Financial Accounting, Seventh Canadian Edition, 7th edition Walter T Harrison Test Bank

Type:

Test Bank

Resource:

Financial Accounting

Edition:

7th Edition

Author(s):

Walter T. Harrison Wendy Tietz C. Thomas Greg Berberich Catherine Seguin

Test Item File Kathy Falk University of Toronto

Financial Accounting Seventh Canadian Edition C. William (Bill) Thomas Baylor University

Wendy M. Tietz Kent State University

Walter T. Harrison, Jr. Baylor University

Greg Berberich University of Waterloo

Catherine Seguin University of Toronto

Financial Accounting, Cdn. Ed., 7CE (Harrison/Horngren) Chapter 1 The Financial Statements 1.1

Explain why accounting is the language of business

1) Which of the following persons or groups have the ultimate control of a corporation?

A) the chief executive officer B) the board of directors C) the audit committee D) the shareholders Answer: D Diff: 2 Type: MC L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 2) Financial statements are: A) reports issued by outside consultants who are hired to analyze key operations of the business B) reports created by management that states it is responsible for the acts of the corporation C) standard documents that tell us how well a business is performing and where it stands in financial terms D) standard documents issued by outside consultants who are hired to analyze key operations of the business in financial terms Answer: C Diff: 1 Type: MC L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 3) Since they are both the same activities, the terms "accounting" and "bookkeeping" are synonymous and can be used interchangeably.

Answer: FALSE Explanation: Bookkeeping is a mechanical part of accounting. Accounting requires an understanding of the principles used.

Diff: 2 Type: TF L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

1 .

4) The three forms of business organizations are proprietorships, partnerships, and non-profit organizations.

Answer: FALSE Explanation: Proprietorships, partnerships, and Corporations.

Diff: 1 Type: TF L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 5) Accounting is called an information system since it measures business activities, processes data into reports, and communicates results to decision makers.

Answer: TRUE Diff: 1 Type: TF L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 6) From a legal perspective, proprietors, partners, and shareholders are personally liable for a corporation's debts.

Answer: FALSE Explanation: Shareholders are not personally liable for a corporation.

Diff: 2 Type: TF L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 7) From an accounting viewpoint, a proprietorship is a distinct and separate entity from the proprietor.

Answer: TRUE Diff: 2 Type: TF L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

2 .

8) The owners' equity of proprietorships and partnerships is different.

Answer: TRUE Diff: 2 Type: TF L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 9) Financial accounting information is prepared exclusively for external users.

Answer: FALSE Explanation: Financial accounting information is prepared for both internal and external users.

Diff: 1 Type: TF L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 10) Management accounting is prepared primarily for external users.

Answer: FALSE Explanation: Management accounting is prepared primarily for internal users.

Diff: 1 Type: TF L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 11) One benefit of organizing a business as a proprietorship is that the proprietor is not required to pay income tax on the business' earnings.

Answer: FALSE Explanation: The proprietor must report the proprietorship's income on his or her personal tax return.

Diff: 1 Type: TF L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

3 .

12) Accounting is often referred to as "the language of business." Why is accounting described this way? How is accounting different from bookkeeping?

Answer: Accounting is the system that measures business activities, processes that information into reports, and communicates the results to decision makers. Accounting, as an information system, provides the elements necessary for management and others to make decisions and estimate how well a company may perform in the future. Accounting is the common "language" used by managers, investors, and others to communicate information about a business.

Bookkeeping is simply the procedural element of accounting that processes the accounting data.

Accounting is an information system, of which bookkeeping is a component.

Diff: 1 Type: ES L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

4 .

13) There are several types of decision makers who use accounting information. List five of these users of accounting information and give an example of a decision each would make.

Answer: Individuals ∙ to manage bank accounts ∙ to evaluate job prospects ∙ to make investments ∙ to decide whether to rent or buy a home Managers of businesses ∙ to set goals for the organization ∙ to evaluate progress toward those goals ∙ to decide how much inventory to keep on hand ∙ to decide how much cash to borrow Investors and creditors ∙ to decide whether or not to invest in a new company ∙ to determine whether or not to make a loan Government regulatory agencies (e.g., Ontario Securities Commission) ∙ to make sure that the company is abiding by federal or provincial regulations Taxing authorities ∙ to determine the amount of tax due Non-profit organizations ∙ to set goals for the organization ∙ to evaluate progress toward those goals ∙ to decide how much cash to borrow Labour unions ∙ to determine wage demands Diff: 2 Type: ES L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

5 .

14) What are the three forms of business organizations? How do they differ?

Answer: A proprietorship has a single, or sole, owner who is responsible for the business and its operations. A partnership has two or more individuals who operate together as co-owners of the business. In both of these forms of organization, the owners are individually liable for the debts of the business. A corporation is a business owned by shareholders, who may or may not have a part in the day-to-day operations of the business. The shareholders of a corporation are not legally liable for the debts of the business.

It is easier to sell one's ownership of a corporation, since the ownership is evidenced by shares of stock, which can be traded. There are legal rules to be considered when a partner wishes to sell his or her interest in a partnership. Such rules make it more difficult to sell a partnership interest.

A sole proprietor who sells his or her business may encounter difficulty since the business owner may be the business itself (such as a consultant or other independent contractor).

Diff: 2 Type: ES L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 15) There are many different stakeholders in Dollarama Inc. Explain why the same information may not be suitable or appropriate for all stakeholders.

Answer: Different stakeholders make different decisions that require different information. For example, lenders want to know whether the company will be able to repay its loans but the Canada Revenue Agency (CRA) wants to know the amount of taxes that should be paid for the current year. Much of the information that the lenders would request, such as who are the company's major customers and the amounts they owe the company, would be of no interest to CRA. CRA is simply interested in compliance with the income tax act.

Diff: 3 Type: ES L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

6 .

16) Dollarama is a publicly owned corporation. How does it differ from a privately owned corporation?

Answer: The shares of Dollarama can be bought or sold on the Toronto Stock Exchange without asking the permission of the other shareholders, which is not true of a private corporation. The ownership of the shares of private corporations is limited. Shares of private corporations can only be purchased with the agreement of the existing shareholders.

Private corporations are not necessarily small. For instance, The Jim Pattison Group is Canada's third largest privately held company and has 31,000 employees and annual sales of more than $6 billion.

Diff: 3 Type: ES L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 17) What is a not-for-profit organization?

Answer: A not-for-profit organization is organized for some other purpose than the earning of profit. Many examples are possible. For example, The Salvation Army or the University of Toronto are organized for the purpose of providing services to community stakeholders.

Many business students will eventually find employment in not-for-profit organizations or the public sector and a knowledge of accounting is just as important in these types of organizations as it is in multinational public corporations.

Diff: 3 Type: ES L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

7 .

18) Think about the impact accounting has on our economy and our nation. Name some external groups interested in reviewing a company's financial statements.

Answer: ∙ shareholders and other investors ∙ bankers ∙ other creditors ∙ Canada Revenue Agency ∙ other governmental agencies ∙ the general public Diff: 1 Type: ES L.O.: 1-1 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 1.2

Describe the purpose and explain the elements of each financial statement

1) Accounting standards for accountants in Canada are established by: A) the Chartered Professional Accountants of Canada B) the Canadian Public Accountability Board C) the Canadian Securities Administrators D) the International Accounting Standards Board Answer: A Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 2) The accounting equation can be stated as: A) Assets + Liabilities = Shareholders' equity B) Assets = Liabilities + Shareholders' equity C) Assets = Liabilities - Shareholders' equity D) Assets + Shareholders' equity = Liabilities Answer: B Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

8 .

3) The owners' interest in the assets of a corporation is known as: A) assets B) shareholders' equity C) expenses D) revenues Answer: B Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 4) If liabilities increase $120,000 during a given period and shareholders' equity decreases $25,000 during the same period, assets must: A) decrease $145,000 B) increase $145,000 C) increase $95,000 D) decrease $95,000 Answer: C Diff: 3 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 5) Which of the following best describes a liability?

A) Liabilities are a form of share capital.

B) Liabilities are future economic benefits to which a company is entitled.

C) Liabilities are accounts receivable of the company.

D) Liabilities are economic obligations to creditors to be paid at some future date by the company.

Answer: D Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

9 .

6) Expenses are: A) increases in assets resulting from operations B) increases in retained earnings resulting from operations C) increases in liabilities resulting from purchasing assets D) decreases in retained earnings resulting from operations Answer: D Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 7) On January 1, 2020, total assets for Liftoff Technologies were $125,000; on December 31, 2020, total assets were $145,000. On January 1, 2020, total liabilities were $110,000; on December 31, 2020, total liabilities were $115,000. What are the amount of the change and the direction of the change in Liftoff Technologies shareholders' equity for 2020?

A) decrease of $15,000 B) increase of $15,000 C) increase of $30,000 D) decrease of $30,000 Answer: B Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 8) Receivables are classified as: A) increases in earnings B) assets C) decreases in earnings D) liabilities Answer: B Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

10 .

9) Shareholders' equity for Raisin Corporation on January 1, 2020 and December 31, 2020 were $60,000 and $75,000, respectively. Assets on January 1, 2020 and December 31, 2020 were $115,000 and $105,000, respectively. Liabilities on January 1, 2020 were $55,000. What is the amount of liabilities on December 31, 2020?

A) $40,000 B) $15,000 C) $30,000 D) $55,000 Answer: C Diff: 3 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 10) Claims held by the shareholders (owners) of a corporation are referred to as: A) retained earnings B) share capital C) share capital minus retained earnings D) share capital plus retained earnings Answer: D Diff: 3 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 11) Revenues are: A) increases in liabilities resulting from delivering goods or services to customers B) increases in retained earnings resulting from delivering goods or services to customers C) decreases in assets resulting from delivering goods or services to customers D) decreases in retained earnings resulting from delivering goods or services to customers Answer: B Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

11 .

12) If assets increase $120,000 during a given period and liabilities decrease $25,000 during the same period, shareholders' equity must: A) increase $95,000 B) decrease $145,000 C) decrease $95,000 D) increase $145,000 Answer: D Diff: 3 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 13) Which of the following financial statements would a potential investor most likely use to evaluate a company's financial performance for the current period?

A) balance sheet B) income statement C) cash flow statement D) retained earnings statement Answer: B Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 14) How do revenues for a period relate to the beginning and ending balances in retained earnings?

A) Revenues will increase the beginning balance of retained earnings for the period.

B) Revenues will decrease the beginning balance of retained earnings for the period.

C) Revenues less expenses will either increase or decrease the beginning balance of retained earnings for the period.

D) Revenues less expenses will either increase or decrease the ending balance of retained earnings for the period.

Answer: D Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

12 .

15) Retained earnings appear on which of the following financial statements?

A) statement of retained earnings, cash flow statement, and income statement, but not the balance sheet B) statement of retained earnings and balance sheet, but not the income statement or cash flow statement C) statement of retained earnings, cash flow statement, and balance sheet, but not the income statement D) statement of retained earnings and cash flow statement, but not the income statement or balance sheet Answer: B Diff: 3 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 16) Dividends appear on the: A) retained earnings statement B) income statement C) balance sheet D) both the retained earnings statement and the income statement Answer: A Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 17) Dividends: A) always affect net income B) are distributions to shareholders of assets (usually cash) generated by net income C) are expenses D) must be paid to shareholders when the company earns a profit Answer: B Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

13 .

18) Assets appear on the: A) balance sheet B) income statement C) retained earnings statement D) cash flow statement Answer: A Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 19) An investor wishes to assess a company's financial position at the end of the period. Which financial statement would the investor probably examine?

A) the cash flow statement B) the income statement C) the balance sheet D) the statement of retained earnings Answer: C Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 20) The balance sheet is sometimes also called the: A) statement of operations B) statement of cash position C) statement of financial position D) statement of income and expense Answer: C Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

14 .

21) The cash flow statement is divided into three categories relating to cash flows from operating, investing, and: A) management planning activities B) financing activities C) strategic positioning activities D) marketing activities Answer: B Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 22) To determine a company's gross margin for the period, an investor would look on the: A) balance sheet B) cash flow statement C) income statement D) statement of retained earnings Answer: C Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 23) Which financial statement is based on the accounting equation?

A) statement of retained earnings B) income statement C) cash flow statement D) balance sheet Answer: D Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

15 .

24) The main source of cash for a business normally arises from: A) current assets B) operating activities C) financing activities D) investing activities Answer: B Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 25) Gains and losses appear on which of the financial statements listed below?

A) the balance sheet B) the income statement C) the retained earnings statement D) the cash flow statement Answer: B Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 26) The date of the income statement: A) covers one day in time B) covers a period of time, usually for an accounting period C) is not dated D) may cover a period of time or only one day in time, like a snapshot photograph Answer: B Diff: 3 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

16 .

27) Operating expenses appear on the income statement: A) directly after gross margin B) directly after cost of goods sold C) directly after revenue D) do not appear on the income statement Answer: A Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 28) Common shares is a component of: A) total assets B) total liabilities C) share capital D) retained earnings Answer: C Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 29) Cost of goods sold is: A) added to sales on the income statement B) deducted from sales on the balance sheet C) deducted from sales on the income statement D) added to sales on the retained earnings statement Answer: C Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

17 .

30) Suppose The Fruit Group buys a kiwi for $.10 and sells the kiwi for $.50. The cost of goods sold would be: A) $.10 B) $.40 C) $.50 D) $.05 Answer: A Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 31) Net income is: A) deducted from beginning retained earnings on the retained earnings statement B) added to beginning retained earnings on the retained earnings statement C) added to assets on the balance sheet D) deducted from net sales on the income statement Answer: B Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 32) Notes receivable due in 60 days would be classified as a: A) non-current asset on the balance sheet B) current asset on the balance sheet C) current liability on the balance sheet D) non-current liability on the balance sheet Answer: B Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

18 .

33) Cash received from the issuance of share capital would appear: A) as an operating activity on the cash flow statement B) would not appear on a cash flow statement C) as an investing activity on the cash flow statement D) as a financing activity on the cash flow statement Answer: D Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 34) Losses are reported on the: A) income statement B) balance sheet C) cash flow statement D) statement of retained earnings Answer: A Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 35) What is the proper order for the cash flow statement?

A) financing activities, investing activities, and operating activities B) operating activities, investing activities, and financing activities C) operating activities, financing activities, and investing activities D) investing activities, financing activities, and operating activities Answer: B Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

19 .

36) The ending balance in retained earnings appears on the: A) balance sheet only B) balance sheet and statement of retained earnings C) statement of retained earnings only D) income statement Answer: B Diff: 3 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 37) Cash dividends: A) decrease revenue on the income statement B) increase expenses on the income statement C) decrease retained earnings on the retained earnings statement D) decrease operating activities on the cash flow statement Answer: C Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 38) Common shares appear on the: A) balance sheet B) income statement C) cash flow statement D) retained earnings statement Answer: A Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

20 .

39) The repayment of a note payable would be classified as a(n): A) investing activity on a cash flow statement B) financing activity on a cash flow statement C) operating activity on a cash flow statement D) current asset on the balance sheet Answer: B Diff: 3 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 40) The issuance of shares for cash would be classified as a(n): A) investing activity on a cash flow statement B) financing activity on a cash flow statement C) operating activity on a cash flow statement D) current asset on the balance sheet Answer: B Diff: 3 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 41) Income taxes owed to the federal government would be classified as a: A) current asset on the balance sheet B) current liability on the balance sheet C) non-current asset on the balance sheet D) financing activity on the cash flow statement Answer: B Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

21 .

42) The balance sheet contains information about: A) liabilities, equity, and expenses B) assets, revenues, and liabilities C) assets, liabilities, and equity D) revenues, expenses, and equity Answer: C Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 43) Which of the following financial statements provides a "snapshot photo" of one moment in time?

A) balance sheet B) income statement C) statement of retained earnings D) cash flow statement Answer: A Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 44) Assets are generally divided into: A) current assets and solvent assets B) current assets and reliable assets C) non-current assets and solvent assets D) current assets and non-current assets Answer: D Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

22 .

