Fundamental Financial Accounting Concepts.pdf

1) Indicate whether each of the following statements about markets is true or false. ________ a) Financial resources can be provided to a business by investors. ________ b) Resource owners are the businesses that transform resources into products that satisfy consumer desires. ________ c) Labor resources include both the physical and intellectual labor of a business's employees. ________ d) Businesses purchase their resources from resource owners. ________ e) Consumers are the main providers of resources in any market. 2) Indicate whether each of the following statements about accounting information is true or false. ________ a) Financial accounting is primarily intended to satisfy the information needs of internal stakeholders. ________ b) Managerial accounting information includes financial and nonfinancial information. ________ c) The accounting information intended to satisfy the needs of a company's employees is managerial accounting information. ________ d) GAAP requires that companies adhere to financial accounting standards. ________ e) Managerial accounting information is usually less detailed than financial accounting information. 3) Indicate whether each of the following statements about liabilities is true or false. ________ a) A net loss on the income statement decreases liabilities. ________ b) The acquisition of a bank loan increases both assets and liabilities. ________ c) The accounting equation requires that liabilities be equal to stockholders’ equity. ________ d) The amount of a company's liabilities is equal to the difference between its assets and its stockholders’ equity. ________ e) Liabilities are reported on the statement of cash flows of a business. 4) Indicate whether each of the following statements about retained earnings is true or false. ________ a) A dividend paid to stockholders decreases retained earnings. ________ b) Issuing common stock for cash increases retained earnings. ________ c) The amount of net income for a period must equal retained earnings. ________ d) The purchase of a truck decreases retained earnings. ________ e) Net income increases retained earnings. 5) Indicate whether each of the following statements about the types of transactions is true or false. ________ a) An asset source transaction increases total assets and increases claims to assets. ________ b) The issuance of stock to owners for cash would be an example of an asset exchange transaction. ________ c) Purchasing equipment for cash is an example of an asset use transaction. ________ d) Paying a dividend to stockholders is an example of an asset use transaction. ________ e) Making a payment on a bank loan is an example of an asset exchange transaction. 6) Indicate whether each of the following statements about financial statements is true or false. ________ a) A cash dividend paid to stockholders is reported in the investing activities section of the statement of cash flows. ________ b) A cash dividend paid to stockholders is reported on the statement of changes in stockholders' equity. ________ c) A cash dividend paid to stockholders is reported on the income statement. ________ d) The balance sheet reports the ending balances of permanent accounts as of the last day of the accounting period. ________ e) Changes in retained earnings during the accounting period are reported on the income statement. 7) Indicate whether each of the following statements about stockholders’ equity is true or false. ________ a) Expenses decrease retained earnings. ________ b) Stockholders' equity and liabilities can be viewed either as sources of assets or claims to assets of the business. ________ c) Retained earnings is increased by loans received from a bank. ________ d) Dividends paid to stockholders decrease common stock. ________ e) Generally, assets are reported at the actual price paid for them when purchased regardless of subsequent changes in market value. 8) Jessup Company was founded in Year 1. It acquired $45,000 cash by issuing stock to investors and an additional $15,000 cash by borrowing from creditors. During Year 1 it received $25,000 cash revenues and paid $32,000 in cash expenses. The company then went out of business. Required: a) Explain the term, "business liquidation." b) What amount of cash should Jessup Company have had on hand immediately before going out of business? c) What amount of cash will Jessup's creditors receive? d) What amount of cash will Jessup's stockholders receive? 9) Bates Company entered into the following transactions during its first year in business. Assume that all transactions involve the receipt or payment of cash. 1) Issued common stock to investors for $25,000 cash. 2) Borrowed $18,000 from the local bank. 3) Provided services to customers for $28,000. 