solutiontestbank.net · Web viewIncrease = IDecrease = DNo Effect = NA (Note that "No Effect" means that the event does not affect that element of the financial statements or that

Fundamental Financial Accounting Concepts, 10e (Edmonds)Chapter 2 Accounting for Accruals and Deferrals

For questions 1 through 6:Indicate how each event affects the financial statements model. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.

Increase = I Decrease = D No Effect = NA

(Note that "No Effect" means that the event does not affect that element of the financial statements or that the event causes an increase in that element, which is offset by a decrease in that same element.)

1) Banks Co. performed $5,000 of services for customers on account.

Assets Liabilities Equity Revenues Expenses Net IncomeStmt of Cash Flows

Answer: (I) (NA) (I) (I) (NA) (I) (NA)Performing services on account increases assets (accounts receivable) and increases revenue, which increases net income and equity (retained earnings). It does not affect the statement of cash flows, as it does not affect cash.Difficulty: 1 EasyTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

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2) Todd Co. collected $2,000 cash from customers in partial settlement of its accounts receivable.


Answer: (NA) (NA) (NA) (NA) (NA) (NA) (I)Collecting on accounts receivable increases one asset (cash) and decreases another asset (accounts receivable). It does not affect the income statement, but is reported as a cash inflow for operating activities on the statement of cash flows.Difficulty: 1 EasyTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

3) Angstrom Co. provided $2,600 of services for a customer who paid $1,000 cash immediately and promised to pay an additional $1,600 one month later.


Answer: (I) (NA) (I) (I) (NA) (I) (I)This event increases revenue, net income, and equity (retained earnings) by $2,600. Cash increases by $1,000 and accounts receivable increases by $1,600, which results in an increase in assets of $2,600. It is reported as a $1,000 cash inflow for operating activities on the statement of cash flows.Difficulty: 2 MediumTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



4) Amity Co. signed contracts for $25,000 of services to be performed in the future.


Answer: (NA) (NA) (NA) (NA) (NA) (NA) (NA)This event does not affect the financial statements at all. Revenue is recorded when services are performed, not when the contract is signed.Difficulty: 3 HardTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

5) At the end of the accounting period, Signet Co. recorded accrued salaries.


Answer: (NA) (I) (D) (NA) (I) (D) (NA)Accruing salaries expense increases liabilities (salaries payable) and it increases expenses, which decreases net income and equity (retained earnings). It does not affect the statement of cash flows.Difficulty: 1 EasyTopic: Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



6) Calloway Company collected $750 from a customer for services that Calloway agrees to perform in the future.


Answer: (I) (I) (NA) (NA) (NA) (NA) (I)Collecting a payment in advance from a customer increases assets (cash) and increases liabilities (unearned revenue). It does not affect the income statement. Revenue will not be recognized until the services are provided. It will be reported as a cash inflow from operating activities on the statement of cash flows.Difficulty: 1 EasyTopic: Accounting for Unearned RevenueLearning Objective: 02-07 Show how accounting for unearned revenues affects financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

7) When is revenue recognized under accrual accounting?

Answer: Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, is commonly called accrual accounting. Difficulty: 1 EasyTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

8) What does the balance in accounts receivable represent?

Answer: Accounts receivable is an asset account. Its balance represents expected future cash receipts arising from permitting customers to buy now and pay later. Difficulty: 1 EasyTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



9) When are expenses recognized under accrual accounting in relation to the payment of cash?

Answer: Accrual accounting requires that companies recognize expenses in the period in which they are incurred regardless of when cash is paid. In accrual transactions, that means that expenses are recorded before cash payments, and in deferral transactions they are recorded after cash payments.Difficulty: 2 MediumTopic: Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

10) What is the effect on the accounting equation of a cash payment to creditors?

Answer: Assets decrease; liabilities decreaseMaking a cash payment to creditors decreases assets (cash) and decreases liabilities (accounts payable).Difficulty: 2 MediumTopic: Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

11) Why are adjusting entries necessary in an accrual accounting system? What are some common examples?

Answer: An adjusting entry is an entry that updates account balances prior to preparing financial statements. Adjusting entries record revenues and expenses that should be recognized in the current accounting period, but have not yet been recorded. Some common adjusting entries include recognizing accrued salaries expense, the expenses that arise through the use of prepaid items, such as supplies and prepaid rent, as well as recognizing revenue that had been previously unearned.Difficulty: 2 MediumTopic: Accounting for Payables (Year-End Adjusting Entry); Accounting for Supplies; Accounting for Prepaid Items; Accounting for Unearned RevenueLearning Objective: 02-02 Show how payables affect financial statements.; 02-04 Identify the steps in the accounting cycle.; 02-05 Show how accounting for supplies affects financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.; 02-07 Show how accounting for unearned revenues affects financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



12) What effect does the recording of revenue normally have on total assets?

Answer: The recording of revenue normally has the effect of increasing total assets (usually cash or accounts receivable).If revenue is earned at the same time cash is collected, cash is increased. If revenue is earned on account, and a customer is billed, accounts receivable is increased. A less common situation involves earning revenue after cash was received in advance, in which case assets are unaffected (that is, liabilities decrease and equity increases).Difficulty: 1 EasyTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

13) What effect does providing services on account have on the statement of cash flows? What effect does it have on the balance sheet?

Answer: There is no effect on the statement of cash flows when services are performed on account. Assets and equity will increase on the balance sheet.Providing services on account does not affect the cash account; therefore, the statement of cash flows is unaffected. The asset accounts receivable increases as does equity (since revenue increases retained earnings).Difficulty: 2 MediumTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

14) Describe the purpose of the closing process.

Answer: The temporary accounts (that is, revenue, expense, and dividends) are closed prior to the start of the next accounting cycle. After closing, these accounts have zero balances and are ready to capture the revenue, expense, and dividend information for the next accounting period. After closing, the balance in the Retained Earnings account will be equal to the amount shown in the year-end balance sheet.Difficulty: 2 MediumTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



15) Describe the difference between temporary and permanent accounts, and state which ones are closed.

Answer: Temporary accounts (revenues, expenses and dividends) collect information about a single period only; they are closed at the end of that period (that is, after closing, their balances will equal zero). Permanent accounts include the balance sheet accounts (assets, liabilities, common stock and retained earnings); their balances roll forward each year rather than being closed out.Difficulty: 2 MediumTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

16) Define the accounting cycle and list the steps of the cycle.

Answer: The accounting cycle is a series of steps or procedures that occur repeatedly throughout the life of a business. The steps identified to this point are (1) recording transactions, (2) adjusting the accounts, (3) preparing financial statements, and (4) closing the temporary accounts. The first step occurs continually throughout the accounting period. Steps 2, 3, and 4 normally occur at the end of the accounting period.Difficulty: 2 MediumTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

17) Explain the meaning of the "matching concept."

Answer: The "matching concept" refers to the process of "matching" the expenses with the revenues that they produce in the appropriate time period. This matching is largely done through the adjusting process. For example, the accrual of salary expense has the effect of matching the correct portion of salary expense to the accounting period in which the employees contributed to producing revenue. Matching means that expenses should be recognized in the same accounting period as the revenues that they helped a business to earn.The matching concept is the foundation of accrual accounting — the recognition of revenues as they are earned and expenses as they are incurred, regardless of when cash is exchanged.Difficulty: 2 MediumTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



18) In the closing process, the amounts in the temporary accounts are transferred to what other account(s)?

Answer: Retained EarningsClosing the revenue accounts transfers their balances to and increases the balance of the Retained Earnings account. Closing the expenses and dividends accounts transfers their balances to and decreases the Retained Earnings account. Note that after closing, the balance in the Retained Earnings account is equal to the amount shown in the year-end balance sheet.Difficulty: 1 EasyTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

19) Explain the meaning of the fraud triangle and each of its elements.

Answer: The auditing profession has identified three elements that are typically present when fraud occurs. These three elements are often shown in the form of a triangle. The first of these elements is the availability of opportunity without which fraud could not exist. Therefore, opportunity is at the top of the triangle. The second element recognizes pressure as a key ingredient of misconduct. Pressure can come from a variety of sources. The third element is rationalization. Few individuals think of themselves as evil. They develop rationalizations to justify their misconduct.Difficulty: 2 MediumTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: UnderstandAACSB: Reflective Thinking; Communication; EthicsAICPA: BB Legal; FN Risk Analysis

20) Discuss the importance of ethics in the accounting profession.

Answer: The accountant's role in society requires trust and credibility. Accounting information is worthless if the accountant is not trustworthy. Similarly, tax and consulting advice is useless if it comes from an incompetent person. The importance of ethical conduct is universally recognized across a broad spectrum of accounting organizations. Corporate management is responsible for preparing financial reports, while outside independent accountants (CPAs) audit the reports.Difficulty: 2 MediumTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: UnderstandAACSB: Communication; EthicsAICPA: BB Industry; FN Decision Making



21) Bledsoe Company acquired $17,000 cash by issuing common stock on January 1, Year 1. During Year 1, Bledsoe earned $8,500 of revenue on account. The company collected $6,000 cash from customers in partial settlement of its accounts receivable and paid $5,400 cash for operating expenses. Based on this information alone, what was the impact on total assets during Year 1?A) Total assets increased by $20,100.B) Total assets increased by $600.C) Total assets increased by $26,100.D) Total assets did not change.

Answer: AExplanation: $17,000 (cash) + $8,500 (accounts receivable) + $6,000 (cash) - $6,000 (accounts receivable) - $5,400 (cash) = $20,100 increaseDifficulty: 3 HardTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: ApplyAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

22) Addison Company experienced an accounting event that affected its financial statements as indicated below:

Assets = Liab. + Equity Rev. − Exp. = Net Inc. Stmt ofCash Flows

+ NA + + NA + NA

Which of the following accounting events could have caused these effects on Addison's statements?A) Issued common stockB) Earned revenue on accountC) Earned cash revenueD) Collected cash from customers in partial settlement of its accounts receivable.

Answer: BExplanation: Earning revenue on account increases assets (accounts receivable) and increases revenue, which increases net income and equity (retained earnings). It does not affect cash flows.Difficulty: 2 MediumTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



23) Which of the following choices accurately reflects how the recording of accrued salary expense affects the financial statements of a business?


A. NA = + + − − − + = NA NA

B. NA = NA + +− NA − NA = NA NA

C. NA = + + − NA − + = − NA

D. + = + + NA NA − + = − -OA

A) Option AB) Option BC) Option CD) Option D

Answer: CExplanation: Accruing salary expense increases liabilities (salaries payable) and increases expenses, which decreases net income and equity (retained earnings). It does not affect cash flows.Difficulty: 2 MediumTopic: Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



24) Which of the following adjustments would not be described as an accrual?A) Recording interest that has been earned but will not be collected until the next accounting period.B) Recording operating expenses that have been incurred but not paid as of the end of the accounting period.C) Recording salary expense that has been incurred but not paid as of the end of the accounting period.D) Recording insurance expense relating to insurance premiums that were paid in advance.

Answer: DExplanation: The term deferral describes a revenue or an expense event that is recognized after cash has been exchanged. Commonly, deferred expenses include prepaid insurance. On the other hand, the term accrual describes a revenue or an expense event that is recognized before cash is exchanged. The other three answer choices describe accruals: interest receivable, accounts payable, and salaries payable.Difficulty: 3 HardTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



25) Janzen Company recorded employee salaries earned but not yet paid. Which of the following represents the effect of this transaction on the financial statements?