45) Current assets are assets expected to be converted to cash, sold, or consumed: A) within the next 12 months or within the business's normal operating cycle if less than a year B) within the next 12 months or within the business's normal operating cycle if longer than a year C) within the next 6 months D) within the next 24 months Answer: B Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 46) Equipment would appear on the: A) income statement with the revenues B) balance sheet with the non-current assets C) balance sheet with the current assets D) income statement with the operating expenses Answer: B Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 47) Depreciation is normally associated with which asset on the balance sheet?

A) land B) accounts receivable C) inventory D) equipment Answer: D Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

23 .

48) Cash would appear on the: A) income statement with the revenues B) retained earnings statement with the net income C) balance sheet with the current assets D) balance sheet with the current liabilities Answer: C Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 49) Accounts payable would appear on the: A) income statement with the expenses B) retained earnings statement with the dividends C) balance sheet with the current assets D) balance sheet with the current liabilities Answer: D Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 50) When accounting for cash collected from customers, the transaction would appear on the cash flow statement as a(an): A) operating activity B) financing activity C) investing activity D) activity that would not appear on the cash flow statement Answer: A Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

24 .

51) When a repurchase of shares is done by a company it: A) increases the amount of owners' equity B) decreases the amount of owners' equity C) decreases the amount of total liabilities D) increases the amount of total liabilities Answer: B Diff: 3 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 52) All of the following are considered standard financial statements except the: A) statement of earnings B) statement of assets C) statement of retained earnings D) cash flow statement Answer: B Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 53) The statement that presents a summary of the revenues and expenses of an entity is called the: A) balance sheet B) cash flow statement C) statement of retained earnings D) income statement Answer: D Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

25 .

54) The income statement presents a summary of the: A) revenues and expenses of an entity for a specific time period B) assets and liabilities of an entity C) cash inflows and outflows of an entity D) changes that occurred in the shareholders' equity of an entity Answer: A Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 55) Increases in shareholders' equity arise from: A) investments by the owner B) payment of dividends C) net income earned during the period D) both investments by the owner and net income earned during the period Answer: D Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 56) Decreases in shareholders' equity result from: A) owner investments B) a net loss during the period C) a net income during the period D) owner investments and a net loss during the period Answer: B Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

26 .

57) Purchases and sales of non-current assets are examples of: A) investing activities B) dividend activities C) financing activities D) operating activities Answer: A Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 58) Cash spent to purchase a new building would appear on the cash flow statement as: A) a financing activity B) an operating activity C) an investing activity D) a dividend activity Answer: C Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 59) The payment of the chief financial officer's salary would appear: A) on the cash flow statement with the operating activities B) on the balance sheet with the current liabilities C) on the income statement with the revenues D) on the income statement as part of cost of goods sold Answer: A Diff: 3 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

27 .

60) The amount of net income shown on the income statement also appears on the: A) balance sheet B) statement of assets C) statement of financial position D) statement of retained earnings Answer: D Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 61) The balance sheet contains: A) the amount of net income B) the beginning balance in retained earnings C) the ending balance in retained earnings D) the amount of dividends paid to shareholders Answer: C Diff: 2 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 62) What is one component of shareholders' equity?

A) common shares B) notes payable C) property, plant, and equipment D) cash Answer: A Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

28 .

63) Generally accepted accounting principles, or GAAP, are the rules and procedures established by the Chartered Professional Accountants of Canada (CPAC).

Answer: TRUE Diff: 1 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 64) All corporations that are publicly accountable must apply International Financial Reporting Standards (IFRS).

Answer: TRUE Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 65) In accounting, the word "net" means after a subtraction.

Answer: TRUE Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 66) Net income is calculated by taking a company's earnings less their dividends paid out.

Answer: FALSE Explanation: Net income is calculated by taking total revenues less total expenses.

Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

29 .

67) Retained earnings represent cash that is available to a company for future operations and expansion.

Answer: FALSE Explanation: A company's retained earnings represent the accumulated net income of the company, less any net losses and dividends declared.

Diff: 3 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 68) Liabilities are often referred to as "outsider claims" and owners' equity as "insider claims" to assets.

Answer: TRUE Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 69) It would be unusual for the balance sheet of a proprietorship to include the term "retained earnings."

Answer: TRUE Diff: 3 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 70) A form of the accounting equation can be stated as Assets - Liabilities = Share capital + Retained earnings.

Answer: TRUE Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

30 .

71) The income statement measures the company's financial position at the end of the year.

Answer: FALSE Explanation: The balance sheet measures the company's financial position at the end of the year.

Diff: 1 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 72) The balance sheet measures how well the company performed during the year.

Answer: FALSE Explanation: The income statement measures how well the company performed during the year.

Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 73) The basic component of share capital is retained earnings.

Answer: FALSE Explanation: The basic component of share capital is common shares.

Diff: 1 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 74) Shareholders' equity is often referred to as "net assets" and represents the residual amount of business assets that can be claimed by the owners.

Answer: TRUE Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

31 .

75) The accounting equation must always be in balance.

Answer: TRUE Diff: 1 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 76) The statement of retained earning discloses the amount of dividends declared during the year.

Answer: TRUE Diff: 1 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 77) The statement of cash flows categorizes the sources and uses of the net cash flow generated by the company during the year.

Answer: TRUE Diff: 1 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 78) Expenses are increases in retained earnings that result from operations.

Answer: FALSE Explanation: Expenses reduce retained earnings that result from operations.

Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

32 .

79) For business purposes, dividend payments are classified as expenses.

Answer: FALSE Explanation: Dividends represent the distribution of past earnings to current shareholders of the company.

Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 80) Revenues less cash outflow equals net income (or net loss).

Answer: FALSE Explanation: Revenues less expenses equals net income (or net loss).

Diff: 1 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 81) The Cash Flow Statement is organized in terms of the organization's operating, investing, and financing activities.

Answer: TRUE Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 82) Under ASPE the payment of interest is a financing activity.

Answer: FALSE Explanation: The payment of interest (under ASPE) is an operating activity.

Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

33 .

83) Dividends are a form of expenses.

Answer: FALSE Explanation: Dividends represent the distribution of past earnings to current shareholders of the company.

Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 84) Revenues are increases in retained earnings from the delivery of goods or services.

Answer: TRUE Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 85) Closing retained earnings as reported on the balance sheet represent a company's net income from its formation, less the cumulative dividends declared to-date.

Answer: TRUE Diff: 2 Type: TF L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

34 .

86) Your friend has asked you to review and analyze the financial status of her company before she goes to the bank to request a loan. Answer the following questions: a. What will you need to review in order to make a sound decision? b. What will the bank be looking for? Be specific.

Answer: a. A decision maker would like to have access to all the financial statements of a company for several years, including the income statement, balance sheet, statement of retained earnings, and cash flow statement. b. The bank will be looking at the company's ability to repay the loan. The bank will look at the amount of income generated by the company for the past several years as well as whether or not it has been increasing or decreasing. The amount of debt already owed by the company will also be an issue. The bank would like to see that shareholders' equity exceeds total liabilities at the time of the loan request. Also, dividends paid to the owner should not exceed the net income in any given period. These are indications that the owner is as much at risk as the bank would be if the loan were granted.

Diff: 3 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

35 .

87) Following is an alphabetical list of the assets, liabilities, revenues, and expenses of Keykin Inc. Prepare an income statement for the year ended September 30, 2020.

Accounts payable $2,800 Note payable $4,000 Accounts receivable 5,400 Rent expense 10,200 Advertising expense 3,600 Salary expense 12,100 Cash 9,100 Salary payable 900 Cost of goods sold 31,700 Sales revenue 75,800 Inventory 7,900 Supplies 1,800 Interest expense 800 Utilities expense 700 Answer: Keykin Inc. Income Statement For the Year Ended September 30, 2020 Revenues: Sales revenue $75,800 Expenses: Cost of goods sold $31,700 Rent expense 10,200 Salary expense 12,100 Advertising expense 3,600 Interest expense 800 Utilities expense 700 59,100 Net income $16,700 Diff: 2 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

36 .

88) Snow Inc. gathered together the following information regarding the asset, liability, shareholders' equity, revenue, and expense accounts as of the end of its first year in operations, July 31, 2020: Rent expense $7,500 Truck 14,600 Supplies 2,500 Salary expense 19,400 Accounts receivable 8,200 Note payable 11,000 Common shares 25,000

Dividends $10,200 Accounts payable 6,700 Service revenue 45,500 Salary payable 1,200 Utilities expense 5,000 Interest expense 1,500 Cash 20,800

Prepare an income statement for Snow Inc. for the year ended July 31, 2020.

Answer: Snow Inc. Income Statement For the Year Ended July 31, 2020 Revenues: Service revenue

$45,500

Expenses: Salary expense Rent expense Utilities expense Interest expense

$19,400 7,500 5,000 1,500

33,400 Net income $12,100 Diff: 2 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

37 .

89) The following alphabetical listing shows the assets, liabilities, and shareholders' equity for Zap Ltd. as of December 31, 2020. Prepare a balance sheet dated December 31, 2020.

Accounts payable $12,200 Inventory $23,500 Accounts receivable 21,000 Note payable 11,000 Cash 21,600 Retained earnings 17,100 Common shares 50,600 Salary payable 2,300 Equipment 24,600 Supplies 2,500 Answer: Zap Ltd. Balance Sheet December 31, 2020 Assets Liabilities Cash $21,600 Accounts payable $12,200 Accounts receivable 21,000 Note payable 11,000 Inventory 23,500 Salary payable 2,300 Supplies 2,500 Total liabilities 25,500 Equipment 24,600 Shareholders' equity Common shares 50,600 Retained earnings 17,100 Total shareholders' equity 67,700 Total liabilities and _______ Total assets $93,200 shareholders' equity $93,200 Diff: 2 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

38 .

90) Following is an alphabetical list of the assets, liabilities, and shareholders' equity accounts of Bliz Inc. Prepare a balance sheet dated April 30, 2020.

Accounts payable $10,200 Note payable $15,000 Accounts receivable 17,000 Retained earnings 27,500 Cash 32,900 Salary payable 10,700 Common shares 34,400 Supplies 13,900 Inventory 34,000 Answer: Bliz Inc. Balance Sheet April 30, 2020 Assets Liabilities Cash $32,900 Accounts payable $10,200 Accounts receivable 17,000 Note payable 15,000 Inventory 34,000 Salary payable 10,700 Supplies 13,900 Total liabilities 35,900 Shareholders' equity Common shares 34,400 Retained earnings 27,500 Total shareholders' equity 61,900 Total liabilities and ______ Total assets $97,800 shareholders' equity $97,800 Diff: 2 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

39 .

91) Keria Corp. prepared the following random list of assets, liabilities, revenues, and expenses from its December 31, 2020, accounting records. The beginning retained earnings as of January 1, 2020, was $43,100 and the owner, Keria Staple, received dividends of $14,600 during the year. Prepare the balance sheet for Keria Corp. as of December 31, 2020.

Accounts receivable Interest expense Supplies Accounts payable Utilities expense Furniture Salary payable Common shares Answer:

Assets Cash Accounts receivable Supplies Furniture Automobiles Land

Total assets

$15,700 Service revenue $50,500 4,900 Cash 128,000 1,500 Note payable 17,000 106,100 Salary expense 18,000 5,200 Interest payable 1,600 18,000 Rent expense 9,400 2,400 Automobiles 12,900 30,500 Land 23,000 Keria Corp.

Balance Sheet December 31, 2020 Liabilities $128,000 Accounts payable $106,100 15,700 Note payable 17,000 1,500 Interest payable 1,600 18,000 Salary payable 2,400 12,900 Total liabilities 127,100 23,000 Shareholders' equity Common shares 30,500 Retained earnings 41,500 * Total shareholders' equity 72,000 Total liabilities and _______ $199,100 shareholders' equity $199,100

*

$41,500 = $43,100 + $13,000 (which is net income) - $14,600 Net income = $50,500 - $4,900 - $5,200 - $18,000 - $9,400 = $13,000 Diff: 3 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

40 .

92) Tall Tree Ltd. gathered together the following information regarding the asset, liability, shareholders' equity, revenue, and expense accounts as of the end of its first year in operation, May 31, 2020: Accounts payable $9,600 Accounts receivable 3,200 Cash 13,800 Common shares 15,000 Dividends 8,300 Interest expense 1,200 Note payable 21,000

Rent expense Salary expense Salary payable Service revenue Supplies Truck Utilities expense

$6,500 19,400 1,300 45,500 2,500 34,600 5,000

Prepare the Statement of Retained Earnings for Tall Tree Ltd. for the year ended May 31, 2020.

Answer: Tall Tree Ltd. Statement of Retained Earnings For the Year Ended May 31, 2020 Retained earnings, June 1, 2019 Add: Net income Deduct: Dividends Retained earnings, May 31, 2020

$0 13,400 13,400 8,300 $ 5,100

*Net income $13,400 = 45,500 - 1,200 - 6,500 - 19,400 - 5,000 Diff: 2 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

41 .

93) A cash flow statement is divided into the following sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. For each of the following events, state the section in which it would be listed. a. Received cash from issuance of long-term note payable b. Payment of interest (ASPE) c. Repurchase of shares d. Sale of land e. Received cash from customers f. Payment of dividends g. Purchase of equipment h. Issuance of 50 shares of common stock Answer: a. financing activity b. operating activity c. financing activity d. investing activity e. operating activity f. financing activity g. investing activity h. financing activity Diff: 3 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

42 .

94) Classify each statement below as an operating activity, investing activity, or a financing activity. a. Sold 12,000 shares for cash. b. Paid salaries of employees. c. Paid amount due for income taxes. d. Paid interest expense (ASPE). e. Purchased office equipment for cash. f. Sold old office equipment and received cash. g. Received interest income. h. Paid interest on a bank loan. i. Paid dividends to shareholders.

Answer: a. financing activity b. operating activity c. operating activity d. operating activity e. investing activity f. investing activity g. operating activity h. operating activity i. financing activity Diff: 2 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 95) Prepare a Statement of Retained Earnings: On October 31, 2020, Lariat Inc. reported retained earnings of $250,000. For the year ended October 31, 2020, Lariat had a net income of $80,000 and paid dividends of $50,000.

Answer: Lariat Inc. Statement of Retained Earnings For the Year Ended October 31, 2020 Retained Earnings, November 1, 2019 $ 250,000 Net income for the year 80,000 Less dividends (50,000) Retained Earnings, October 31, 2020 $ 280,000 Diff: 3 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

43 .

96) A cash flow statement is divided into the following sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. For each of the following events, state the section in which it would be listed. a. Paid cash to retire long-term note payable b. Payment of wages c. Issuance of shares d. Purchase of land e. Depreciation/Amortization expense f. Payment of dividends g. Sale of equipment h. Equipment rental fee Answer: a. financing activity b. operating activity c. financing activity d. investing activity e. operating activity (be careful - it is a non-cash item but still shows up here) f. financing activity g. investing activity h. operating activity Diff: 3 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 97) A company's management makes three major types of decisions on an ongoing basis: decisions regarding operating activities, decisions regarding investing activities, and decisions regarding financing activities. Discuss each of these three types of activities, including examples of each type.

Answer: Operating activities relate to deciding how to operate the business and involves decisions such as what products and/or services to sell, what prices to sell those products and services for, and how to market those products and services. Investing activities relate to deciding what kinds of investments to make and involve decisions such as what types of noncurrent assets to buy. Financing activities relate to deciding how to finance the company's operations and involve decisions such as whether to obtain cash by selling shares or by borrowing from a bank.

Diff: 2 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

44 .

98) What do shareholders look for when reviewing and analyzing the income statement?

Answer: When reviewing the income statement, shareholders look for steadily increasing levels of net income over time. Net income on an income statement means the company is profitable. A steady increase in net income indicates the company's profits are solid. Net income affects both stock prices and future dividends. A shareholder's personal wealth will be enhanced through an increase in the market price of the company's stock and future dividends to be received.

Diff: 2 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 99) What do creditors such as bankers look for when reviewing assets and liabilities on the balance sheet?

