CFA Exam 1 with complete solutions

Businesses earn profits by converting financial, physical, and labor resources into goods and services that satisfy consumer demands. This statement is - Answer- true Resource owners want to provide resources to businesses with high profit potential because those businesses will pay higher taxes. This statement is - Answer- false Accounting provides a service to society by gathering and reporting information about a company's profit potential. This statement is - Answer- true Generally Accepted Accounting Principles (GAAP) are designed to provide guidance for - Answer- financial accounting Hector Lopez owns Hector Company. If Hector has 100% ownership interest in the company, the Company's accountant will prepare only one set of statements that reflects the combined assets of Hector and his company. This statement is - Answer- false Ellen Elder and her brother, Buster started Elder Company when they each invested $600 in the company. After the investments there will be - Answer- three reporting entities Paul Savage purchased a restaurant named Burger Haven from Larry Jones. The purchase would cause the number of reporting entities to - Answer- remains constant Which of the following is an accurate definition of the term asset? - Answer- A resource that will be used to produce revenue Which of the following is not a source of assets? - Answer- none. (creditors, investors, and operations are all a source) If total assets increase then - Answer- liabilities, common stock, or retained earnings must increase. Liabilities - Answer- represent obligations to repay debts, may increase when assets increase, and have priority in business liquidations Which of the following is an accurate depiction of the accounting equation? - Answer- Assets = Liabilities + Common Stock + Retained Earnings Juarez Company acquired $1,200 from the issue of common stock. Which of the following shows how this event will affect the company's accounting equation? The letters "NA" indicate that the component of the equation is not affected. - Answer- assets=1,200 liabilities= NA common stock= 1,200 Retained earnings= NA Morrison Company experienced a business event that had the following effect on its accounting equation: Assets= 25,000 Liabilities= 25,000 common stock= NA Retained earnings= NA - Answer- Paid off debt Daemon Company paid cash to purchase land. Which of the following shows how this event will affect the company's accounting equation? The letters "NA" indicate that the component of the equation is not affected. - Answer- Assets= +- Liabilities= NA Common stock= NA Retained earnings= NA Fen Company paid a $300 cash dividend. Which of the following shows how this event will affect the company's accounting equation? The letters "NA" indicate that the component of the equation is not affected. - Answer- Assets= 300 Liabilities= NA Common stock= NA Retained earnings= 300 Which of the following is a true statement? - Answer- All are true: A cash revenue is an economic benefit that will cause assets and retained earnings to increase. A cash expense is an economic sacrifice that will cause assets and retained earnings to decrease. A cash dividend is a transfer of assets from a business to its owners that will cause the assets and retained earnings of the business to decrease. The accounting records of Coastal Company contained the following account balances. Cash $ 500 Land $ 800 Notes Payable $ 200 Common Stock $ 400 The records also contained an account titled Retained Earnings. Based on this information the balance of the retained earnings account must be - Answer- $700 The following accounting equation represents the financial position of Qualtro Company. Based on this equation, Qualtro - Answer- Can pay a $300 cash dividend The following accounting equation represents the financial position of Bentley Company. Based on this equation, Bentley - Answer- none Alexis Company was started in Year 1. At the end of Year 1 the Company's had the following accounting equation. During Year 2, the company experienced the following accounting events. • Paid of $500 of its note payable. • Earned $700 of cash revenue. • Paid $400 of cash expenses. • Paid a $100 cash dividend. - Answer- 20% Alexis Company was started in Year 1. At the end of Year 1 the Company's had the following accounting equation. During Year 2, the company experienced the following accounting events. • Paid of $500 of its note payable. • Earned $700 of cash revenue. • Paid $400 of cash expenses. • Paid a $100 cash dividend. Based on this information alone, what percent of the company's assets at the end of Year 2 were provided by earnings? - Answer- 24% Alexis Company was started in Year 1. At the end of Year 1 the Company's had the following accounting equation. If at the end of Year 1 an appraiser provides a certified opinion that the market value of the land is $2,800 the company would continue to list the land on its books at $2,200. This statement is: - Answer- true Companies maintain accounting records that show assets at the amount of their market value because that information is more relevant than the historical cost. This statement is - Answer- false Maria Company began Year 2 with $85,000 in its Land account. During Year 2 the company made two separate purchases of land. The first purchase of land cost $52,000. The second purchase of land cost $94,000. Based on this information the company's accounting records will have - Answer- Can be all: one land account. two land accounts. three land accounts. Watt Company was established in January, Year 1. During Year 1 the company experienced the following events. • Collected $6,000 cash from the issue of common stock. • Borrowed $3,000 cash from the state bank. • Earned $4,000 of cash revenue. • Paid $2,000 cash expenses. The company was liquidated at the end of Year 1. Based on this information - Answer- The stockholder will receive $8,000 Emerald Company was established in January, Year 1. During Year 1 the