Fundamental Financial Accounting Concepts Thomas Edmonds 9th Edition-Test Bank

Chapter 01 - An Introduction to Accounting Chapter 01 An Introduction to Accounting Answer Key Short Answer Questions Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. 1. Walker Co. issued common stock for $150,000 cash. Answer: (I) (N) (I) (N) (N) (N) (I) Learning Objective: 01-02 Level of Learning: 2 Medium Topic Area: Recording Business Events Under the Accounting Equation AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Feedback: Issuing common stock is an asset source transaction that increases the business’s assets (cash) and its stockholders’ equity (common stock). It does not affect the income statement, but is reported as a cash flow from financing activities in the statement of cash flows. 1-1 Chapter 01 - An Introduction to Accounting 2. Nguyen Co. borrowed $50,000 cash from Metropolitan Bank. Answer: (I) (I) (N) (N) (N) (N) (I) Learning Objective: 01-08 Topic Area: Recording Business Events Under the Accounting Equation AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 2 Medium Feedback: Borrowing cash is an asset source transaction that increases a business’s assets (cash) and its liabilities (notes payable). It does not affect the income statement, but is reported as a cash flow from financing activities in the statement of cash flows. 3. Bell Co. provided consulting services for $20,000 cash. Answer: (I) (N) (I) (I) (N) (I) (I) Learning Objective: 01-08 Topic Area: Recording Business Events Under the Accounting Equation AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 2 Medium Feedback: This is an asset source transaction that increases the business’s assets (cash). When a business provides services, it earns revenue. Revenue increases net income, which will increase equity (retained earnings) at the end of the accounting period. This event is reported as a cash flow from operating activities in the statement of cash flows. 1-2 Chapter 01 - An Introduction to Accounting 4. Pierce Co. paid $40,000 cash to purchase land. Answer: (N) (N) (N) (N) (N) (N) (D) Learning Objective: 01-08 Topic Area: Recording Business Events Under the Accounting Equation AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 2 Medium Feedback: Purchasing land for cash is an asset exchange transaction that increases one asset (land) and decreases another asset (cash). It does not affect the income statement, and is reported as an investing activity in the statement of cash flows. 5. Perez Co. paid $220,000 cash in salaries to its employees. Answer: (D) (N) (D) (N) (I) (D) (D) Learning Objective: 01-08 Topic Area: Recording Business Events Under the Accounting Equation AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 2 Medium Feedback: Paying expenses such as salaries is an asset use transaction that decreases the business’s assets (cash) and decreases its equity (retained earnings). Note that the expense decreases net income, and will decrease retained earnings at the end of the accounting period. It is reported as a cash flow for operating activities in the statement of cash flows. 1-3 Chapter 01 - An Introduction to Accounting 6. Epstein Co. paid a $20,000 cash dividend to its owners. Answer: (D) (N) (D) (N) (N) (N) (D) Learning Objective: 01-08 Topic Area: Recording Business Events Under the Accounting Equation AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 2 Medium Feedback: Paying a cash dividend is an asset use transaction that decreases a business’s assets (cash) and its equity. The dividends account will decrease the retained earnings at the end of the accounting period. It does not affect net income, and is reported as a cash flow for financing activities in the statement of cash flows. 7. North Co. issued a note to purchase a building. Answer: (I) (I) (N) (N) (N) (N) (N) Learning Objective: 01-08 Topic Area: Recording Business Events Under the Accounting Equation AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 2 Medium Feedback: Issuing a note to purchase a building is an asset source transaction that increases a business’s assets (building) and increases its liabilities (notes payable). It does not affect net income or the statement of cash flows. 