Answer: Assets show what the company can pledge as collateral that a creditor can collect in the event of the company failing to pay its debts. Liabilities indicate how much the company owes other creditors. Assets should be increasing faster than liabilities over time. The amount of assets should exceed the amount of liabilities.

Diff: 2 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 100) What is the purpose of a cash flow statement?

Answer: A cash flow statement reports how the company generates and uses its cash. Wise use of cash generates revenues and additional cash. Operating activities should be the main source of cash. The cash flow statement provides information that would be difficult to obtain from analyzing the other financial statements.

Diff: 2 Type: ES L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

45 .

1.3

Prepare the financial statements and analyze the relationships among them

1) Which financial statement must be prepared before the others?

A) income statement B) balance sheet C) cash flow statement D) retained earnings statement Answer: A Diff: 2 Type: MC L.O.: 1-3 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 2) Describe the relationship between the Income Statement, Statement of Retained Earnings and the Balance Sheet.

Answer: The income statement needs to be prepared first as the net income figure is part of the calculation of ending retained earnings on the Statement of Retained Earnings. Once the Statement of Retained Earnings has been prepared this figure is then inserted in the Balance Sheet in the Shareholders' Equity section.

Diff: 2 Type: ES L.O.: 1-3 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 3) The closing retained earnings balance as determined by compiling the balance sheet is used to complete the statement of retained earnings.

Answer: FALSE Explanation: The closing retained earnings balance as determined by completing the statement of retained earnings is reported as part of shareholders' equity on the balance sheet.

Diff: 2 Type: TF L.O.: 1-3 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

46 .

4) Tap Corporation gathered together the following information regarding the asset, liability, shareholders' equity, revenue, and expense accounts as of the end of its first year in operations, August 31, 2020: Rent expense $ 7,500 Truck 23,600 Supplies 2,500 Salary expense 19,400 Accounts receivable 8,200 Note payable 10,000 Common shares 25,000

Dividends $10,200 Accounts payable 6,700 Service revenue 45,600 Salary payable 12,200 Utilities expense 5,000 Interest expense 1,200 Cash 21,900

Prepare a balance sheet for Tap Corporation dated August 31, 2020.

Answer: Tap Corporation Balance Sheet August 31, 2020 Assets Liabilities Cash $21,900 Accounts payable $6,700 Accounts receivable 8,200 Note payable 10,000 Supplies 2,500 Salary payable 12,200 Truck 23,600 Total liabilities 28,900

Total assets

$56,200

Shareholders' equity Common shares 25,000 Retained earnings 2,300 * Total shareholders' equity 27,300 Total liabilities and _______ Shareholders' equity $56,200

* $2,300= $0 + $12,500 (net income) - $10,200 Net income = $45,600 - $7,500 - $19,400 - $5,000 - $1,200 = $12,500 Diff: 3 Type: ES L.O.: 1-3 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

47 .

5) Choose the appropriate definition for the terms below. a. a business owned by a single owner b. a statement summarizing the revenues and expenses for a given period c. resources that provide future economic benefits to a business d. claims by outsiders on the resources of a business e. revenues less expenses f. a business owned by shareholders g. shows the net change in the cash account for a given period h. a formal listing of the accounting equation on a specified date ________ 1. corporation ________ 2. cash flow statement ________ 3. income statement ________ 4. net income ________ 5. proprietorship ________ 6. balance sheet ________ 7. liabilities ________ 8. assets Answer: 1. f 2. g 3. b 4. e 5. a 6. h 7. d 8. c Diff: 2 Type: ES L.O.: 1-3 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 6) Which of the following financial statements shows the net increase or decrease in cash during the period?

A) balance sheet B) income statement C) statement of retained earnings D) cash flow statement Answer: D Diff: 1 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 48 .

7) Which of the following statements should be prepared right before the balance sheet?

A) statement of retained earnings B) cash flow statement C) statement of financial position D) income statement Answer: A Diff: 3 Type: MC L.O.: 1-2 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 1.4

Explain and apply underlying accounting concepts, assumptions, and principles

1) In order for information to be considered a faithful representation it must be all of the following except: A) complete B) predictive C) without material error D) neutral Answer: B Diff: 2 Type: MC L.O.: 1-4 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 2) The primary objective of financial reporting is to provide information: A) to the federal government about tax matters B) useful for making investment and lending decisions C) regarding the cash flows of the business D) about the profitability of the business Answer: B Diff: 2 Type: MC L.O.: 1-4 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

49 .

3) The ________ assumption assumes that the organization will continue operating normally for the foreseeable future.

A) cost B) stable monetary unit C) entity D) going-concern Answer: D Diff: 1 Type: MC L.O.: 1-4 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 4) The accounting concept that maintains that each organization or section of an organization stands apart from other organizations and individuals is known as the: A) reliability principle B) going-concern assumption C) entity assumption D) monetary unit assumption Answer: C Diff: 2 Type: MC L.O.: 1-4 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 5) The principle that states that assets acquired by the business should be recorded at their actual price is the: A) objectivity assumption B) stable monetary unit assumption C) cost assumption D) reliability assumption Answer: C Diff: 1 Type: MC L.O.: 1-4 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

50 .

6) The relevant measure of value of the assets of a company that is going out of business is its: A) historical cost B) recorded value C) carrying amount D) liquidation value Answer: D Diff: 2 Type: MC L.O.: 1-4 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 7) The CEO of a business owns a home and two automobiles. The company the CEO works for also owns automobiles and a home in a remote area used for strategic planning meetings by its executives. Which principle or assumption "draws a sharp boundary" around the possessions of the CEO and the assets of the business for which he works?

A) the entity assumption B) the stable-monetary-unit assumption C) the going-concern assumption D) the objectivity assumption Answer: A Diff: 2 Type: MC L.O.: 1-4 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 8) The stable-monetary-unit assumption is the basis for ignoring: A) the possibility that the value of inventory might drop below its historical cost B) fluctuations in the value of the Canadian dollar relative to foreign currencies C) the effect of inflation in the accounting records D) the difference between the appraised value and the actual cost when recording an asset at its historical cost Answer: C Diff: 3 Type: MC L.O.: 1-4 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

51 .

9) When accounting information is reliable to users it means that assets and services should be recorded at their actual cost, since cost is a reliable measure to use in financial accounting.

Answer: FALSE Explanation: It is reliable to users so they can have faith that the information can be relied upon to make decisions about the company and its management.

Diff: 1 Type: TF L.O.: 1-4 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 10) Relevance and comparability are the two fundamental qualitative characteristics of accounting.

Answer: FALSE Explanation: Comparability is an enhancing qualitative characteristic; faithful representation is the other fundamental qualitative characteristic.

Diff: 2 Type: TF L.O.: 1-4 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 11) Materiality is a component of the faithful representation qualitative characteristic.

Answer: FALSE Explanation: Materiality is a component of the relevance qualitative characteristic.

Diff: 2 Type: TF L.O.: 1-4 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 12) Financial statement information that reflects the economic substance of a transaction is considered to be representationally faithful.

Answer: TRUE Diff: 2 Type: TF L.O.: 1-4 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

52 .

13) Choose the appropriate definition for the terms below. a. professional guidelines followed by accountants b. corporations that have issued shares in public markets c. organizations that do not issue information used by the public d. set of standards used by public corporations e. the group responsible for Canadian GAAP f. issues International Financial Reporting Standards g. another set of GAAP for private enterprises h. this group was established to oversee accounting and reporting standards for both Canadian companies and not-for-profits ________ 1. International Accounting Standards Board ________ 2. ASPE ________ 3. publicly accountable enterprises ________ 4. Chartered Professional Accountants ________ 5. GAAP ________ 6. Accounting Standards Board ________ 7. International Financial Reporting Standards ________ 8. private enterprises Answer: 1. f 2. g 3. b 4. e 5. a 6. h 7. d 8. c Diff: 2 Type: ES L.O.: 1-4 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

53 .

1.5

Ethically evaluate business decisions

1) All of the following are factors that influence business and accounting decisions except: A) economic B) legal C) ethical D) operational inefficiency Answer: D Diff: 1 Type: MC L.O.: 1-5 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 2) CPA has a code of professional conduct.

Answer: TRUE Diff: 1 Type: TF L.O.: 1-5 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 3) The application of IFRS and ASPE frequently requires the use of professional judgment.

Answer: TRUE Diff: 2 Type: TF L.O.: 1-5 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting 4) Briefly describe the objectivity principle in the CPA Code of Professional Conduct.

Answer: A member shall not allow their professional or business judgment to be compromised by bias, conflict of interest, or the undue influence of others.

Diff: 2 Type: ES L.O.: 1-5 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

54 .

5) Fraudulent financial reporting is a type of fraud that impacts financial statements. Why do managers undertake this type of fraudulent activity?

Answer: Managers falsify financial reporting to deceive investors and creditors into loaning money to or investing in the company when they may not have done so otherwise.

Diff: 2 Type: ES L.O.: 1-5 CPA COMPETENCIES: Chapter 1 1.1.1 Evaluates financial reporting needs 1.1.2 Evaluates the appropriateness of the basis of financial reporting 1.1.3 Evaluates reporting processes to support reliable financial reporting

55 .

Financial Accounting, Cdn. Ed., 7CE (Harrison/Horngren) Chapter 2 Recording Business Transactions 2.1 Recognize a business transaction and describe the various types of accounts in which it can be recorded 1) Interest payable, income tax payable and salary payable are all examples of: A) accrued liabilities B) prepaid expenses C) expenses of future periods D) retained earnings Answer: A Diff: 1 Type: MC L.O.: 2-1 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 2) A record of all the changes in a particular asset during a period of time is found in a(n): A) transaction B) trial balance C) prior period's balance sheet D) account Answer: D Diff: 1 Type: MC L.O.: 2-1 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 3) An accounts receivable represents the promise of the business to pay a debt.

Answer: FALSE Explanation: Accounts receivable represent the amounts owing from customers who have purchased goods or services but not yet paid for them.

Diff: 2 Type: TF L.O.: 2-1 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 4) Prepaid rent is an expense because the payment provides a future benefit of the company.

Answer: FALSE Explanation: Prepaid expenses are expenses a company has paid for in advance of actually using the product or service it has purchased.

Diff: 2 Type: TF L.O.: 2-1 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

1 .

5) Assets include cash, land, and accounts payable.

Answer: FALSE Explanation: Accounts payable is a liability.

Diff: 2 Type: TF L.O.: 2-1 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 6) Explain the following terms in your own words and give an example of each for Humpty's Equipment Inc. a. asset b. liability c. shareholders' equity d. dividend e. revenue f. expense Answer: a. Assets are resources stemming from past transactions expected to provide economic benefits in the future by contributing to earning revenues. Humpty uses a significant amount of machinery and equipment to manufacture its products. b. A liability is an obligation to provide goods or services in the future due to a past transaction.

Some examples are accounts payables and loans. Humpty borrows money (loan) from several sources including PEI business development Inc. c. Shareholders' equity is direct or indirect investment in an entity by its owners. Examples are common shares and preferred shares. Humpty issues common shares and they trade on the Toronto Stock Exchange under the symbol SNX. d. Dividends are amounts paid to the owners from the earnings of the firm. Examples are common share dividends and preferred dividends. e. Revenues are economic benefits earned by providing goods or services to customers.

Examples are sales and fees earned. f. Expenses are costs incurred to earn revenue. Examples include cost of goods sold and wages.

Diff: 1 Type: ES L.O.: 2-1 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

2 .

7) Define and provide an example of each of the following.

Account Asset

Definition

Example

Revenue

Liability

Answer: Example (Only one example is needed.)

Answers include: Economic resources that provide a Cash, Accounts Receivable, future benefit for a business.

Inventory, Prepaid Expenses, Investments, Buildings The increase in shareholders' equity Sales Revenue, Legal Service from delivery of goods or services to Revenue, Rental Revenue, customers Interest Revenue Debts owed by the business.

Accounts Payable, Notes Payable, Accrued Liabilities Definition Account Asset

Revenue

Liability

Diff: 2 Type: ES L.O.: 2-1 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 8) List the types of accounts that appear on the income statement and the balance sheet.

Answer: The income statement contains accounts classified as revenues and expenses. The balance sheet contains accounts classified as assets, liabilities, and shareholders' equity.

Diff: 2 Type: ES L.O.: 2-1 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

3 .

2.2

Determine the impact of business transactions on the accounting equation

1) All of the following accounts would be considered assets except for: A) Cash B) Common Shares C) Prepaid Expenses D) Notes Receivable Answer: B Diff: 2 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 2) The payment of an amount owed to a creditor would: A) increase assets B) increase liabilities C) decrease net income D) decrease liabilities Answer: D Diff: 2 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 3) When a company performs a service and immediately collects the cash from the customer, which of the following would occur?

A) Net income would increase.

B) Expenses would decrease.

C) Assets would decrease.

D) Shareholders' equity would decrease.

Answer: A Diff: 2 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 4) Purchasing supplies and paying cash for them would: A) increase total assets B) decrease total assets C) have no effect on total assets D) increase total liabilities and shareholders' equity Answer: C Diff: 2 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 4 .

5) Paying a utility bill when received would: A) increase expenses B) increase liabilities C) increase owners' equity D) decrease revenues Answer: A Diff: 2 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 6) Borrowing money from the bank by signing a note payable would: A) increase shareholders' equity B) increase net income C) decrease liabilities D) have no effect on shareholders' equity Answer: D Diff: 2 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 7) Receiving a payment from a customer on account would: A) have no effect on shareholders' equity B) increase net income C) increase shareholders' equity D) increase liabilities Answer: A Diff: 2 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 8) The purchase of land for cash would: A) increase total assets B) decrease shareholders' equity C) increase the total debits on the trial balance D) not affect the total of debits or credits on the trial balance Answer: D Diff: 3 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

5 .

9) An owner investment of a building, valued at $100,000 with an $80,000 outstanding mortgage, transferring this asset into the business would: A) increase assets by $20,000 B) increase assets by $80,000 C) increase shareholders' equity by $20,000 D) increase shareholders' equity by $100,000 Answer: C Diff: 3 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 10) Performing services on account would: A) increase assets and liabilities B) increase assets and decrease shareholders' equity C) increase revenue and decrease shareholders' equity D) increase net income and shareholders' equity Answer: D Diff: 3 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 11) The collection of cash from a customer on account would: A) increase net income and shareholders' equity B) increase assets and decrease liabilities C) increase assets and increase net income D) have no effect on net income or shareholders' equity Answer: D Diff: 3 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 12) Dividends paid to the shareholders when declared will: A) increase assets and decrease liabilities B) decrease assets and increase liabilities C) have no effect on shareholders' equity D) decrease assets and decrease shareholders' equity Answer: D Diff: 3 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

6 .

13) What type of account is Prepaid Rent?

A) a liability B) an expense C) shareholders' equity D) an asset Answer: D Diff: 2 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 14) The costs of operating a business are usually called: A) expenses B) liabilities C) assets D) revenues Answer: A Diff: 1 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 15) Note payable, accounts payable, and salary payable are all examples of: A) assets B) revenue C) expenses D) liabilities Answer: D Diff: 1 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 16) Which of the following business events may not be recorded in a company's general ledger?

A) The company paid each of its employees a Christmas bonus.

B) The company issued 100 shares of common stock.

C) The company purchased two acres of land for future plant expansion.

D) A lawsuit has been filed by one of the company's customers (against the company).

Answer: D Diff: 2 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

7 .

17) The payment of salaries to employees when earned would: A) increase assets B) increase net income C) increase liabilities D) decrease shareholders' equity Answer: D Diff: 2 Type: MC L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 18) A transaction involving the cash purchase of equipment will decrease one asset account and increase another asset account.

Answer: TRUE Diff: 2 Type: TF L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 19) A balance sheet is organized in order of the accounting equation, with liabilities first, followed by assets and shareholders' equity.

Answer: FALSE Explanation: The accounting equation is assets = liabilities + shareholders' equity Diff: 1 Type: TF L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 20) A balance sheet is a required financial statement that reports the financial position of the company as of a given day in time.

