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Chapter 2 Financial Statements: An Overview True/False Required: For each of the following items, indicate whether it is True or False, by placing a (T) or (F) in the space provided. _______ 1.

The accounting equation is: Assets = Liabilities – Stockholders’ Equity.

_______ 2.

The owners of sole proprietorships and partnerships enjoy the feature of unlimited liability.

_______ 3.

The Statement of Financial Position describes the firm’s resources and claims to those resources.

_______ 4.

Stockholders’ equity is sometimes called the residual claim because owners can claim only what is left over after all creditor claims have been met.

_______ 5.

A classified balance sheet lists assets in order of how quickly they can be converted into cash.

_______ 6.

Current assets are assets that are expected to be converted into cash or expire within one year or one operating cycle, whichever is shorter.

_______ 7.

Common stock and retained earnings combined represent the amount contributed by stockholders when they purchased shares from the company.

_______ 8.

Under the accrual concept, revenues are recorded as earned and expenses are recorded when cash is paid.

_______ 9.

Under the indirect method of presenting the Statement of Cash Flows, net income under the accrual concept is adjusted to its cash flow equivalent.

_______ 10. A company’s annual report contains footnotes that describe significant accounting policies employed by the firm.


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Multiple Choice Required: Select the one best answer and place its letter in the space provided. _______ 1. Each of the following forms of organization have the limited liability feature except: a. Corporations b. LLCs. c. LLPs. d. Partnerships. _______ 2. Many public accounting firms are organized as: a. Corporations. b. LLCs. c. LLPs. d. Sole proprietorships. _______ 3. A disadvantage unique to the corporate form of organization is: a. Double taxation. b. Limited access to additional funds. c. Difficulty in ownership transfer. d. Unlimited liability. _______ 4. An advantage of the corporate form of organization is: a. Income is taxed only once. b. Limited liability. c. Some sharing of risk. d. Some access to additional funds. _______ 5. Each of the following represents liabilities except: a. Accrued expenses. b. Retained earnings. c. Salaries payable. d. Unearned revenues. _______ 6. An income statement consists of all of the following, except: a. Interest expense. b. Cost of goods sold. c. Retained earnings. d. Income taxes. _______ 7. Which of the financial statements is for a particular point in time? a. Statement of Changes in Stockholders’ Equity b. Statement of Earnings c. Statement of Cash Flows d. Statement of Financial Position


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_______ 8.

Each of the following are included in stockholders’ equity except: a. Additional paid-in capital. b. Common stock. c. Deferred taxes. d. Retained earnings.

_______ 9.

Which of the following is not a current asset? a. Inventory b. Prepaid expenses c. Equipment d. Accounts receivable

_______ 10.

In a classified balance sheet, assets are listed: a. Alphabetically. b. In liquidity order. c. From largest to smallest. d. In order of acquisition.

_______ 11.

Which of the following is the accounting equation? a. Assets = liabilities – stockholders’ equity b. Assets = liabilities x stockholders’ equity c. Assets = liabilities / stockholders’ equity d. Assets = liabilities + stockholders’ equity

_______ 12.

Liabilities that become due, or expected to be settled, within one year are classified as: a. Accrued liabilities. b. Current liabilities. c. Long-term liabilities. d. Non-current liabilities.

_______ 13.

The income statement contains all of the following, except: a. Taxes payable. b. Interest expense. c. Revenues. d. Cost of goods sold.

_______ 14.

Stockholders’ equity is also referred to as each of the following except: a. Net assets. b. Net book value. c. A residual claim. d. Each of the above is correct.


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_______ 15.

Dividends declared are reported on the statement of: a. Cash Flows. b. Changes in Stockholders’ Equity. c. Earnings. d. Financial Position.

_______ 16.

Which of the following is not a major category in the balance sheet? a. Assets b. Liabilities c. Retained earnings d. Stockholders’ equity

_______ 17. Which section of the balance sheet reflects the owners’ claim in a company? a. Retained earnings b. Assets c. Liabilities d. Stockholders’ equity _______ 18.

Which of the following would typically be classified as a current liability? a. Accrued payroll b. A note payable due in 2 years c. Mortgage payable d. Bonds payable

_______ 19. Cash inflows and outflows associated with the sales of goods to customers are reported as a. financing activities. b. income activities. c. investing activities. d. operating activities. _______ 20. The starting point in the operating activities section of the statement of cash flows under the indirect method is: a. Sales revenue. b. Retained earnings. c. Beginning cash balance. d. Net earnings. _______ 21. In which section of the annual report does management provide its assessment of the past year’s operating results, liquidity, and capital expenditures? a. Message from chief executive officer b. Management’s discussion and analysis c. Financial highlights d. Statement of management’s responsibilities