Assets = Liab. + Equity Rev. − Exp. = Net Inc. Cash FlowA. + = + + NA + − NA = + −OAB. NA = + + − NA − + = − −IAC. − = NA + − NA − + = − NAD. NA = + + − NA − + = − NA


Answer: DExplanation: Accruing salaries expense increases liabilities (salaries payable) and increases expenses, which decreases net income and equity (retained earnings). It does not affect cash flows.Difficulty: 2 MediumTopic: Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

26) Revenue on account amounted to $5,000. Cash collections of accounts receivable amounted to $2,300. Expenses for the period were $2,100. The company paid dividends of $450. What was net income for the period?A) $1,200B) $2,900C) $2,850D) $2,450

Answer: BExplanation: Net income = Revenue of $5,000 - Expenses of $2,100 = $2,900; dividends decrease retained earnings but do not affect net income.Difficulty: 2 MediumTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



27) Recognizing an expense may be accompanied by which of the following?A) An increase in liabilitiesB) A decrease in liabilitiesC) A decrease in revenueD) An increase in assets

Answer: AExplanation: Recognizing an expense may be accompanied by an increase in liabilities (i.e. accounts payable, salaries payable) or a decrease in assets (i.e. cash, prepaid rent or insurance).Difficulty: 2 MediumTopic: Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

28) Which of the following statements is true regarding accrual accounting?A) Revenue is recorded only when cash is collected.B) Expenses are recorded when they are incurred.C) Revenue is recorded in the period when it is earned.D) Revenue is recorded in the period when it is earned and expenses are recorded when they are incurred.

Answer: DExplanation: Revenue is recognized when earned and expenses are recognized when incurred, regardless of when cash is exchanged.Difficulty: 2 MediumTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



29) Recognition of revenue may be accompanied by which of the following?A) A decrease in a liabilityB) An increase in a liabilityC) An increase in an assetD) An increase in an asset or a decrease in a liability

Answer: DExplanation: Recognizing revenue may be accompanied by either an increase in assets (cash or accounts receivable) or a decrease in liabilities (unearned revenue).Difficulty: 2 MediumTopic: Accounting for Unearned Revenue; Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.; 02-07 Show how accounting for unearned revenues affects financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

30) Mize Company provided $45,500 of services on account, and collected $38,000 from customers during the year. The company also incurred $37,000 of expenses on account, and paid $32,400 against its payables. How do these events impact the elements of the financial statements model?A) Total assets would increase.B) Total liabilities would increase.C) Total equity would increase.D) All of these answer choices are correct.

Answer: DExplanation: Change in total assets = Increase in accounts receivable because of services provided on account of $45,500 - Decrease in account receivable because of collections on account of $32,400 = $13,100 increaseChange in total liabilities = Increase in accounts payable because of expenses incurred on account $37,000 - Decrease in accounts payable because of payments on account of $32,400 = $4,600 increaseChange in equity = Increase in retained earnings (revenue) of $45,500 - Decrease in retained earnings (expenses) of $37,000 = $8,500 increaseDifficulty: 3 HardTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



31) Which of the following events would not require a year-end adjusting entry?A) Purchasing supplies for cash during the year.B) Paying for one year's rent during the year.C) Providing services on account during the year.D) Each of these events would require a year-end adjusting entry.

Answer: CExplanation: Providing services on account does not require an adjusting entry at the end of the accounting period. Accounts receivable is increased when services are provided on account and is decreased when payment is received from customers. Supplies and prepaid rent both require year-end adjusting entries to recognize expense.Difficulty: 3 HardTopic: Accounting for Prepaid Items; Accounting for Supplies; Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.; 02-05 Show how accounting for supplies affects financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

32) How does the adjusting entry to recognize the portion of the unearned revenue that a company earned during the accounting period affect the elements of the financial statements? A) An increase in assets and a decrease in liabilities.B) An increase in liabilities and a decrease in equity.C) A decrease in liabilities and an increase in equity.D) A decrease in assets and a decrease in liabilities.

Answer: CExplanation: Recognizing the portion of the unearned revenue that a company earned during the accounting period involves a decrease in liabilities (unearned revenue) and an increase in equity (retained earnings as a result of revenue).Difficulty: 2 MediumTopic: Accounting for Unearned RevenueLearning Objective: 02-07 Show how accounting for unearned revenues affects financial statements.Bloom's: AnalyzeAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



33) On December 1, Year 1, Jack's Snow Removal Company received $6,000 of cash in advance from a customer and promised to provide services for that customer during the months of December, January, and February. How will the Year 1 year-end adjustment to recognize the partial expiration of the contract impact the elements of the financial statements model?A) Total assets will increase by $2,000.B) Equity will increase by $2,000.C) Total liabilities will increase by $2,000.D) Total assets will increase by $2,000 and equity will increase by $2,000.

Answer: BExplanation: The year-end adjustment to recognize one month's work on the three-month contract results in a $2,000 decrease in liabilities (unearned revenue) and a $2,000 increase in equity (retained earnings due to recognizing revenue).Difficulty: 2 MediumTopic: Accounting for Unearned RevenueLearning Objective: 02-07 Show how accounting for unearned revenues affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



34) The following account balances were drawn from the Year 1 financial statements of Grayson Company:

Cash $ 8,800 Accounts payable $ 2,500 Accounts receivable $ 3,000 Common stock ? Land $ 16,000 Retained earnings, Jan. 1 $ 5,400 Revenue $ 19,000 Expenses $ 14,500

What is the balance of the Common Stock account?A) $15,400B) $19,900C) $900D) $20,800

Answer: AExplanation: Assets = Liabilities + Equity$8,800 + $3,000 + $16,000 = $2,500 + EquityEquity = $25,300Equity = Common stock + Retained earnings$25,300 = Common Stock + ($5,400 + $19,000 - $15,500)$25,300 = Common Stock + $9,900Common Stock = $15,400Difficulty: 3 HardTopic: Steps in an Accounting Cycle; Preparing Financial Statements with AccrualsLearning Objective: 02-04 Identify the steps in the accounting cycle.; 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



35) Prior to closing, Syracuse Company's accounting records showed the following balances:

Retained earnings $ 16,800 Service revenue 21,750 Interest revenue 1,800 Salaries expense 12,300 Operating expense 3,450 Interest expense 900 Dividends 2,700

After closing, what is the balance of the Retained Earnings account?A) $16,800B) $23,700C) $21,000D) $26,400

Answer: CExplanation: Ending balance of retained earnings = Beginning balance + Net income - DividendsEnding balance of retained earnings = $16,800 + ($21,750 + $1,800 - $12,300 - $3,450 - $900) - $2,700 = $21,000Difficulty: 3 HardTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



36) On January 1, Year 2, the Supplies account of Sheldon Company had a balance of $1,200. During the year, the company purchased $3,400 of supplies on account and made partial payments totaling $3,000 on those accounts. On December 31, Year 2, Sheldon determined that there were $1,400 of supplies on hand. Which of the following would be reported on Sheldon's Year 2 financial statements?A) $1,600 of supplies; $200 of supplies expenseB) $1,400 of supplies; $2,000 of supplies expenseC) $1,400 of supplies; $3,200 of supplies expenseD) $1,600 of supplies; $3,400 of supplies expense

Answer: CExplanation: Supplies = Amount on hand at end of year of $1,400Supplies expense = Beginning balance of Supplies account of $1,200 + Supplies purchased of $3,400 − Ending balance of Supplies account of $1,400 = $3,200Difficulty: 2 MediumTopic: Accounting for SuppliesLearning Objective: 02-05 Show how accounting for supplies affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement

37) On October 1, Year 1, Jason Company paid $7,200 to lease office space for one year beginning immediately. What is the amount of rent expense that will be reported on the Year 1 income statement and what is the cash outflow for rent that would be reported on the Year 1 statement of cash flows?A) $7,200; $7,200B) $1,800; $1,800C) $1,800; $7,200D) $1,200; $7,200

Answer: CExplanation: Monthly rent expense = Payment of $7,200 ÷ 12 months = $600 per monthRent expense (on the income statement) = $600 per month × 3 months = $1,800The $7,200 payment is the cash outflow for rent that will be reported on the statement of cash flows.Difficulty: 3 HardTopic: Accounting for Prepaid ItemsLearning Objective: 02-06 Show how accounting for prepaid items affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



38) What do accountants commonly do when the connection between an expense and the corresponding revenue is vague?A) Accelerate revenue recognition and delay expense recognition.B) Match the expense with the period in which it is incurred.C) Recognize the expense at the time payment is made.D) Delay expense recognition until it can be matched with revenue.

Answer: BExplanation: When the connection between an expense and the corresponding revenue is vague, accountants commonly match the expense with the period in which it is incurred.Difficulty: 2 MediumTopic: Preparing Financial Statements with AccrualsLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Decision Making

39) How would a payment for rent paid in advance be classified?A) Asset source transactionB) Asset use transactionC) Asset exchange transactionD) Claims exchange transaction

Answer: CExplanation: Purchasing prepaid rent increases one asset (prepaid rent) and decreases another asset (cash). Therefore, it is classified as an asset exchange transaction.Difficulty: 1 EasyTopic: Transaction Classification; Accounting for Prepaid ItemsLearning Objective: 02-06 Show how accounting for prepaid items affects financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



40) Revenue on account amounted to $9,000. Cash collections of accounts receivable amounted to $8,100. Cash paid for operating expenses was $7,500. The amount of employee salaries accrued at the end of the year was $900. What was the net cash flow from operating activities?A) $900B) $600C) $1,500D) $8,700

Answer: BExplanation: Cash collected on accounts receivable of $8,100 − Cash paid for operating expenses of $7,500 = $600. Revenue earned on account and accrued salaries are not cash flow activities.Difficulty: 2 MediumTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement

41) Which of the following accounts would not appear on a balance sheet?A) Service RevenueB) Salaries PayableC) Unearned RevenueD) Interest Payable

Answer: AExplanation: Service Revenue and Interest Expense are income statement accounts and, as such, they do not appear on the balance sheet. Unearned Revenue, despite having the word "revenue" in its title, is a liability account that appears on the balance sheet, as does Salaries Payable.Difficulty: 2 MediumTopic: Preparing Financial Statements with AccrualsLearning Objective: 02-03 Prepare financial statements that include accruals.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



42) Warren Enterprises began operations during Year 1. The company had the following events during Year 1:

• The business issued $40,000 of common stock to its stockholders. • The business purchased land for $24,000 cash. • Services were provided to customers for $32,000 cash. • Services were provided to customers for $10,000 on account. • The company borrowed $32,000 from the bank. • Operating expenses of $24,000 were incurred and paid in cash. • Salary expense of $1,600 was accrued. • A dividend of $8,000 was paid to the stockholders of Warren Enterprises.

After closing, what is the balance of the Retained Earnings account as of December 31, Year 1?A) $10,000B) $8,400C) $16,400D) $42,000

Answer: BExplanation: Net income = Revenues of $42,000 – Operating expenses of $25,600 = $16,400Ending retained earnings = Beginning retained earnings of $0 + Net income of $16,400 – Dividends of $8,000 = $8,400Difficulty: 3 HardTopic: Accounting for Receivables; Steps in an Accounting Cycle; Preparing Financial Statements with Accruals; Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-01 Show how receivables affect financial statements.; 02-04 Identify the steps in the accounting cycle.; 02-02 Show how payables affect financial statements.; 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



43) Which of the following would cause net income on the accrual basis to be different from (either higher or lower than) "cash provided by operating activities" on the statement of cash flows?A) Purchased land for cashB) Purchased supplies for cashC) Paid advertising expenseD) Paid dividends to stockholder

Answer: BExplanation: Purchasing supplies for cash is a cash outflow for operating activities, but will not be reported as an expense until the supplies are used. Purchasing land is a cash outflow for investing activities and does not affect net income. Paying utilities expense causes equal decreases in net income and cash flows from operating activities. Paying dividends to stockholders is a cash outflow for financing activities and does not affect net income.Difficulty: 3 HardTopic: Accounting for SuppliesLearning Objective: 02-05 Show how accounting for supplies affects financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

44) Rushmore Company provided services for $45,000 cash during Year 1. Rushmore incurred $36,000 of operating expenses on account during Year 1, and by the end of the year, $9,000 of that amount had been paid with cash. If these are the only accounting events that affected Rushmore during Year 1, which of the following statements is true?A) The amount of net loss shown on the income statement is $9,000.B) The amount of net income shown on the income statement is $27,000.C) The amount of net income shown on the income statement is $9,000.D) The amount of net cash flow from operating activities shown on the statement of cash flows is $18,000.