Answer: TRUE Diff: 2 Type: TF L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 21) Notes Payable is a typical example of a liability account.

Answer: TRUE Diff: 1 Type: TF L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

8 .

22) The account called Accrued Liabilities is really an expense account and not a liability account.

Answer: FALSE Explanation: An accrued liability is a liability for an expense that has not been billed for or paid.

Diff: 1 Type: TF L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 23) The retained earnings account represents the money invested by shareholders into the business since its inception.

Answer: FALSE Explanation: Retained earnings shows the cumulative net income earned by the company over its lifetime, minus its cumulative net losses and dividends.

Diff: 1 Type: TF L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 24) The purchase of office equipment on account would increase an asset and decrease a liability account.

Answer: FALSE Explanation: On account would increase a liability for a company to pay in the future.

Diff: 2 Type: TF L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

9 .

25) Analyze the following transactions. Indicate which accounts are affected and whether they will increase or decrease. Transaction (a) is completed as an example. a. Owner investment of cash into the business. b. Payment of a utility bill. c. Purchase of inventory for cash. d. Payment of an accounts payable. e. Performing a service on account. f. Collecting cash from a customer as payment on his account.

Transaction a.

Accounts Cash Common shares

Increase x

Decrease

x

b. c. d. e. f.

10 .

Answer: Transaction a.

b. c.

d.

e.

f.

Accounts Cash Common shares Utility expense Cash Inventory Cash Accounts Payable Cash Accounts Receivable Service Revenue Cash Accounts Receivable

Increase x

Decrease

x x x x x x x x x x x

Diff: 2 Type: ES L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 26) For each of the following independent scenarios, fill in the blanks with the appropriate dollar amount.

Assets - Liabilities = Shareholders' Equity Scenario A $ 270,000 $ $ 75,000 Scenario B 600,000 1,500,000 Scenario C 450,000 400,000 Scenario D 410,000 95,000 Answer: Assets Liabilities = Shareholders' Equity Scenario A$ 270,000 $ 195,000 $ 75,000 Scenario B2,100,000 600,000 1,500,000 Scenario C 450,000 400,000 50,000 Scenario D 410,000 315,000 95,000 Diff: 1 Type: ES L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

11 .

27) Slick Corporation has summarized financial statements as shown below. Fill in the blank areas to complete the financial statements. Begin in 2018 and move forward from there.

Slick Corporation For the Year Ended June 30 2020 2019 Revenues $ $2,100,000 Expenses 1,470,000 1,430,000 Net Income 130,000 Retained Earnings beginning Dividends declared 336,000 Retained earnings end 350,000 Common Shares end 250,000 Liabilities end 200,000 180,000 Assets end 830,000 Answer: Slick Corporation For the Year Ended June 30 2020 Revenues $1,600,000 Expenses 1,470,000 Net Income 130,000 Retained Earnings beginning 384,000 Dividends declared 164,000 Retained earnings end 350,000 Common Shares end 280,000 Liabilities end 200,000 Assets end 830,000 Diff: 2 Type: ES L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

2019 $2,100,000 1,430,000 670,000 50,000 336,000 384,000 250,000 180,000 814,000

12 .

2018 $2,500,000 550,000 0 50,000 250,000 430,000

2018 $2,500,000 1,950,000 550,000 0 500,000 50,000 250,000 130,000 430,000

28) The following is a summary of the balance sheet accounts for Betty's Bacon Inc. Organize the accounts into Betty's Bacon's Balance Sheet.

Accounts Payable 37,500 Land 62,500 Inventory 42,500 Salary Payable 12,000 Prepaid Insurance 5,000 Tax Payable 50,000 Common Shares 75,000 Accounts Receivable17,500 Furniture and Fixtures125,000 Retained Earnings 40,000 Bank loan 44,000 Cash 6,000 Answer: Betty's Bacon Inc. Balance Sheet Cash $6,000 Accounts Receivable 17,500 Inventory 42,500 Prepaid Insurance 5,000 Land 62,500 Furniture and Fixtures125,000

Total assets

$258,500

Bank loan Accounts Payable Salary Payable Tax Payable Total liabilities

$44,000 37,500 12,000 50,000 143,500

Retained Earnings Common Shares

40,000 75,000

Total liabilities and equity

$258,500

Diff: 1 Type: ES L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

13 .

29) Prepare a Statement of Retained Earnings for the year ended June 30, 2020.

Chedacorn was incorporated on July 1, 2018 by 10 shareholders who each invested $100,000 in cash in exchange for common shares. Chedacorn's year end is June 30th. In its first year of business Chedacorn had a net income of $243,750. For its years ended June 30, 2019 and 2020, its second and third years of operation, Chedacorn reported net income of $472,500 and $560,000 respectively. In its first year Chedacorn did not pay any dividends, but in fiscal 2018 it paid $62,500 in dividends and in 2019 it paid $100,000 in dividends.

Answer: Chedacorn Corporation Statement of Retained Earnings For the Year Ended June 30, 2020 Retained Earnings, July 1, 2019 Net income for the year Less dividends Retained Earnings, June 30, 2020

$ 653,750 560,000 (100,000) $ 1,113,750

Note: To solve the exercise, retained earnings on July 1, 2019 must be calculated. This amount is $243,750 + $472,500 - $62,500.

Diff: 1 Type: ES L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 30) What criteria are used to determine if a transaction has occurred?

Answer: If the event affects the entity's financial position and can be reliably recorded, then a transaction has occurred. If both of these criteria are not met, a transaction has not occurred.

Some business events do not lead to transactions, such as the retirement of an executive officer in the company, or changing the company's logo. However, if these events have some financial impact, then a transaction has occurred.

Diff: 2 Type: ES L.O.: 2-2 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 2.3

Analyze business transactions using T-accounts

1) The right side of a T-account is always the: A) increase side B) credit side C) debit side D) decrease side Answer: B Diff: 1 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 14 .

2) The entry to record the purchase of supplies on account would include a: A) credit to the Accounts Payable account B) debit to the Retained Earnings account C) credit to the Cash account D) credit to the Supplies account Answer: A Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 3) Credits to revenue accounts ultimately result in: A) a decrease in owners' equity B) an increase in owners' equity C) a decrease in assets D) an increase in liabilities Answer: B Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 4) The purchase of office equipment for cash would include a: A) debit to Cash B) debit to Office Equipment C) credit to Accounts Payable D) credit to Office Equipment Answer: B Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 5) An owner makes an investment of cash into the business. Such a transaction would include a: A) debit to Common shares B) credit to Cash C) debit to Cash D) debit to Accounts Receivable Answer: C Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

15 .

6) A business purchases a truck by signing a note payable to the seller. Such a transaction would include a: A) credit to Truck B) debit to Note Payable C) credit to Note Payable D) debit to an expense account Answer: C Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 7) The accounting transaction to record payment of the heating bill would include a: A) debit to Cash B) credit to Accounts Payable C) debit to Utilities Expense D) debit to Accounts Receivable Answer: C Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 8) The accounting transaction to record payment of the advertising bill would include a: A) debit to Cash B) credit to Accounts Payable C) debit to Advertising Expense D) debit to Accounts Receivable Answer: C Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 9) The accounting transaction to record payment of the telephone bill would include a: A) credit to Cash B) credit to Accounts Payable C) credit to Utilities Expense D) debit to Accounts Receivable Answer: A Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

16 .

10) The accounting transaction to record the payment of salaries to employees would include a: A) credit to Salary Expense B) debit to Accounts Payable C) debit to Salary Expense D) debit to Cash Answer: C Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 11) An owners' investment of land and a building into the business would include a: A) debit to Land and a credit to Common shares B) debit to Land and a credit to Building C) debit to Common shares and a credit to Building D) debit to Building and a debit to Common shares Answer: A Diff: 3 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 12) The purchase of an automobile with a cash down payment and a written promise to pay the balance in the future would include a: A) credit to Cash and a credit to Note Payable B) debit to Cash and a credit to Automobile C) debit to Note Payable and a credit to Cash D) debit to Cash and a debit to Note Payable Answer: A Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 13) The purchase of a building with a cash down payment and a written promise to pay the balance in the future would include a: A) credit to Cash and a credit to Note Payable B) debit to Cash and a credit to Buildings C) debit to Note Payable and a credit to Cash D) debit to Cash and a debit to Note Payable Answer: A Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

17 .

14) Paying a dividend to the company's shareholders would include a: A) debit to Cash and a credit to Dividends B) debit to Dividends and a credit to Cash C) debit to Retained Earnings and a credit to Dividends D) debit to Accounts Payable and a credit to Retained Earnings Answer: B Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 15) Receiving a cheque from a customer on account would include a: A) debit to Accounts Receivable and a credit to Cash B) debit to Cash and a credit to Accounts Payable C) debit to Accounts Payable and a credit to Cash D) debit to Cash and a credit to Accounts Receivable Answer: D Diff: 3 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 16) Receiving cash from a customer on account would include a: A) debit to Accounts Receivable and a credit to Cash B) debit to Cash and a credit to Accounts Payable C) debit to Accounts Payable and a credit to Cash D) debit to Cash and a credit to Accounts Receivable Answer: D Diff: 3 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 17) Making a cash payment to settle a debt would include a: A) debit to Cash and a credit to Accounts Receivable B) debit to Accounts Receivable and a credit to Cash C) debit to Accounts Payable and a credit to Cash D) debit to Accounts Payable and a credit to Accounts Receivable Answer: C Diff: 3 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

18 .

18) Paying by cheque to settle a debt would include a: A) debit to Cash and a credit to Accounts Receivable B) debit to Accounts Receivable and a credit to Cash C) debit to Accounts Payable and a credit to Cash D) debit to Accounts Payable and a credit to Accounts Receivable Answer: C Diff: 3 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 19) Performing a service on account would include a: A) debit to Cash B) debit to Revenue C) credit to Accounts Receivable D) debit to Accounts Receivable Answer: D Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 20) Purchasing a three-year insurance policy for cash would include a: A) debit to Cash and a credit to Accounts Receivable B) debit to Insurance Expense and a credit to Dividends C) debit to Prepaid Insurance and a credit to Accounts Payable D) debit to Prepaid Insurance and a credit to Cash Answer: D Diff: 3 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 21) The payment for rent of the office building for one month would include a: A) debit to Cash B) credit to Accounts Payable C) debit to Rent Expense D) credit to Revenue Answer: C Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

19 .

22) The purchase of office furniture on account (that is, on credit) would include a: A) credit to Accounts Payable B) credit to Office Furniture C) debit to Accounts Receivable D) credit to Cash Answer: A Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 23) Which of the following statements regarding accounts is incorrect?

A) An asset is increased by a debit and decreased by a credit.

B) Revenue is increased by a debit and an expense is increased by a credit.

C) A liability is decreased by a debit and increased by a credit.

D) Revenue is increased by a credit and an expense is increased by a debit.

Answer: B Diff: 3 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 24) Which of the following statements regarding accounts is correct?

A) Assets are decreased by debits.

B) Expenses are decreased by debits.

C) Revenues are increased by debits.

D) Liabilities are decreased by debits.

Answer: D Diff: 3 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 25) Which of the following accounts normally has a debit balance?

A) Dividends B) Retained Earnings C) Share capital D) Revenue Answer: A Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

20 .

26) The account credited when supplies are purchased on account is: A) Cash B) Supplies C) Supplies Expense D) Accounts Payable Answer: D Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 27) When the owner of a business invests cash into the business, which of the following accounts is debited?

A) Dividends B) Cash C) Common Shares D) Accounts Receivable Answer: B Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 28) When a business sells inventory in exchange for cash, which of the following accounts is credited?

A) Revenue B) Cash C) Owners' Equity D) Accounts Payable Answer: A Diff: 3 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 29) The account credited when cash is received from a customer on account is: A) Cash B) Accounts Payable C) Revenue D) Accounts Receivable Answer: D Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

21 .

30) A debit increases the balance of which types of accounts?

A) assets and liabilities B) assets and expenses C) liabilities and expenses D) assets and shareholders' equity Answer: B Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 31) A credit decreases the balance of which types of accounts?

A) expenses and assets B) liabilities and expenses C) assets and liabilities D) assets and shareholders' equity Answer: A Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 32) A credit increases the balance of which types of accounts?

A) revenue and assets B) liabilities and assets C) liabilities and expenses D) shareholders' equity and liabilities Answer: D Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 33) Which type of account is credited when a company pays its employees?

A) an expense account B) an asset account C) a liability account D) the owners' equity account Answer: B Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

22 .

34) Which type of account is credited when a company records a debt?

A) expense B) retained earnings C) liability D) asset Answer: C Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 35) When a company purchases inventory on account (that is, on credit), which type of account is credited to record the transaction?

A) asset B) expense C) liability D) owners' equity Answer: C Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 36) The payment of expenses should be recorded with a credit to: A) Cash B) Dividends C) Common shares D) Accounts Receivable Answer: A Diff: 2 Type: MC L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 37) The left side of a T-account is always the side that increases the balance of the account.

Answer: FALSE Explanation: The left side of a T-account increases assets and decreases liabilities and shareholders' equity.

Diff: 1 Type: TF L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

23 .

38) The right side of a T-account is always the debit side.

Answer: FALSE Explanation: The right side of a T-account is the credit side.

Diff: 1 Type: TF L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 39) Assets, shareholders' equity, and expenses are all increased by debits.

Answer: FALSE Explanation: Shareholders' equity is increased by a credit.

Diff: 2 Type: TF L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 40) A credit always decreases an asset account.

Answer: TRUE Diff: 2 Type: TF L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 41) Expenses increase shareholders' equity. That is why they are credits.

Answer: FALSE Explanation: Expenses result in decreases to shareholders' equity. Expenses are recorded using debits.

Diff: 2 Type: TF L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 42) A dividend account is known as a contra equity account.

Answer: TRUE Diff: 2 Type: TF L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 43) An expense account is known as a contra equity account.

Answer: TRUE Diff: 2 Type: TF L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

24 .

44) The purchase of office supplies for cash would include a debit to the asset Office Supplies and a credit to the asset Cash.

Answer: TRUE Diff: 2 Type: TF L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 45) Every accounting transaction involves an increase in at least one account and a decrease in at least one other account.

Answer: FALSE Explanation: A transaction has two sides: a debit side and a credit side.

Diff: 2 Type: TF L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 46) The purchase of a building with a down payment of cash and the signing of a note payable for the remainder would include a debit to both the asset Building, and a credit to the asset Cash and the liability Note Payable.

Answer: TRUE Diff: 2 Type: TF L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 47) The Dividends account normally has a debit balance.

Answer: TRUE Diff: 2 Type: TF L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 48) Every transaction affects at least two accounts.

Answer: TRUE Diff: 1 Type: TF L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

25 .

49) State the increase side (debit or credit) for each of the following accounts. a. Inventory b. Retained earnings c. Cash d. Accounts Payable e. Dividends f. Land g. Supplies h. Common Shares i. Service Revenue j. Accounts Receivable Answer: a. debit f. debit b. credit g. debit c. debit h. credit d. credit i. credit e. debit j. debit Diff: 2 Type: ES L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

26 .

50) Given the following list of errors, determine the effect on assets, liabilities, and shareholders' equity by completing the chart below. Use (+) to indicate overstated, (-) to indicate understated, and (0) to indicate no effect. Transaction (a) is completed as an example. a. The entry to record the purchase of $800 of equipment on account was never posted. b. The entry to record the purchase of $100 of supplies for cash was posted as a debit to Supplies and a credit to Accounts Payable. c. A $1,000 debit to Cash was posted as $100. d. A $400 debit to the Accounts Payable account was never posted. e. A debit to Accounts Receivable of $500 was posted as a credit to Accounts Receivable.

Total Assets Total Liabilities Shareholders' Equity a.

-$800 -$800 $0 b. c. d. e.

Answer: Total Assets Total Liabilities Shareholders' Equity a.

-$800 -$800 $0 b. +$100 +$100 $0 c.

-$900 $0 $0 d. $0 +$400 $0 e.

-$1,000 $0 $0 Diff: 3 Type: ES L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

27 .

