life of a firm

A)dividends over net income
B)net income over dividends
C)assets over liabilities
D)liabilities over shareholders' equity
E)shareholders' equity over liabilities

Question 54

Which of the following is/are true regarding T-accounts?

A)for each transaction, the amount entered on the left side of (or debited to) the accounts for each transaction equals the amount entered on the right side of (or credited to) the accounts.
B)recording equal amounts of debits and credits for each transaction ensures that the balance sheet equation will always balance.
C)one side of the space formed by the vertical line records increases in the item and the other side records decreases.
D)all of the above
E)none of the above

Question 55

Any single event or transaction will have which of the following effect(s) on the balance sheet?

A)It increases an asset and increases either a liability or shareholders' equity.
B)It decreases an asset and decreases either a liability or shareholders' equity.
C)It increases one asset and decreases another asset.
D)It increases one liability or shareholders' equity and decreases another liability or shareholders' equity.
E)all of the above

Question 56

Horton Company reports the following: $\begin{array}{ll}\text { Contributed Capital } & \$ 200 \\\text { Total Revenues } & \$ 800 \\\text { Total Liabilities } & \$ 1,200 \\\text { Beginning Retained Earnings } & (\$ 100) \\\text { Total Expenses } & \$ 500 \\\text { Dividends } & \$ \quad 0\end{array}$ What are Total Assets?

A)$2,600
B)$1,600
C)$1,400
D)$1,000
E)$800

Question 57

Noncurrent assets are expected to be converted to cash over

A)a month.
B)a quarter.
C)a half of a year.
D)a year.
E)a period of time greater than a year.

Question 58

Which of the following is/are true regarding the T-account?

A)the name or title of the account appears on the horizontal line.
B)dates and other information can appear in T-accounts.
C)one side of the space formed by the vertical line records increases in the item and the other side records decreases.
D)all of the above
E)none of the above

Question 59

To maintain balance sheet equality, it is necessary to report every event and transaction in a dual manner. If a transaction results in an increase in a Liability account, then which of the following must occur, to maintain the balance sheet equation?

A)decrease another liability.
B)decrease shareholders' equity.
C)increase an asset.
D)all of the above will maintain the balance sheet equation
E)none of the above

Question 60

The accounting system uses a device called an account.An account

A)is created each time a transaction takes place.
B)accumulates the increases and decreases that occur during the period for a single item.
C)is created only for income statement items.
D)is created only for balance sheet items.
E)is created only for statement of cash flows items.

Question 61

Under U.S.GAAP, assets and liabilities in the balance sheet appear in order of

A)decreasing closeness-to-cash.
B)increasing closeness-to-cash.
C)alphabetical order.
D)numerical order.
E)all of the above.

Question 62

ABC Group (ABC), headquartered in Switzerland, is one of the world's largest engineering companies.ABC applies U.S.GAAP, and reports its results in millions of U.S.dollars.Based on ABC's financial reports for fiscal 2013, at January 1, 2013, ABC reported a balance in its Prepaid Rent account of $247 million; assume that this amount reflects its prepayments of rent on factory and office space for the next month.Assume also that on January 31, 2013, ABC paid $3,200 million as the annual rent for the period from February 1, 2013, to January 31, 2014.ABC has a calendar year reporting period.Select the correct journal entries that ABC Group would make during January 2013 that affect the Prepaid Rent account.

A)Rent Expense $3,200 million Cash $3,200 million
Prepaid Rent $247 million
Rent Expense $247 million
B)Rent Expense $3,200 million Prepaid Rent $3,200 million
Prepaid Rent $247 million
Cash $247 million
C)Rent Expense $3,200 million Prepaid Rent $3,200 million
Prepaid Rent $247 million
Cash $247 million
D)Rent Expense $247 million Prepaid Rent $247 million
Prepaid Rent $3,200 million
Cash $3,200 million
E)none of the above

Question 63

Ying Corporation, a Japanese construction firm, reported a balance in Income Taxes Payable of ¥3,700 million at the beginning of 2013 and ¥14,300 million at the end of 2013.Net income before income taxes for 2013 totaled ¥73,000 million.Assume that the firm is subject to an income tax rate of 43%.Compute the amount of cash payments made for income taxes during 2013.(Ying Corporation applies Japanese accounting standards, and reports its results in millions of yen (¥).In answering this question, assume that Ying Corporation uses either U.S.GAAP or IFRS; for purposes of this problem, this choice will not matter.)

