Question 1

Assets such as inventory and property, plant, and equipment are reported on the balance sheet at their current market value.

Accepted Answer

These assets are generally reported at historical cost.

Question 2

If Howard, Inc. purchased inventory on credit from Roan Company, then the transaction recorded by Howard would include an increase in a liability and an increase in asset.

Accepted Answer

The transaction recorded by Howard would include an increase to an asset (inventory) and an increase to a liability (accounts payable).

Question 3

Operating expenses include interest expense related to a company's financing activities.

Accepted Answer

Interest expense is considered to be a nonoperating expense.

Question 4

Accrual accounting recognizes revenues only when cash is received and expenses only when cash is paid.

Accepted Answer

Accrual accounting refers to the recognition of revenue when earned and the matching of expenses when incurred. The recognition of revenues and expenses does not always relate to the receipt or payment of cash.

Question 5

Under the matching principle, the cost of inventory should be reported as an expense in the income statement when it is purchased, even if it is purchased on credit and will not be paid until the next reporting period.

Accepted Answer

Under the matching principle, the cost of inventory should only be reported as expense in the period in which it is used up, typically at the point of sale. Purchased inventories that have not yet been sold are reported as assets. Unpaid amounts to suppliers are reported as liabilities.

Question 6

If Umbrella Company paid $2,000 cash dividends to its shareholders, retained earnings would be reduced by $2,000.

Accepted Answer

A cash dividend results in a reduction of retained earnings.

Question 7

If stockholders' equity is $88,000 on January 1, 2016, and decreases to $64,000 on December 31, 2016, this could only be due to a net loss of $24,000.

Accepted Answer

A reduction in stockholders' equity could also be due to a declared cash dividend.

Question 8

Which of the following is not shown in the statement of stockholder's equity?
A) Unearned revenue
B) Dividends
C) Retained earnings
D) Common stock

Accepted Answer

Unearned revenue is a liability that represents amounts collected in advance from customers. It is an obligation that must be satisfied with a future cash payment or delivery of goods or services.

Question 9

What are probable future sacrifices called and how are they reported?
A) Assets on the balance sheet
B) Stockholders' equity on the balance sheet
C) Dividends on the statement of stockholders' equity
D) Liabilities on the balance sheet

Accepted Answer

Liabilities are probably future economic sacrifices resulting from a current or past event. They are obligations that must be satisfied with a future cash payment or delivery of goods or services.

Question 10

Account titles are commonly grouped into what five categories in the chart of accounts?
A) Current assets, Current liabilities, Noncurrent assets, Noncurrent liabilities, Stockholders' equity
B) Assets, Liabilities, Equity, Revenue, Expenses
C) Common stock, Additional paid-in capital, Treasury stock, Retained earnings, Accumulated other comprehensive income or loss
D) Cash, Marketable securities, Accounts payable, Long-term debt, Common stock

Accepted Answer

In the chart of accounts, account titles are commonly grouped into the five categories of: Assets, Liabilities, Equity, Revenues, and Expenses.

Question 11

Which one of the following does not impact retained earnings directly?
A) Net income
B) Net loss
C) Dividends
D) Stock issuances

Accepted Answer

Stock issuances impact stockholders' equity through the common stock account.

Question 12

An income statement does not include which of the following?
A) Operating expenses
B) Cost of goods sold
C) Retained earnings
D) Sales

Accepted Answer

Retained earnings represent accumulated earnings from previous accounting periods that has not been distributed to stockholders as dividends.

Question 13

An accrual of wages expense would produce what effect on the balance sheet?
A) Increase liabilities and decrease equity
B) Decrease liabilities and increase equity
C) Increase assets and increase liabilities
D) Decrease assets and decrease liabilities

Accepted Answer

An accrual of wages expense produces an increase in wages payable (liability) and a decrease in retained earnings (stockholders' equity), resulting in a decrease of profit.

Question 14

Hopewell Industries recorded and paid $1,800 advertising for the current month. Which occurred?
A) Current assets increase.
B) Gross profit decreases.
C) Operating income decreases.
D) Retained earnings increases.