51) State the decrease side (debit or credit) for each of the following accounts. a. Prepaid Expenses b. Contributed Capital c. Buildings d. Unearned Revenue e. Dividends f. Notes Receivable g. Interest Payable h. Sales Revenue i. Cost of Sales Answer: a. credit f. credit b. debit g. debit c. credit h. debit d. debit i. credit e. credit Diff: 1 Type: ES L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 52) Place a check mark in the appropriate column to show whether the event is recorded as a debit or a credit.

a. Decrease in Cash b. Decrease in Accounts Receivable c. Increase in Service Revenue d. Increase in Rent Expense e. Decrease in Salary Payable f. Decrease in Accounts Payable g. Decrease in Note Payable h. Increase in Common Shares i. Decrease in Dividends Answer: a. credit f. debit b. credit g. debit c. credit h. credit d. debit i. credit e. debit Diff: 2 Type: ES L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

Debit ________ ________ ________ ________ ________ ________ ________ ________ ________

28 .

Credit ________ ________ ________ ________ ________ ________ ________ ________ ________

53) Define the term account and describe the relationship between accounts and the ledger.

Answer: An account is a record of the increases and decreases to a particular asset, liability, or shareholders' equity item. All the accounts grouped together are referred to as the ledger. The groupings of accounts usually follow the order of the accounts as listed on balance sheet, and then the income statement. Sometimes the order is based on the chart of accounts (although this is not mandatory).

Diff: 2 Type: ES L.O.: 2-3 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 2.4

Record business transactions in the journal and post them to the ledger

1) Which of the following items of information would not normally be included in a journal entry?

A) the date the transaction took place B) the dollar amount of the debit C) the title of the account debited D) the location where the transaction took place Answer: D Diff: 2 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 2) The accounting process of copying of amounts from the journal to the appropriate ledger accounts is referred to as: A) journalizing B) footing C) balancing D) posting Answer: D Diff: 1 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

29 .

3) Which element of an accounting system provides information about the balance in each account?

A) source documents B) journals C) ledgers D) cash flow statement Answer: C Diff: 2 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 4) In accounting, the process of posting is: A) copying data from the ledger to the journal B) copying data from the journal to the ledger C) copying data from the source documents to the ledger D) copying data from the source documents to the journal Answer: B Diff: 2 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 5) Posting, a part of the accounting process, refers to: A) copying amounts from the accounts in the general ledger to the journal B) copying amounts from the financial statements to the general ledger C) copying amounts from the journal to the appropriate accounts in the general ledger D) copying amounts from the general ledger to the financial statements Answer: C Diff: 1 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 6) Accounting transactions are first recorded in a book or record called a: A) file B) ledger C) journal D) source document Answer: C Diff: 1 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

30 .

7) A chronological record (or history) of an entity's transactions is called a(n): A) journal B) account C) source document D) ledger Answer: A Diff: 1 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 8) What is the first step in the journalizing process?

A) Enter the transaction in the journal.

B) Identify the transaction from source documents and other information.

C) Determine what accounts will be affected and whether to debit or credit them.

D) Post the transaction to the ledger.

Answer: B Diff: 2 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 9) Which of the following items would not be included in the journal entry for a transaction?

A) the names of the source documents used to record the accounting transaction B) the titles of the accounts that will be used as debits and credits in the transaction C) the date the accounting transaction was entered into the accounting system D) the dollar amounts used to record the debits and credits in the transaction Answer: A Diff: 1 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 10) The entry to record the purchase of office supplies for $100 cash would be: A) Office Supplies 100 Cash 100 B) Accounts Payable 100 Cash 100 C) Office Supplies 100 Accounts Payable 100 D) Cash 100 Office Supplies Expense 100 Answer: A Diff: 1 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 31 .

11) The entry to record an owner investment of $500 into the business would be: A) Dividends 500 Cash 500 B) Cash 500 Dividends 500 C) Cash 500 Service Revenue 500 D) Cash 500 Common Shares 500 Answer: D Diff: 1 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 12) The entry to record an owner investment of $1,500 into the business including a $500 piece of equipment would be: A) Dividends 1,500 Equipment 500 Cash 1,000 B) Cash 1,500 Dividends 1,500 C) Cash 1,500 Service Revenue 1,000 Equipment 500 D) Cash 1,000 Equipment 500 Common Shares 1,500 Answer: D Diff: 1 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

32 .

13) The entry to record the payment of $895 salary to employees would be: A) Cash 895 Salary Payable 895 B) Dividends 895 Cash 895 C) Salary Expense 895 Cash 895 D) Salary Expense 895 Retained Earnings 895 Answer: C Diff: 1 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 14) The entry to record $500 received from a customer for services provided to that customer today would be: A) Cash 500 Accounts Receivable 500 B) Cash 500 Service Revenue 500 C) Service Revenue 500 Accounts Receivable 500 D) Dividends 500 Cash 500 Answer: B Diff: 1 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 15) The ledger provides a good indication of how much cash is available for the business to use.

Answer: TRUE Diff: 2 Type: TF L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 16) Posting is the process of copying the amounts from the journal to the appropriate accounts in the ledger.

Answer: TRUE Diff: 1 Type: TF L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

33 .

17) A journal is a record of financial transactions and can be thought of as a diary; it shows a chronological listing of a business's accounting activities.

Answer: TRUE Diff: 1 Type: TF L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 18) Debits are always recorded (journalized) after credits.

Answer: FALSE Explanation: Debits are recorded first followed by credits.

Diff: 2 Type: TF L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 19) A ledger is the first place where transactions are recorded in the accounting system.

Answer: FALSE Explanation: Transactions are recorded in a journal.

Diff: 1 Type: TF L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 20) Moving data to the ledger is known as journalizing.

Answer: FALSE Explanation: Transferring information from the journal to the ledger is called posting.

Diff: 1 Type: TF L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 21) In the journal you will find the total balance for each account.

Answer: FALSE Explanation: The ledger contains all of a company's accounts, along with their balances.

Diff: 1 Type: TF L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

34 .

22) Prepare journal entries in good form for the following transactions for the Calorie Corp. a. Owner invested cash of $12,000 and office equipment valued at $7,500 into the business, receiving common shares in exchange. b. Purchased supplies for cash, $1,000. c. Paid $750 for one month's rent on the store. d. Billed a client $1,500 for services rendered. e. Owner received a dividend of $300.

Answer: a. Equipment 7,500 Cash 12,000 Common Shares 19,500 b. Supplies 1,000 Cash 1,000 c. Rent Expense 750 Cash 750 d. Accounts Receivable1,500 Service Revenue 1,500 e. Dividends 300 Cash 300 Diff: 2 Type: ES L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

35 .

23) Post the following journal entries to the appropriate T-accounts, and show the resulting balance in each account. a. Cash 34,000 Common Shares b. Supplies 800 Accounts Payable c. Building 80,000 Cash Note Payable d. Accounts Receivable 5,500 Service Revenue e. Salary Expense 1,500 Cash

34,000 800 12,000 68,000 5,500 1,500

Answer:

Diff: 1 Type: ES L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

36 .

24) Given the journal entries below, write an explanation of the event that created the transaction. a. Cash 15,000 Common Shares 15,000 b. Automobile 20,000 Note Payable 15,000 Cash 5,000 c. Accounts Receivable 1,000 Service Revenue 1,000 d. Dividends 500 Cash 500 e. Accounts Payable 1,500 Cash 1,500 f. Salary Expense 1,875 Cash 1,875 Answer: a. Owner invested cash of $15,000 into the business. b. The business purchased an automobile with a $5,000 down payment, and signed a note for the balance of $15,000. c. Performed $1,000 of services for a customer and billed that customer. d. Owner received a dividend of $500. e. Paid $1,500 of the amount owed to a creditor. f. Paid $1,875 to employees for their services.

Diff: 3 Type: ES L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

37 .

25) Following is a list of errors made during the posting process. Indicate the exact dollar impact each error would have on total assets, total liabilities, and shareholders' equity. Complete the chart below by using (+) to indicate overstated, (-) to indicate understated, and (0) to indicate no effect. Transaction (a) is completed as an example. a. A $200 credit to the Accounts Payable account was posted as $2,000. b. A $50 debit to Cash was never posted. c. A $550 credit to the Revenue account was credited to the Accounts Receivable account. d. A $45,000 debit to the Land account was debited to an expense account. e. A $200 payment on an account payable was credited to Accounts Receivable instead of Cash. f. A $350 debit to the Dividends account was posted as $530.

Total Assets Total Liabilities Shareholders' Equity a.

0 +$1,800 0 b. c. d. e. f.

Answer: Total Assets Total Liabilities Shareholders' Equity a.

0 +$1,800 0 b.

-$50 0 0 c.

-$550 0 -$550 d. -$45,000 0 -$45,000 e.

0 0 0 f.

0 0 -$180 Diff: 3 Type: ES L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

38 .

26) Provide a description of the events at Smart's Corp. represented by each of the following journal entries: a) Dr. Cash $500,000 Cr. Land $500,000 b) Dr. Accounts Receivable $20,000 Cr. Revenue $20,000 c) Dr. Cash $100,000 Cr. Common Shares $100,000 d) Dr. Equipment $55,000 Cr. Note Payable $55,000 e) Dr. Rent Expense $125,000 Cr. Cash $125,000 Answer: a. A parcel of land was sold for cash. b. Services were provided to a customer on account. c. Shares of a corporation were issued for cash. d. Equipment was purchased in exchange for a note. e. Rent that was paid in cash and expensed as the rental period is over.

Diff: 1 Type: ES L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 27) Prepare journal entries in good form for the following transactions at Snacktime Corp.: a. Jill (owner) invested cash of $25,000 receiving common shares in exchange. b. Purchased inventory on credit, for $9,000. c. Paid $3,000 for rent of the Snack shop. d. Received $4,700 for services rendered.

Answer: a. Cash 25,000 Common Shares 25,000 b. Inventory 9,000 Accounts Payable 9,000 c. Rent Expense 3,000 Cash 3,000 d. Cash 4,700 Revenue 4,700 Diff: 1 Type: ES L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

39 .

28) Where is information for each account stored?

Answer: Information for each account is stored in the ledger. The ledger becomes an accounting history for each account, since it details all of the transactions for each account. It also contains the dates of the transactions and references to the journal from which the transactions have been posted.

Diff: 1 Type: ES L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 29) Describe the journalizing process including its steps.

Answer: The journal is used to keep a chronological record of the organizations transactions.

The journalizing process involves first determining each account affected by the transaction including its type. Next determine if each account is increased or decreased then apply the rules of debit or credits to each account. The last step is using this information to record the transaction in the journal ensuring all debits and credits balance. A description of the transaction is also included in the journal entry.

Diff: 1 Type: ES L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 30) The journal entry to record the payment of cash dividends to shareholders would include a: A) Debit to Dividends B) Credit to Dividends C) Debit to Cash D) Debit to Retained Earnings Answer: A Diff: 1 Type: MC L.O.: 2-4 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 2.5

Prepare and use a trial balance

1) This summarizes all the account balances for the financial statements and shows whether total debits equals total credits: A) ledger B) trial balance C) journal D) accounting equation Answer: B Diff: 1 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 40 .

2) The normal balance of Accounts Receivable is a ________ because it is a(n) ________ account.

A) credit; liability B) debit; expense C) credit; shareholders' equity D) debit; asset Answer: D Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 3) The normal balance of the Supplies account is a ________ because it is a(n) ________ account.

A) credit; liability B) debit; asset C) credit; expense D) debit; shareholders' equity Answer: B Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 4) The normal balance of the Accounts Payable account is a ________ because it is a(n) ________ account.

A) debit; asset B) credit; shareholders' equity C) credit; liability D) credit; revenue Answer: C Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 5) The normal balance of the Common Shares account is a ________ because it increases ________.

A) debit; assets B) credit; shareholders' equity C) credit; liabilities D) debit; expenses Answer: B Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 41 .

6) The normal balance of an expense account is a ________ because expenses decrease ________.

A) credit; assets B) debit; shareholders' equity C) credit; liabilities D) debit; revenues Answer: B Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 7) The normal balance of the Dividends account is a ________ because it decreases ________.

A) debit; shareholders' equity B) debit; liabilities C) debit; assets D) credit; revenues Answer: A Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 8) The normal balance of a revenue account is a ________ because revenues increase ________.

A) debit; assets B) debit; dividends C) credit; liabilities D) credit; shareholders' equity Answer: D Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 9) A trial balance is: A) prepared before the posting process is completed B) a list of income statement accounts with their balances C) a list of balance sheet accounts with their balances D) a list of all accounts with their balances Answer: D Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

42 .

10) A trial balance is a useful device because it provides a check on accuracy by showing whether: A) total assets equal total liabilities B) total debits equal total credits C) total revenues equal total expenses D) total of all the income statement accounts equals the total of all the balance sheet accounts Answer: B Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 11) If the debit amount of an entry to record the purchase of supplies on account was not posted: A) liabilities would be understated B) liabilities would be overstated C) assets would be overstated D) assets would be understated Answer: D Diff: 3 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 12) If the credit amount of an entry to record the payment of salaries was not posted: A) expenses would be understated B) assets would be overstated C) shareholders' equity would be understated D) expenses would be overstated Answer: B Diff: 3 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 13) Which of the following statements regarding a trial balance is false?

A) A trial balance may be taken at any time the postings are up to date.

B) A trial balance is a list of all accounts with their balances.

C) A trial balance is the same as a balance sheet.

D) A trial balance provides a check on the equality of debits and credits.

Answer: C Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

43 .

14) A trial balance has all of the following features listed below except: A) a heading B) subtotals for assets, liabilities, and shareholders' equity C) totals for both debits and credits D) accounts listed in order, assets first, followed by liabilities and then shareholders' equity Answer: B Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 15) An organization's list of all its accounts and the related account numbers is called a: A) journal B) ledger C) trial balance D) chart of accounts Answer: D Diff: 1 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 16) A chart of accounts is: A) prepared as the last step in analyzing transactions B) a source document C) the same as a trial balance D) a list of all of the accounts of the organization and their related account numbers Answer: D Diff: 1 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 17) A trial balance that is "in balance" proves: A) the equality of the debits and credits B) all journal entries were properly posted to the ledger C) all transactions were properly recorded during the accounting period D) that the financial statement cannot be prepared using the account balances Answer: A Diff: 1 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

44 .

18) A chart of accounts is: A) a list of all accounts B) a list of all balance sheet accounts C) a list of all income statement accounts D) a list of all accounts with their ending balances Answer: A Diff: 1 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 19) The normal balance of a liability account is a ________ and the normal balance of the common shares account is a ________.

A) debit; credit B) debit; debit C) credit; debit D) credit; credit Answer: D Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 20) Which of the following accounts does not have a normal credit balance?

A) Retained Earnings B) Common Shares C) Accounts Payable D) Inventory Answer: D Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 21) The normal balance of an expense account is a ________ while the normal balance of a revenue account is a ________.

A) debit; debit B) credit; credit C) credit; debit D) debit; credit Answer: D Diff: 2 Type: MC L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

45 .

22) The trial balance lists all the balance sheet accounts first, then all the accounts that affect shareholders' equity.

Answer: TRUE Diff: 2 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 23) A trial balance is a list of all of a company's accounts with their account numbers.

Answer: FALSE Explanation: A trial balance lists all of a business's ledger accounts and their balances.

Diff: 2 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 24) A trial balance is simply a list of all accounts and their balances at a point in time.

Answer: TRUE Diff: 1 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 25) If a trial balance is in balance, the accountant is assured that no mistakes were made either in recording or posting.

Answer: FALSE Explanation: Accounting errors can still occur in recording transactions.

Diff: 2 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 26) The trial balance is used to prepare the income statement.

Answer: TRUE Diff: 2 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 27) On a trial balance the total of all debits must equal the total of all credits.

Answer: TRUE Diff: 1 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

46 .

28) Accounts payable normally has a debit balance.

Answer: FALSE Explanation: Increases in liabilities are recorded as a credit.