Answer: CExplanation: Net income = Revenue of $45,000 – Operating expenses of $36,000 = $9,000Net cash flow from operating activities = Cash collections of $45,000 – Cash payments for operating expenses of $9,000 = $36,000Difficulty: 2 MediumTopic: Preparing Financial Statements with Accruals; Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.; 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



[The following information applies to the questions displayed below.] The following pre-closing accounts and balances were drawn from the records of Carolina Company on December 31, Year 1:

Cash $ 4,000 Accounts receivable $ 3,400 Dividends 2,000 Common stock 3,900 Land 3,200 Revenue 3,200 Accounts payable 1,800 Expense 2,200 Retained earnings 5,900

45) What is the amount of total assets that will be reported on the balance sheet as of December 31, Year 1?A) $12,600B) $13,800C) $7,200D) $10,600

Answer: DExplanation: Total assets = Cash of $4,000 + Land of $3,200 + Accounts Receivable of $3,400 = $10,600Difficulty: 3 HardTopic: Preparing Financial Statements with AccrualsLearning Objective: 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement

46) What is the amount of net income that will be reported on the Year 1 income statement?A) $2,200B) $3,200C) $1,000D) $200

Answer: CExplanation: Net income = Revenue of $3,200 − Expenses of $2,200 = $1,000Difficulty: 1 EasyTopic: Preparing Financial Statements with AccrualsLearning Objective: 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



47) After closing, what is the balance of the Retained Earnings account on December 31, Year 1?A) $5,900B) $7,200C) $3,900D) $4,900

Answer: DExplanation: Net income = Revenue of $3,200 – Expenses of $2,200 = $1,000Ending retained earnings = Beginning retained earnings of $5,900 + Net income of $1,000 – Dividends of $2,000 = $4,900Difficulty: 3 HardTopic: Steps in an Accounting Cycle; Preparing Financial Statements with AccrualsLearning Objective: 02-04 Identify the steps in the accounting cycle.; 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement

[The following information applies to the questions displayed below.] Nelson Company experienced the following transactions during Year 1, its first year in operation.

Acquired $12,000 cash by issuing common stock Provided $4,600 of services on account Paid $3,200 cash for operating expenses Collected $3,800 of cash from customers in partial settlement of its accounts receivable Paid a $200 cash dividend to stockholders

48) What is the amount of net income that will be reported on the Year 1 income statement?A) $1,400B) $800C) $1,000D) $1,200

Answer: AExplanation: Net income = Revenue of $4,600 − Expenses of $3,200 = $1,400Difficulty: 3 HardTopic: Preparing Financial Statements with AccrualsLearning Objective: 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



49) What is the amount of net cash flows from operating activities that will be reported on the Year 1 statement of cash flows?A) $400B) $600C) $1,400D) $1,200

Answer: BExplanation: Net cash flow from operating activities = Cash collections of $3,800 – Cash payments for expenses of $3,200 = $600The cash paid for dividends would be reported as a financing activity.Difficulty: 3 HardTopic: Preparing Financial Statements with AccrualsLearning Objective: 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement

50) What is the amount of total assets that will be reported on the balance sheet as of December 31, Year 1?A) $12,400B) $12,600C) $13,400D) $13,200

Answer: DExplanation: Total assets = Cash of $12,400 (calculated as $12,000 + $3,800 – $3,200 – $200) + Accounts Receivable of $800 (calculated as $4,600 – $3,800) = $13,200Difficulty: 3 HardTopic: Preparing Financial Statements with AccrualsLearning Objective: 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



51) What is the balance of the retained earnings that will be reported on the balance sheet as of December 31, Year 1?A) $1,200B) $1,000C) $1,400D) $13,200

Answer: AExplanation: Ending retained earnings = Beginning retained earnings of $0 + Net income of $1,400 − Dividends of $200 = $1,200Alternatively:Assets of $13,200 = Liabilities of $0 + Common stock of $12,000 + Retained earningsRetained earnings = $1,200Difficulty: 3 HardTopic: Preparing Financial Statements with Accruals; Statement of changes in stockholders' equityLearning Objective: 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement

52) On December 31, Year 1, Gaskins Co. owed $4,500 in salaries to employees who had worked during December but will not be paid until January, Year 2. If the year-end adjustment is properly recorded on December 31, Year 1, what will be the effect of this accrual on net income and cash flows from operating activities reported for Year 1?A) No effect on net income; no effect on cash flow from operating activitiesB) Decrease in net income; no effect on cash flow from operating activitiesC) Increase in net income; decrease in cash flow from operating activitiesD) No effect on net income; decrease in cash flow from operating activities

Answer: BExplanation: Recording the adjusting entry will increase salaries expense, which will reduce net income and it will increase salaries payable, a liability. It will not affect cash flows.Difficulty: 2 MediumTopic: Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



53) Duluth Co. collected a $6,000 cash advance from a customer on November 1, Year 1 for services to be provided over a six-month period beginning on that date. If the year-end adjustment is properly recorded, what will be the effect of the adjusting entry on Duluth's Year 1 financial statements?A) Increase assets and decrease liabilitiesB) Increase assets and increase revenuesC) Decrease liabilities and increase revenuesD) No effect

Answer: CExplanation: The adjusting entry to recognize revenue earned on the contract will increase revenues and decrease liabilities (unearned revenue).Difficulty: 2 MediumTopic: Accounting for Unearned RevenueLearning Objective: 02-07 Show how accounting for unearned revenues affects financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

54) On September 1, Year 1, Gomez Company collected $9,000 in advance from a customer for services to be provided over a one-year period beginning on that date. How much revenue would Gomez Company report related to this contract on its income statement for the year ended December 31, Year 1? How much would the company report as net cash flows from operating activities for Year 1?A) $3,000; $3,000B) $9,000; $9,000C) $3,000; $9,000D) $0; $9,000

Answer: CExplanation: Monthly revenue = Receipt of $9,000 ÷ 12 months = $750 per monthRevenue (on the income statement) = $750 per month × 4 months (September through December) = $3,000The company will recognize the $9,000 received as a cash inflow for operating activities in Year 1.Difficulty: 2 MediumTopic: Accounting for Unearned RevenueLearning Objective: 02-07 Show how accounting for unearned revenues affects financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



55) Which of the following are "matched" under the matching concept?A) Expenses and revenuesB) Expenses and liabilitiesC) Assets and equityD) Assets and liabilities

Answer: AExplanation: The matching concept refers to the matching of expenses to the revenues that those expenses produce.Difficulty: 1 EasyTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

56) Which of the following financial statements is impacted most significantly by the matching concept?A) Balance sheetB) Income statementC) Statement of changes in stockholders' equityD) Statement of cash flows

Answer: BExplanation: The matching concept is an accounting principle of recognizing expenses in the same accounting period as the revenues they produce. Revenues and expenses are reported on the income statement.Difficulty: 2 MediumTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



57) Which of the following is frequently used to describe the expenses that are matched in the same accounting period in which they are incurred?A) Market expensesB) Matching expensesC) Period costsD) Working costs

Answer: CExplanation: When the connection between and expense and the corresponding revenue is vague, accountants commonly match the expense with the period in which it is incurred. Those expenses are frequently called period costs.Difficulty: 1 EasyTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

58) If retained earnings decreased during the year, and no dividends were paid, which of the following statements must be true?A) Expenses for the year exceeded revenues.B) The company did not have enough cash to pay its expenses.C) Total equity decreased.D) Liabilities increased during the year.

Answer: AExplanation: If retained earnings decreased and no dividends were paid, the company must have reported a net loss. A net loss would have been the result if expenses for the year exceeded revenues.Difficulty: 2 MediumTopic: Preparing Financial Statements with AccrualsLearning Objective: 02-03 Prepare financial statements that include accruals.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



59) Which of the following correctly states the proper order of the steps in the accounting cycle?A) Record transactions, adjust accounts, close temporary accounts, prepare statements.B) Adjust accounts, record transactions, close temporary accounts, prepare statements.C) Record transactions, adjust accounts, prepare statements, close temporary accounts.D) Adjust accounts, prepare statements, record transactions, close temporary accounts.

Answer: CExplanation: In the accounting cycle, a company records transactions throughout the accounting period, then adjusts accounts at the end of the period. Next, the company prepares financial statements, and finally, it closes temporary accounts in order to begin the next accounting period. If accounts were closed prior to preparing statements, the income statement accounts would have zero balances on the income statement.Difficulty: 2 MediumTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

60) What is the purpose of the accrual basis of accounting?A) Recognize revenue when it is collected from customers.B) Match assets with liabilities during the proper accounting period.C) Recognize expenses when cash disbursements are made.D) Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands.

Answer: DExplanation: Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, is commonly called accrual accounting.Difficulty: 2 MediumTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



61) Which of the following types of accounts is closed at the end of an accounting cycle?A) DividendsB) Common stockC) AssetsD) Liabilities

Answer: AExplanation: Revenues, expenses and dividends are closed to retained earnings at the end of an accounting cycle.Difficulty: 1 EasyTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

62) Which of the following types of accounts is not closed at the end of an accounting cycle?A) RevenuesB) Retained earningsC) DividendsD) Expenses

Answer: BExplanation: Revenues, expenses and dividends are closed to retained earnings at the end of an accounting cycle. Retained earnings is a permanent account that is reported on the balance sheet.Difficulty: 2 MediumTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



63) Which of the following statements best describes the balance in a revenue account at the beginning of an accounting period?A) ZeroB) Last period's ending balanceC) Higher than the previous period's beginning balanceD) Equal to the amount of retained earnings for the previous period

Answer: AExplanation: The temporary accounts (that is, revenue, expense, and dividends) are closed prior to the start of the next accounting cycle. After closing, these accounts have zero balances and are ready to capture the revenue, expense, and dividend information for the next annual accounting period.Difficulty: 2 MediumTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

64) What should an accountant do when there is no traceable connection between expenses and revenue?A) Apply the matching conceptB) Design a system of internal controlC) Exercise judgmentD) Be as uniform as possible

Answer: CExplanation: Although it would be more accurate to match expenses with revenues than with periods, there is sometimes no traceable connection between expenses and revenue. Accountants must exercise judgment to select the accounting period in which to recognize revenues and expenses.Difficulty: 2 MediumTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



65) Which of the following is not an element of the fraud triangle?A) RelianceB) RationalizationC) OpportunityD) Pressure

Answer: AExplanation: The auditing profession has identified three elements that are typically present when fraud occurs. These three elements are often shown in the form of a triangle. The first of these elements is the availability of opportunity without which fraud could not exist. The second element recognizes pressure as a key ingredient of misconduct. The third element is the rationalization.Difficulty: 1 EasyTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: RememberAACSB: EthicsAICPA: BB Critical Thinking; FN Risk Analysis; FN Decision Making

66) Which of the following is not a principle of the AICPA Code of Professional Conduct?A) Due CareB) Objectivity and IndependenceC) IntegrityD) Internal Controls

Answer: DExplanation: The AICPA Code of Professional Conduct includes the following six principles: Responsibilities, Public Interest, Integrity, Objectivity and Independence, Due Care, and Score and Nature of Services.Difficulty: 2 MediumTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: RememberAACSB: EthicsAICPA: BB Critical Thinking; FN Decision Making



67) Which of the following is not one of the common elements that are typically present when fraud occurs?A) The capacity to rationalizeB) The existence of pressure leading to an incentiveC) The assistance of othersD) The presence of an opportunity

Answer: CExplanation: The auditing profession has identified three elements that are typically present when fraud occurs: opportunity, pressure, and rationalization.Difficulty: 1 EasyTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: UnderstandAACSB: EthicsAICPA: BB Critical Thinking; FN Risk Analysis; FN Decision Making

68) What is the term used to describe the policies and procedures that are designed to reduce the opportunities for fraud?A) Internal controlsB) Asset source transactionsC) Accounting standardsD) Financial systems

Answer: AExplanation: Internal controls are policies and procedures designed to reduce the opportunities for fraud.Difficulty: 1 EasyTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: RememberAACSB: EthicsAICPA: BB Critical Thinking; FN Risk Analysis



69) What action did the U.S. Congress take because of the audit failures at Enron, WorldCom and other companies?A) Required publicly-traded companies to be audited by a government agencyB) Passed the Sarbanes-Oxley ActC) Required companies to begin preparing an additional financial statementD) Passed an amendment to the Securities and Exchange Act

Answer: BExplanation: Congress passed the Sarbanes-Oxley Act in 2002 in response to audit failures at Enron and WorldCom, among others.Difficulty: 1 EasyTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Legal; FN Risk Analysis

70) Which of the following describes the effects of a claims exchange transaction on a company's financial statements?