8. Name the group that has the primary authority for establishing U.S. GAAP. Answer: The Financial Accounting Standards Board (FASB) Learning Objective: 01-01 1-4 Chapter 01 - An Introduction to Accounting Topic Area: Role of Accounting in Society AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Difficulty: 1 Easy Feedback: The Financial Accounting Standards Board (FASB) is a privately funded organization with the primary authority for establishing accounting standards in the United States 9. Who are the three distinct types of participants in a market? Briefly describe the role of each group of participants. Answer: Markets include consumers, conversion agents, and resource owners. Consumers use resources. Conversion agents are businesses that convert resources to the form that consumers want. Resource owners control the distribution of resources to conversion agents. Learning Objective: 01-01 Topic Area: Role of Accounting in Society AACSB: Reflective Thinking AICPA: BB Industry Blooms: Understand Difficulty: 2 Medium 10. What is meant by the term "stakeholders?" Answer: Stakeholders are the parties that are interested in operations of an organization. Stakeholders often are users or potential users of accounting information. Stakeholders include resource providers, financial analysts, brokers, attorneys, government regulators and news reporters. Learning Objective: 01-01 Topic Area: Role of Accounting in Society AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Remember Difficulty: 2 Medium 1-5 Chapter 01 - An Introduction to Accounting 11. What is meant by the term "global GAAP"? How does it impact U.S. companies? What body is responsible for setting global standards? Answer: International Financial Reporting Standards (IFRS) have been adopted by most countries outside of the United States, and are becoming "global GAAP." Many believe that U.S. companies will be allowed to use either IFRS or U.S. GAAP in the future, and there is an ongoing process to reduce the differences between IFRS and GAAP. The International Accounting Standards Board (IASB), headquartered in London, is responsible for forming these standards. Learning Objective: 01-01 Topic Area: Measurement Rules AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium 12. Briefly distinguish between financial accounting and managerial accounting. Answer: Financial accounting is designed to satisfy the needs of external resource providers (external users), and must adhere to Generally Accepted Accounting Principles. Managerial accounting, however, provides information that is useful to managers within a business (internal users), and does not have to follow GAAP. Learning Objective: 01-01 Topic Area: Role of Accounting in Society AACSB: Communications AACSB: Reflective thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Understand Difficulty: Medium 13. Explain some of the accounting similarities and differences between not-for-profit organizations and for-profit businesses. Answer: Similarities: Both types of organizations add value through resource transformation. Accounting information can be useful in measuring the goods and services provided and the efficiency and effectiveness in producing goods and providing services. Difference: Not-for-profit organizations exist for a purpose other than earning a profit, while making a profit is a primary goal for businesses. Learning Objective: 01-01 1-6 Chapter 01 - An Introduction to Accounting Topic Area: Role of Accounting in Society AACSB: Communication AACSB: Reflective Thinking AICPA: BB Industry Blooms: Understand Difficulty: 2 Medium 14. What financial statement elements are reported on a balance sheet? Answer: A business's balance sheet shows the elements: assets, liabilities, and equity. Learning Objective: 01-05 Topic Area: Preparing Financial Statements – Balance Sheet AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Difficulty: Medium 15. From what three sources does a business obtain its assets? Answer: A business obtains its assets from creditors, from investors, and from operations. Learning Objective: 01-02 Learning Objective: 01-04 Topic Area: Recording Business Events Under the Accounting Equation Topic Area: Types of Transactions AACSB: Reflective Thinking AICPA: BB Resource management AICPA: FN Risk Analysis Blooms: Remember Difficulty: 2 Medium 16. How does providing services for cash affect the accounting equation? Is it considered an asset source, asset use, or asset exchange transaction? Answer: Providing services for cash increases assets and increases equity. It is considered an asset source transaction. Learning Objective: 01-02 Learning Objective: 01-04 Topic Area: The Accounting Equation Topic Area: Types of Transactions AACSB: Reflective Thinking 1-7 Chapter 01 - An Introduction to Accounting AACSB: Analyze AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Difficulty:2 Medium Feedback: Providing services for cash increases cash, an asset, and revenue increases equity (retained earnings). 17. How does the payment of cash dividends to stockholders affect the accounting equation? Is it considered an asset source, asset use, or asset exchange transaction? Answer: Payment of cash dividends decreases assets and decreases equity. It is considered an asset use transaction. Learning Objective: 01-02 Learning Objective: 01-04 Topic Area: Recording Business Events Under the Accounting Equation Topic Area: Types of Transactions AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 2 Medium Feedback: Paying dividends decreases assets (cash) and decreases equity (retained earnings). 