Diff: 1 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 29) Accounts receivable normally has a credit balance.

Answer: FALSE Explanation: Increases in assets are recorded as a debit.

Diff: 1 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 30) The revenue account typically has a credit balance.

Answer: TRUE Diff: 1 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 31) The trial balance is the starting point for preparing the organization's financial statements.

Answer: TRUE Diff: 1 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 32) All revenue accounts normally have a credit balance.

Answer: TRUE Diff: 1 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 33) All shareholders' equity accounts typically have a credit balance except for dividends which are a debit.

Answer: TRUE Diff: 1 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

47 .

34) On a trial balance the total of all debits must equal the total of all credits.

Answer: TRUE Diff: 1 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 35) Total debits must always equal total credits in order for a trial balance to balance.

Answer: TRUE Diff: 1 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 36) The normal balance for any account is always the side of the account (debit or credit) where increases are recorded.

Answer: TRUE Diff: 2 Type: TF L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

48 .

37) Given the following transactions for Clip Corporation, prepare a trial balance as of March 31, 2020. a. Owner invested $15,250 cash and $6,500 worth of equipment into the business received common shares in return. b. Purchased supplies on account, $450. c. Rented office space paying one month's rent, $850. d. Performed services for a customer on account, $1,400. e. Purchased a truck by paying $1,000 down and signing a note for the remainder of $8,500. f. Performed services for a customer and immediately collected $800 cash. g. Paid employees salaries of $1,200. h. Owner received a dividend of $500.

Answer: Clip Corporation Trial Balance March 31, 2020 Debit Credit Cash $12,500 Accounts Receivable 1,400 Supplies 450 Equipment 6,500 Truck 9,500 Accounts Payable $450 Note Payable 8,500 Common Shares 21,750 Dividends 500 Service Revenue 2,200 Salary Expense 1,200 Rent Expense 850 ______ Total $32,900 $32,900 Diff: 3 Type: ES L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

49 .

38) Given a random list of accounts with their normal balances, prepare a trial balance for Sable Ltd. as of December 31, 2020. List the accounts in the appropriate order.

Common Shares $150,500 Accounts Receivable $33,600 Note Payable 20,300 Service Revenue 82,000 Supplies 1,600 Insurance Expense 10,200 Land 45,000 Equipment 9,200 Salary Expense 38,000 Accounts Payable 25,000 Dividends 19,300 Cash 129,500 Utilities Expense 18,500 Prepaid Insurance 7,400 Retained Earnings 34,500 Answer: Sable Ltd. Trial Balance December 31, 2020 Debit Credit Cash $129,500 Accounts Receivable 33,600 Prepaid Insurance 7,400 Supplies 1,600 Land 45,000 Equipment 9,200 Accounts Payable $25,000 Note Payable 20,300 Common Shares 150,500 Retained Earnings 34,500 Dividends 19,300 Service Revenue 82,000 Salary Expense 38,000 Utilities Expense 18,500 Insurance Expense 10,200 Total $312,300 $312,300 Diff: 2 Type: ES L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

50 .

39) An inexperienced accountant prepared the following trial balance on December 31, 2020, for the Chalet Corporation. Prepare a corrected trial balance based on the incorrect trial balance and the additional data.

Chalet Corporation Trial Balance December 31, 2020 Debit Credit Cash $28,700 Accounts Receivable $33,600 Prepaid Insurance 7,400 Supplies 1,600 Land 45,000 Equipment 78,300 Accounts Payable 25,000 Note Payable 65,000 Common Shares 30,000 Retained Earnings 34,000 Dividends 19,300 Service Revenue 82,000 Salary Expense 38,000 Utilities Expense 18,500 Insurance Expense 10,500 ________ Total $293,800 $223,100 Additional data: 1. Cash is overstated by $5,700.

2. Note Payable is understated by $7,200.

3. All accounts have a normal balance.

4. Service Revenue equals three times Salary Expense.

51 .

Answer:

Chalet Corporation Trial Balance December 31, 2020 Debit Credit Cash $23,000 Accounts Receivable $33,600 Prepaid Insurance 7,400 Supplies 1,600 Land 45,000 Equipment 78,300 Accounts Payable 25,000 Note Payable 72,200 Common Shares 30,000 Retained Earnings 34,000 Dividends 19,300 Service Revenue 114,000 Salary Expense 38,000 Utilities Expense 18,500 Insurance Expense 10,500 _______ Total $275,200 $275,200 Diff: 3 Type: ES L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

52 .

40) Fox Ltd. had the following trial balance on October 31, 2020.

Fox Ltd. Trial Balance October 31, 2020 Debit Credit Cash $56,500 Accounts receivable 20,000 Notes receivable 5,000 Land 80,000 Accounts payable $10,200 Note payable 15,000 Common shares 105,500 Service revenue 34,000 Salary expense 12,000 Advertising expense 5,000 ________ $178,500 $164,700 The following errors caused the trial balance not to balance: a. Recorded a $2,000 debit to Note Payable as a debit to Note Receivable. b. Posted a $3,000 credit to Accounts Payable as $300. c. Recorded a cash revenue transaction by debiting Cash for $6,000 and crediting Accounts Receivable for $6,000. d. The Common Shares account is understated by $11,100.

Prepare a corrected trial balance as of October 31, 2020. All accounts have a normal balance.

Answer: Fox Ltd. Trial Balance October 31, 2020 Debit Credit Cash $56,500 Accounts receivable 26,000 Notes receivable 3,000 Land 80,000 Accounts payable $12,900 Note payable 13,000 Common shares 116,600 Service revenue 40,000 Salary expense 12,000 Advertising expense 5,000 _______ $182,500 $182,500 Diff: 3 Type: ES L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

53 .

41) From the following list of transactions, prepare a trial balance dated March 31, 2020, for Niko Inc., which began operations on March 1, 2020. a. Sold 600 common shares for $12,000. b. Located a building suitable for a dry cleaning business, paying the first month's rent of $2,000. c. Purchased cleaning supplies for $500 cash. d. Purchased cleaning equipment on account costing $6,000. e. Services of $5,000 were rendered for cash during the month. f. Paid $1,500 salaries to employees for the month. g. Paid utilities bill of $500 for the month.

Answer: Niko Inc. Trial Balance March 31, 2020 Debit Credit Cash $12,500 Cleaning supplies 500 Cleaning equipment 6,000 Accounts payable $6,000 Common shares 12,000 Dry cleaning revenue 5,000 Rent expense 2,000 Salary expense 1,500 Utilities expense 500 ______ $23,000 $23,000 Diff: 2 Type: ES L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

54 .

42) A junior bookkeeper, Bob Delisle, prepared the following trial balance on April 30, 2020, for Big Party Inc. Prepare a corrected trial balance based on the incorrect trial balance and the additional data.

Big Party Inc. Trial Balance April 30, 2020 Debit $5,740

Cash Accounts Receivable Prepaid Insurance 1,480 Supplies 320 Land 9,000 Machinery 15,660 Accounts Payable Note Payable 13,000 Common Shares Retained Earnings Dividends 3,860 Service Revenue Salary Expense 7,600 Utilities Expense Interest Expense 2,100 Total $58,760

Credit $6,720

5,000 6,000 6,800 16,400 3,700 ______ $44,620

Additional data: 1. Cash is overstated by $1,140.

2. Note Payable is understated by $1,440.

3. Service Revenue is understated by $6,400.

55 .

Answer:

Big Party Inc. Trial Balance April 30, 2020

Debit Credit Cash $4,600 Accounts Receivable $6,720 Prepaid Insurance 1,480 Supplies 320 Land 9,000 Machinery 15,660 Accounts Payable 5,000 Note Payable 14,440 Common Shares 6,000 Retained Earnings 6,800 Dividends 3,860 Service Revenue 22,800 Salary Expense 7,600 Utilities Expense 3,700 Interest Expense 2,100 _______ Total $55,040 $55,040 Diff: 1 Type: ES L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

56 .

43) Prepare a trial balance for Salty Inc. dated June 30, 2020, based on the following transactions that occurred during the month of June. a. Owner invested $25,000 cash into the business and received common shares in return. b. Rented an office and paid one month's rent, $900. c. Purchased $400 of supplies on account. d. Performed services on account, $5,500. e. Paid $2,000 cash for office furniture. f. Owner received a dividend of $700. g. Collected $1,200 on account.

Answer: Salty Inc. Trial Balance June 30, 2020 Debit Credit Cash $22,600 Accounts Receivable 4,300 Supplies 400 Office Furniture 2,000 Accounts Payable $400 Common Shares 25,000 Dividends 700 Service Revenue 5,500 Rent Expense 900 Total $30,900 $30,900 Diff: 3 Type: ES L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

57 .

44) Prepare a trial balance for Zeng Inc. dated April 30, 2020, based on the following transactions that occurred during the month of June. a. Owner invested $55,000 cash into the business and received common shares in return. b. Rented an office and paid one month's rent, $700. c. Purchased $600 of supplies on account. d. Performed services on account, $7,500. e. Paid $4,200 cash for office furniture. f. Owner received a dividend of $500. g. Collected $3,000 on account.

Answer: Zeng Inc. Trial Balance April 30, 2020 Debit Credit Cash $52,600 Accounts Receivable 4,500 Supplies 600 Office Furniture 4,200 Accounts Payable $600 Common Shares 55,000 Dividends 500 Service Revenue 7,500 Rent Expense 700 ______ Total $63,100 $63,100 Diff: 3 Type: ES L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 45) Identify the normal balance for asset and liability accounts. What is the reasoning behind the "normal balances" for these accounts?

Answer: Using a T-account format, the normal balance of any account is the side that increases the balance in the account. For asset accounts the normal balance would be the debit side of the T-account. Asset accounts are often referred to as "debit-balance accounts." Crediting a liability account increases its balance, so it has a normal balance of a credit. Liability accounts are called "credit-balance accounts."

The reason why assets are debit-balance accounts and liabilities are credit-balance accounts is caused by the accounting equation. "Assets equal liabilities plus shareholders' equity" means that asset and liability accounts must have opposite normal balances for the equation to balance.

Diff: 2 Type: ES L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

58 .

46) Identify the normal balance for the Retained Earnings account and expense accounts. What is the reasoning behind the "normal balances" for these accounts?

Answer: Using a T-account format, the normal balance of any account is the side that increases the balance in the account. For the Retained Earnings account, its normal balance would be the credit side of the T-account. The Retained Earnings account is referred to as a "credit-balance account." Debiting an expense account increases its balance, so it has a normal balance of a debit. Expense accounts are called "debit-balance accounts."

The reason why the Retained Earnings account is a credit-balance account and expense accounts are debit-balance accounts is caused by the accounting equation. "Assets equal liabilities plus shareholders' equity" means that the Retained Earnings account must have a credit balance in order for the equation to balance.

Expense accounts are deducted from revenue accounts to obtain net income (or net loss).

Revenue accounts carry a normal credit balance, and therefore expense accounts must carry a normal debit balance for us to obtain net income or loss. Net income increases the Retained Earnings credit balance account. A net loss for the period would decrease the Retained Earnings account.

Diff: 2 Type: ES L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements 47) Describe what is listed on a trial balance.

Answer: The trial balance lists all the company's accounts (i.e., assets, liabilities, owners' equity, revenues, and expenses) and their balances as of a specific date. This information is obtained from the ledger.

Diff: 1 Type: ES L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

59 .

48) Use T-accounts to analyze the following transactions for the Red Panda Corporation: a. Owner invested $550,000 cash and equipment with a value of $5,500 into the business received common shares in return. b. Purchased office supplies on account, $300. c. Performed services for a customer on account, $3,500. d. Purchased a building by paying $100,000 down and signing a note for the remainder of $800,000. e. Performed services for a customer and immediately collected $4,500 cash. f. Paid employees salaries of $2,200.

Determine the ending cash balance. Note this is their first month of operations.

Answer:

Diff: 3 Type: ES L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

60 .

49) Use T-accounts to show the resulting balance in each account. a. Cash 34,000 Common Shares b. Supplies 800 Accounts Payable c. Building 80,000 Cash Note Payable d. Accounts Receivable 5,500 Service Revenue e. Salary Expense 1,500 Cash Answer:

34,000 800 12,000 68,000 5,500 1,500

Diff: 2 Type: ES L.O.: 2-5 CPA COMPETENCIES: Chapter 2 1.3.1 Prepares financial statements

61 .

Financial Accounting, Cdn. Ed., 7CE (Harrison/Horngren) Chapter 3 Accrual Accounting and the Financial Statements 3.1

Explain how accrual accounting differs from cash-basis accounting

1) There are two methods used to account for transactions. These methods are: A) cash and deferral B) cash and accrual C) accrual and deferral D) deferral and prepaid Answer: B Diff: 1 Type: MC L.O.: 3-1 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) An accountant who records a transaction only when cash is received or disbursed is using which basis of accounting?

A) prepaid B) accrual C) cash D) deferral Answer: C Diff: 1 Type: MC L.O.: 3-1 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

1 .

3) A company using the cash basis of accounting receives cash for services yet to be performed.

The entry to record the cash received will involve a credit to: A) Prepaid Revenue B) Service Revenue C) Accrued Revenue D) Deferred Revenue Answer: B Diff: 2 Type: MC L.O.: 3-1 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) An accrual refers to an event: A) where the cash has not been exchanged between the two parties B) that will never involve an income statement account C) that will never involve cash D) where the cash has already exchanged hands between the two parties Answer: A Diff: 3 Type: MC L.O.: 3-1 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Which of the following transactions would be recorded at the time the transaction occurs under the accrual basis, but would not be recorded until sometime in the future under the cash basis?

A) sale of merchandise on account B) payment of interest expenses C) payment of employee salaries D) issuance of stock Answer: A Diff: 3 Type: MC L.O.: 3-1 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

2 .

6) Companies using the cash basis of accounting for their business generally make better decisions.

Answer: FALSE Explanation: Users relying on cash-basis financial statements results in incomplete information, which would likely lead to make poor business decisions.

Diff: 2 Type: TF L.O.: 3-1 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) In accrual accounting, revenue may be earned prior to or after cash is received.

Answer: TRUE Diff: 2 Type: TF L.O.: 3-1 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Corporations typically use the cash basis for their transactions.

Answer: FALSE Explanation: The cash basis of accounting is not permitted by IFRS. Diff: 1 Type: TF L.O.: 3-1 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) The cash basis of accounting records the impact of all business transactions as they occur.

Answer: FALSE Explanation: The cash-basis of accounting only records business transactions involving the receipt or payment of cash.

Diff: 1 Type: TF L.O.: 3-1 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

3 .

10) Accrual accounting is more complex than the cash basis.

Answer: TRUE Diff: 1 Type: TF L.O.: 3-1 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) When using accrual accounting, the receipt or payment of cash is irrelevant to deciding whether a business transaction should be recorded.

Answer: TRUE Diff: 2 Type: TF L.O.: 3-1 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

4 .

12) The following transactions for Carleton Company occurred during January 2020: 1 Purchased a two-year insurance policy for cash, $8,400.

4 Paid utilities bill received in December 2019, $450.

9 Performed a service on account, $1,200.

16 Paid bimonthly salary to employees, $2,700.

21 Received $800 from a customer on account.

25 Received $600 from January 9 transaction.

30 Prepared the adjusting entry for insurance from January 1 transaction.

30 Accrued wages of $2,750.

Required: Show the amount of revenue and expense recognized for each transaction under both the accrual basis and the cash basis of accounting by completing the charts below.

Date

ACCRUAL BASIS Revenue Expense

Date

CASH BASIS Revenue Expense

5 .

Answer:

ACCRUAL BASIS Date Revenue Jan. 9 $1,200 Jan. 16 Jan. 30 Jan. 30

CASH BASIS Date Revenue Jan. 1 Jan. 4 Jan. 16 Jan. 21 $800 Jan. 25 $600

Expense $2,700 $ 350 $2,750

Expense $8,400 $ 450 $2,700

Diff: 2 Type: ES L.O.: 3-1 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3.2

Apply the revenue and expense recognition principles

1) An accrual refers to an event: A) where the expense or revenue is recorded after the cash settlement B) where the liability is recorded after the cash settlement C) where the expense or revenue is recorded before the cash settlement D) where the asset is recorded after the cash settlement Answer: C Diff: 3 Type: MC L.O.: 3-2 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

6 .