A. NA = NA + NA NA − NA = NA +OA

B. + = + + NA NA − NA = NA +OA

C. NA = + + − NA − + = − NA

D. All of these could represent the effects of a claims exchange transaction.


Answer: CExplanation: A claims exchange transaction will result in either an increase in liabilities and a decrease in equity or a decrease in liabilities and an increase in equity. It may or may not affect the income statement, but it will never affect the statement of cash flows, as it does not affect any asset, including cash.Difficulty: 2 MediumTopic: Transaction ClassificationLearning Objective: 02-09 Classify accounting events into one of four categories.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



71) Which of the following is an asset source transaction?A) Issued common stockB) Paid a cash dividend to stockholdersC) Collected cash from customers in settlement of accounts receivableD) Accrued salary expense

Answer: AExplanation: Issuing common stock is an asset source transaction that increases assets (cash) and increases equity (common stock). Paying a cash dividend is an asset use transaction, receiving a payment on accounts receivable is an asset exchange transaction, and accruing salary expense is a claims exchange transaction.Difficulty: 2 MediumTopic: Transaction Classification; Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

72) Which of the following is an asset use transaction?A) Purchased machine for cash.B) Recorded insurance expense at the end of the period.C) Invested cash in an interest earning account.D) Accrued salary expense at the end of the period.

Answer: BExplanation: Recording insurance expense at the end of the period is an asset use transaction that decreases assets (prepaid insurance) and decreases equity (insurance expense decreases retained earnings). Purchasing a machine for cash and investing cash in an interest earning account are asset exchange transactions. Accruing salary expense is a claims exchange transaction.Difficulty: 2 MediumTopic: Transaction Classification; Accounting for Prepaid Items; Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



73) Which of the following is a claims exchange transaction?A) Recognized revenue earned on a contract where the cash had been collected at an earlier date.B) Issued common stock.C) Invested cash in an interest earning account.D) Purchased machine for cash.

Answer: AExplanation: Recognizing revenue earned on a contract where the cash had been collected at an earlier date is a claims exchange transaction that decreases liabilities (unearned revenue) and increases equity (revenue increases retained earnings). Purchasing a machine for cash and investing in an interest earning account are asset exchange transactions. Issuing common stock is an asset source transaction.Difficulty: 2 MediumTopic: Transaction Classification; Accounting for Unearned RevenueLearning Objective: 02-07 Show how accounting for unearned revenues affects financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

74) Which of the following is an asset exchange transaction?A) Issued common stock.B) Accrued salary expense at the end of the accounting period.C) Collected cash on accounts receivable.D) Recognized revenue earned on a contract where the cash had been collected at an earlier date.

Answer: CExplanation: Collecting cash on accounts receivable is an asset exchange transaction that increases one asset (cash) and decreases another asset (accounts receivable). Issuing common stock is an asset source transaction. Accruing salary expense and recognizing revenue earned on a contract where the cash had been collected at an earlier date are both claims exchange transactions.Difficulty: 2 MediumTopic: Transaction Classification; Accounting for Unearned Revenue; Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.; 02-07 Show how accounting for unearned revenues affects financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



75) If a company provides services to clients but has not yet collected any cash, how should that transaction be classified?A) Claims exchange transactionB) Asset use transactionC) Asset source transactionD) Asset exchange transaction

Answer: CExplanation: This transaction increases assets (accounts receivable) and increases equity (revenue increases retained earnings), and is therefore classified as an asset source transaction.Difficulty: 2 MediumTopic: Transaction Classification; Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

76) Vanguard Company uses accrual accounting. Indicate whether each of the following statements regarding Vanguard's accounting system is true or false.________ a) The recognition of accounting events and the realization of cash consequences must occur in different accounting periods.________ b) The cash consequence of a transaction sometimes precedes its accounting recognition.________ c) Expenses may either be matched to revenues they produce or to periods in which they are incurred.________ d) Vanguard may record accrual transactions, but may not record deferral transactions.________ e) Vanguard is not permitted to make cash sales.

Answer: a) F b) T c) T d) F e) F

a) This is false. Recognizing accounting events (reporting them on the financial statements) and realizing cash consequences may, but not must, occur in different accounting periods.b) This is true. Sometimes the cash consequence of a transaction occurs after its accounting recognition. An example is revenue earned on account.c) This is true. The matching concept allows companies that use accrual accounting to match expenses with either revenues or accounting periods.d) This is false. A company that uses accrual accounting records both accrual and deferral transactions.e) This is false. Accrual basis companies may make cash sales and may pay cash expenses.Difficulty: 2 MediumTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



77) Wheaton Co. performed services for a customer on account. Indicate whether each of the following statements about this transaction is true or false.________ a) Assets and equity both increase when the revenue is recognized.________ b) This transaction did not affect cash flows.________ c) The company recorded an increase in revenue and a decrease in accounts receivable.________ d) Recognition of revenue would be delayed until cash was collected.________ e) This transaction is an example of an asset exchange transaction.

Answer: a) T b) T c) F d) F e) F

a) This is true. Assets (accounts receivable) and equity (revenue increases retained earnings) both increase.b) This is true. Because cash is not affected, cash flows are not affected.c) This is false. The event resulted in an increase in revenue and an increase in accounts receivable.d) This is false. Kenyon would recognize revenue when the services are performed, not when cash is received.e) This is false. Because assets (accounts receivable) increase, it is an asset source transaction.Difficulty: 2 MediumTopic: Accounting for Receivables; Transaction ClassificationLearning Objective: 02-01 Show how receivables affect financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



78) Dixon Company collected cash in Year 1 from a customer for services to be performed beginning January, Year 2. Indicate whether each of the following statements about this transaction is true or false.________ a) Dixon's Year 2 income statement would not be affected by this transaction.________ b) Dixon's Year 1 statement of cash flows would be affected by this transaction.________ c) This transaction is an asset exchange transaction.________ d) The revenue for the services provided will be recorded in Year 2.________ e) The transaction increases Dixon's liabilities.

Answer: a) F b) T c) F d) T e) T

a) This is false. Because work will not begin until Year 2, the revenue is recognized in Year 2.b) This is true. Only the Year 1 statement of cash flows is affected because no cash is received in Year 2.c) This is false. Collecting a cash advance is an asset source transaction that increases assets (cash) and increases liabilities (unearned revenue).d) This is true. Revenue will be recognized only when services are performed, beginning in Year 2.e) This is true. The transaction increases unearned revenue, a liability.Difficulty: 2 MediumTopic: Accounting for Unearned Revenue; Transaction ClassificationLearning Objective: 02-07 Show how accounting for unearned revenues affects financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



79) Regarding the relationships of revenues and expenses to assets and liabilities, state whether each of the following statements is true or false.________ a) Recording an increase in a revenue account may be associated with a decrease in assets.________ b) Recording an increase in a revenue account may be associated with a decrease in liabilities.________ c) An increase in Salaries Expense may be accompanied by a decrease in Salaries Payable.________ d) Recording a decrease in assets may be associated with an increase in an expense account.________ e) A decrease in Supplies will be accompanied by an increase in Supplies Expense.

Answer: a) F b) T c) F d) T e) T

a) This is false. An increase in a revenue account is usually associated with an increase in assets, such as cash or accounts receivable.b) This is true. Recording an increase in revenue may be associated with a decrease in liabilities, as in the case of earning revenue from a prepaid contract (unearned revenue).c) This is false. An increase in salaries expense could be accompanied by an increase in salaries payable, as in the case of accruing salaries expense, but not a decrease.d) This is true. Recording a decrease in assets (such as prepaid rent or insurance, or supplies) may be associated with an increase in expenses.e) This is true. Supplies expense is increased when supplies are used, or decreased.Difficulty: 3 HardTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry); Accounting for Supplies; Accounting for Prepaid Items; Accounting for Unearned RevenueLearning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-05 Show how accounting for supplies affects financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.; 02-07 Show how accounting for unearned revenues affects financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



80) Wyatt Company paid $57,000 in January, Year 2 for salaries that had been earned by employees in December, Year 1. Indicate whether each of the following statements about financial statement effects of the January, Year 2 event is true or false.________ a) The income statement for Year 2 is not affected because the salaries expense had been recognized at the end of December, Year 1.________ b) Cash flows from operating activities decreased on the Year 2 statement of cash flows.________ c) Payment of the salaries in Year 2 increased a liability.________ d) The Year 2 statement of changes in stockholders' equity would not be affected because the salaries expense had been recognized at the end of December, Year 1.________ e) Both assets and equity decreased in Year 2 as a result of this transaction.

Answer: a) T b) T c) F d) T e) F

a) This is true. The expense is recognized in the period in which the salaries were earned, in Year 1.b) This is true. The January, Year 2 payment decreases cash flows from operating activities in Year 2.c) This is false. When the payment is made, salaries payable, a liability, is decreased, not increased.d) This is true. Because the expense was recognized in Year 1, the Year 2 statement of changes in stockholders' equity is unaffected.e) This is false. The January, Year 2 payment decreases assets (cash) and liabilities (salaries payable), but not equity.Difficulty: 3 HardTopic: Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



81) Indicate whether each of the following statements about the closing process and the accounting cycle is true or false.________ a) The closing process transfers certain account balances to retained earnings at the end of the accounting cycle.________ b) Only accounts that appear on the income statement are closed at the end of each accounting cycle.________ c) The temporary accounts are closed prior to the start of the next accounting cycle.________ d) The permanent accounts contain information that is cumulative in nature.________ e) The retained earnings balance at the end of any given year is equal to that year's net income.

Answer: a) T b) F c) T d) T e) F

a) This is true. The closing process transfers the balances in revenue, expense, and dividend accounts to retained earnings at the end of the period.b) This is false. Dividends are closed, but do not appear on the income statement.c) This is true. The temporary accounts (revenue, expense, and dividends) are closed prior to the start of the next accounting cycle.d) This is true. All balance sheet, or permanent, accounts contain cumulative information.e) This is false. Because the retained earnings account accumulates earnings from year to year, its balance is not necessarily equal to net income in any particular year.Difficulty: 2 MediumTopic: The Accounting Cycle; Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



82) Regarding the effects of end-of-period adjustments, state whether each of the following statements is true or false.________ a) Recording the usage of supplies involves an increase in liabilities and a decrease in equity.________ b) The accrual of salaries is considered a claims exchange transaction.________ c) Recording services performed on a prepaid contract involves a decrease in liabilities and an increase in assets.________ d) End-of-period adjustments often affect cash flows.________ e) Failure to record accrued salaries at the end of the year will cause reported net income to be higher than it should have been.

Answer: a) F b) T c) F d) F e) T

a) This is false. Recording usage of supplies decreases assets (supplies) and increases expense, which decreases equity.b) This is true. Accruing salaries increases a liability (salaries payable) and decreases equity (salaries expense decreases retained earnings).c) This is false. Recording service performed on a prepaid contract involves a decrease in liabilities (unearned revenue) and an increase in revenue, which increases equity. Assets are not affected.d) This is false. End of period adjustments never affect the cash account, therefore never affect cash flows. e) This is true. Failure to record accrued salaries would understate salaries expense, causing reported income to be higher than it should have been.Difficulty: 2 MediumTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry); Accounting for Supplies; Accounting for Unearned Revenue; Transaction ClassificationLearning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-05 Show how accounting for supplies affects financial statements.; 02-07 Show how accounting for unearned revenues affects financial statements.Bloom's: Analyze; UnderstandAACSB: Reflective Thinking; Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



83) Indicate whether each of the following statements regarding the four types of accounting events is true or false.________ a) Asset exchange transactions involve an increase in one asset and a decrease in another asset.________ b) An asset source transaction involves an increase in assets and an increase in a corresponding claims account.________ c) An asset use transaction cannot result in an increase in equity.________ d) Asset exchange transactions cannot affect cash flows.________ e) Some claims exchange transactions involve an increase in a liability account and a decrease in an equity account.

