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Homework answers / question archive / Part One: Balance Sheet and Income Statement Classifications
Part One: Balance Sheet and Income Statement Classifications.
Specify on the answer sheet the letter of the financial statement classification the account would appear in. Use only the classifications shown.
Balance Sheet Income and Retained Earnings Statement
a. Current Assets j. Sales Revenue
b. Investments k. Cost of Goods Sold
c. Property, Plant, and Equipment l. Operating Expenses
d. Intangible Assets m. Other Revenues and Gains
e. Other Assets n. Other Expenses and Losses
f. Current Liabilities o. Extraordinary Item
g. Long-term Debt p. Retained Earnings Section
h. Capital Stock q. Not on the Statements
i. Retained Earnings
Account balances taken from the ledger of Morin Company on December 31, 2005 follow:
1. Capital Stock, $10 par
2. Loss on Sale of Equipment
3. Land
4. Notes Payable?Short Term
5. Accum. Depreciation?Buildings
6. Mortgage Payable due 2007
7. Sales
8. Dividends Declared and Paid
9. Merchandise Inventory
10. Salaries and Wages Expense
11. Merchandise on order with supplier
12 Interest Revenue
13. Accounts Payable
14. Long-Term Investments
15. Accounts Receivable
16. Error made in computing 2003 depreciation expense
Part Two ? Key Conceptual Terms.
Various accounting assumptions, principles, constraints, and characteristics are listed below. Select those which best justify the following accounting procedures and indicate the corresponding letter(s) in the answer sheet provided. A letter may be used more than once or not at all.
a. Historical cost f. Economic entity k. Revenue recognition
b. Relevance g. Materiality l. Full disclosure
c. Monetary unit h. Conservatism m. Substance over form
d. Going concern i. Periodicity n. Industry practices
e. Consistency j. Matching o. Reliability
1. Using the lower of cost or market approach in valuing inventories.
2. Describing the depreciation methods used in the financial statements.
3. Applying the same accounting treatment to similar accounting events.
4. The quality which helps users make predictions about present, past, and future events.
5. Recording a transaction when goods or services are exchanged for cash or claims to cash.
6. Expensing, when acquired, metal office wastebaskets having a life of ten years.
7. Provides the figure at which to record a liability.
8. The preparation of timely reports on continuing operations.
9. Not reporting assets at liquidation prices (do not use "historical cost").
10. Reporting information which is faithfully representative of economic events.
Part Three ? Multiple Choice Questions. Specify on the answer sheet the best choice.
1. Which of the following transactions would be considered a financing activity in preparing a statement of cash flows?
a. Amortizing a discount on bonds payable
b. Recording net income from operations
c. Selling common stock
d. Purchasing inventory
2. The net income for the year ended December 31, 2004, for Ryan Company was $720,000. Additional information is as follows:
Capital expenditures $1,200,000
Depreciation on plant assets 450,000
Cash dividends paid on common stock 180,000
Increase in noncurrent deferred tax liability 45,000
Amortization of patents 21,000
Based on the information given above, what should be the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 2004?
a. $1,056,000.
b. $1,146,000.
c. $1,191,000.
d. $1,236,000.
3. Information concerning the debt of Dickey Company is as follows:
Short-term borrowings:
Balance at December 31, 2004 $525,000
Proceeds from borrowings in 2005 325,000
Payments made in 2005 (450,000)
Balance at December 31, 2005 $400,000
Current portion of long-term debt:
Balance at December 31, 2004 $1,625,000
Transfers from caption "Long-Term Debt" 500,000
Payments made in 2005 (1,225,000)
Balance at December 31, 2005 $ 900,000
Long-term debt:
Balance at December 31, 2004 $9,000,000
Proceeds from borrowings in 2005 2,250,000
Transfers to caption "Current Portion of Long-Term Debt" (500,000)
Payments made in 2005 (1,500,000)
Balance at December 31, 2005 $9,250,000
In preparing a statement of cash flows for the year ended December 31, 2005, for Dickey Company, cash flows from financing activities would reflect
Inflow Outflow
a. $2,000,000 $2,000,000
b. $2,250,000 $2,250,000
c. $2,650,000 $2,575,000
d. $2,575,000 $3,175,000
4. How does failure to record accrued revenue distort the financial reports?
a. It understates revenue, net income, and current assets.
b. It understates net income, stockholders' equity, and current liabilities.
c. It overstates revenue, stockholders' equity, and current liabilities.
d. It understates current assets and overstates stockholders' equity.