2) The accounting principle which tells accountants when to record revenue and in what amount is called the: A) expense recognition principle B) revenue recognition principle C) cost constraint D) going concern principle Answer: B Diff: 1 Type: MC L.O.: 3-2 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Under the revenue recognition principle, a business should record revenue when the business: A) receives an order from a customer for goods or services B) prepares the invoice (bill) for goods or services C) delivers goods or services to a customer D) receives payment from a customer for goods or services Answer: C Diff: 3 Type: MC L.O.: 3-2 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) On October 25, 2020 Quick Corp. prints a cheque for November's rent payment. Quick Corp. mails the cheque on October 27 to the landlord. The landlord receives the cheque October 31 and cashes the cheque on November 2. When should Quick Corp. record the rent expense associated with this transaction?

A) October 25, B) October 27 C) November 30 D) November 2 Answer: C Diff: 3 Type: MC L.O.: 3-2 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

7 .

5) An expense incurred in 2019 is not paid until 2020. Using the accrual basis of accounting, the expense should appear on: A) the 2020 income statement B) the 2019 income statement C) neither the 2019 nor 2020 income statement D) both the 2019 and 2020 income statements Answer: B Diff: 2 Type: MC L.O.: 3-2 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Cash for services to be performed in 2020 is received in 2019. Using the accrual basis of accounting, the revenue should appear on: A) the 2020 income statement B) both the 2019 and 2020 income statements C) neither the 2019 nor 2020 income statement D) the 2019 income statement Answer: A Diff: 3 Type: MC L.O.: 3-2 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) On December 15, 2019, a company receives an order from a customer for services to be performed on December 28, 2019. Due to a backlog of orders, the company does not perform the services until January 3, 2020. The customer pays for the services on January 6, 2020. When should revenue be recorded by the company?

A) December 15, 2019 B) January 3, 2020 C) December 28, 2019 D) January 6, 2020 Answer: B Diff: 2 Type: MC L.O.: 3-2 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8 .

8) Using accrual accounting, expenses are not recorded until the cash for the expense is disbursed.

Answer: FALSE Explanation: Expenses are recorded when there has been a decrease in future economic benefits and it can be reliably measured.

Diff: 2 Type: TF L.O.: 3-2 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) The IFRS revenue recognition standard is based on the idea that all business transactions involve contracts that exchange goods or services for cash or claims to receive cash.

Answer: TRUE Diff: 2 Type: TF L.O.: 3-2 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Under the revenue recognition principle, businesses should record revenue when it is earned regardless of when payment is received from the customer.

Answer: TRUE Diff: 2 Type: TF L.O.: 3-2 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) To obtain a new customer, a business sells merchandise to the customer for $100. Normally, the merchandise sells for $120. For this sale, the business should record revenue of $100, not $120.

Answer: TRUE Diff: 1 Type: TF L.O.: 3-2 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9 .

12) Under IFRS and ASPE one of the formal principles which set out the criteria that must be satisfied before an expense can be recognized is: A) There has been a decrease in future economic benefits caused by a decrease in an asset or an increase in a liability.

B) The expense cannot be reliably measured.

C) The ownership (or control) and benefits of the goods have been transferred to the customer, or the services have been provided to the customer.

D) There has been an increase in future economic benefits caused by a decrease in an asset or an increase in a liability.

Answer: A Diff: 2 Type: MC L.O.: 3-2 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) Under the ASPE revenue recognition standard, a sales transaction must satisfy three criteria before the seller can recognize revenue. Which of the following is not a criteria?

A) The amount of revenue to be received can be reliably measured.

B) The ownership (or control) and benefits of the goods have been transferred to the customer, or the services have been provided to the customer.

C) It is probable that the customer will pay for the goods or services when payment becomes due.

D) There has been a decrease in future economic benefits caused by a decrease in an asset or an increase in a liability.

Answer: D Diff: 2 Type: MC L.O.: 3-2 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

10 .

3.3

Record adjusting journal entries

1) An accountant who uses the accrual basis of accounting receives cash in advance for services yet to be performed. The entry to record this transaction will include a credit to which of the following accounts?

A) Unearned Service Revenue B) Prepaid Expense C) Unearned Expense D) Service Revenue Answer: A Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) A company using the accrual basis of accounting receives its utility bill which will be paid in two weeks. The entry will involve a debit to: A) Utilities Expense B) Utilities Payable C) Prepaid Utilities D) Prepaid Revenue Answer: A Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) A company using the accrual basis of accounting pays for one year of rent in advance. The entry to record this payment will involve a debit to: A) Rent Revenue B) Rent Expense C) Prepaid Rent D) Deferred Rent Revenue Answer: C Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11 .

4) A deferral refers to an event: A) where the recognition of an expense or revenue is recorded before the cash is paid or received B) where the liability for an expense is recorded after the expense is actually incurred C) where the liability for an expense is recorded before the expense is actually incurred D) where the recognition of an expense or revenue is recorded after the cash is paid or received Answer: D Diff: 3 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) On December 1, 2020, Cream Ale Ltd. receives $1,800 in advance for an agreement to brew beer during the months of December, January, and February. As of December 31, 2020, Cream Ale Ltd: A) would have a $1,200 liability to its client under accrual accounting, and would have a $1,800 liability to its client under cash-basis accounting B) would have recognized $600 revenue under accrual accounting, and would have recognized $1,800 revenue under cash-basis accounting C) would have a $0 liability to its client under accrual accounting, and would have a $1,200 liability to its client under cash-basis accounting D) would have recognized $600 cash under accrual accounting, and would have recognized $1,800 cash under cash-basis accounting Answer: B Explanation: $1,800/3 = $600 Diff: 3 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

12 .

6) An accountant who keeps his books using accrual accounting performs a service but does not receive payment at the time the service is performed. The entry made by the accountant will require a credit to: A) Unearned Expense B) Deferred Expense C) Service Revenue D) Unearned Service Revenue Answer: C Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) An accountant recognizes the impact of a business event as it occurs and accounts for it appropriately in which basis of accounting?

A) deferred B) accrual C) cash D) prepaid Answer: B Diff: 1 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) A company using the cash basis of accounting pays for one year of rent in advance. The entry to record this transaction will involve a debit to: A) Deferred Rent Revenue B) Rent Revenue C) Rent Expense D) Prepaid Rent Answer: C Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

13 .

9) Adjusting entries: A) are prepared at the option of the accountant B) are not needed under the accrual basis of accounting C) are prepared at the beginning of the accounting period to update all accounts D) are prepared at the end of the accounting period to update certain accounts Answer: D Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Which of the following is not one of the three basic categories of adjusting entries?

A) accruals B) depreciation C) deferrals D) expiration Answer: D Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) The adjusting entry for supplies used during the current period will involve a credit to: A) Supplies B) Supplies Expense C) Accrued Supplies D) Supplies Revenue Answer: A Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

14 .

12) An adjustment of an asset for which the business paid cash in advance is: A) a deferral B) an accrual C) unearned revenue D) revenue recognition Answer: A Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) The adjusting entry to allocate the cost of a plant asset such as equipment over its useful life involves a credit to: A) Equipment Expense B) Depreciation Expense C) Accumulated Equipment D) Accumulated Depreciation Answer: D Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) The adjusting entry to record salaries owed to employees but not paid until the next accounting period involves a credit to: A) Salary Expense B) Unearned Salaries C) Salary Payable D) Deferred Salary Answer: C Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

15 .

15) On September 1 of the current year, Prepaid Rent was debited for $3,000. This amount represents payment for one year of rent, paid in advance. The adjusting entry on December 31 will involve a: A) debit to Rent Expense for $2,000 B) debit to Rent Expense for $1,000 C) debit to Rent Payable for $2,000 D) debit to Rent Payable for $1,000 Answer: B Explanation: $3,000 x 4/12 = $1,000 Diff: 3 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) On October 31 of the current year, a contract was signed and a cheque received for services to be performed by October 31 of the following year. The Unearned Service Revenue account was credited for $4,800. Assuming services were performed evenly during the remainder of the year, the adjusting entry on December 31 will involve a: A) credit to Unearned Service Revenue $800 B) credit to Service Revenue for $4,000 C) credit to Service Revenue $800 D) debit to Unearned Service Revenue $4,000 Answer: C Explanation: $4,800 x 2/12 = $800 Diff: 3 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

16 .

17) On December 31, 2020, salaries owed to employees total $5,650 and will be paid on January 4, 2021. The adjusting entry prepared on December 31, 2020, includes a: A) debit to Salary Expense for $5,650 B) debit to Salary Payable for $5,650 C) credit to Cash for $5,650 D) credit to Salary Expense for $5,650 Answer: A Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18) Accumulated depreciation is classified as a(n): A) expense account B) contra-asset account C) asset account D) liability account Answer: B Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 19) Honey Brown Inc. paid six months' rent in advance totalling $9,000. At the end of the first month, the adjusting entry would include a: A) debit to Prepaid Rent for $7,500 B) debit to Prepaid Rent for $1,500 C) debit to Rent Expense for $7,500 D) debit to Rent Expense for $1,500 Answer: D Explanation: $9,000/6 =$1,500 Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

17 .

20) A journal entry contains a debit to an asset account and a credit to a revenue account. This is an example of a(n): A) accrued revenue B) deferred expense C) unearned revenue D) accrued expense Answer: A Diff: 3 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 21) A journal entry contains a debit to an expense account and a credit to a payable account. This is an example of a(n): A) accrued revenue B) accrued expense C) deferred revenue D) deferred expense Answer: B Diff: 3 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 22) The adjusting entry made to record prepaid insurance that has expired during the period would include a debit to: A) Unearned Insurance B) Prepaid Insurance C) Accrued Insurance D) Insurance Expense Answer: D Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

18 .

23) Upper Canada Corp. bought $72,000 of equipment with an estimated service life of 4 years.

The equipment will be worthless at the end of its life. The annual amount of depreciation on this equipment is: A) $18,000 B) $36,000 C) $72,000 D) $0 Answer: A Explanation: $72,000/4 = $18,000 Diff: 1 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 24) Chance Stables purchased a new baler as its annual equipment purchase. The baler was purchased for $10,000 down and a $50,000 note and has an estimated life of 8 years. The baler will be worthless at the end of its life. The annual amount of depreciation on this equipment is: A) $7,500 B) $6,250 C) $10,000 D) $50,000 Answer: A Explanation: $60,000/8 = $7,500 Diff: 1 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

19 .

25) A journal entry contains a debit to the Cash account and a credit to the Unearned Service Revenue account. This is an example of a(n): A) deferred expense B) accrued expense C) accrued revenue D) deferred revenue Answer: D Diff: 3 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 26) Shaftebury Ltd. began operations and purchased $15,900 of supplies. By year end, $8,800 of supplies were still on hand. The adjusting entry at year end would include a: A) debit to Supplies for $8,800 B) credit to Supplies Expense for $7,100 C) credit to Supplies Expense for $8,800 D) debit to Supplies Expense for $7,100 Answer: D Explanation: $15,900 - $8,800 = $7,100 Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 27) Rover Ltd. had $8,200 of supplies on hand at the beginning of the month. A count at the end of the month indicated $1,350 of supplies were still on hand. The adjusting entry at year end would include a: A) debit to Supplies Expense for $6,850 B) credit to Supplies Expense for $6,850 C) credit to Supplies Expense for $1,350 D) debit to Supplies for $1,350 Answer: A Explanation: $8,200 - $1,350 = $6,850 Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 20 .

28) The adjusted trial balance serves as the basis for preparing: A) the balance sheet only B) the income statement only C) both the balance sheet and the income statement D) the statement of retained earnings Answer: C Diff: 1 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 29) What will be the result if the adjusting entry to record the current period's depreciation on equipment is not recorded?

A) The net income for the period will be understated.

B) The net income for the period will be overstated.

C) The net income for the period will not be affected.

D) The assets for the period will be understated.

Answer: B Diff: 3 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 30) What will be the result if no adjusting entry is made to record revenue earned during the current period when the cash was received in the last accounting period?

A) The assets will be understated.

B) The liabilities will be understated.

C) The liabilities will be overstated.

D) The assets will be overstated.

Answer: C Diff: 3 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

21 .

31) What effect does an accrued expense adjustment have on the financial statements?

A) The adjustment increases expenses and decreases assets.

B) The adjustment decreases expenses and increases liabilities.

C) The adjustment increases expenses and increases liabilities.

D) The adjustment increases expenses and increases net income.

Answer: C Diff: 3 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 32) On June 1, 2020, Destiny Ltd. received $3,600 for services to be performed evenly over the next twelve months. The adjusting entry on December 31, 2020, would include a: A) debit to Cash for $3,600 B) debit to Service Revenue for $1,500 C) debit to Unearned Service Revenue for $1,500 D) debit to Unearned Service Revenue for $2,100 Answer: D Explanation: $3,600 x 7/12 = $2,100 Diff: 3 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 33) What effect does an accrued revenue adjustment have on a company's net income?

A) The adjustment increases net income for the period.

B) The adjustment decreases net income for the period.

C) The adjustment has no effect on net income.

D) The effect of the adjustment cannot be determined with the information given.

Answer: A Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

22 .

34) An adjustment is made for an expense incurred prior to its payment. The adjustment is called a(n): A) accrued expense B) prepaid expense C) unearned expense D) accrued asset Answer: A Diff: 3 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 35) Allocating the cost of long-lived tangible assets used in the operations of a business is referred to as: A) depreciation B) a deferral C) an accrual D) using up the asset Answer: A Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 36) Unearned Revenue is a(n): A) revenue account B) expense account C) asset account D) liability account Answer: D Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

23 .

37) What is the liability called that arises from an expense that the business has incurred but has not yet paid?

A) It is known as an unearned expense.

B) It is called a deferred expense.

C) It is called a prepaid expense.

D) It is referred to as an accrued expense.

Answer: D Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 38) The adjusting entry for accrued revenue always involves a: A) debit to a revenue account and a credit to an asset account B) debit to a liability account and a credit to an asset account C) debit to an asset account and a credit to a liability account D) debit to an asset account and a credit to a revenue account Answer: D Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 39) The adjusting entry for a prepaid expense always involves a(n): A) liability account and a revenue account B) expense account and a liability account C) asset account and a liability account D) expense account and an asset account Answer: D Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

24 .

40) The adjusting entry for unearned revenue always involves a: A) debit to a revenue account and a credit to a liability account B) debit to a liability account and a credit to a revenue account C) debit to an asset account and a credit to a liability account D) debit to an asset account and a credit to a revenue account Answer: B Diff: 2 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 41) Prepaid expenses are often referred to as deferrals because the recording of the expense is deferred until after cash is paid.

Answer: TRUE Diff: 3 Type: TF L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 42) Depreciation is an expense that gradually reduces the value of an asset over its useful life.

Answer: TRUE Diff: 2 Type: TF L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 43) If prepaid rent has expired during the current period and no adjustment has been made, net income for the current period will be overstated.

Answer: TRUE Diff: 3 Type: TF L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

25 .

44) If deferred revenue has been earned by the end of the current period and no adjustment is recorded, net income for the current period will be understated.

Answer: TRUE Diff: 3 Type: TF L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 45) Adjusting journal entries recorded at the end of an accounting period update only revenue and expense accounts, and have no effect on either asset or liability accounts.

Answer: FALSE Explanation: Accrual accounting ensures that all assets and liabilities have been recorded at the period end, and that all revenues earned and expenses incurred during the period have been included in the accounts.

Diff: 2 Type: TF L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 46) A liability that the business has incurred but has not yet paid is known as accrued revenue.

Answer: FALSE Explanation: Expenses that have not yet been billed or paid are called accrued expenses.

Diff: 2 Type: TF L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 47) An adjusted trial balance is prepared without incorporating any end-of-period adjustments.