Answer: a) T b) T c) T d) F e) T

a) This is true. An asset exchange transaction involves an increase in one asset and a decrease in another asset.b) This is true. An asset source transaction involves an increase in assets and an increase in liabilities or equity.c) This is true. An asset use transaction involves a decrease in assets and either a decrease in liabilities or equity. Therefore, it cannot result in an increase in equity. d) This is false. Because an asset exchange transaction involves an increase in one asset and a decrease in another, it often affects cash.e) This is true. Some claims exchange transactions, including accruing salaries, involve an increase in a liability and a decrease in equity.Difficulty: 2 MediumTopic: Transaction ClassificationLearning Objective: 02-09 Classify accounting events into one of four categories.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



84) Indicate whether each of the following statements about corporate governance is true or false.________ a) The Financial Accounting Standards Board issues a code of ethical behavior by which public accountants must abide.________ b) The Sarbanes Oxley Act created the Public Company Accounting Oversight Board (PCAOB).________ c) Because of the Sarbanes Oxley Act, audit firms are not permitted to provide many nonaudit services to audit clients.________ d) The fraud triangle identifies opportunity, pressure, and rationalization as the three elements that are typically present when fraud is committed.________ e) An executive found guilty of falsely certifying a company's financial statements faces up to a $100,000 fine and five years in prison.

Answer: a) F b) T c) T d) T e) F

a) This is false. The AICPA, not FASB, issues a code of professional behavior for CPAs.b) This is true. The PCAOB is a result of the Sarbanes-Oxley Act.c) This is true. The Sarbanes-Oxley Act restricts nonaudit services that audit firms can provide to audit clients.d) This is true. Opportunity, pressure, and rationalization make up the fraud triangle.e) This is false. A $5 million fine and 20-year prison sentence are possible penalties for executives who falsely certify a company's financial statements.Difficulty: 2 MediumTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Legal; FN Risk Analysis

85) The term "recognition" means to report an economic event in the financial statements.

Answer: TRUEExplanation: Recognition means recording revenue or expense, which results in reporting the event in the financial statements.Difficulty: 1 EasyTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



86) Companies that use accrual accounting recognize revenues and expenses at the time that cash is received or paid, respectively.

Answer: FALSEExplanation: Accrual basis companies recognize revenue when earned and expense when incurred, regardless of when cash is received or paid.Difficulty: 1 EasyTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

87) The term "accrual" describes an earnings event that is recognized before cash is received or paid.

Answer: TRUEExplanation: Accruals involve events such as earning revenue on account and incurring expense on account, in which earnings is affected before cash is received or paid.Difficulty: 1 EasyTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

88) A company may recognize a revenue or expense without a corresponding cash collection or payment in the same accounting period.

Answer: TRUEExplanation: Accrual basis companies recognize revenue when earned and expense when incurred, regardless of when cash is received or paid.Difficulty: 1 EasyTopic: Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



89) A payment to an employee in settlement of salaries payable decreases an asset and decreases equity.

Answer: FALSEExplanation: The event decreases assets (cash) and decreases liabilities (salaries payable).Difficulty: 2 MediumTopic: Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

90) An increase in an expense may be accompanied by a decrease in a liability.

Answer: FALSEExplanation: An increase in an expense, such as salaries expense, may be accompanied by an increase in a liability, such as salaries payable, but it may not be accompanied by a decrease in a liability.Difficulty: 1 EasyTopic: Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

91) Revenues and expenses are temporary accounts.

Answer: TRUEExplanation: Revenues and expenses, along with dividends, are temporary accounts.Difficulty: 1 EasyTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



92) The balances of the temporary accounts are transferred to Net Income, a permanent account, during the closing process.

Answer: FALSEExplanation: All temporary account balances are transferred to the Retained Earnings account during the closing process. Net income is not an account; it is a total calculated on the income statement.Difficulty: 1 EasyTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

93) Accounts that are closed include expenses, dividends, and unearned revenues.

Answer: FALSEExplanation: The temporary accounts (that is, revenue, expense, and dividends) are closed prior to the start of the next accounting cycle. Unearned Revenue, which is a liability account, is a permanent account; as such, it is not closed.Difficulty: 2 MediumTopic: Accounting for Unearned Revenue; Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.; 02-07 Show how accounting for unearned revenues affects financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

94) After the closing process, all income statement accounts have balances that carry forward into the next accounting period.

Answer: FALSEExplanation: Revenues and expenses are income statement accounts. The temporary accounts (that is, revenue, expense, and dividends) are closed prior to the start of the next accounting cycle. After closing, these accounts have zero balances and are ready to capture the revenue, expense, and dividend information for the next accounting period.Difficulty: 1 EasyTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



95) Two of the steps in the accounting cycle are adjusting the accounts and closing the accounts.

Answer: TRUEExplanation: The accounting cycle includes recording transactions, adjusting the accounts, preparing statements, and closing the accounts.Difficulty: 1 EasyTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

96) Accrual accounting usually fails to match expenses with revenues.

Answer: FALSEExplanation: A primary goal of accrual accounting is to appropriately match expenses with revenues, the matching concept. Appropriately matching expenses with revenues can be difficult even when using accrual accounting.Difficulty: 1 EasyTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

97) The matching concept leads accountants to select the recognition alternative that produces the lowest amount of net income.

Answer: FALSEExplanation: The matching concept does not lead accountants to select the recognition alternative that produces the lowest amount of net income. Instead, it is an accounting principle of recognizing expenses in the same accounting period as the revenues they produce.Difficulty: 2 MediumTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



98) Adjusting entries never affect a business's cash account.

Answer: TRUEExplanation: Transactions affecting the Cash account are recorded during the first step (recording transactions) of the accounting cycle. Adjusting entries are made at the end of the accounting period so that all revenue and expense account balances and related asset and liability account balances are updated prior to their use in preparing the financial statements. These entries are recorded during the second step (Adjusting the accounts) of the accounting cycle. Adjusting entries never affect the Cash account.Difficulty: 2 MediumTopic: Steps in an Accounting CycleLearning Objective: 02-04 Identify the steps in the accounting cycle.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

99) Asset use transactions always involve the payment of cash.

Answer: FALSEExplanation: Asset use transactions can also involve a decrease in another asset account, such as supplies or prepaid rent.Difficulty: 2 MediumTopic: Transaction ClassificationLearning Objective: 02-09 Classify accounting events into one of four categories.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

100) The governance of a corporation includes the roles and responsibilities of the board of directors, managers, shareholders, and auditor.

Answer: TRUEExplanation: All of these stakeholders determine how a company is operated.Difficulty: 1 EasyTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Risk Analysis



101) The ethical standards for certified public accountants only require that such accountants comply with applicable laws and regulations.

Answer: FALSEExplanation: The high ethical standards required by the profession state "a certified public accountant assumes an obligation of self-discipline above and beyond requirements of laws and regulations."Difficulty: 1 EasyTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: UnderstandAACSB: Reflective Thinking; EthicsAICPA: BB Critical Thinking; BB Legal; FN Decision Making

102) Certified public accountants are obligated to act in a way that serves the public interest.

Answer: TRUEExplanation: The Public Interest Principle of the AICPA Code of Professional Conduct states: "Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism."Difficulty: 1 EasyTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: RememberAACSB: Reflective Thinking; EthicsAICPA: BB Critical Thinking; FN Decision Making

103) The bankruptcies of Enron and WorldCom both indicated the occurrence of major audit failures.

Answer: TRUEExplanation: The massive surprise bankruptcies of Enron in late 2001 and WorldCom several months later suggested major audit failures on the part of the independent auditors. An audit failure means a company's auditor does not detect, or fails to report, that the company's financial reports are not in compliance with GAAP.Difficulty: 1 EasyTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: UnderstandAACSB: Reflective Thinking; EthicsAICPA: BB Critical Thinking; BB Legal; FN Risk Analysis



104) The Sarbanes-Oxley Act includes several significant reforms that affect the auditing profession, but it did not reduce an audit firm's ability to provide non-audit services to its audit clients.

Answer: FALSEExplanation: Prior to the Sarbanes-Oxley Act (SOX), independent auditors often provided nonaudit services, such as installing computer systems, for their audit clients. To reduce the likelihood of conflicts of interest, SOX prohibits all registered public accounting firms from providing audit clients, contemporaneously with the audit, certain nonaudit services, including internal audit outsourcing, financial-information-system design and implementation services, and expert services.Difficulty: 2 MediumTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: UnderstandAACSB: EthicsAICPA: BB Critical Thinking; BB Legal; FN Risk Analysis

105) The internal controls of a business are designed to reduce the probability of occurrence of fraud.

Answer: TRUEExplanation: Internal controls are policies and procedures that a business implements to reduce opportunities for fraud and to assure that its objectives will be accomplished.Difficulty: 1 EasyTopic: Corporate GovernanceLearning Objective: 02-10 Discuss the primary components of corporate governance.Bloom's: UnderstandAACSB: Reflective Thinking; EthicsAICPA: BB Critical Thinking; FN Risk Analysis

106) Providing services to customers on account is an asset exchange transaction.

Answer: FALSEExplanation: Providing services to customers on account is an asset source transaction that increases the asset accounts receivable.Difficulty: 1 EasyTopic: Transaction Classification; Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



107) An adjusting entry that decreases unearned revenue and increases service revenue is a claims exchange transaction.

Answer: TRUEExplanation: Unearned revenue, a liability, decreases and service revenue increases the equity account retained earnings, making this a claims exchange transaction.Difficulty: 2 MediumTopic: Transaction Classification; Accounting for Unearned RevenueLearning Objective: 02-07 Show how accounting for unearned revenues affects financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

108) Sometimes the recognition of revenue is accompanied by an increase in liabilities.

Answer: FALSEExplanation: Recognition of revenue increases equity, which cannot be accompanied by an increase in liabilities. It could, however, be accompanied by a decrease in liabilities as in a claims exchange transaction.Difficulty: 2 MediumTopic: Accounting for Unearned RevenueLearning Objective: 02-07 Show how accounting for unearned revenues affects financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

109) The collection of an account receivable is a claims exchange transaction.

Answer: FALSEExplanation: The collection of an account receivable is an asset exchange transaction.Difficulty: 2 MediumTopic: Transaction Classification; Accounting for ReceivablesLearning Objective: 02-01 Show how receivables affect financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



110) Hernandez Company began business operations and experienced the following transactions during Year 1, its first year of operations:1) Issued common stock for $50,000 cash.2) Provided services to customers for $125,000 on account.3) Purchased $2,500 of supplies on account.4) Paid $30,000 cash to rent office space for a 12-month period beginning July 1.5) Collected $115,000 cash from customers.6) Paid cash for $90,000 of operating expenses.7) Adjusted the accounting records to reflect that there was $750 of supplies remaining on hand at year-end.8) Recorded a year-end adjustment to recognize rent expense.

Required:a) Record the above transactions on a horizontal statements model, reflecting their effect on the different financial statements.

b) Prepare Hernandez Company's income statement, balance sheet and statement of cash flows for the year ended December 31, Year 1.

Answer: a)

b)



Difficulty: 3 HardTopic: Accounting for Receivables; Preparing Financial Statements with Accruals; Accounting for Supplies; Accounting for Prepaid Items; Preparing Financial Statements with DeferralsLearning Objective: 02-01 Show how receivables affect financial statements.; 02-03 Prepare financial statements that include accruals.; 02-05 Show how accounting for supplies affects financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.; 02-08 Prepare financial statements that include deferrals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



111) The following transactions apply to Einstein Corporation.1) Issued common stock for $50,000 cash.2) Provided services to customers for $28,000 on account.3) Purchased land for $16,000 cash.4) Purchased $1,500 of supplies on account.5) Paid $12,000 for operating expenses.6) Paid $550 on accounts payable.7) Collected $25,000 cash from customers.8) Accrued $600 of salary expense at year end.9) Paid $2,000 dividends to stockholders.

Required:a) Identify the effect on the statement of cash flows for each of the above transactions. b) Classify the above accounting events into one of four types of transactions (asset source, asset use, asset exchange, claims exchange).

Answer:

Difficulty: 2 MediumTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry); Accounting for Supplies; Accounting for Supplies; Transaction ClassificationLearning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-05 Show how accounting for supplies affects financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



112) The following events occurred during a company's first year of operations, which ended on December 31:a) On April 1, paid $36,000 for to lease office space for one year beginning immediately.b) On February 1, paid $3,000 to purchase supplies; a physical count revealed $1,080 of supplies on hand on December 31.c) On September 1, received $48,000 cash in advance for services to be performed over a six-month period beginning immediately.