18. If the total equity claimed by owners of Vargas Construction is $150,000 and liabilities are $75,000, what are total assets? Answer: $225,000 Learning Objective: 01-02 Learning Objective: 01-05 Topic Area: Recording Business Events Under the Accounting Equation Topic Area: Preparing Financial Statements – Balance Sheet AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 2 Medium Feedback: Assets = Liabilities $75,000 + Equity $150,000; Assets = $225,000 19. What is meant by the term double-entry bookkeeping? Answer: All transactions affect the accounting equation in at least two places. Learning Objective: 01-02 1-8 Chapter 01 - An Introduction to Accounting Topic Area: Recording Business Events Under the Accounting Equation AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Difficulty: 1 Easy Feedback: Double-entry bookkeeping is necessary to maintain the balance of the accounting equation, assets = liabilities + equity. 20. Give three examples of asset use transactions. Answer: Paid loan, paid expense, and paid dividends to stockholders. Learning Objective: 01-04 Topic Area: Types of Transactions AACSB: Reflective Thinking AICPA: BB Resource Management AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Feedback: Asset use transactions involve a decrease in assets (for example, cash) and will also result in a decrease in either liabilities (paid loan) or equity (paid expense or dividends). 21. What does a company's statement of cash flows tell you about the company? Answer: The statement of cash flows tells how a company obtained and used cash during the accounting period. Learning Objective:01-06. Topic Area: Preparing Financial Statements - Statement of Cash Flows AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 1 Easy Feedback: The statement of cash flows explains the change in cash from the beginning to the end of the period. 22. If a corporation issues common stock for $50,000 cash, in which section of the statement of cash flows will this transaction be reported? Answer: Issuing stock is reported in the financing activities section. Learning Objective: 01-06 Topic Area: Preparing Financial Statements - Statement of Cash Flows AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Difficulty: Easy 1-9 Chapter 01 - An Introduction to Accounting Feedback: All cash exchanged between a company and its stockholders is considered a financing activity. 23. Which types of accounts are closed out to retained earnings at the end of an accounting period? Answer: Revenues, expenses, and dividends are temporary accounts and are closed at the end of the accounting period. Learning Objective: 01-07 Topic Area: The Closing Process AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Difficulty: Easy Feedback: These accounts are called temporary, or nominal, accounts. Note that dividends are reported on neither the income statement nor the balance sheet. 24. Name and briefly describe each of the four financial statements. Answer: The balance sheet lists the assets of a business and corresponding claims (liabilities and stockholders’ equity) on those assets. It draws its name from the accounting equation, The income statement matches revenue (benefits) with the expenses (sacrifices) that were incurred to generate the revenue. The statement of changes in stockholders' equity is used to explain the effects of transactions on stockholders' equity during an accounting period. The statement of cash flows explains how a company obtained and used cash during the accounting period. The statement classifies cash receipts (inflows) and payments (outflows) into three categories: financing activities, investing activities, and operating activities. Learning Objective: 01-05 Learning Objective: 01-06 Topic Area: Preparing Financial Statements AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 3 Hard 1-10 Chapter 01 - An Introduction to Accounting 25. Define the term "accounting period." How does this term relate to the “matching concept” as it pertains to the income statement? Answer: An accounting period is the span of time covered by the financial statements, normally one year; the span of time for which income is measured. The practice of pairing together on the income statement revenues and expenses that were incurred in the same accounting period is known as the matching concept. Learning Objective: 01-05 Topic Area: Preparing Financial Statements - Income Statement AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Multiple Choice Questions 26. Which of the following groups has the primary responsibility for establishing generally accepted accounting principles for business entities in the United States? A. Securities and Exchange Commission. B. U.S. Congress. C. International Accounting Standards Board. D. Financial Accounting Standards Board. Answer: D Learning Objective: 01-01 Topic Area: Role of Accounting in Society AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement Blooms: Remember Difficulty: Easy Feedback: The Financial Accounting Standards Board is a privately funded group charged with establishing accounting standards for the U.S. It is not a branch of the U.S. government. 