company experienced the following events • Collected $50,000 cash from the issue of common stock. • Borrowed $45,000 cash from the state bank. • Earned $120,000 of cash revenue. • Paid $180,000 cash expenses. The company was liquidated at the end of Year 1. Based on this information - Answer- the creditor (the bank) would receive $35,000. Alexis Company was started in Year 1. At the end of Year 1 the Company's had the following accounting equation. If at the end of Year 1 an appraiser provides a certified opinion that the market value of the land is $2,800 the company would continue to list the land on its books at $2,200. This statement is - Answer- true Companies maintain accounting records that show assets at the amount of their market value because that information is more relevant than the historical cost. This statement is - Answer- false Maria Company began Year 2 with $85,000 in its Land account. During Year 2 the company made two separate purchases of land. The first purchase of land cost $52,000. The second purchase of land cost $94,000. Based on this information the company's accounting records will have - Answer- one, two, or three land accounts Emerald Company was established in January, Year 1. During Year 1 the company experienced the following events • Collected $50,000 cash from the issue of common stock. • Borrowed $45,000 cash from the state bank. • Earned $120,000 of cash revenue. • Paid $180,000 cash expenses. The company was liquidated at the end of Year 1. Based on this information - Answer- the creditor (the bank) would receive $35,000. Watt Company was established in January, Year 1. During Year 1 the company experienced the following events. • Collected $6,000 cash from the issue of common stock. • Borrowed $3,000 cash from the state bank. • Earned $4,000 of cash revenue. • Paid $2,000 cash expenses. The company was liquidated at the end of Year 1. Based on this information - Answer- the stockholders would receive $8,000. The following accounting equation represents the financial position of Bentley Company. Based on this equation, Bentley 600, 2200, 1000, 1400, 400 - Answer- none are correct The following accounting equation represents the financial position of Qualtro Company. Based on this equation, Qualtro 400, 2200, 800, 1200, 600 - Answer- can pay a $300 cash dividend. Kilgore Company experience the following events during its first accounting period. (1) Issued common stock for $5,000 cash. (2) Earned $3,000 of cash revenue. (3) Paid a $4,000 cash to purchase land. (4) Paid cash dividends amounting to $400. (5) Paid $2,200 of cash expenses. Based on this information the amount of net income is - Answer- $800 Kilgore Company experienced the following events during its first accounting period. (1) Issued common stock for $5,000 cash. (2) Earned $3,000 of cash revenue. (3) Paid a $4,000 cash to purchase land. (4) Paid cash dividends amounting to $400. (5) Paid $2,200 of cash expenses. The market value of the land at the end of the accounting period was $4,300. Based on this information the amount of total assets appearing on the year-end balance sheet is - Answer- $5,400 Kilgore Company experienced the following events during its first accounting period. (1) Issued common stock for $5,000 cash. (2) Earned $3,000 of cash revenue. (3) Paid a $4,000 cash to purchase land. (4) Paid cash dividends amounting to $400. (5) Paid $2,200 of cash expenses. Based on this information, the amount of cash flow from investing activities appearing on the statement of cash flows is - Answer- $4,000 OUTflow At the end of Year 1 Bowers Company had $6,000 of assets, $2,000 of liabilities, $3,000 of common stock, and $1,000 of retained earnings. During Year 2 Bowers experienced the following events. (1) Borrowed $4,000 cash. (2) Earned $5,000 of cash revenue. (3) Paid $3,000 of cash expenses. (4) Paid $7,000 cash to purchase land Based on this information, the amount of net income, cash flow from investing activities, and total liabilities appearing on the Year 2 financial statements is - Answer- 2,000, 7,000, 6,000 At the beginning of Year 2, Clayton Company had $6,000 of cash, $7,000 land, $2,000 of liabilities, $3,000 of common stock, and $8,000 of retained earnings. During Year 2, Clayton experienced the following events. 1. Borrowed $1,500 cash. 2. Earned $6,500 of cash revenue. 3. Paid $4,000 of cash expenses. 4. Paid $5,000 cash to purchase land. Based on this information the amount of total assets, total liabilities, and retained earnings appearing on the Year 2 financial statements is - Answer- 17,000, 3,500, 10,500 The process of transferring information out of the temporary accounts at the end of an accounting period is called closing. This statement is - Answer- true Information in temporary accounts is transferred to the common stock account at the end of an accounting period. This statement is - Answer- false Which of the accounts is closed at the end of an accounting period? - Answer- Revenue Which of the accounts is closed at the end of an accounting period? - Answer- Expense, Dividend, and Revenue During its first year of operation, Cade Company experienced the following events. (1) Issued common stock for $7,000 cash. (2) Earned $5,000 of cash revenue. (3) Paid $3,000 of cash expenses. (4) Paid cash dividends amounting to $1,000. Before closing on December 31, the balance in the retained earning account would be - Answer- zero During its first year of operation, Cade Company experienced the following events. (1) Issued common stock for $7,000 cash. (2) Earned $5,000 of cash revenue. (3) Paid $3,000 of cash expenses. (4) Paid cash dividends amounting to $1,000. After closing on December 31, the balance in the retained earning account would be - Answer- $1,000 At the beginning of Year 2 Clair Company had a $5,500 balance in its retained earnings account. During January of Year 2 Clair earned $2,000 of revenue and incurred $1,400 of expenses. Based on this information, the balance in retained earnings account on