Required:For each event: (1) Show how the events affect each of the company's accounts using the horizontal statements model. In the last column, enter OA, IA, or FA for the type of cash flow activity, if applicable.(2) In the row that follows, show how the corresponding adjustment, required as of December 31, affects each of the company's accounts.

Answer:

a) Payment of $36,000 ÷ Time period of 12 months = $3,000 per month; April through December = 9 months; $3,000 per month × 9 months = Expense of $27,000b) Purchase of $3,000 − Amount of hand of $1,080 = Amount used of $1,920 c) Receipt of $48,000 ÷ Time period of 6 months = $8,000 per month; September through December = 4 months; $8,000 per month × 4 months = $32,000Difficulty: 2 MediumTopic: Accounting for Supplies; Accounting for Prepaid Items; Accounting for Unearned RevenueLearning Objective: 02-05 Show how accounting for supplies affects financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.; 02-07 Show how accounting for unearned revenues affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



113) The following data were taken from the accounting records of Li Company at December 31, Year 1. All adjustments have been recorded. The closing entries have not been recorded.

Required:a) List the accounts that should be closed at the end of Year 1.b) Prepare an income statement for Li Company for Year 1.c) Determine the balance in retained earnings after closing entries have been recorded.

Answer: a) The accounts that should be closed are:• Service revenue• Salaries expense• Operating expense• Supplies expense• Insurance expense• Rent expense• Dividends



b)

c)

Difficulty: 3 HardTopic: Preparing Financial Statements with Accruals; Steps in an Accounting CycleLearning Objective: 02-03 Prepare financial statements that include accruals.; 02-04 Identify the steps in the accounting cycle.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



114) For each of the following transactions, indicate the type by entering AS for asset source transactions, AU for asset use transactions, AE for asset exchange transactions, and CE for claims exchange transactions.1) ________ Paid $2,000 in dividends to its stockholders2) ________ Recorded the accrual of $1,000 in salaries to be paid later3) ________ Issued common stock for $20,000 in cash4) ________ Earned revenue to be collected next year5) ________ Paid the salaries accrued in #2 above 6) ________ Received cash from customers in #4 above7) ________ Purchased supplies on account8) ________ Received $500 from a customer for services to be provided later

Answer: 1) AU 2) CE 3) AS 4) AS 5) AU 6) AE 7) AS 8) AS1) Assets (cash) decreased, Equity (retained earnings from dividends) decreased2) Liabilities (salaries payable) increased, Equity (retained earnings from salaries expense) decreased3) Assets (cash) increased, Equity (common stock) increased4) Assets (accounts receivable) increased, Equity (retained earnings from revenue) increased5) Assets (cash) decreased, Liabilities (salaries payable) decreased 6) Assets (cash) increased, Assets (accounts receivable) decreased7) Assets (supplies) increased, Liabilities (accounts payable) increased 8) Assets (cash) increased, Liabilities (unearned revenue) increasedDifficulty: 2 MediumTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry); Accounting for Unearned Revenue; Transaction ClassificationLearning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-07 Show how accounting for unearned revenues affects financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



115) Classify each of the following transactions for the purpose of the statement of cash flow as operating activities (OA), investing activities (IA), financing activities (FA), or not reported on the statement of cash flows (NA).1) ________ Sold land2) ________ Provided consulting services on account3) ________ Borrowed funds from the bank4) ________ Paid rent in advance for the next six months5) ________ Paid cash to settle accrued salary expense6) ________ Purchased supplies on account7) ________ Collected accounts receivable

Answer: 1) IA 2) NA 3) FA 4) OA 5) OA 6) NA 7) OA1) Purchasing and selling long-lived assets is an investing activity2) Because cash was not collected or paid, the statement of cash flows is not affected3) Borrowing cash is a financing activity4) Paying rent, including paying in advance, is an operating activity5) Paying salaries is an operating activity6) Making purchases on account does not affect cash flows7) Collecting cash from customers is an operating activityDifficulty: 2 MediumTopic: Preparing Financial Statements with Accruals; Preparing Financial Statements with DeferralsLearning Objective: 02-03 Prepare financial statements that include accruals.; 02-08 Prepare financial statements that include deferrals.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



116) Maggie Stern started a consulting business, Stern Consulting, on January 1, Year 1. The following events occurred in Year 1:1) Acquired $9,000 cash by issuing common stock2) Provided services on account, $27,5003) Paid cash for $13,500 in operating expenses4) Collected $11,000 of the revenue that was previously recorded on account5) Paid a cash dividend of $5,000 to the stockholders

Required:a) Show the effects of the above transactions on the accounting equation.

b) Prepare an income statement and statement of cash flows for Year 1.

Answer:



b)

Difficulty: 2 MediumTopic: Accounting for Receivables; Preparing Financial Statements with AccrualsLearning Objective: 02-01 Show how receivables affect financial statements.; 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



117) Turner Company started its business by issuing $10,000 of common stock on January 1, Year 1. The company performed $38,000 of services for customers on account in Year 1. It collected $32,500 of this amount in Year 1, recorded expenses on account of $29,500, paid $21,000 of the payables owed, and paid a $500 dividend to the stockholders.

Required:a) Determine the amount of total assets at the end of Year 1.b) Determine the amount of cash on hand at the end of Year 1.c) Determine the amount of net income for Year 1.d) Prepare a balance sheet as of December 31, Year 1.

Answer: a) $26,500 b) $21,000c) $8,500d)

a) Total assets = $10,000 + $38,000 − $21,000 − $500 = $26,500 b) Cash on hand at end of Year 1 = $10,000 + $32,500 − $21,000 − $500 = $21,000c) Net income = $38,000 − $29,500 = $8,500Difficulty: 3 HardTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry); Preparing Financial Statements with AccrualsLearning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



118) The Maryland Corporation was started on January 1, Year 1, with the issuance of $50,000 of stock. During Year 1, the company provided $75,000 of services on account and collected $68,000 of that amount. Maryland incurred $63,000 of expenses, and paid $50,000 of that amount during Year 1. On December 31, Year 1, Maryland paid investors a $2,000 cash dividend and accrued $4,000 of salary expense.

Required: 1) Determine the net income for year ended December 31, Year 1.2) Prepare Maryland Corporation's Statement of Cash Flows for the year ended December 31, Year 1. 3) Determine the balance in Maryland's Retained Earnings account after closing.



Answer: 1) $8,000 2)

3) Ending retained earnings = Beginning retained earnings of $0 + Net income of $8,000 net income − Dividends of $2,000 = $6,000

1) Net income = $75,000 − 63,000 − 4,000 = $8,0003) Ending retained earnings = Beginning retained earnings of $0 + Net income of $8,000 net income − Dividends of $2,000 = $6,000Difficulty: 3 HardTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry); Preparing Financial Statements with Accruals; Steps in an Accounting CycleLearning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-03 Prepare financial statements that include accruals.; 02-04 Identify the steps in the accounting cycle.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



119) Consider the following independent scenarios:a) At January 1, Year 2, accounts receivable was $24,000. Cash collected on accounts receivable during Year 2 was $55,000. At December 31, Year 2, accounts receivable was $30,000. What were the revenues earned on account during Year 2?b) At January 1, Year 2, accounts payable was $19,000. During Year 2, expenses on account were $68,000. At December 31, Year 2, accounts payable was $15,000. What was the amount of cash payments on accounts payable that were made during Year 2?c) At January 1, Year 2, the balance in the prepaid insurance account was $480, which related to insurance coverage that expired on March 1, Year 2. On March 1, Year 2, the company paid $3,000 for insurance coverage for one year of insurance coverage that began on that date. What was the amount of insurance expense for Year 2?d) At January 1, Year 2, the balance in the supplies account was $550. At December 31, Year 2, the company counted $400 of supplies on hand. The company reported supplies expense in Year 2 of $3,300. What was the total of supplies purchases during Year 2?

Answer: a) $61,000 b) $72,000 c) $2,980d) $3,150

a) Beginning accounts receivable of $24,000 + Revenues earned on account − Cash collections on account of $55,000 = Ending accounts receivable of $30,000; Revenues earned on account = $61,000 b) Beginning accounts payable of $19,000 + Expenses incurred on account of $68,000 − Cash payments made on accounts payable = Ending accounts payable of $15,000; Cash payments made on accounts payable = $72,000 c) Monthly insurance expense beginning March 1 = Payment of $3,000 ÷ 12 months = $250 per month; Year 2 Insurance expense = Insurance expense relating to Jan. and Feb. of $480 + Insurance expense for March through December of $250 per month × 10 months = $480 + $2,500 = $2,980d) Beginning supplies of $550 + Supplies purchased − Supplies expense = Ending balance of supplies; $400 + Supplies purchased − $3,300 = $400; Supplies purchased = $3,150 Difficulty: 3 HardTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry); Accounting for Supplies; Accounting for Prepaid ItemsLearning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-05 Show how accounting for supplies affects financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



120) Oregon Co. began operations on January 1, Year 1, by issuing $10,000 in common stock to the stockholders. On March 1, Year 1, Oregon received $36,000 cash in advance from a client for services and promised to perform those services for a one-year period beginning April 1, Year 1. During Year 1, services in the amount of $32,000 were provided to customers on account, and 80% of this amount was collected by year-end. During Year 1, operating expenses incurred on account were $24,000, and 60% of this amount was paid by year-end. During the year, Oregon paid $1,200 to purchase supplies. By year-end, $1,080 of the supplies had been used. Dividends to stockholders were $2,000 during the year. During Year 1, Oregon paid salaries of $28,000, and on December 31, Year 1, the company accrued salaries of $2,800. Oregon recorded all appropriate adjusting entries at year end.

Required:1) What would Oregon report for service revenue for Year 1?2) What would Oregon report for salaries expense for Year 1?3) What would Oregon report for supplies expense for Year 1?4) What would the amount be for net cash flows from operating activities for Year 1?5) What is the net income for Year 1?6) What would the balance in the retained earnings account be at December 31, Year 1?



Answer: 1) $59,0002) $30,8003) $1,0804) $18,0005) $3,1206) $1,120

1) Monthly revenue relating to cash received in advance = Receipt of $36,000 ÷ 12 months = $3,000 per monthRelated revenue earned during Year 1 = $3,000 per month × 9 months (April through December) = $27,000Year 1 Service revenue = Revenue earned on account of $32,000 + Revenue earned relating to cash received in advance of $27,000 = $59,0002) Salaries expense = Salaries incurred and paid during the year of $28,000 + Accrued salaries at year-end of $2,800 = $30,8003) Supplies expense = Supplies used during the year of $1,0804) Net cash flows from operating activities = Cash collections on accounts receivable of $25,600 (calculated as $32,000 × 80%) + Cash received in advance of $36,000 − Cash payment for operating expenses of $14,400 (calculated as $24,000 × 60%) − Cash paid for supplies of $1,200 − Salaries incurred and paid during the year of $28,000 = $18,0005) Net income = Revenue of $59,000 (from part 1) − Operating expenses of $24,000 − Salaries expense of $30,800 − Supplies expense of $1,080 = $3,1206) Ending retained earnings = Beginning retained of $0 + Net income of $3,120 − Dividends of $2,000 = $1,120Difficulty: 3 HardTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry); Preparing Financial Statements with Accruals; Accounting for Supplies; Accounting for Prepaid Items; Accounting for Unearned Revenue; Preparing Financial Statements with DeferralsLearning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-03 Prepare financial statements that include accruals.; 02-05 Show how accounting for supplies affects financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.; 02-07 Show how accounting for unearned revenues affects financial statements.; 02-08 Prepare financial statements that include deferrals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



121) In a company's annual report, the reader will find a company's income statement, statement of changes in stockholder's equity, balance sheet, and statement of cash flows. These financial statements can help the reader to answer specific questions.