5. On June 15, 2004 Greer Corporation accepted delivery of merchandise which it purchased on account. As of June 30 Greer had not recorded the transaction or included the merchandise in its inventory. The effect of this error on its balance sheet for June 30, 2004 would be
a. assets and stockholders' equity were overstated but liabilities were not affected.
b. stockholders' equity was the only item affected by the omission.
c. assets and liabilities were understated but stockholders' equity was not affected.
d. assets and stockholders' equity were understated but liabilities were not affected.
6. Notes to financial statements should not be used to
a. describe the nature and effect of a change in accounting principles.
b. identify substantial differences between book and tax income.
c. correct an improper financial statement presentation.
d. indicate basis for asset valuation.
7. The occurrence which most likely would have no effect on 2004 net income (assuming that all amounts involved are material) is the
a. sale in 2004 of an office building contributed by a stockholder in 1980.
b. collection in 2004 of a receivable from a customer whose account was written off in 2003 by a charge to the allowance account.
c. settlement based on litigation in 2004 of previously unrecognized damages from a serious accident which occurred in 2002.
d. worthlessness determined in 2004 of stock purchased on a speculative basis in 2000.
8. Under which of the following conditions would material flood damage be considered an extraordinary item for financial reporting purposes?
a. Only if floods in the geographical area are unusual in nature and occur infrequently.
b. Only if the flood damage is material in amount and could have been reduced by prudent management.
c. Under any circumstances as an extraordinary item.
d. Flood damage should never be classified as an extraordinary item.
Part One: Balance Sheet and Income Statement Classifications.
Specify on the answer sheet the letter of the financial statement classification the account would appear in. Use only the classifications shown.
Balance Sheet Income and Retained Earnings Statement
a. Current Assets j. Sales Revenue
b. Investments k. Cost of Goods Sold
c. Property, Plant, and Equipment l. Operating Expenses
d. Intangible Assets m. Other Revenues and Gains
e. Other Assets n. Other Expenses and Losses
f. Current Liabilities o. Extraordinary Item
g. Long-term Debt p. Retained Earnings Section
h. Capital Stock q. Not on the Statements
i. Retained Earnings
Account balances taken from the ledger of Morin Company on December 31, 2005 follow:
1. Capital Stock, $10 par (h)
2. Loss on Sale of Equipment (n)
3. Land (c)
4. Notes Payable?Short Term (f)
5. Accum. Depreciation?Buildings (c)
6. Mortgage Payable due 2007 (g)
7. Sales (j)
8. Dividends Declared and Paid (p)
9. Merchandise Inventory (a)
10. Salaries and Wages Expense (l)
11. Merchandise on order with supplier (q)
12 Interest Revenue (m)
13. Accounts Payable (f)
14. Long-Term Investments (b)
15. Accounts Receivable (a)
16. Error made in computing 2003 depreciation expense (o)
Part Two ? Key Conceptual Terms.
Various accounting assumptions, principles, constraints, and characteristics are listed below. Select those which best justify the following accounting procedures and indicate the corresponding letter(s) in the answer sheet provided. A letter may be used more than once or not at all.
a. Historical cost f. Economic entity k. Revenue recognition
b. Relevance g. Materiality l. Full disclosure
c. Monetary unit h. Conservatism m. Substance over form
d. Going concern i. Periodicity n. Industry practices
e. Consistency j. Matching o. Reliability
n 1. Using the lower of cost or market approach in valuing inventories.
l 2. Describing the depreciation methods used in the financial statements.
e 3. Applying the same accounting treatment to similar accounting events.
CONSISTENCY is using the same accounting procedures by an accounting entity from period to period.
b 4. The quality which helps users make predictions about present, past, and future events.
RELEVANCE CONCEPT refers to the capacity of accounting information to make a difference to the external decision makers who use financial reports.
k 5. Recording a transaction when goods or services are exchanged for cash or claims to cash.
REVENUE RECOGNITION is the process of recording revenue, under one of the various acceptable methods, in the accounting period. The most common method of recognizing revenue is at the time of sale or provisioning of service.
j 6. Expensing, when acquired, metal office wastebaskets having a life of ten years.
a 7. Provides the figure at which to record a liability.
HISTORICAL COST IS an accounting principle requiring all financial statement items to be based on original cost.
i 8. The preparation of timely reports on continuing operations.
PERIODICITY CONCEPT is the concept that each accounting period has an economic activity associated with it, and that the activity can be measured, accounted for, and reported upon.
g 9. Not reporting assets at liquidation prices (do not use "historical cost").
MATERIALITY PRINCIPLE requires accountants to use generally accepted accounting principles except when to do so would be expensive or difficult, and where it makes no real difference if the rules are ignored. If a rule is temporarily ignored, the net income of the company must not be significantly affected, nor should the reader's ability to judge the financial statements be impaired.
o 10. Reporting information which is faithfully representative of economic events.