27. The Heritage Company is a manufacturer of office furniture. Which term best describes Heritage's role in society? A. Conversion agent B. Regulatory agency C. Consumer D. Resource owner Answer: A Learning Objective:01-01 1-11 Chapter 01 - An Introduction to Accounting Topic Area: Role of Accounting in Society AACSB: Reflective Thinking AICPA: BB Industry AICPA : FN Measurement Blooms: Understand Difficulty: Medium Feedback: Businesses serve as conversion agents in the marketplace, transforming basic resources provided by resource owners into goods and services that consumers demand. Regulatory agencies set policies that affect the way that businesses operate. 28. Which resource providers lend financial resources to a business with the expectation of repayment with interest? A. Consumers B. Creditors C. Investors D. Owners Answer: B Learning Objective: 01-01 Topic Area: Role of Accounting in Society AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement Blooms: Remember Difficulty: 1 Easy Feedback: Businesses borrow money from creditors, and repay the amount borrowed, plus an additional fee known as interest. Investors, in contrast, provide financial resources in exchange for ownership interest in the business. 29. Which type of accounting information is intended to satisfy the needs of external users of accounting information? A. Cost accounting B. Managerial accounting C. Tax accounting D. Financial accounting Answer: D Learning Objective: 01-01 Topic Area: Role of Accounting in Society AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Difficulty: 1 Easy Feedback: Financial accounting is intended to satisfy the needs of external users of accounting information. Managerial accounting, including cost accounting, is intended for the needs of internal users, or managers, of a business. Tax accounting is specifically intended for tax regulatory agencies. 1-12 Chapter 01 - An Introduction to Accounting 30. Which of the following is false regarding managerial accounting information? A. It is often used by investors. B. It is more detailed than financial accounting information. C. It can include nonfinancial information. D. It focuses on divisional rather than overall profitability. Answer: A Learning Objective: 01-01 Topic Area: Role of Accounting in Society AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Blooms: Understand Difficulty: Medium Feedback: Managerial accounting provides information primarily for internal users, or managers, of businesses. Managers require more detailed information about a business than do external users, and sometimes that information is nonfinancial in nature. Managerial accounting information focuses on divisional rather than overall profitability and is not typically made available to external users, such as investors. 31. Financial accounting standards are known collectively as GAAP. What does that acronym stand for? A. Generally Accepted Accounting Principles B. Generally Applied Accounting Procedures C. Governmentally Approved Accounting Practices D. Generally Authorized Auditing Principles Answer: A Learning Objective: 01-01 Topic Area: Measurement Rules AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Remember Difficulty: Easy Feedback: Generally Accepted Accounting Principles are established by the Financial Accounting Standards Board. 32. International accounting standards are formulated by the IASB. What does that acronym stand for? A. Internationally Accepted Standards Board B. International Accounting Standards Board C. International Accountability Standards Bureau D. International Accounting and Sustainability Board Answer: B Learning Objective: 01-01 Topic Area: Measurement Rules AACSB: Reflective Thinking AICPA: BB Critical Thinking 1-13 Chapter 01 - An Introduction to Accounting AICPA: BB Global AICPA: FN Measurement Blooms: Remember Difficulty: Easy Feedback: The International Accounting Standards Board establishes accounting standards for most countries outside of the U.S. 33. Which of the following items is an example of revenue? A. Cash received from a bank loan B. Cash received from investors from the sale of common stock C. Cash received from customers at the time services were provided D. Cash received from the sale of land for its original selling price Answer: C Learning Objective: 01-02 Topic Area: Recording Business Events Under the Accounting Equation AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Difficulty: Easy Feedback: Cash received from providing services to customers is an example of revenue, and is an asset source transaction. Cash received from a bank loan results in a liability, notes payable. Cash investments made by owners increase the stockholders’ equity account common stock. Cash received from the sale of land for its original selling price is an asset exchange transaction that decreases one asset, land, and increases another asset, cash. 34. Which of the following is not an element of the financial statements? A. Net income B. Revenue C. Assets D. Cash Answer: D Learning Objective: 01-02 Topic Area: Elements of Financial Statements AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Difficulty: Medium Feedback: Cash is not an element of the financial statements. It is an account that is part of the element assets. 