Required:Identify which financial statement would be most useful in answering the following questions. If more than one financial statement can answer the question, identify all applicable statements.1) How much cash was collected from customers in partial settlement of accounts receivable during the current year?2) What was the total amount of land owned by the company?3) What was the total revenue earned by the company during the most recent year?4) What were the types of claims that the company has against its assets?5) What was the total amount of cash received by the issuance of common stock?6) Was the company profitable during the most recent year?7) What was the amount of cash dividends paid to the stockholders during the most recent year? 8) What was the total amount of cash borrowed by the company during the most recent year? 9) What was the ending balance of retained earnings?10) What was the amount of change in the cash balance during the current year?

Answer: 1) Statement of cash flows2) Balance sheet3) Income statement4) Balance sheet5) Statement of cash flows and statement of changes in stockholder's equity6) Income statement and statement of changes in stockholder's equity7) Statement of cash flows and statement of changes in stockholder's equity8) Statement of cash flows 9) Balance sheet and statement of changes in stockholder's equity10) Statement of cash flowsDifficulty: 2 MediumTopic: Preparing Financial Statements with AccrualsLearning Objective: 02-03 Prepare financial statements that include accruals.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



122) The following events apply to Bowman's Cleaning Service for Year 1.1). Issued stock for $44,000 cash2). On May 1, paid $27,000 for one year's rent in advance3). Purchased on account $4,500 of supplies to be used in the business4). Performed services of $68,400 and received cash5). At December 31, adjusted the records for the expired rent6). At December 31, an inventory of supplies showed that $660 of supplies were still unused

Required: Show how each of these transactions affects the company's accounts. Calculate the year-end total for each account.

Answer:

Difficulty: 2 MediumTopic: Accounting for Supplies; Accounting for Prepaid ItemsLearning Objective: 02-05 Show how accounting for supplies affects financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



123) Using the form below, record each of the following Year 1 transactions for Mayer Corporation. a) Nov. 1: Received cash from clients for services to be performed over the next six months, $12,000.b) Nov. 1: Paid $1,200 for a 12-month insurance policy.c) Dec. 31: Recorded expiration of two months of the insurance.d) Dec. 31: Earned $4,000 of the amount received from clients in November

Answer:

Difficulty: 1 EasyTopic: Accounting for Prepaid Items; Accounting for Unearned RevenueLearning Objective: 02-06 Show how accounting for prepaid items affects financial statements.; 02-07 Show how accounting for unearned revenues affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



124) The following transactions apply to Kellogg Company.1) Issued common stock for $20,000 cash2) Provided services to customers for $38,000 on account3) Purchased land for $15,000 cash4) Incurred $29,000 of operating expenses on account5) Collected $35,000 cash from customers for services provided in event #26) Paid $27,000 on accounts payable7) Paid $2,000 dividends to stockholders

Required:a) Identify the dollar amount effect on the statement of cash flows, if any, for each of the above transactions. b) If applicable, indicate whether each transaction involves operating, investing, or financing activities.

Answer:

Difficulty: 2 MediumTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.Bloom's: Analyze; ApplyAACSB: Analytical Thinking; Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



125) Grant Hylton started a consulting business, Hylton Consulting, on January 1, Year 1, and the business engaged in the following transactions during the year:1) Issued $40,000 of common stock for cash2) Provided services on account, $46,5003) Incurred $37,500 of operating expense, but only paid $32,000 of this amount4) Collected $39,000 of the revenue that was previously recorded on account5) Paid a cash dividend of $4,000 to the stockholders

Required:a) Show the effects of the above transactions on the accounting equation

b) Prepare an income statement and statement of cash flows for Year 1.

Answer: a)



b)

Difficulty: 3 HardTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry); Preparing Financial Statements with AccrualsLearning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



126) Pierce Company was founded in Year 1 and engaged in the following transactions:1. Issued common stock for cash2. Paid rent in advance for three months at a time3. Purchased supplies on account4. Collected cash from a customer for services to be provided over a period of one year5. Paid a cash dividend to stockholders6. Purchased a two-year fire insurance policy7. Provided services to customers on account8. Collected cash from customers in partial settlement of accounts receivable9. Paid cash for various operating expenses

Required:a) Identify the transactions from the list above that will require adjusting entries at year end.b) Explain why adjusting entries are required before financial statements can be prepared.

Answer: a) Adjusting entries are required for transactions 2, 3, 4, and 6b) Adjusting entries are required at the end of an accounting period to properly match expenses with revenues. Transactions that involve deferrals and accruals often require adjusting entries to bring account balances up to date.Difficulty: 2 MediumTopic: Accounting for Receivables; Steps in an Accounting Cycle; Accounting for Supplies; Accounting for Prepaid ItemsLearning Objective: 02-01 Show how receivables affect financial statements.; 02-04 Identify the steps in the accounting cycle.; 02-05 Show how accounting for supplies affects financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Communication; FN Measurement



127) Jenna Fisk started her business by issuing $8,000 of common stock on January 1, Year 1. Jenna performed $18,500 of service on account during Year 1, and she collected $16,200 of this amount by the end of Year 1. She also paid operating expenses of $14,900 and paid a $600 dividend to the stockholders during Year 1.

Required:a) Determine the amount of total assets at the end of Year 1. b) Determine the amount of cash on hand at the end of Year 1.c) Determine net income for Year 1.d) Prepare a balance sheet as of December 31, Year 1.

Answer: a) $11,000 b) $8,700 c) $3,600 d)

a) Total assets = $8,000 + $18,500 − $14,900 − $600 = $11,000 b) Cash balance = $8,000 + $16,200 − $14,900 − $600 = $8,700 c) Net income = $18,500 − $14,900 = $3,600 Difficulty: 3 HardTopic: Accounting for Receivables; Preparing Financial Statements with AccrualsLearning Objective: 02-01 Show how receivables affect financial statements.; 02-03 Prepare financial statements that include accruals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



128) The effects of transactions occurring during Year 1 and their related year-end adjustments have been recorded below using the accounting equation.

Required:With your knowledge of transaction analysis using an accounting equation:a) Prepare an income statement for Year 1.b) Prepare a statement of cash flows for Year 1.

Answer: a)



b)

Difficulty: 3 HardTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry); Accounting Prepaid Items; Accounting for Unearned Revenue; Preparing Financial Statements with DeferralsLearning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.; 02-07 Show how accounting for unearned revenues affects financial statements.; 02-08 Prepare financial statements that include deferrals.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



129) Cascade Corporation began business operations and experienced the following transactions during Year 1:1) Issued common stock for $20,000 cash2) Provided services to customers for $80,000 on account3) Incurred $36,000 of operating expenses on account4) Collected $46,000 cash from customers5) Paid $30,000 on accounts payable

Required:Record the above transactions on a horizontal statements model to reflect their effect on Cascade's financial statements. In the last column, enter OA, IA, or FA for the type of cash flow activity, if applicable.

Answer:

Difficulty: 2 MediumTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



130) Indicate for each of the following items if the item would be reported on the income statement (IS), statement of changes in stockholders' equity (SE), balance sheet (BS), or statement of cash flows (CF). Some items may appear on more than one statement; if so, identify all applicable statements.1) Salaries payable2) Prepaid insurance3) Dividends paid to stockholders4) Interest revenue5) Accounts payable6) Salaries expense7) Retained earnings8) Unearned subscription revenue9) Cash flows from operating activities10) Beginning common stock11) Issued stock to investors for cash12) Accounts receivable

Answer: 1) BS, 2) BS, 3) SE and CF, 4) IS, 5) BS, 6) IS, 7) BS and SE, 8) BS, 9) CF, 10) SE, 11) SE and CF, 12) BSDifficulty: 2 MediumTopic: Preparing Financial Statements with Accruals; Preparing Financial Statements with DeferralsLearning Objective: 02-03 Prepare financial statements that include accruals.; 02-08 Prepare financial statements that include deferrals.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

131) Classify each of the following transactions for the purpose of the statement of cash flows as operating activities (OA), investing activities (IA), financing activities (FA), or not reported on the statement of cash flows (NA).1) ________Collected accounts receivable2) ________Made adjusting entry to accrue salary expense at the end of the year3) ________Borrowed funds from the bank4) ________Paid rent for the month5) ________Paid cash to settle accounts payable6) ________Issued common stock for $30,000 cash7) ________Paid cash to acquire land

Answer: 1) OA, 2) NA, 3) FA, 4) OA, 5) OA, 6) FA, 7) IADifficulty: 2 MediumTopic: Preparing Financial Statements with AccrualsLearning Objective: 02-03 Prepare financial statements that include accruals.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



132) Tucker Company shows the following transactions for the accounting period ending December 31, Year 1:1) Sold books to customers for $68,000 on account2) Collected $56,000 from customers3) Issued common stock for $16,000 cash4) Prepaid four months' rent for $8,800 on October 1, Year 15) Purchased supplies for $21,000 cash6) Physical count shows $6,500 of supplies remained on December 31, Year 17) Recorded adjustment for prepaid rent usedShow how the above transactions and year-end adjustments affect the accounting equation.

Answer:

Difficulty: 2 MediumTopic: Accounting for Receivables; Accounting for Supplies; Accounting for Prepaid ItemsLearning Objective: 02-01 Show how receivables affect financial statements.; 02-05 Show how accounting for supplies affects financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



133) For each of the following transactions, indicate the type by entering "AS" for asset source transaction, "AU" for asset use transaction, "AE" for asset exchange transaction, and "CE" for claims exchange transaction.1) ________ Paid $10,000 for a plot of land.2) ________ Recorded the accrual of $1,000 in salaries to be paid the following week.3) ________ Issued common stock for $20,000 in cash.4) ________ Incurred operating expense on account.5) ________ Paid off its accounts payable.6) ________ Earned revenue to be collected at a future date.7) ________ Paid $2,000 in dividends to its stockholders.8) ________ Received cash from customers in #6 above.9) ________ Paid the salaries accrued in #2 above.10) ________ Borrowed money from a local bank.

Answer: 1) AE 2) CE 3) AS 4) CE 5) AU 6) AS 7) AU 8) AE 9) AU 10) ASDifficulty: 2 MediumTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry); Accounting for Supplies; Accounting for Prepaid Items; Accounting for Unearned Revenue; Transaction ClassificationLearning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-05 Show how accounting for supplies affects financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.; 02-07 Show how accounting for unearned revenues affects financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



134) Determine whether each of the following events are asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE) transactions.________1) Borrowed $6,000 from creditors________2) Issued common stock to investors for $8,000 cash________3) Paid one year's rent in advance________4) Provided services to customers and collected $35,000 cash________5) Paid creditors $10,000________6) Received $3,000 of revenue in advance________7) Provided services to customers on account, $12,000________8) Collected $2,000 from customers in partial settlement of accounts receivable________9) Recognized accrued salary expense of $2,000________10) Adjusted the records for supplies used of $800

Answer: 1) AS 2) AS 3) AE 4) AS 5) AU 6) AS 7) AS 8) AE 9) CE 10) AU

1) Borrowing cash is an asset source transaction that increases cash2) Issuing common stock is an asset source transaction that increases cash3) Paying rent in advance is an asset exchange transaction that increases prepaid rent and decreases cash4) Providing services for cash is an asset source transaction that increases cash5) Paying creditors is an asset use transaction that decreases cash6) Receiving an advance payment is an asset source transaction that increases cash7) Providing services on account is an asset source transaction that increases accounts receivable8) Collecting on accounts receivable is an asset exchange transaction that increases cash and decreases accounts receivable9) Accruing salary expense is a claims exchange transaction that increases accounts payable and decreases retained earnings10) Recognizing supplies expense is an asset use transaction that decreases suppliesDifficulty: 2 MediumTopic: Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry); Accounting for Supplies; Accounting for Prepaid Items; Accounting for Unearned Revenue; Transaction ClassificationLearning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-05 Show how accounting for supplies affects financial statements.; 02-06 Show how accounting for prepaid items affects financial statements.; 02-07 Show how accounting for unearned revenues affects financial statements.; 02-09 Classify accounting events into one of four categories.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



For questions 135 through 137:Indicate how each event affects the financial statements model. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.

Increase = I Decrease = D No Effect = NA

(Note that "No Effect" means that the event does not effect that element of the financial statements or that the event causes an increase in that element is offset by a decrease in that same element.)