Accepted Answer

Assets (cash) decrease and Advertising Expense (an operating expense) increases, causing operating income to decrease.

Question 15

As inventory and PPE assets on the balance sheet are consumed, they are reflected:
A) As a revenue on the income statement
B) As an expense on the income statement
C) As common stock on the balance sheet
D) Assets are never consumed

Accepted Answer

As assets are consumed (used up), their cost is transferred into the income statement as an expense.

Question 16

Which of the following will properly record the payment of a one-year insurance policy?
A) Increase assets and increase retained earnings
B) Increase liabilities and decrease retained earnings
C) Increase and decrease assets
D) Decrease assets and decrease liabilities

Accepted Answer

Prepaid insurance in increased and cash is decreased, both of which are assets.

Question 17

Cash collected on accounts receivable would produce what effect on the balance sheet?
A) Increase liabilities and decrease equity
B) Decrease liabilities and increase equity
C) Increase assets and decrease assets
D) Decrease assets and decrease liabilities

Accepted Answer

Cash collected on accounts receivable produces an increase in cash and a decrease in accounts receivable, both asset accounts. There is no impact on profit and on equity.

Question 18

Which of the following is one effect of a purchase of $1,000 of inventory on credit?
A) It would increase liabilities by $1,000
B) It would decrease retained earnings by $1,000
C) It would decrease liabilities by $1,000
D) It would decrease cash asset $5,000

Accepted Answer

The purchase on credit creates an account payable. It would increase liabilities by $1,000. In addition, the inventory account in the asset section of the balance sheet would also increase.

Question 19

The Cash t-account has a beginning balance of $64,000. During the year, $488,000 was debited and $498,000 was credited to the account.
What is the ending balance of cash?
A) ($10,000)
B) $74,000
C) $54,000
D) Cannot be determined from the information given.

Accepted Answer

$64,000 + $488,000 - $498,000 = $54,000

Question 20

On January 1, 2016, Lorraine Company paid a $32,000 cash security deposit to rent office space.
Which of the following would be the correct journal entry to record this transaction?
A) 
B) 
C) 
D)

Accepted Answer

Security deposit is debited and Cash is credited for $32,000.

Quiz 2: Constructing Financial Statements

Assets such as inventory and property, plant, and equipment are reported on the balance sheet at their current market value.

If Howard, Inc. purchased inventory on credit from Roan Company, then the transaction recorded by Howard would include an increase in a liability and an increase in asset.

Operating expenses include interest expense related to a company's financing activities.

Accrual accounting recognizes revenues only when cash is received and expenses only when cash is paid.

Under the matching principle, the cost of inventory should be reported as an expense in the income statement when it is purchased, even if it is purchased on credit and will not be paid until the next reporting period.

If Umbrella Company paid $2,000 cash dividends to its shareholders, retained earnings would be reduced by $2,000.

If stockholders' equity is $88,000 on January 1, 2016, and decreases to $64,000 on December 31, 2016, this could only be due to a net loss of $24,000.

Which of the following is not shown in the statement of stockholder's equity?

What are probable future sacrifices called and how are they reported?

Account titles are commonly grouped into what five categories in the chart of accounts?

Which one of the following does not impact retained earnings directly?

An income statement does not include which of the following?

An accrual of wages expense would produce what effect on the balance sheet?

Hopewell Industries recorded and paid $1,800 advertising for the current month. Which occurred?

As inventory and PPE assets on the balance sheet are consumed, they are reflected:

Which of the following will properly record the payment of a one-year insurance policy?

Cash collected on accounts receivable would produce what effect on the balance sheet?

Which of the following is one effect of a purchase of $1,000 of inventory on credit?

The Cash t-account has a beginning balance of $64,000. During the year, $488,000 was debited and $498,000 was credited to the account. What is the ending balance of cash?

On January 1, 2016, Lorraine Company paid a $32,000 cash security deposit to rent office space. Which of the following would be the correct journal entry to record this transaction?