1-14 Chapter 01 - An Introduction to Accounting 35. The balance sheet of the Algonquin Company reported assets of $50,000, liabilities of $22,000 and common stock of $15,000. Based on this information only, the amount or balance for retained earnings must be A. $7,000 B. $57,000 C. $13,000 D. $87,000 Answer: C Learning Objective: 01-02 Learning Objective: 01-05 Topic Area: Recording Business Events Under the Accounting Equation Topic Area: Preparing Financial Statements – Balance Sheet AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: Easy Feedback: Assets = Liabilities + Equity; Equity includes common stock and retained earnings. $50,000 = $22,000 + $15,000 + Retained earnings; Retained earnings = $13,000 36. Stosch Company's balance sheet reported assets of $40,000, liabilities of $15,000 and common stock of $12,000 as of December 31, 2015. If Retained Earnings on the December 31, 2016 balance sheet is $18,000 and Stosch paid a $14,000 dividend during 2016, then the amount of net income for 2016 was which of the following? A. $17,000 B. $19,000 C. $13,000 D. $21,000 Answer: B Learning Objective: 01-05 Topic Area: Preparing Financial Statements AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: Hard Feedback: If assets on December 31, 2015 totaled $40,000, total claims (including liabilities, common stock, and retained earnings) on that date must have also been $40,000. If liabilities were $15,000 and common stock was $12,000, retained earnings on December 31, 2015 must have been $13,000. At the end of 2016, the company reported $18,000 in retained earnings, a $5,000 increase. During 2016, Stosch paid a $14,000 cash dividend, which reduced retained earnings. Therefore, 2016 net income must have been $5,000 greater than the dividend paid. $14,000 + $5,000 = $19,000. 1-15 Chapter 01 - An Introduction to Accounting 37. Hazeltine Company issued common stock for $200,000 cash. As a result of this event, A. assets increased. B. equity increased. C. claims increased. D. assets, claims, and equity all increased. Answer: D Learning Objective: 01-02 Topic Area: Recording Business Events Under the Accounting Equation AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Understand Difficulty: Medium Feedback: Issuing common stock increases both assets (cash) and equity (common stock). Equity and liabilities collectively make up claims in the accounting equation. 38. If Ballard Company reported assets of $500 and liabilities of $200, Ballard's stockholders’ equity totaled A. $300. B. $500. C. $700. D. Can not be determined. Answer: A Learning Objective: 01-03 Topic Area: The Accounting Equation AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: Easy Feedback: In the accounting equation, assets equal claims (liabilities + equity). If assets are $500, total claims must also be $500. Therefore, equity must be $500 - $200, or $300. 39. If a company's total assets increased while liabilities and common stock were unchanged, then A. revenues were greater than expenses. B. retained earnings were less than net income during the period. C. no dividends were paid during the period. D. the company must have purchased assets with cash. Answer: A Learning Objective: 01-02 1-16 Chapter 01 - An Introduction to Accounting Topic Area: Recording Business Events Under the Accounting Equation AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: Hard Feedback: If a company’s total assets increased while liabilities and common stock were unchanged, retained earnings must have increased. In order for retained earnings to increase, the company must have reported net income as a result of revenues exceeding expenses. 40. Li Company paid cash to purchase land. As a result of this accounting event A. total assets decreased. B. total assets were unaffected. C. total equity decreased. D. both assets and total equity decreased. Answer: B Learning Objective: 01-02 Learning Objective: 01-04 Topic Area: Recording Business Events Under the Accounting Equation Topic Area: Types of Transactions AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: Easy Feedback: Paying cash for land is an asset exchange transaction that increases one asset (land) and decreases another asset (land). The result is no overall change in total assets. 