Question 1

The stockholders' equity of a firm can be defined as
A)net current assets.
B)net noncurrent assets.
C)a residual interest.
D)total assets plus total liabilities.
E)the owners' claim to the assets and liabilities.

Accepted Answer

Stockholders' equity represents the residual interest in the assets of a firm after liabilities have been deducted. In other words, it is the portion of the company's assets that belongs to the shareholders. Therefore, choice C is the correct answer.

Question 2

Recording revenues and expenses directly in the Retained Earnings account suppresses information about the causes of net income.

Accepted Answer

Recording revenues and expenses directly in the Retained Earnings account does not allow for the differentiation between the sources of net income, which could be important information for analysis and decision making.

Question 3

Which of the following is/are true?
A)Revenues measure the inflow of net assets from operating activities.
B)Expenses measure the outflow of net assets consumed in the process of generating revenues.
C)Recognizing revenues and expenses always involves a simultaneous entry in an asset and/or liability account.
D)Adjusting entries almost always involve an entry in at least one income statement and one balance sheet account.
E)All of the above answer choices are true.

Accepted Answer

All of the answer choices are true.

A) Revenues represent the inflow of economic resources (such as cash or accounts receivable) from operating activities that result in an increase in equity.

B) Expenses represent outflows of economic resources (such as cash or inventory) that are incurred in the process of generating revenues and result in a decrease in equity.

C) Recognizing revenues and expenses typically involves an entry in at least one income statement account (such as revenue or expense) and may also involve an entry in a balance sheet account (such as accounts receivable or prepaid expenses).

D) Adjusting entries are made at the end of an accounting period to update accounts for transactions or events that have not been recorded or have been recorded incorrectly. These entries almost always involve at least one income statement account (such as an expense or revenue account) and one balance sheet account (such as a prepaid expense or accrued liability).

Question 4

Once revenue and expense accounts serve their purpose of accumulating specific revenue and expense items for an accounting period, they have no further purpose for that period.

Accepted Answer

At the end of an accounting period, revenue and expense accounts are closed to summarize the financial performance of the period, and their balances are transferred to the income summary or directly to retained earnings, rendering them ready to accumulate new transactions in the next period.

Question 5

The last step in the accounting record-keeping process is:
A)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.
B)preparing the income statement for the period from amounts in the income statement accounts.
C)closing the temporary income statement accounts to retained earnings.
D)preparing the balance sheet from amounts in the balance sheet accounts.
E)preparing the statement of cash flows from balance sheet amounts and from details of transactions affecting the cash account.

Accepted Answer

The answer of The last step in the accounting record-keeping...

Question 6

The income statement links the beginning and ending balance sheets.

Accepted Answer

The income statement shows the changes in revenue, expenses, and net income over a period of time, which affects the retained earnings portion of the balance sheet. Therefore, it connects the beginning and ending balance sheets.

Question 7

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.

Accepted Answer

All the statements are true regarding the rules of recording in T-accounts: increases in assets are recorded on the left side (debit), while decreases are on the right side (credit); for liabilities and shareholders' equity, increases are recorded on the right side (credit), and decreases on the left side (debit).

Question 8

Under accrual accounting, revenue is recognized when
A)the firm has performed all, or most of, the services it expects to provide.
B)the firm has received cash, or some other asset such as a receivable, whose cash-equivalent value it can measure with reasonable precision.
C)the firm has significant uncertainty about the amount and timing of the cash inflows and outflows from the sales transaction.
D)both a and b must be present.
E)none of the above.

Accepted Answer

Under accrual accounting, revenue is recognized when the firm has performed all or most of the services it expects to provide (A) and when it has received cash or some other asset, such as a receivable, whose cash-equivalent value it can measure with reasonable precision (B). Both conditions must be met for revenue to be recognized.

Question 9

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)

Accepted Answer

This equation, known as the Retained Earnings equation, is a fundamental concept in accounting and is used to link the balance sheet and income statement. It shows how the net income and dividends affect the retained earnings balance from the beginning of the period to the end of the period.

Question 10

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)None of these answer choices is correct.

Accepted Answer

An account is a record that accumulates the increases and decreases that occur during the period for a single item, such as an asset, liability, equity, revenue or expense. It is used to keep track of the financial transactions of a business.

Question 11

The _____ convention, links the timing of some expenses with revenue recognition.
A)going concern
B)conservatism
C)matching
D)materiality
E)objectivity

Accepted Answer

The matching convention ensures that expenses are recognized in the same period as the revenue they helped to generate. This allows for accurate reporting of an entity's profitability.

Question 12

To record the purchase of equipment that is fully financed by the seller, you would
A)debit a liability and credit an asset.
B)debit an asset and credit cash.
C)debit an asset and credit a liability.
D)debit an asset and credit shareholders' equity.
E)debit a liability and credit shareholders' equity.

Accepted Answer

When equipment is fully financed by the seller, it means that the company did not have to pay any cash to purchase the equipment. Therefore, there is no cash outflow, and the credit to cash does not apply. The equipment acquired is recorded as an asset, and the obligation to pay the seller for the equipment is recorded as a liability. Hence, we debit an asset and credit a liability to record the purchase of equipment that is fully financed by the seller.

Question 13

Which of the following is/are false?
A)Firms do not necessarily recognize revenues when they receive cash
B)Firms do not necessarily recognize expenses when they disburse cash.
C)Net income will not necessarily equal cash flow from operations each period.
D)A profitable firm will likely borrow funds in order to remain in business, but eventually operations must generate cash to repay the borrowing.
E)None of the above are false

Accepted Answer

All of the statements are true.