135) Carson Company accrued $100 of interest expense.


Answer: (NA) (I) (D) (NA) (I) (D) (NA)Accruing interest expense increases liabilities (interest payable) and decreases equity (interest expense decreases retained earnings). It increases expenses and decreases net income. It does not affect cash flows.Difficulty: 1 EasyTopic: Accounting for Interest ExpenseLearning Objective: 02-12 Compute interest expense and show how it affects financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

136) Venture Company paid $50 of interest expense that had been previously accrued.


Answer: (D) (D) (NA) (NA) (NA) (NA) (D)Paying accrued interest expense decreases assets (cash) and decreases liabilities (interest payable). It does not affect the income statement, but is reported as a cash outflow for operating activities on the statement of cash flows.Difficulty: 1 EasyTopic: Accounting for Interest ExpenseLearning Objective: 02-12 Compute interest expense and show how it affects financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement



137) Cason Company recorded $2,000 of depreciation expense on a delivery van.


Answer: (D) (NA) (D) (NA) (I) (D) (NA)Recording depreciation expense decreases assets (increases the contra-asset accumulated depreciation) and decreases equity (depreciation expense decreases retained earnings). It increases expenses and decreases net income. It does not affect cash flows.Difficulty: 1 EasyTopic: Accounting for Depreciation ExpenseLearning Objective: 02-11 Compute depreciation expense and show how it affects financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

138) Joseph Company purchased a delivery van on January 1, Year 1 for $35,000. The van is estimated to have a 5-year useful life and a $5,000 salvage value. How much expense should Joseph recognize in Year 1 related to the use of the van?A) $6,000B) $7,000C) $30,000D) $5,000

Answer: AExplanation: Depreciation expense = (Cost of $35,000 − Salvage value of $5,000) ÷ Useful life of five years = $6,000Difficulty: 1 EasyTopic: Accounting for Depreciation ExpenseLearning Objective: 02-11 Compute depreciation expense and show how it affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



139) Which of the following events involves a deferral?A) Recording interest that has been earned but not received.B) Recording revenue that has been earned but not yet collected in cash.C) Recording supplies that have been purchased with cash but not yet used.D) Recording salaries owed to employees at the end of the year that will be paid during the following year.

Answer: CExplanation: Recording the purchase of supplies constitutes a deferral because it involves the payment of cash before an expense (in this case, supplies expense) is recognized.Difficulty: 2 MediumTopic: Accounting for Supplies; Accounting for Interest Expense; Accounting for Receivables; Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-01 Show how receivables affect financial statements.; 02-02 Show how payables affect financial statements.; 02-05 Show how accounting for supplies affects financial statements.; 02-12 Compute interest expense and show how it affects financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

140) The entry to recognize depreciation expense incurred on equipment involves which of the following?A) A decrease in assetsB) An increase in liabilitiesC) An increase in assetsD) A decrease in liabilities

Answer: AExplanation: Recognizing depreciation expense involves a decrease in assets due to an increase in the contra-asset accumulated depreciation and a decrease in equity due to recognizing depreciation expense.Difficulty: 2 MediumTopic: Accounting for Depreciation ExpenseLearning Objective: 02-11 Compute depreciation expense and show how it affects financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



141) The following accounts and balances were drawn from the records of Barnes Company: Cash $ 4,500 Accounts receivable $ 2,700 Equipment $ 10,000 Accumulated depreciation $ 3,200 Accounts payable $ 2,800 Common stock $ 6,000

Based on this information alone the amount of Barnes's retained earnings is:A) $11,600.B) $17,200.C) $5,200.D) None of these answers is correct.

Answer: CExplanation: Assets = $4,500 + $2,700 + $10,000 − $3,200 = $14,000Assets of $14,000 = Liabilities of $2,800 + EquityEquity = $11,200Equity = Common stock of $6,000 + Retained earnings$11,200 = $6,000 + Retained earningsRetained Earnings = $5,200Difficulty: 2 MediumTopic: Accounting for Depreciation ExpenseLearning Objective: 02-11 Compute depreciation expense and show how it affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



142) Which of the following would be included in the cash flow from operating activities section of the statement of cash flows?A) Accrual of salary expense at year-end.B) Purchase of equipment for cash.C) Payments of cash dividends to the owners of the business.D) Cash paid for interest on a note payable.

Answer: DExplanation: Paying or receiving interest is considered an operating activity. Accruing salary expense is not a cash flow. Paying dividends is a financing activity, and purchasing equipment is an investing activity.Difficulty: 2 MediumTopic: Accounting for Interest Expense; Accounting for Payables (Year-End Adjusting Entry)Learning Objective: 02-02 Show how payables affect financial statements.; 02-12 Compute interest expense and show how it affects financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

143) Chester Company began Year 2 with a note payable of $20,000 and an interest payable of $800. During the year, the company accrued an additional $400 of interest expense, and paid off the note with interest. What is the amount of cash flows for financing activities that will be reported on the statement of cash flows as a result of these transactions?A) $1,200 outflowB) $20,000 outflowC) $20,400 outflowD) $21,200 outflow

Answer: BExplanation: Only the $20,000 outflow relating to the payment of the note is considered an outflow for financing activities. The $1,200 cash outflow for interest is considered an operating activity.Difficulty: 3 HardTopic: Accounting for Interest ExpenseLearning Objective: 02-12 Compute interest expense and show how it affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



144) Consider how each of the transactions listed below affect net income reported on the income statement and the net cash flows from operating activities reported on the statement of cash flows. Which transaction(s) would affect the income statement in a different period from the statement of cash flows?A) Recognized depreciation expense on equipment.B) Incurred operating expenses on account.C) Paid interest that was accrued in a prior year.D) All of these answer choices would affect the income statement in a different period from the statement of cash flows.

Answer: DExplanation: Recognizing depreciation expense reduces net income, but does not affect cash flows from operating activities. Incurring operating expenses on account also reduces net income, but does not affect cash flows from operating activities. Paying interest that was accrued in a prior year will reduce cash flows from operating activities, but will not affect net income.Difficulty: 2 MediumTopic: Accounting for Interest Expense; Accounting for Depreciation ExpenseLearning Objective: 02-11 Compute depreciation expense and show how it affects financial statements.; 02-12 Compute interest expense and show how it affects financial statements.Bloom's: AnalyzeAACSB: Analytical ThinkingAICPA: BB Critical Thinking; FN Measurement

145) On January 1, Year 1, Alabama Company purchased a machine for $26,000. The machine has an estimated useful life of 4 years and an estimated salvage value of $6,000. What is the book value of the machine reported on Alabama's balance sheet as of December 31, Year 1?A) $26,000B) $19,500C) $21,000D) $15,000

Answer: CExplanation: Accumulated depreciation at end of Year 1 = (Cost of $26,000 − Salvage value of $6,000) ÷ 4 years = $5,000Book value = Cost of $26,000 cost − Accumulated depreciation of $5,000 = $21,000Difficulty: 2 MediumTopic: Computing Depreciation ExpenseLearning Objective: 02-11 Compute depreciation expense and show how it affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



146) Recognition of depreciation expense is an asset use transaction.

Answer: TRUEExplanation: Recognition of depreciation expense is an asset use transaction that decreases the book (carrying) value of the depreciated asset and decreases equity.Difficulty: 2 MediumTopic: Accounting for Depreciation ExpenseLearning Objective: 02-11 Compute depreciation expense and show how it affects financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

147) Recognition of depreciation expense on equipment decreases the equipment account.

Answer: FALSEExplanation: Recognition of depreciation expense increases the contra-asset accumulated depreciation which decreases the book (carrying) value of the asset on the balance sheet. It does not decrease the equipment account itself.Difficulty: 2 MediumTopic: Accounting for Depreciation ExpenseLearning Objective: 02-11 Compute depreciation expense and show how it affects financial statements.Bloom's: UnderstandAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

148) When a company purchases a depreciable asset, it must estimate the asset's useful life and salvage value.

Answer: TRUEExplanation: It is necessary to estimate an asset's useful life and salvage value in order to calculate depreciation expense associated with the use of that asset.Difficulty: 1 EasyTopic: Accounting for Depreciation ExpenseLearning Objective: 02-11 Compute depreciation expense and show how it affects financial statements.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement



149) The cash payment of interest is classified as a financing activity on the statement of cash flows.

Answer: FALSEExplanation: The cash payment of interest is classified as an operating activity on the statement of cash flows.Difficulty: 2 MediumTopic: Accounting for Interest ExpenseLearning Objective: 02-12 Compute interest expense and show how it affects financial statements.Bloom's: RememberAACSB: Reflective ThinkingAICPA: BB Critical Thinking; FN Measurement

150) Thurston Company started its business on January 1, Year 1 by issuing $15,000 of common stock. On January 1, the company purchased equipment for $10,500. The equipment is estimated to have a three-year useful life and a $1,500 salvage value. On March 1, Thurston issued a $27,000, 6% five-year note to Community Bank. Customers paid Thurston $54,000 for services performed in Year 1. The company paid $33,000 for operating expenses, and paid a $900 dividend to the stockholders. At year-end, Thurston recognized interest expense on the note and depreciation expense on the equipment.

Required:a) What is the amount of interest expense Thurston will recognize in Year 1?b) What is the book (carrying) value of the equipment at the end of Year 1?c) What is the net income for Year 1?d) Prepare a balance sheet as of the end of Year 1.



Answer: a) $1,350b) $7,500c) $16,650 d)

a) Year 1 Interest expense = Principal of $27,000 × 6% × 10/12 = $1,350 b) Year 1 Depreciation expense = (Cost of $10,500 − Salvage value of $1,500) ÷ Useful life of 3 years = $3,000; Book value = Cost of $10,500 − Accumulated depreciation of $3,000 = $7,500c) Net income = $54,000 − ($33,000 + $3,000 + $1,350) = $16,650 Difficulty: 3 HardTopic: Preparing Financial Statements with Accruals; Preparing Financial Statements with Deferrals; Accounting for Depreciation Expense; Accounting for Interest ExpenseLearning Objective: 02-03 Prepare financial statements that include accruals.; 02-08 Prepare financial statements that include deferrals.; 02-11 Compute depreciation expense and show how it affects financial statements.; 02-12 Compute interest expense and show how it affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



151) The following events apply to Jason's Lawn Service for Year 1.1) Issued stock for $14,000 cash2) On January 1, paid $12,000 cash for equipment that has an estimated life of five years and a salvage value of $2,0003) On May 1, issued a $3,000, 5% 3-year note to a local bank4) Performed services of $18,400 and received cash5) Paid $15,000 of operating expenses6a) Adjusted the records to recognize expense associated with use of the equipment during Year 16b) Adjusted the records to recognize interest expense for Year 1

Required: Record the effects of the above events under the appropriate account headings in the accounting formula below.



Answer:

6a) Depreciation expense = (Cost of $12,000 − Salvage value of $2,000) ÷ Useful life of five years = $2,0006b) Interest expense = Principal of $3,000 × 5% × 8/12 = $100Difficulty: 3 HardTopic: Accounting for Depreciation Expense; Accounting for Interest ExpenseLearning Objective: 02-11 Compute depreciation expense and show how it affects financial statements.; 02-12 Compute interest expense and show how it affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



152) Osage Corporation began business operations and experienced the following transactions during Year 1:1) Issued common stock for $25,000 cash2) Issued a $20,000, 6% 4-year note to the bank on February 13) Provided services to customers for $80,000 cash4) Paid $38,000 for operating expenses5) Accrued interest expense on the note6) Paid a $4,000 dividend to shareholders

Required:Record the above transactions on a horizontal statements model to reflect their effect on Osage's financial statements. In the last column, enter OA, IA, FA for the type of cash flow activity, or NA if there is no activity.

Answer:

Difficulty: 2 MediumTopic: Accounting for Interest ExpenseLearning Objective: 02-12 Compute interest expense and show how it affects financial statements.Bloom's: ApplyAACSB: Knowledge ApplicationAICPA: BB Critical Thinking; FN Measurement



Documents

solutiontestbank.net · Web viewIncrease = IDecrease = DNo Effect = NA (Note that "No Effect" means that the event does not affect that element of the financial statements or that