41. Turner Company reported assets of $20,000 (including cash of $9,000), liabilities of $8,000, common stock of $7,000, and retained earnings of $5,000. Based on this information, what can be concluded? A. 25% of Turner’s assets are the result of prior earnings. B. $5,000 is the maximum dividend that can be paid to shareholders. C. 40% of Turner’s assets are the result of borrowing from creditors. D. 25% of Turner’s assets are from prior earnings, $5,000 is the maximum possible dividend, and 40% of assets are the result of borrowed resources. Answer: D Learning Objective: 01-03 Topic Area: Interpreting Information Shown in the Accounting Equation AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: Medium Feedback: Retained earnings of $5,000 is equal to 25% of the company’s assets, indicating that 25% of Turner’s assets are from prior earnings. $8,000, or 40%, of Turner’s assets are liabilities, indicating that those assets are the result of borrowed resources. A company can pay out no more in dividends than it has in its retained earnings account. 1-17 Chapter 01 - An Introduction to Accounting 42. At the time of liquidation, Fairchild Company reported assets of $200,000, liabilities of $120,000, common stock of $90,000 and retained earnings of ($10,000). What amount of Fairchild’s assets are the shareholders entitled to receive? A. $200,000 B. $80,000 C. $90,000 D. $100,000 Answer: B Learning Objective: 01-03 Topic Area: Interpreting Information Shown in the Accounting Equation AACSB: Knowledge Application AICPA: BB Resource Management AICPA: FN Measurement Blooms: Apply Difficulty: Medium Feedback: Creditors receive first priority in asset distribution during a business liquidation. Therefore, creditors would collect the $120,000 owed to them, leaving the shareholders with the remaining $80,000. 43. As of December 31, 2016, Bristol Company had $100,000 of assets, $40,000 of liabilities and $25,000 of retained earnings. What percentage of Bristol’s assets were obtained through investors? A. 60% B. 25% C. 40% D. 35% Answer: D Learning Objective: 01-03 Topic Area: Interpreting Informations Shown in the Accounting Equation AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: Medium Feedback: If assets total $100,000, claims must also total $100,000. Claims include liabilities, common stock and retained earnings. Because liabilities and retained earnings equal $65,000, common stock must be $35,000. The common stock account represents the assets that were obtained through investors. $35,000 is 35% of $100,000. 1-18 Chapter 01 - An Introduction to Accounting 44. On January 1, 2015, Chavez Company had beginning balances as follows: Assets = $12,500 Liabilities = $4,500 Common Stock = $3,000 During 2016, Chavez paid dividends to its stockholders of $2,000. Given that ending retained earnings was $6,000, what was Chavez's net income for the 2016 accounting period? A. $3,000 B. $5,000 C. $7,000 D. $2,000 Answer: A Learning Objective: 01-05 Learning Objective: 01-08 Topic Area: Preparing Financial Statements Topic Area: The Horizontal Financial Statements Model AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: Hard Feedback: On January 1: Assets = Liabilities + Common Stock + Retained Earnings $12,500 = $4,500 + $3,000 + Retained Earnings Retained Earnings = $5,000 $5,000 + Net Income - $2,000 = $6,000 Net Income = $3,000 45. The transaction, "provided services for cash," affects which two accounts? A. Revenue and Expense B. Cash and Revenue C. Cash and Expense D. Cash and Dividends Answer: B Learning Objective:01-02 Topic Area: Recording Business Events Under the Accounting Equation AACSB: Reflective Thinking AICPA: BB Resource Management AICPA : FN Measurement Blooms: Understand Difficulty: Easy Feedback: Providing services for cash increases a company’s assets (cash) and equity (revenue, which closes to retained earnings). 1-19 Chapter 01 - An Introduction to Accounting 46. During 2016, Millstone Company earned $6,500 of cash revenue, paid cash dividends of $1,000 to owners and paid $4,000 for cash expenses. Liabilities were unchanged. Which of the following accurately describes the effect of these events on the elements of the company's financial statements? A. Assets increased by $6,500. B. Assets increased by $1,500. C. Equity increased by $2,500. D. Assets increased by $5,500. Answer: B Learning Objective: 01-02 Learning Objective: 01-08 Topic Area: Recording Business Events Under the Accounting Equation Topic Area: The Horizontal Financial Statements Model AACSB: Knowledge Application AICPA: BB Resource Management AICPA: FN Measurement Blooms: Apply Difficulty: Medium Feedback: Revenue – Expenses – Dividends = Change in Equity $6,500 - $4,000 - $1,000 = $1,500 change in equity. If there was no change in liabilities, the change in assets must also equal $1,500. 