Question 14

A seller of goods can easily associate (or match) the consumption of the benefits of the asset sold with revenues from its sale.At the time of sale and revenue recognition, the seller
A)removes the asset (inventory) from the seller's balance sheet.
B)recognizes revenue.
C)recognizes a reduction in an asset (inventory).
D)records the cost of goods sold expense in the same amount by which inventory decreases.
E)All of the answer choices are correct.

Accepted Answer

All of the answer choices are correct. When a seller sells goods, they remove the asset (inventory) from their balance sheet, recognize revenue, recognize a reduction in inventory, and record the cost of goods sold expense in the same amount by which inventory decreases. This is done to match the consumption of the benefits of the asset sold with revenues from its sale.

Question 15

When the accountant transfers the balance in each temporary revenue and expense account to the Retained Earnings account, this procedure is known as the closing of accounts.

Accepted Answer

The description provided accurately describes the closing process of temporary accounts at the end of an accounting period.

Question 16

The accrual basis of accounting is often contrasted with the cash basis of accounting.Which of the following is true of the cash basis of accounting?
A)The cash basis is not subject to manipulation
B)Most larger companies use the cash basis of accounting
C)The cash basis of accounting provides a strong basis to determine the total assets of the company
D)The cash basis provides an inferior picture of operating performance
E)The cash basis provides an superior picture of operating performance

Accepted Answer

The cash basis of accounting only recognizes revenues and expenses when cash is received or paid out, respectively. This can result in a distorted picture of a company's operating performance because it does not consider non-cash transactions such as accounts receivable and accounts payable. Therefore, the cash basis provides an inferior picture of operating performance compared to the accrual basis.

Question 17

Over sufficiently long time periods, the amount of net income equals
A)cash inflows minus cash outflows from operating activities.
B)cash inflows minus cash outflows from operating and investing activities.
C)cash inflows minus cash outflows from operating, investing, and debt servicing activities.
D)cash inflows minus cash outflows from operating and debt servicing activities.
E)cash inflows minus cash outflows from investing and debt servicing activities.

Accepted Answer

The answer of Over sufficiently long time periods, the amount...

Question 18

U.S.GAAP and IFRS require firms to initially report the results of most income transactions in the
A)retained earnings bypassing the income statement.
B)income statement instead of bypassing the income statement and reporting the amounts in some other shareholders' equity account.
C)paid-in-capital bypassing the income statement.
D)retained earnings bypassing the income statement
E)treasury stock bypassing the income statement

Accepted Answer

Both U.S.GAAP and IFRS require firms to initially report the results of most income transactions in the income statement. It is not reported in any other shareholders' equity accounts or bypassed through retained earnings, paid-in-capital or treasury stock.

Question 19

Many firms provide similar types of airline services with similar types of assets.They each received unqualified opinions from their independent auditors.Yet, Flash Airlines appears to apply its accounting principles more aggressively in income-enhancing ways relative to its competitors.The choices for Flash Airlines in applying generally accepted accounting principles under the accrual basis of accounting include(s):
A)depreciable lives for buildings and equipment.
B)estimated uncollectibles for accounts receivable.
C)estimated warranty costs.
D)all of the above.
E)none of the above.

Accepted Answer

All of the choices given (A, B, and C) are acceptable ways of applying generally accepted accounting principles under the accrual basis of accounting. Flash Airlines may be choosing to use more aggressive estimates or assumptions for these items, which could be enhancing their reported income relative to their competitors who are using more conservative estimates. However, as long as Flash Airlines' accounting practices are in compliance with GAAP, there is nothing inherently wrong with their approach.

Question 20

Which of the following concepts best characterizes the accrual basis of accounting?
A)Conservatism
B)Matching
C)Understandability
D)Going concern
E)Unit of measurement

Accepted Answer

The accrual basis of accounting requires that revenues and expenses be recognized in the accounting period in which they are earned or incurred, regardless of when cash is received or paid. The concept of matching requires that expenses be matched with the revenues they help generate in the same accounting period. This concept is essential to the accrual basis of accounting.

Quiz 3: The Basics of Record Keeping and Financial Statement Preparation: Income Statement

The stockholders' equity of a firm can be defined as

Recording revenues and expenses directly in the Retained Earnings account suppresses information about the causes of net income.

Which of the following is/are true?

Once revenue and expense accounts serve their purpose of accumulating specific revenue and expense items for an accounting period, they have no further purpose for that period.

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

The income statement links the beginning and ending balance sheets.

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?

Under accrual accounting, revenue is recognized when

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)

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

The _____ convention, links the timing of some expenses with revenue recognition.

To record the purchase of equipment that is fully financed by the seller, you would

Which of the following is/are false?

A seller of goods can easily associate (or match) the consumption of the benefits of the asset sold with revenues from its sale.At the time of sale and revenue recognition, the seller

When the accountant transfers the balance in each temporary revenue and expense account to the Retained Earnings account, this procedure is known as the closing of accounts.

The accrual basis of accounting is often contrasted with the cash basis of accounting.Which of the following is true of the cash basis of accounting?

Over sufficiently long time periods, the amount of net income equals

U.S.GAAP and IFRS require firms to initially report the results of most income transactions in the

Which of the following concepts best characterizes the accrual basis of accounting?