4) Paid expenses amounting to $21,400. 5) Purchased a plot of land costing $22,000. 6) Paid a dividend of $15,000 to its stockholders. 7) Repaid $12,000 of the loan listed in item 2. Required: (a) Fill in the three column headings of the accounting equation in the first row of the table shown below. (b) Show the effects of the above transactions on the accounting equation. Event number = + 1. 2. 3. 4. 5. 6. 7. Total 10) Each of the following requirements is independent of the others. a) Valdez Corporation has liabilities of $95,000 and stockholders’ equity of $115,000. What is the amount of Valdez's assets? b) Global Company has assets of $320,000 and liabilities of $95,000. What is the amount of Global's stockholders’ equity? c) Brown Company has assets of $90,000 and liabilities of $25,000. What is the amount of Brown's claims? 11) The following business events occurred for Ringgold Company during Year 1, its first year in operation: 1. Issued stock to investors for $45,000 cash 2. Borrowed $25,000 cash from the local bank 3. Provided services to its customers and received $32,000 cash 4. Paid expenses of $28,000 5. Paid $22,000 cash for land 6. Paid dividend of $12,000 to stockholders 7. Repaid $10,000 of the loan listed in item 2 Required: a) Show the effects of the above transactions on the accounting equation, below. Include dollar amounts of increases and decreases. Enter "NA" for elements of the accounting equation that are not affected by the transaction. If one element of the accounting equation is affected by an increase and also by a decrease, enter each part on a separate line. (The effects of the first transaction is shown below.) b) After entering all the events, calculate the total amounts of assets, liabilities, and stockholders’ equity at the end of the year. Event number Assets = Liabilities + Stockholders' Equity 1. 45,000 NA 45,000 2. 3. 4. 5. 6. 7. Total 12) Ramirez Company experienced the following events during Year 1: 1. Acquired $50,000 cash by issuing common stock 2. Borrowed $25,000 cash from a creditor 3. Provided services to customers for $38,000 cash 4. Paid $32,000 cash for operating expenses 5. Paid a cash dividend of $2,500 to stockholders 6. Purchased land with cash, $30,000 Required: a) Show how each of these events affects the accounting equation. Enter "NA" for elements of the accounting equation that are not affected by the transaction. If one element of the accounting equation is affected by an increase and also by a decrease, enter each part on a separate line. (The effects of the first event are shown below.) b) Calculate the total amount of assets, liabilities, common stock, and retained earnings at the end of the period. Stockholders' Equity Event number Assets = Liabilities + Common Stock + Retained Earnings 1. 50,000 NA 50,000 NA 2. 3. 4. 5. 6. Total 13) At the beginning of Year 2, the accounting records of Grace Company included the accounts and balances shown on the first row of the table below. During Year 2, the following transactions occurred: 1. Received $95,000 cash for providing services to customers 2. Paid salaries expense, $50,000 3. Purchased land for $12,000 cash 4. Paid $4,000 on note payable 5. Paid operating expenses, $22,000 6. Paid cash dividend, $2,500 Required: a) Record the transactions in the appropriate accounts. Record the amounts of revenue, expense, and dividends in the retained earnings column. Enter 0 for items not affected. Provide appropriate titles for these accounts in the last column of the table. Event Assets = Liabilities + Stockholders' Equity Account Titles for RE Cash Land Notes Payable Common Stock + Retained Earnings Beginning 29,000 32,000 18,000 33,000 10,000 1. 2. 3. 4. 5. 6. b) What is the amount of total assets as of December 31, Year 2? c) What is the amount of total stockholders' equity as of December 31, Year 2? 14) Montgomery Company experienced the following events during Year 1 (all were cash events): 1.Issued a note 2.Paid operating expenses 3.Issued common stock 4.Provided services to customers 5.Repaid part of the note in event 1 6.Paid dividends to stockholders Required: Indicate how each of these events affects the accounting equation by writing the letter "I" for increase, the letter "D" for decrease, and "NA" for no effect under each of the components of the accounting equation. Use only one item of entry in each column. (The effects of the first event are shown below.) Stockholders' Equity Event number Assets = Liabilities + Common Stock + Retained Earnings 1. I I NA NA 2. 3. 4. 5. 6. 