47. At the end of 2016, retained earnings for the Baker Company was $3,500. Revenue earned by the company in 2016 was $1,500, expenses paid during the period were $800, and dividends paid during the period were $500. Based on this information alone, retained earnings at the beginning of 2016 was A. $3,300. B. $3,700. C. $2,800. D. $3,800. Answer: A Learning Objective: 01-05 Learning Objective: 01-08 Topic Area: Preparing Financial Statements Topic Area: The Horizontal Financial Statements Model AACSB: Knowledge Application AICPA: BB Resource Management AICPA: FN Measurement Blooms: Apply Difficulty: Hard Feedback: Beginning Retained Earnings + Revenue – Expenses – Dividends = Ending Retained Earnings Beginning Retained Earnings + $1,500 - $800 - $500 = $3,500 Beginning Retained Earnings = $3,300 1-20 Chapter 01 - An Introduction to Accounting 48. Which of the following is not an asset use transaction? A. Paying cash dividends B. Paying cash expenses C. Paying off the principal of a loan D. Paying cash to purchase land Answer: D Learning Objective: 01-02 Learning Objective: 01-04 Topic Area: Recording Business Events Under the Accounting Equation Topic Area: Types of Transactions AACSB: Reflective Thinking AICPA: BB Resource Management AICPA: FN Measurement Blooms: Understand Difficulty: Easy Feedback: Paying cash to purchase land is an asset exchange transaction. 49. Borrowing cash from the bank is an example of which type of transaction? A. Asset source B. Claims exchange C. Asset use D. Asset exchange Answer: A Learning Objective: 01-02 Learning Objective: 01-04 Topic Area: Recording Business Events Under the Accounting Equation Topic Area: Types of Transactions AACSB: Reflective Thinking AICPA: BB Resource Management AICPA: FN Measurement Blooms: Understand Difficulty: Easy Feedback: Borrowing cash is an asset source transaction that increases a business’s assets (cash) and increases its liabilities (notes payable). 50. Which of the following could describe the effects of an asset exchange transaction on a company's financial statements? A. B. C. D. Answer: A Learning Objective: 01-04 1-21 Chapter 01 - An Introduction to Accounting Topic Area: Types of Transactions AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: Easy Feedback: An asset exchange transaction is one that increases one asset account and decreases another, resulting in no net change in assets. There are no changes to the company’s liabilities and equity either. If one of the asset accounts affected is cash, there will be an effect on cash flows. 51. Which of the following does not describe the effects of an asset use transaction on a company's financial statements? A. B. C. D. Assets = - = - = - = NA = Liab. + Equity Rev. - - + NA NA - - + NA NA - NA + - NA - + + NA + - Exp. = NA = NA = + = + = Net Inc. Cash NA -OA NA -FA - -OA - NA Answer: D Learning Objective: 01-04 Topic Area: Types of Transactions AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: Medium Feedback: An asset use transaction is one that decreases a business’s assets and increases either liabilities or equity. An asset use transaction may or may not affect expenses. If the asset account decreased is cash, there will be an effect on cash flows. 52. Which of the following cash transactions results in no net change in assets? A. Borrowing cash from a bank B. Issuing common stock for cash C. Purchasing land for cash D. Providing services for cash Answer: C Learning Objective: 01-02 Topic Area: Recording Business Events Under the Accounting Equation AACSB: Reflective Thinking AACSB: Reflective Thinking AICPA: BB Resource Management AICPA: FN Measurement Blooms: Understand Difficulty: Easy Feedback: Purchasing land for cash is an asset exchange transaction that does not affect total assets. Issuing stock to owners is an asset source transaction that increases assets. Expense transactions do not increase assets. 1-22 Chapter 01 - An Introduction to Accounting 53. Which of the following items appears in the investing activities section of the statement of cash flows? A. Cash inflow from interest revenue. B. Cash inflow from the issuance of common stock. C. Cash outflow for the payment of dividends. D. Cash outflow for the purchase of land. Answer: D Learning Objective: 01-06 . Topic Area: Preparing Financial Statements - Statement of Cash Flows AACSB: Reflective Thinking AICPA: BB Resource Management AICPA: FN Measurement Blooms: Understand Difficulty: Medium Feedback: Purchasing a computer (a long-lived asset) for cash is an investing activity. Issuing common stock and paying dividends are both financing activities. Cash inflow from interest revenue is an operating activity. 54. Jackson Company had a net increase in cash from operating activities of $10,000 and a net decrease in cash from financing activities of $2,000. If the beginning and ending cash balances for the company were $4,000 and $11,000, then net cash change from investing activities was: A. an outflow or decrease of $1,000. B. an inflow or increase of $2,000. C. an inflow or increase of $1,000. 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