WGU D102 Pre-Assessment Exam with complete solutions

What information is contained in a balance sheet? - ANSWER-Report of a company's financial position as of a point in time. What is an owners' equity item? - ANSWER-Capital stock A company ended July with assets of $150,000 and owner's equity of $60,000. What is the amount of liabilities at the end of July? - ANSWER-$90,000 What is reported in a multiple-step income statement that is not reported in a single-step income statement? - ANSWER-Gross profit How is gross profit computed? - ANSWER-Sales minus cost of goods sold. The following are some accounts from a company's financial statements: accounts receivable cost of goods sold cash retained earnings sales inventory income tax expense accounts payable Which set is a list of all of the items that are used in computing this company's net income? - ANSWER-Sales, cost of goods sold, and income tax expense. What cash flow category contains activities whereby cash is obtained from or repaid to owners or creditors? - ANSWER-Financing Here are some financial statement items for the year for a company. Cash received from customers Cash received from the sale of land Cash paid for dividends Cash paid to employees for wages Cash paid to purchase a new building Cash paid for rent Cash received as new investment from owners Which set of items is a list of items that are used in computing the company's financing cash flow for the year? - ANSWER-Cash paid for dividends and cash received as new investment from owners. Here are some financial statement items for a company. Net income Cash flow from financing activities Cash balance at the beginning of the year Sales Cash flow from investing activities Accounts receivable Retained earnings at the beginning of the year Cash flow from operating activities What items are used in computing the company's ending cash balance for the year? - ANSWER-Cash balance at the beginning of the year, cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. How is revenue typically recorded with debits and credits? - ANSWER-As a credit, representing an increase in equity. What is the proper way to record an increase in an asset account and an increase in an equity account? - ANSWER-Asset, debit; equity, credit A company was started last year when the shareholders invested $70,000 cash into it. At that time, the company also borrowed $100,000 cash from a local bank. The company used $140,000 cash to purchase inventory for $140,000. This year the company sold all of the inventory for $95,000 cash (and that is not a typographical error; the amount received for all of the inventory was only $95,000 cash). Which account balance is correct with respect to this company's balance sheet after the sale of the inventory? - ANSWER-Total owners' equity is $25,000. On January 1, a company had these assets, liabilities, and equities: Cash $100 Inventory $140 Accounts payable $70 Paid-in capital $150 Retained earnings $20 During the year, the company entered into these transactions: Selling inventory costing $140 for a total of $200; cash of $30 was received, and the remaining $170 was put on account. Paying cash for rent of $45. Paying cash dividends of $30. What is this company's total equity at the end of the year? - ANSWER-$155 A company made a $3,000 cash payment on a loan. Of the $3,000 cash paid, $2,400 was for interest expense and $600 was a payment to reduce the loan balance. What is included in the journal entry necessary to record this loan payment? - ANSWER-Debit to interest expense for $2,400. A company was started last year when the shareholders invested $70 cash into the company. At that time, the organization also borrowed $30 cash from a local bank. The organization used $80 cash to purchase inventory for $80. This year the company sold all of the inventory for $55 cash. (That is not a typographical error; the amount received for all of the inventory was only $55 cash.) Assuming that there is no interest on the loan, what is true with respect to this company's balance sheet after the sale of the inventory? - ANSWER-Total owners' equity is $45. How are expenses typically recorded with debits and credits? - ANSWER-As a debit, representing a reduction in equity. A company purchased inventory for $5,000. The company paid $1,000 cash and the remainder of the purchase was made on account. What is included in the journal entry necessary to record this inventory purchase? - ANSWER-Credit to accounts payable for $4,000. A company sold inventory that cost $1,300 for $2,000. It received $500 cash and the remainder was on account. What is included in the journal entry or entries necessary to record this sale of inventory? - ANSWER-Debit to accounts receivable for $1,500. On August 1 of Year 1, a company paid $7,200 for two years' rent. The rental period starts on August 1 of Year 1. Which debit or credit is correctly included in the adjusting journal entry necessary on December 31 of Year 1? - ANSWER-Debit to rent expense for $1,500. The revenue recognition principle states that revenues are recorded when two main criteria have been met. One of those criteria is that cash has been collected or collectability is reasonably assured. What is the other criterion? - ANSWER-The earnings process is substantially complete. What is the matching principle? - ANSWER-Expenses are recorded in the same period in which the corresponding revenue is recorded. For large, publicly traded companies, why is accrual basis accounting preferred over cash basis accounting? - ANSWER-Accrual basis accounting provides a more accurate picture of a company's economic profitability. On October 1 of Year 1, a company made a $60,000 cash loan to another company. The interest rate on the loan is 5%. No cash payments will be collected on the loan until September 30 of Year 2. Which debit or credit is correctly included in the adjusting journal entry necessary on the company's books (the lender) on December 31 with respect to this loan? - ANSWER-Credit to interest revenue for $750. On May 1 of Year 1, a company received $24,000 cash for rent in advance. This $24,000 rental receipt covers the period from May 1 of Year 1 to April 30 of Year 2. Which debit or credit is correctly included in the journal entry necessary on May 1 to record this cash received for rent in advance? - ANSWER-Credit to unearned rent for $24,000. On January 1, a company had office supplies costing $4,600. During the year, the company bought (and recorded) additional office supplies costing $9,900. On December 31, a physical count of office supplies revealed that supplies costing $2,900 remained. Which debit or credit is correctly included in the adjusting journal entry necessary on December 31 to record the supplies