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_______ 22. The acquisition or disposal of long term assets are reported as a. financing activities. b. investing activities. c. operating activities. d. purchasing activities. _______ 23. Which section of the annual report provides the reader with information about significant accounting policies employed by the firm? a. Financial highlights b. Notes to financial statements c. Other corporate information d. Management’s discussion and analysis _______ 24. The section of the annual report that establishes whether or not the financial statements are presented in conformity with accounting principles is called the: a. Notes to financial statements. b. Financial highlights. c. Auditor’s report. d. Management’s discussion and analysis. _______ 25. The issuance and repayment or repurchase of debt and equity is reported as a. financing activities. b. investing activities. c. issuing activities. d. operating activities. _______ 26. The Statement of Earnings is sometimes called each of the following except the a. Income Statement. b. Statement of Income. c. Statement of Retained Earnings. d. The Statement of Earnings is called all of the above options. _______ 27. Retained earnings is reported in the Statement of a. Earnings b. Financial Position only. c. Changes in Stockholders’ Equity only. d. Changes in Stockholders’ Equity and the Statement of Financial Position.


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_______ 28. Net earnings is reported in how many of the major financial statements? a. one b. two c. three d. four _______ 29. The financial statement that is prepared first is the Statement of a. Cash Flows. b. Changes in Stockholder Equity. c. Earnings. d. Financial Position. _______ 30. Depreciation expense is reported on the Statement of a. Earnings only. b. Financial Position. c. Cash Flows only. d. Earnings and the Statement of Cash Flows _______ 31. The ending cash balance is reported on the Statement of a. Changes in Stockholders’ Equity. b. Cash Flows only. c. Financial Position only. d. Financial Position and the Statement of Cash Flows. _______ 32. Accounting recognition of the revenues and expenses that go into the determination of net income are governed by the a. accrual concept. b. cash concept. c. expense concept. d. revenue concept. _______ 33. Income before income taxes equals sales less a. cost of goods sold. b. general and administrative costs. c. all expenses. d. all expenses except interest. _______ 34. General and administrative costs includes a. cost of goods sold. b. income taxes. c. interest expense. d. salaries and wages.


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_______ 35. A 10 K report filed with the SEC contains financial statement information for a a. month. b. quarter. c. week. d. year. _______ 36. A 10 Q report filed with the SEC includes financial information for a a. month. b. quarter. c. week. d. year. _______ 37. Which of the following financial statements is often called a balance sheet? a. Statement of Changes in Stockholders’ Equity b. Statement of Cash Flows c. Statement of Earnings d. Statement of Financial Position _______ 38. The financial statement that explains changes in stockholders’ equity arising from the firm’s operating activities is the Statement of a. Cash Flows. b. Changes in Stockholders’ Equity. c. Earnings. d. Financial Position. _______ 39. Each of the following financial statements describe changes in a firm’s financial position except the Statement of a. Cash Flows. b. Changes in Stockholders’ Equity. c. Earnings. d. Financial Position. _______ 40. The dominant form of business organization has become a. corporations. b. limited liability partnerships. c. partnerships. d. sole proprietorships.


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Matching 1. (5 Minutes) Listed below are a series of terms and a series of definitions. Terms A. Accrual concept B. Balance sheet C. Cost of goods sold D. Current assets E. Fiscal year _______ 1.

F. Indirect method G. Limited Liability H. Net asset I. Retained earnings J. Statement of Earnings

Definitions Accumulated amount of net income less dividends distributed to stockholders since the company formed.

_______ 2.

Net income under the accrual concept is adjusted to its cash flow equivalent.

_______ 3.

The difference between what a company owns and what it owes.

_______ 4.

Investors cannot lose more than the amounts that they invest should the firm perform poorly.

_______ 5.

Explains changes in stockholders’ equity arising from the firm’s operating activities.

_______ 6.

The expense recorded when inventory is sold.

_______ 7.

The SEC requires firms to report balance sheet data at the end of this time.

_______ 8.

Revenues are recorded as earned and expenses are recorded as incurred.

_______ 9.

Reports a firm’s assets, liabilities, and stockholders’ equity at a particular point in time.

_______ 10.

Assets that are expected to be converted into cash or expire within one year or the operating cycle, whichever is longer.

Required: Match each term to the appropriate definition by placing its letter in the space provided.


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Exercises 1. (5 minutes) Using the following abbreviations, classify where the items listed below would appear in the financial statements. CA: Current Assets NCA: Noncurrent Assets CL: Current Liabilities NCL: Noncurrent Liabilities SE: Stockholders’ Equity IS: Income Statement Item CF: Cash Flow Statement Item _______ 1. Additional Paid-in Capital _______ 2. Prepaid Expenses _______ 3. Salaries Payable _______ 4. Sales _______ 5. Dividends Paid

_______ 6. Cost of Goods Sold _______ 7. Land _______ 8. Retained Earnings _______ 9. Accounts Receivable _______ 10. Notes Payable (due in 2008)

2. (10 minutes) The following data was taken from the books of Oceanside Corporation as of December 31, 2006: Accounts Payable Cost of Goods Sold Cash Long-Term Notes Payable Sales Revenue Inventory Common Stock Retained Earnings, BB

$9,000 295,000 15,000 20,000 450,000 50,000 90,000 55,000

Salaries Payable Selling Expense General Expense Accounts Receivable Prepaid Insurance Income Tax Expense Equipment Buildings

$48,000 60,000 60,000 12,000 5,000 30,000 71,000 74,000

Required: Prepare an unclassified balance sheet. (Note: You must compute the ending balance of retained earnings.)