A)¥10,600 million
B)¥17,090 million
C)¥20,790 million
D)¥73,000 million
E)none of the above

Question 64

Tokyo Motor Company (Tokyo), a Japanese car manufacturer, reported Sales of Products of ¥22,670 billion for the year ended March 31, 2014.The Cost of Products Sold was ¥18,356 billion.Assume that Tokyo made all sales on credit.Select the correct journal entries that Tokyo made during the fiscal year ended March 31, 2014, related to these transactions.[Tokyo applies U.S.GAAP, and reports its results in millions of yen (¥).]

A)Accounts Receivable ¥22,670 billion Inventories ¥22,670 billion
Cost of Goods Sold ¥18,356 billion
Revenues ¥18,356 billion
B)Accounts Receivable ¥18,356 billion Inventories ¥18,356 billion
Cost of Goods Sold ¥22,670 billion
Revenues ¥22,670 billion
C)Accounts Receivable ¥18,356 billion Revenues ¥18,356 billion
Cost of Goods Sold ¥22,670 billion
Inventories ¥22,670 billion
D)Accounts Receivable ¥22,670 billion Revenues ¥22,670 billion
Cost of Goods Sold ¥18,356 billion
Inventories ¥18,356 billion
E)none of the above

Question 65

On December 31, 2013, the Merchandise Inventories account of the Japanese electronics firm Flower Limited (Flower) had a balance of ¥408,700 million, based on Flower's financial reports for fiscal 2013.Assume that during 2014, Flower purchased merchandise inventories on account for ¥1,456,400 million.On December 31, 2014, it finds that merchandise inventory on hand is ¥412,400 million.Select the correct journal entries to account for all changes in the Inventories during 2014.(Flower applies Japanese accounting standards, and reports its results in millions of yen (¥).In answering this question, assume that Flower uses either U.S.GAAP or IFRS; for purposes of this problem, this choice will not matter.)

A)Cost of Goods Sold ¥1,452,700 million Merchandise Inventories ¥1,452,700 million
B)Merchandise Inventories ¥1,452,700 million Cost of Goods Sold ¥1,452,700 million
C)Cost of Goods Sold ¥1,449,000 million Merchandise Inventories ¥1,449,000 million
D)Merchandise Inventories ¥1,449,000 million Cost of Goods Sold ¥1,449,000 million
E)none of the above

Question 66

T-accounts are frequently used in textbooks, demonstration problems, and examinations to accumulate information about the effects of business transactions on individual balance sheet accounts and to prepare the balance sheet.Alternatively, to accomplish the same objectives, some instructors and students might prefer to use

A)a computer spreadsheet program.
B)P-accounts, only.
C)a single-entry bookkeeping system.
D)P&L-accounts.
E)L-accounts, only.

Question 67

Current liabilities

A)are obligations that a firm expects to pay or discharge during the normal operating cycle of the firm, usually one year.
B)include liabilities to merchandise suppliers, employees, and governmental units.
C)include notes and bonds payable to the extent that they will require the use of current assets within the next year.
D)include all of the above.
E)None of the above answers is correct.

Question 68

C-Swiss, a Swedish firm specializing in communication networks, reported a balance in Inventories of SEK21,500 million at the beginning of 2013 and SEK22,500 million at the end of 2013.During 2013, C-Swiss reported SEK114,100 million in Cost of Sales.How much was C-Swisss' inventory purchases during 2013? [Assume that all of C-Swisss' inventory purchases are made on account and C-Swiss applies IFRS, as well as reports its results in millions of Swedish kronor (SEK).]

A)SEK115,300 million
B)SEK115,200 million
C)SEK115,100 million
D)SEK113,100 million
E)none of the above

Question 69

On April 1, Year 1, Colonial Bookstore bought an insurance policy costing $24,000 that would insure the retail building for two years against fire loss.What asset account and what amount are recorded on the balance sheet at December 31, Year 1?

A)Prepaid Insurance, $15,000
B)Insurance Expense, $15,000
C)Prepaid Insurance, $9,000
D)Insurance Expense, $9,000
E)Prepaid Insurance, $12,000

Question 70

Klothing Company, a U.S.clothing designer, manufacturer, and retailer, reported a balance in prepaid insurance of $90.7 million, based on its financial reports dated March 31, 2013, the end of its fiscal year.Assume that of this balance, $24 million relates to an insurance policy with two remaining months of coverage.Select the correct journal entries that Klothing would make on April 30, 2013 (Assume that the firm closes its books monthly.Klothing applies U.S.GAAP, and reports its results in millions of U.S.dollars.)