15) Indicate how each of the following transactions affects assets by entering "+" for increase, "−" for decrease, or " +/− for an increase that is offset by a decrease (such as an asset exchange). Enter only one item for each answer. ________ 1) Issued stock to investors. ________ 2) Borrowed cash from the bank. ________ 3) Provided services for cash. ________ 4) Paid operating expenses. ________ 5) Purchased land for cash. ________ 6) Paid cash dividend to the stockholders. ________ 7) Repaid the bank loan. 16) Classify each of the following events as an asset source (designate as "AS"), asset use (designate as "AU"), asset exchange (designate as "AX"), or not an asset source (designate as "NA"). ________ 1) Borrowed cash from the bank ________ 2) Issued stock for cash ________ 3) Purchased land for cash ________ 4) Performed services and collected cash ________ 5) Paid cash for operating expense ________ 6) Purchased equipment for cash ________ 7) Paid dividends to stockholders ________ 8) Repaid the bank loan with cash 17) Grimes Corporation reports the following cash transactions for the year ending December 31, Year 1, its first year of operation: 1) Issued common stock for $35,000 2) Borrowed $25,000 from a local bank 3) Purchased land for $40,000 4) Provided services to clients for $38,000 5) Paid operating expenses of $30,500 6) Paid $2,000 cash dividends to stockholders Required: a) What are the total assets for Grimes Corporation at December 31, Year 1? b) Prepare an income statement for Year 1. 18) Young Company reported the following balance sheet for the end of Year 1: Young Company Balance Sheet For the Year Ended December 31, Year 1 Assets Cash $ 58,800 Land 25,500 Total assets $ 84,300 Liabilities Notes payable $ 18,000 Stockholders' equity Common stock 50,000 Retained earnings 16,300 Total stockholders' equity 66,300 Total liabilities and stockholders' equity $ 84,300 During Year 2, Young reported the following transactions: ● Repaid $9,000 to a local bank on a note payable ● Provided services to clients for $27,400 cash ● Paid operating expenses of $20,200 ● Paid $4,500 cash dividends to stockholders Required: Prepare Young Company's balance sheet as of December 31, Year 2. 19) Use the following information to prepare an income statement for Penelope Company for the period ending December 31, Year 1. All transactions were for cash. A) Received revenue from services provided to customers, $30,500. B) Paid $19,000 cash for land. C) Issued $16,000 of common stock. D) Paid dividends to stockholders, $3,000. E) Paid operating expenses, $25,400. 20) The following events are for Holiday Travel Services for Year 1, the first year of operations. Assume that all transactions involve the receipt or payment of cash. 1) The business acquired $50,000 from stock issued to owners. 2) Creditors loaned the company $27,500. 3) The company provided services to its customers and received $75,400. 4) The company paid expenses amounting to $63,250. 5) The company purchased land for $25,000. 6) The company paid a dividend of $5,500 to its owners. Required: a) Show the effects of the above transactions on the accounting equation. (Start by using appropriate element and account headings). For those events that affect retained earnings, indicate in a separate column the appropriate temporary account. Enter a "0" if a transaction does not affect a given account. Event Number = + Other Account Titles 1 2 3 4 5 6 Totals b) Prepare an income statement and balance sheet for and as of the end of Year 1. Answer Key Test name: chapter 1 1) a) T b) F c) T d) T e) F Financial resources are provided to a business by investors and creditors. Businesses, not resource owners, transform resources into products. Resource owners are the main providers of resources in any market. 2) a) F b) T c) T d) T e) F Financial accounting is primarily intended for external, not internal, stakeholders. Managerial accounting information is usually more detailed than financial accounting information. 3) a) F b) T c) F d) T e) F A net loss decreases a company's stockholders’ equity, not its liabilities. The accounting equation requires that assets be equal to liabilities plus stockholders’ equity. Liabilities are reported on the balance sheet, not on the statement of cash flows. 4) a) T b) F c) F d) F e) T Issuing common stock for cash increases the common stock account, not retained earnings. Net income increases retained earnings but does not necessarily equal its total. The purchase of a truck increases one asset (truck) and decreases another asset (cash) or increases a liability (note payable). Retained earnings includes all net income that a company has earned in its existence that has not been paid out in dividends. 