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3. (4 minutes) Using the following abbreviations, classify each of the transactions listed below as operating, investing, or financing activities. OA: Operating Activity IA: Investing Activity FA: Financing Activity _______ 1. Dividends paid _______ 2. Cash paid to suppliers _______ 3. Purchase of equipment _______ 4. Issuance of common stock _______ 5. Payments received on notes receivable _______ 6. Cash received from customers _______ 7. Purchase of treasury stock _______ 8. Sale of property Short Answer 1. (5 minutes) Identify the three principal features (advantages) of corporations. 2. (7 minutes) Identify the major financial statements and briefly explain what information each presents. 3. (5 minutes) List four items (sections) of a company’s annual report other than the financial statements. Essays 1. (8 minutes) Identify the advantages and disadvantages of the main forms of business organization.

2. (10 minutes)


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Define the three sections of the Statement of Financial Position and give examples of items included in each of the sections. Answers True/False 1. F 2. F 3. T 4. T

5. T 6. F 7. F 8. F

9. T 10. T

Multiple Choice 1. d 2. c 3. a 4. b 5. b 6. c 7. d 8. c 9. c

10. b 11. d 12. b 13. a 14. d 15. b 16. c 17. d 18. a

19. d 20. d 21. b 22. b 23. b 24. c 25. a 26. c 27. d

28. c 29. c 30. d 31. d 32. a 33. c 34. d 35. d 36. b

4. G 5. J 6. C

7. E 8. A 9. B

10. D

Matching 1. I 2. F 3. H Exercises 1.)

2.)

1. SE 2. CA 3. CL 4. IS 5. CF

6. IS 7. NCA 8. SE 9. CA 10. NCL

Oceanside Corporation Balance Sheet

37. d 38. c 39. d 40. a


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December 31, 2006 Assets Cash Accounts Receivable Inventory Prepaid Insurance Equipment

Total Assets

Liabilities $15,000 12,000 50,000 5,000 120,000

$202,000

Salaries Payable Accounts Payable Income Tax Payable Long-Term Notes Payable Total Liabilities Stockholders’ Equity

48,000 $9,000 40,000 20,000 117,000

Common Stock 90,000 Retained Earnings 43,000 Total Stockholders’ Equity 133,000 Total Liabilities & Stockholders’ Equity $202,000

3.) 1. FA 2. OA 3. IA 4. FA

5. IA 6. OA 7. FA 8. IA

Short Answers 1. The corporate form of business has three principal features (advantages). These are: limited liability for its investors, ease of transferring ownership, and ease of access to additional funds. 2. The major financial statements are the: Statement of Financial Position, Statement of Earnings, Statement of Cash Flows and Statement of Changes in Stockholders’ Equity. The Statement of Financial Position presents the firm’s resources and claims to those resources. The Statement of Earnings explains changes in stockholders’ equity arising from the firm’s operating activities. The Statement of Cash Flows shows how investing, financing, and operating activities affect cash. The Statement of Changes in Stockholders’ Equity provides details about all of the transactions that affect stockholders’ equity. 3. A company’s annual report includes the following items (sections) in addition to the financial statements: 1) message from Chief Executive Officer, 2) Description of Principal Products, 3) Financial Highlights, 4) Management’s Discussion and Analysis, 5) Notes to Financial Statements, 6) Statement of Management’s Responsibilities, and 7) the Auditor’s Report (only four need to be listed).


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Essays 1. The proprietorship form has the advantage of not paying taxes as a business entity (income is taxed only at the individual level) but has several disadvantages – unlimited liability, no sharing of risk, and limited access to additional funds. The partnership form also has the advantage of the business not being taxed as a business entity but income being taxed at the individual’s rate and has some access to additional funds. Its disadvantages include unlimited liability and difficulty in ownership transfer. The corporate form has the advantages of limited liability and ease of transfer of ownership. It does have the disadvantage of double taxation. 2. The Statement of Financial Position has three sections: assets, liabilities, and stockholders’ equity. Assets are those resources owned by a company or those that a company has the right to use. Examples include cash, inventories, and property and equipment. Liabilities represent the amounts owed to others and include notes payable, accounts payable, and accrued expenses. Stockholders’ equity is the difference between what a company owns and what it owes. Examples include common stock, additional paid-in capital, and retained earnings.


Test bank financial accounting 1st edition hughes