that the company used during the year? - ANSWER-Credit to office supplies for $11,600. At the end of the year, before any closing entries are made, which account has a debit balance? - ANSWER-Cost of goods sold What is a nominal account? Equipment Capital stock Salaries Long-term debt - ANSWER-Salaries In preparing a bank reconciliation, what is the proper treatment of a deposit in transit? Subtract it from the reported cash balance in the bank statement. Add it to the reported cash balance in the company's books. Subtract it from the reported cash balance in the company's books. Add it to the reported cash balance in the bank statement. - ANSWER-Add it to the reported cash balance in the bank statement. A company rents a building that it uses in its operations. The accountant for the company mistakenly input a $1,000 rental payment on the building as $10,000 in the accounting records. What is the impact of this error on the financial statements? Revenues are too low, so reported net income is too low. Revenues are too high, so reported net income is too high. Expenses are too high, so reported net income is too low. Expenses are too low, so reported net income is too high. - ANSWER-Expenses are too high, so reported net income is too low. The accountant for a company mistakenly posted an expense amount as an asset in the general ledger. What is the financial statement impact of this error? - ANSWER-Assets are too high, and retained earnings are too high. The accountant for a company mistakenly posted a liability amount as a revenue in the general ledger. What is the financial statement impact of this error? - ANSWER-Liabilities are too low, and retained earnings are too high. Why are daily cash deposits important? - ANSWER-They prevent the accumulation of a large amount of cash. On July 10, goods were sold for $10,000. Cash of $4,000 was received, and the $6,000 remainder was on account. The customer returned the goods before paying any of the remaining $6,000 on account. Which debit or credit should be included in the journal entry on the seller's books to record the return of the goods? - ANSWER-Credit accounts receivable for $6,000 Gross sales for the year were $100,000. During the year, sales discounts of $3,000 were recorded. In addition, sales returns and allowances for $7,000 were recorded. The total amount of cash collected from customers during the year was $88,000. Many accounts remain uncollected at the end of the year. What is the amount of net sales to be reported for the year? - ANSWER-$90,000 What is the direct write-off method with respect to bad debts? - ANSWER-Recognizing bad debt expense after confirming that a specific customer is not going to pay. On January 6, a credit sale was made for $1,000. Terms for the sale were 4/10, n/30. Cash for the sale was collected on January 25. Which debit or credit should be included in the journal entry to record the cash collection on January 25? - ANSWER-Debit cash for $1,000 A company's controller estimated bad debt expense using the percentage of accounts receivable method. Total sales for the year were $1,500,000. The ending balance in accounts receivable was $300,000. An examination of the outstanding accounts at the end of the year indicates that approximately 7% of these accounts will ultimately prove to be uncollectible. Before any adjustment, the balance in the allowance for bad debts is $4,000 (credit). Total accounts written off as uncollectible during the year were $15,000. Which debit or credit is included in the adjusting entry to record bad debt expense for the year? - ANSWER-Credit allowance for bad debts for $17,000 Which costs are included in work-in-process inventory? - ANSWER-Materials, labor, and overhead Who owns goods in transit? - ANSWER-If the shipping terms are FOB destination, the goods belong to the seller while in transit. On November 1, a company purchased inventory costing $1,000 on account. The payment terms are 2/10, n30. The company paid on November 6 to receive the 2% discount. What is the impact on the company's financial statements of the cash payment of this account within the discount period? - ANSWER-Decrease inventory by $20 A company uses a perpetual inventory system. Beginning inventory for the period was $160,000. Purchases for the period totaled $700,000. A physical count of ending inventory revealed inventory of $130,000. Cost of goods sold according to the perpetual system is $690,000. What is the amount of inventory shrinkage? - ANSWER-$40,000 With a LIFO inventory cost flow assumption, what is assumed about the units that are sold and the units that remain in ending inventory? - ANSWER-New units sold, old units in ending inventory The following are inventory purchase and sales data for a company: Purchased on January 1: 500 units, $9 cost per unit Purchased on January 16: 300 units, $8 cost per unit Sold on January 31: 600 units, $10 selling price per unit There was no inventory before the purchase made on January 1. Assume the company uses the LIFO method for inventory valuation. What is the cost of goods sold for January? - ANSWER-$5,100 The following are inventory purchase and sales data for a company: Purchased on January 1: 500 units, $8 cost per unit Purchased on January 16: 100 units, $9 cost per unit Sold on January 31: 200 units, $10 selling price per unit There was no inventory before the purchase made on January 1. Assume the company uses the LIFO method for inventory valuation. What is the reported cost of ending inventory at the end of January? - ANSWER-$3,200 When a machine is purchased, what is the proper accounting for the amount paid for sales tax on the purchase price? - ANSWER-As part of the cost of the machine On January 1 of Year 1, a company purchased a machine for $20,000. The machine is expected to have a 10-year useful life and a salvage value of $1,000. The company uses straight-line depreciation. What is the book value of this machine at the end of Year 6? - ANSWER-$8,600 On January 1 of Year 1, a company purchased a machine for $10,000. The machine is expected to have a five-year useful life and a salvage value of $2,000. The company uses double-declining balance depreciation. What is the amount of depreciation expense on this machine for Year 2? - ANSWER-$2,400 On January 1 of Year 1, a company purchased a patent for $400,000. The patent had an original legal life of 20 years, but only eight years remained on the date the patent was purchased. The patent is expected to have continuing economic value during this eight years. The patent is assumed to have zero salvage value at the end of its economic useful life. The company uses straight-line amortization. What is the book value of this patent at the end of Year 3? - ANSWER-$250,000