5) a) T b) F c) F d) T e) F The issuance of stock to owners for cash is an example of an asset source, not asset exchange, transaction. Purchasing equipment for cash is an example of an asset exchange transaction in which one asset (cash) decreases and another asset (equipment) increases. Making a payment on a bank loan is an example of an asset use, not asset exchange, transaction. 6) a) F b) T c) F d) T e) F A cash dividend paid to stockholders is reported in the financing activities section of the statement of cash flows. A cash dividend paid to stockholders is reported on the statement of changes in stockholders’ equity, not on the income statement. Changes in retained earnings for the accounting period are reported on the statement of changes in stockholders’ equity, not on the income statement. 7) a) T b) T c) F d) F e) T Loans received from a bank increase assets and liabilities, but do not affect retained earnings. Dividends paid to stockholders decrease retained earnings, not common stock. 8) a) Liquidation is the process of dividing up assets and allocating them to resource providers (creditors and investors). b) Amount of cash on hand = $53,000 c) $15,000 d) $38,000 9) Accounting Equation (a) Assets = Liabilities + Stockholders' Equity (b) 1. 25,000 25,000 2. 18,000 18,000 3. 28,000 28,000 4. (21,400) (21,400) 5. 22,000 (22,000) 6. (15,000) (15,000) 7. (12,000) (12,000) Totals 22,600 6,000 16,600 10) a) $210,000 b) $225,000 c) $90,000 11) Event number Assets = Liabilities + Stockholders' Equity 1. 45,000 NA 45,000 2. 25,000 25,000 NA 3. 32,000 NA 32,000 4. (28,000) NA (28,000) 5. 22,000 NA NA (22,000) NA NA 6. (12,000) NA (12,000) 7. (10,000) (10,000) NA Total 52,000 15,000 37,000 12) Stockholders' Equity Event number Assets = Liabilities + Common Stock + Retained Earnings 1. 50,000 NA 50,000 NA 2. 25,000 25,000 NA NA 3. 38,000 NA NA 38,000 4. (32,000) NA NA (32,000) 5. (2,500) NA NA (2,500) 6. 30,000 (30,000) NA NA NA Total 78,500 25,000 50,000 3,500 13) Event Assets =Liabilities + Stockholders' Equity Account Titles for Cash Land Notes RE Payable Common Stock + Retained Earnings Beginning 29,000 32,000 18,000 33,000 10,000 1. 95,,000 Service Revenue 2. (50,000) 0 0 0 (50,000) Salaries Expense 3. (12,000) 12,000 0 0 0 4. (4,000) 0 (4,000) 0 0 5. (22,000) 0 0 0 (22,000) Operating Expense 6. (2,500) 0 0 0 (2,500) Dividend Total $33,500 $44,000 $14,000 $33,000 $30,500 b) Total assets = $33,500 + $44,000 = $77,500 c) Total stockholders' equity = $33,000 + $30,500 = $63,500 14) Stockholders' Equity Event number Assets = Liabilities + Common Stock + Retained Earnings 1. I I NA NA 2. D NA NA D 3. I NA I NA 4. I NA NA I 5. D D NA NA 6. D NA NA D 15) 1) +, 2) +, 3) +, 4) −, 5) +/−, 6) −, 7) − 16) 1) AS 2) AS 3) AX 4) AS 5) AU 6) AX 7) AU 8) AU 17) a) Total assets = $35,000 + $25,000 + $40,000 − $40,000 + $38,000 − $30,500 − $2,000 = $65,500 b) Grimes Corporation Income Statement For the Year Ended December 31, Year 1 Revenue $ 38,000 Operating expenses (30,500) Net income $ 7,500 18) Young Company Balance Sheet For the Year Ended December 31, Year 2 Assets Cash $ 52,500 Land 25,500 Total assets $ 78,000 Liabilities Notes payable $ 9,000 Stockholders' equity Common stock 50,000 Retained earnings 19,000 Total stockholders' equity 69,000 Total liabilities and stockholders' equity $ 78,000 Ending balances: Cash ($58,800 − $9,000 + $27,400 − $20,200 − $4,500); Land − No change; Notes payable ($18,000 − $9,000); Common stock − No change; Retained earnings ($16,300 + $27,400 − $20,200 − $4,500) 19) Penelope Company Income Statement For the Year Ended December 31, Year 1 Revenue $ 30,500 Operating expenses (25,400) Net income $ 5,100 Only revenue and expenses are reported on the income statement. Purchasing land, paying dividends, and issuing common stock do not affect the income statement. 20) Event number Assets = Liabilities + Stockholders' Equity Other Account Cash Land = Notes Titles Payable + Common Stock + Retained Earnings 1 50,000 0 0 50,000 0 2 27,500 0 27,500 0 0 3 75,,400 Service Revenue 4 (63,250) 0 0 0 (63,250) Operating Expenses 5 (25,000) 25,000 0 0 0 6 (5,500) 0 0 0 (5,500) Dividends Totals 59,150 25,000 27,500 50,000 6,650 (b) Holiday Travel Services Income Statement For the Year Ended December 31, Year 1 Service revenue $ 75,400 Operating expenses (63,250) Net income $ 12,150 Holiday Travel Services Balance Sheet As of December 31, Year 1 Assets Cash $ 59,150 Land 25,000 Total assets $ 84,150 Liabilities Notes payable $ 27,500 Stockholders' equity Common stock 50,000 Retained earnings 6,650 Total stockholders' equity 56,650 Total liabilities and stockholders' equity $ 84,150