RELIABILITY CONCEPT is a quality of information that assures decision makers that the information represented in the financial records and financial statements captures the actual conditions and events of the reported entity.
Part Three ? Multiple Choice Questions. Specify on the answer sheet the best choice.
1. Which of the following transactions would be considered a financing activity in preparing a statement of cash flows?
a. Amortizing a discount on bonds payable
b. Recording net income from operations
c. Selling common stock
d. Purchasing inventory
Answer: c.
2. The net income for the year ended December 31, 2004, for Ryan Company was $720,000. Additional information is as follows:
Capital expenditures $1,200,000
Depreciation on plant assets 450,000
Cash dividends paid on common stock 180,000
Increase in noncurrent deferred tax liability 45,000
Amortization of patents 21,000
Based on the information given above, what should be the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 2004?
a. $1,056,000.
b. $1,146,000.
c. $1,191,000.
d. $1,236,000.
Answer: d.
Net Cash Flow from Operating Activities
Net Income 720,000
Noncash Expenses, Revenues, Losses, and Gains Included in Income:
Depreciation on plant assets 450,000
Increase in noncurrent deferred tax liability 45,000
Amortization of patents 21,000 516,000
Net Cash Flow from Operating Activities 1,236,000
3. Information concerning the debt of Dickey Company is as follows:
Short-term borrowings:
Balance at December 31, 2004 $525,000
Proceeds from borrowings in 2005 325,000
Payments made in 2005 (450,000)
Balance at December 31, 2005 $400,000
Current portion of long-term debt:
Balance at December 31, 2004 $1,625,000
Transfers from caption "Long-Term Debt" 500,000
Payments made in 2005 (1,225,000)
Balance at December 31, 2005 $ 900,000
Long-term debt:
Balance at December 31, 2004 $9,000,000
Proceeds from borrowings in 2005 2,250,000
Transfers to caption "Current Portion of Long-Term Debt" (500,000)
Payments made in 2005 (1,500,000)
Balance at December 31, 2005 $9,250,000
In preparing a statement of cash flows for the year ended December 31, 2005, for Dickey Company, cash flows from financing activities would reflect
Inflow Outflow
a. $2,000,000 $2,000,000
b. $2,250,000 $2,250,000
c. $2,650,000 $2,575,000
d. $2,575,000 $3,175,000
Answer: d.
Cash Flows from Financing Activities
Increases: Cash from the Short-term debt 325,000
Cash from the Long-term debt 2,250,000
Decreases: Cash used to pay Short-term debt 450,000
Cash used to pay current portion of long-term debt 1,225,000
Cash used to pay Long-term debt 1,500,000
4. How does failure to record accrued revenue distort the financial reports?
a. It understates revenue, net income, and current assets.
b. It understates net income, stockholders' equity, and current liabilities.
c. It overstates revenue, stockholders' equity, and current liabilities.
d. It understates current assets and overstates stockholders' equity.
Answer: a.
5. On June 15, 2004 Greer Corporation accepted delivery of merchandise which it purchased on account. As of June 30 Greer had not recorded the transaction or included the merchandise in its inventory. The effect of this error on its balance sheet for June 30, 2004 would be
a. assets and stockholders' equity were overstated but liabilities were not affected.
b. stockholders' equity was the only item affected by the omission.
c. assets and liabilities were understated but stockholders' equity was not affected.
d. assets and stockholders' equity were understated but liabilities were not affected.
Answer: c.
6. Notes to financial statements should not be used to
a. describe the nature and effect of a change in accounting principles.
b. identify substantial differences between book and tax income.
c. correct an improper financial statement presentation.
d. indicate basis for asset valuation.
Answer: c.
7. The occurrence which most likely would have no effect on 2004 net income (assuming that all amounts involved are material) is the
a. sale in 2004 of an office building contributed by a stockholder in 1980.
b. collection in 2004 of a receivable from a customer whose account was written off in 2003 by a charge to the allowance account.
c. settlement based on litigation in 2004 of previously unrecognized damages from a serious accident which occurred in 2002.
d. worthlessness determined in 2004 of stock purchased on a speculative basis in 2000.
Answer: a.
8. Under which of the following conditions would material flood damage be considered an extraordinary item for financial reporting purposes?
a. Only if floods in the geographical area are unusual in nature and occur infrequently.
b. Only if the flood damage is material in amount and could have been reduced by prudent management.
c. Under any circumstances as an extraordinary item.
d. Flood damage should never be classified as an extraordinary item.
Answer: d.
Extraordinary items are those disclosed in annual reports as non-recurring items that materially affected financial results. Examples include expenses related to acquisitions or plant shutdowns, results of legal proceedings, or unanticipated tax benefits.