A)Insurance Expense $ 24 million Prepaid Insurance $24 million
B)Prepaid Insurance $24 million Insurance Expense $24 million
C)Insurance Expense $12 million Prepaid Insurance $12 million
D)Prepaid Insurance $12 million Insurance Expense $12 million
E)none of the above

Question 71

The first step in the accounting record-keeping process is:

A)recording each transaction in a file or other record in the form of a journal entry.
B)posting the amounts from the journal entries to individual balance sheet and income statement accounts in a general ledger.
C)making adjusting journal entries to the accounts to correct errors and to reflect the financial statement impacts of items that occur because of usage or the passage of time.
D)preparing the income statement for the period from amounts in the income statement accounts.
E)preparing the balance sheet from amounts in the balance sheet accounts.

Question 72

Before preparing the balance sheet and income statement, an accountant would use what accounting record to first record the firm's transactions?

A)the trial balance
B)the adjusting entry
C)the general ledger
D)the subsidiary ledger
E)the journal

Question 73

Skyway Company, a U.S.airplane manufacturer, reported a balance of $8,100 million in Inventory at the beginning of 2013 and $9,600 million at the end of 2013.Its income statement reported Cost of Products Sold of $45,400 million for 2013.Compute the cost of inventory either purchased or manufactured during 2013.(Skyway Company applies U.S.GAAP, and reports its results in millions of U.S.dollars.)

A)$49,500 million
B)$39,900 million
C)$46,900 million
D)$39,900 million
E)none of the above

Question 74

Under IFRS, assets and liabilities in the statement of financial position appear in order of

A)decreasing closeness-to-cash.
B)increasing closeness-to-cash.
C)alphabetical order.
D)numerical order.
E)all of the above.

Question 75

_____ accounts provide disaggregated information concerning the net amount of an asset, liability, or shareholders' equity item. Note that the use of such accounts does not affect the total of assets, liabilities, shareholders' equity, revenues, or expenses, but only the balances in various accounts that comprise the totals for these items.

A)Reversing
B)Temporary
C)Contra
D)Closing
E)None of the above

Question 76

Energy Corporation, a U.S.diversified power management company, reported a balance in Retained Earnings of $2,800 million at the beginning of 2013 and $3,300 million at the end of 2013.Based on Energy Corporation's financial reports for fiscal 2013, it reported dividends declared and paid of $250 million for 2013.Compute the amount of net income for 2013.(Energy Corporation applies U.S.GAAP, and reports its results in millions of U.S.dollars.)

A)-$250 million
B)$250 million
C)$550 million
D)$750 million
E)none of the above

Question 77

Prepaid assets are valued on the balance sheet at

A)cost paid to acquire the asset.
B)acquisition cost less accumulated depreciation.
C)cost less expired portion.
D)replacement cost.
E)present value of future cash flows.

Question 78

If a corporation issues 1,000 shares of $1 par value common stock at $5 per share, how should the transaction be accounted for?

A)debit cash for $5,000 and credit common stock for $5,000
B)debit cash for $5,000 and credit common stock for $1,000 and credit additional paid-in capital for $4,000
C)debit cash for $5,000 and credit common stock for $1,000 and credit retained earnings for $4,000
D)credit cash for $5,000 and debit common stock for $5,000
E)debit common stock for $1,000 and debit retained earnings for $4,000 and credit cash for $5,000

Question 79

Benezra S.A., a large Brazilian petrochemical company, reported a balance of R$1,600 million in Accounts Receivable at the beginning of 2013 and R$1,500 million at the end of 2013.Its income statement reported total Sales Revenue of R$12,000 million for 2013.Assuming that Benezra makes all sales on account, compute the amount of cash collected from customers during 2013.Benezra applies Brazilian accounting standards, and reports its results in thousands of reals (R$), the Brazilian currency.(In answering this question, assume that Benezra uses either U.S.GAAP or IFRS; for purposes of this problem, this choice will not matter.)

A)12,000
B)11,900
C)12,100
D)13,600
E)13,500

Question 80

Assets are classified as current for reporting purposes when

A)shares of common stock in a company's important supplier are acquired to ensure continued availability of raw materials.
B)shares of common stock in another company are acquired to diversify operations.
C)expenditures are made in developing new technologies or advertising products.
D)they are reasonably expected to be turned into cash or to be sold or consumed during the normal operating cycle of the business.
E)they are reasonably expected to be turned into cash or to be sold or consumed within the next three years.