Answer: FALSE Explanation: The adjusted trial balance presents the adjustments made to the account balances contained in the unadjusted trial balance.

Diff: 1 Type: TF L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 26 .

48) An expense that a business has paid for but not yet incurred is an accrued expense.

Answer: FALSE Explanation: Expenses that have not yet been billed or paid are called accrued expenses.

Diff: 2 Type: TF L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 49) Deferred revenue occurs when cash is received from a customer before work or the sale is completed.

Answer: TRUE Diff: 2 Type: TF L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 50) The adjusting entry for unearned revenue always involves an asset account and a revenue account.

Answer: FALSE Explanation: The adjusting entry for unearned revenue reduces a liability account and increases a revenue account.

Diff: 2 Type: TF L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

27 .

51) Prepare adjusting entries dated December 31, 2020, based on the following data. a. A two-year insurance policy costing $3,000 was purchased on October 31, 2020. b. Salaries owed to employees on December 31, 2020, amount to $2,300. c. The balance in Supplies before adjustment is $1,400. A physical count reveals $450 of supplies on hand on December 31, 2020. d. Depreciation on office equipment for the year is $1,869. e. Unearned Service Revenue has a balance of $4,200 before adjustment. Records show that $2,725 of that amount has been earned by December 31, 2020.

Answer: Dec. 31 Insurance Expense 250 Prepaid Insurance 250 ($3,000 x 2/24) 31 Salary Expense 2,300 Salary Payable 2,300 31 Supplies Expense 950 Supplies ($1,400 - $450) 31 Depreciation ExpenseOffice Equipment 1,869 Accumulated DepreciationOffice Equipment

950

1,869

31 Unearned Service Revenue 2,725 Service Revenue 2,725 Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

28 .

52) Given the following adjustment data, state whether the resulting adjustment will be a deferral or an accrual. a. Supplies were used during the month. b. Estimated the monthly utilities bill and recorded the expense. c. Unearned service revenue had been earned by the end of the month. d. Recorded the monthly depreciation on the office equipment. e. Recorded salaries owed to employees at the end of the month but not paid until early next month. f. Recorded interest earned on a note receivable but not yet collected.

Answer: a. deferral b. accrual c. deferral d. deferral e. accrual f. accrual Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 53) Explain the concept of unearned revenue using your student tuition fees. How does your academic institution account for the payment of tuition in its financial statements?

Answer: Your university or college collects cash from you in August or September before providing any course lectures, tutorials, etc. In other words, they have collected cash before providing any services. Until this takes place your tuition is considered unearned revenue. When the course is delivered the administration can begin to recognized revenue.

Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

29 .

54) Explain the concept of accrued expenses using a Le Chateau store as an example.

Answer: An accrued expense is one where Le Chateau has received the benefit but not yet paid for something. One example could be electricity for the store, it is used during the month of May but the bill may appear early in the next month June. The same may be true for other expenses such as the telephone.

Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

30 .

55) Prepare the necessary adjusting entries on December 31, 2020, based on the following unadjusted and adjusted trial balances.

Peanut Butter & Jam Inc. Unadjusted Trial Balance December 31, 2020 Debit Credit Cash $25,500 Accounts receivable 15,000 Supplies 4,500 Prepaid insurance 5,000 Equipment 89,000 Accumulated depreciation-equipment $6,000 Accounts payable 1,800 Unearned service revenue 3,700 Common shares 93,200 Retained earnings 21,000 Service revenue 30,700 Utilities expense 5,800 Salary expense 9,900 Advertising expense 1,700 ________ $156,400 $156,400 Peanut Butter & Jam Inc. Adjusted Trial Balance December 31, 2020 Debit Cash $25,500 Accounts receivable 15,000 Supplies 3,000 Prepaid insurance 4,200 Equipment 89,000 Accumulated depreciation-equipment Accounts payable Salary payable Unearned service revenue Common shares Retained earnings Service revenue Utilities expense 5,800 Supplies expense 1,500 Salary expense 11,100 Insurance expense 800 Depreciation expense-equipment 600 Advertising expense 1,700 $158,200

31 .

Credit

$6,600 1,800 1,200 2,500 93,200 21,000 31,900

________ $158,200

Answer: Dec. 31 Supplies 31 Insurance Expense Prepaid Insurance

Supplies Expense 1,500 1,500 800 800

31 Depreciation Expense -Equipment 600 Accumulated Depreciation-Equipment 31 Salary Expense Salary Payable

600

1,200 1,200

31 Unearned Service Revenue 1,200 Service Revenue 1,200 Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

32 .

56) State the effect on net income, total assets, total liabilities, and shareholders' equity if the following adjustments are omitted by completing the chart below. a. Utilities expense incurred but not yet paid, $350. b. Supplies used during the current period, $650. c. Service revenue earned, but not yet collected, $4,500. d. Unearned revenue earned during the period, $900. e. Depreciation on equipment, $2,600.

Net Income

Total Assets

Total Liabilities

Total Assets

Total Liabilities

Shareholders' Equity

a. b. c. d. e.

Answer: Net Income a. b. c. d. e.

over 350 over 650 under 4,500 under 900 over 2,600

under 350 over 650 under 4,500 over 900 over 2,600

Shareholders' Equity over 350 over 650 under 4,500 under 900 over 2,600

Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

33 .

57) The December 31, 2020, trial balance of Pilsner Inc. included the following selected accounts: Accounts receivable $176,000 Unearned service revenue 24,000 Prepaid rent 69,000 Prepaid insurance 36,000 Equipment 280,000 Accumulated depreciation-equipment 30,000 Salary expense 130,000 Additional data: ∙ One-third of the revenue received in advance has been earned by December 31, 2020. ∙ The prepaid insurance represents the annual premium on a policy providing coverage starting September 1, 2020. ∙ Since the last payday, employees have earned an additional $2,500 which has not yet been paid or recorded. ∙ The equipment has an estimated life of 10 years and no expected value at the end of its life. ∙ Services performed but unbilled and uncollected at year end amount to $6,500. ∙ The prepaid rent relates to half a year beginning on October 1, 2020.

Prepare the necessary year-end adjusting entries as of December 31, 2020 Answer: Dec. 31 Depreciation Expense-Equipment 28,000 Accumulated Depreciation-Equipment 28,000 ($280,000/10) 31 Accounts Receivable 6,500 Service Revenue 6,500 31 Unearned Service Revenue 8,000 Service Revenue 8,000 ($24,000/3) 31 Rent Expense 34,500 Prepaid Rent 34,500 ($69,000 x 3/6) 31 Insurance Expense 12,000 Prepaid Insurance 12,000 ($36,000 x 4/12) 31 Salary Expense 2,500 Salary Payable 2,500 Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 34 .

58) The December 31, 2020, trial balance of Sable Inc. included the following accounts: Cash $956,000 Accounts receivable $30,000 Unearned service revenue 20,000 Supplies 13,500 Prepaid insurance 12,000 Equipment 80,000 Accumulated depreciation-equipment30,000 Salary expense 130,000 Additional data: ∙ An inventory count of supplies indicated $1,500 were still on hand at year end. ∙ The prepaid insurance represents the annual premium on a policy providing coverage starting July 1, 2020. ∙ Since the last payday, employees have earned an additional $15,500 which has not yet been paid or recorded. ∙ Sable Inc has now earned half of the unearned revenue. ∙ The equipment has an estimated life of 10 years and no expected value at the end of its life. ∙ Services performed but unbilled and uncollected at year end amount to $9,250.

Prepare the necessary year-end adjusting entries as of December 31, 2020 Answer: Dec. 31 Depreciation Expense-Equipment 8,000 Accumulated Depreciation-Equipment 8,000 ($80,000/10) 31 Accounts Receivable 9,250 Service Revenue 9,250 31 Unearned Service Revenue 10,000 Service Revenue 10,000 ($20,000/2) 31 Supplies Expense 12,000 Supplies 12,000 ($13,500 - $1,500) 31 Insurance Expense 6,000 Prepaid Insurance 6,000 ($12,000 x 6/12) 31 Salaries expense 15,500 Salaries payable 15,500 Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 35 .

59) Pale Ale Ltd. had the following trial balance as of June 30, 2020: Pale Ale Ltd. Trial Balance June 30, 2020 Debit Credit Cash $10,600 Accounts receivable 13,200 Supplies 2,400 Prepaid insurance 1,500 Equipment 38,500 Accumulated depreciation-equipment $8,300 Accounts payable 2,500 Unearned service revenue 8,900 Common shares 15,000 Retained earnings 10,100 Service revenue 35,000 Salary expense 11,200 Utilities expense 2,400 ________ $79,800 $79,800 Additional information: ∙ Supplies used during the month, $450. ∙ Prepaid insurance expired during the month, $300. ∙ Depreciation on equipment for the month, $550. ∙ Unearned service revenue earned during the month, $2,200. ∙ Accrued salary expense at the end of the month, $650.

Based on the trial balance and the additional data, prepare an adjusted trial balance dated June 30, 2020.

36 .

Answer:

Pale Ale Ltd. Adjusted Trial Balance June 30, 2020 Debit Credit Cash $10,600 Accounts receivable 13,200 Supplies 1,950 Prepaid insurance 1,200 Equipment 38,500 Accumulated depreciation-equipment $8,850 Accounts payable 2,500 Unearned service revenue 6,700 Salary payable 650 Common shares 15,000 Retained earnings 10,100 Service revenue 37,200 Salary expense 11,850 Supplies expense 450 Insurance expense 300 Depreciation expense-equipment 550 Utilities expense 2,400 _______ $81,000 $81,000 Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

37 .

60) Prepare adjusting entries dated December 31, 2020, based on the following data. a. A two-year insurance policy costing $6,000 was purchased on October 31, 2020. b. Salaries owed to employees on December 31, 2020, amount to $4,600. c. The balance in Supplies before adjustment is $2,800. A physical count reveals $900 of supplies on hand on December 31, 2020. d. Depreciation on office equipment for the year is $1,869.

Answer: Dec. 31 Insurance Expense 500 Prepaid Insurance 500 ($6,000 x 2/24) 31 Salary Expense 4,600 Salary Payable 4,600 31 Supplies Expense 1,900 Supplies 1,900 ($2,800 - $900) 31 Depreciation ExpenseOffice Equipment 1,869 Accumulated DepreciationOffice Equipment 1,869 Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 61) Briefly explain the difference between the cash basis of accounting and the accrual basis of accounting. Are adjusting entries necessary under both methods?

Answer: The cash basis of accounting recognizes revenues and expenses only when cash is received or paid. There is no need for receivable or payable accounts since no accruals are made.

This eliminates the need for adjustments at the end of the period.

Under the accrual basis of accounting, the accountant recognizes the impact of a business transaction on an entity when the transaction occurs, whether or not cash is received or paid. The accountant will record revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid. Adjustments are usually necessary at the end of the period to update certain asset and liability accounts and to recognize revenues that have been earned but not collected and expenses that have been incurred but not paid.

Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 38 .

62) Ed Ng is a friend of yours from university. After finishing high school he decided to open his own human resources consulting business rather than working for a large bureaucratic organization. He recently opened his business, and has contracted his services to a number of local retailers. He is paid a monthly fee for his services.

He has just received his first set of financial statements from his accountant. He is quite upset.

The statements show a cash balance of $7,200 at the end of the month, but a net income of only $1,000. He has written you a letter, asking you whether such a situation is possible, or whether he should find another accountant.

Please explain to Ed what happened.

Answer: The situation described is entirely possible given that the accountant prepared the financial statements in accordance with generally accepted accounting principles (GAAP). Under GAAP, financial statements must be prepared using accrual accounting.

Accrual accounting means that revenues are recognized when earned, not necessarily when the cash is received. If, for example, cash was collected in advance of providing customer services, the cash would show on the balance sheet but no revenue would be recorded until later when the cash has been earned. As well, under accrual accounting, expenses are matched to revenue and may be recorded before the cash has been paid. These accrued expenses mean that the income statement may show expenses, which would lower net income, without a related reduction in cash.

Either of these two reasons would lead to the income statement showing less earnings than the cash in the bank account.

Sincerely, Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

39 .

63) Barley & Hops Company was formed in 2020. During the year the company had the following events occur: 1. The company issued $100,000 in common shares for cash.

2. The company purchased equipment for $15,000, paying $5,000 down and signing a 1-year, 8% note for the balance.

3. The company hired 4 employees.

4. The company had sales of $250,000. All sales were on account.

5. The company incurred the following expenses: rent: $2,000, salaries: $20,000, advertising $2,000 and utilities $4,000. All expenses were paid in cash.

Required: Prepare the journal entries to record the above transactions.

Answer: 1. Dr. Cash 100,000 Cr. Common shares 100,000 2. Dr. Equipment Cr. Cash Cr. Bank loan

15,000 5,000 10,000

3. Not an accounting transaction — no entry required.

4. Dr. Accounts receivable Cr. Sales revenue

250,000 250,000

5. Dr. Rent expense 2,000 Salaries expense 20,000 Advertising 2,000 Utilities 4,000 Cr. Cash 28,000 Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

40 .

64) Blitz Limited has recently hired a junior accountant. The accountant noticed that his predecessor had made several mistakes in recording transactions during the most recent fiscal year. For each of the following situations, prepare the adjusting entry that should be made to correct the error.

1. Blitz received a $15,000 advance from a client for work that is going to be completed in the next year. The bookkeeper debited cash and credited revenue.

2. Blitz purchased a new piece of equipment at a cost of $36,000. At the time of purchase, the equipment was debited to repairs and maintenance expense. The equipment is expected to have a useful life of 10 years. Blitz uses straight-line depreciation. Assume that the equipment had been in use for a full year.

3. During the year Blitz declared $5,000 in dividends. The bookkeeper had recorded this payment as a debit to dividends expense and a credit to cash.

Answer: 1. Dr. Service revenue 15,000 Cr. Unearned revenue 15,000 2. Dr. Equipment Cr. Repairs and Maintenance expense

36,000 36,000

Dr. Depreciation expense (36,000 ÷ 10 years) Cr. Accumulated depreciation

3,600 3,600

3. Dr. Retained Earnings 5,000 Cr. Dividend payable 5,000 Diff: 2 Type: ES L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

41 .

65) The journal entry to accrue for interest expense is a credit to which account?

A) Cash B) Interest expense C) Accounts payable D) Interest payable Answer: D Diff: 1 Type: MC L.O.: 3-3 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3.4

Prepare the financial statements

1) In what order are financial statements generally prepared?

A) balance sheet, statement of retained earnings, and income statement B) income statement, statement of retained earnings, and balance sheet C) income statement, balance sheet, and statement of retained earnings D) statement of retained earnings, income statement, and balance sheet Answer: B Diff: 2 Type: MC L.O.: 3-4 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) Why does an accountant prepare the income statement first?

A) Net income must be computed first to properly complete the other financial statements.

B) It is easier to adjust income statement accounts first than it is to adjust balance sheet accounts.

C) Management, being profit oriented, is more interested in the company's net income than in the assets the company owns and the debts it owes.

D) There is no particular order in which financial statements must be prepared.

Answer: A Diff: 3 Type: MC L.O.: 3-4 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

42 .

3) Net income appears on: A) only the income statement B) both the income statement and the statement of retained earnings C) both the income statement and the balance sheet D) only the balance sheet Answer: B Diff: 2 Type: MC L.O.: 3-4 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) The ending balance in Retained Earnings is found on: A) both the statement of retained earnings and the balance sheet B) only the statement of retained earnings C) both the income statement and the balance sheet D) only the balance sheet Answer: A Diff: 2 Type: MC L.O.: 3-4 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Prepaid expense accounts should appear on the balance sheet.

Answer: TRUE Diff: 2 Type: TF L.O.: 3-4 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

43 .

6) The statement of retained earnings is the first financial statement to be prepared, followed by the balance sheet, and then the income statement.

Answer: FALSE Explanation: Net income must be computed first to properly complete the other financial statements.

Diff: 2 Type: TF L.O.: 3-4 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) Retained earnings for the beginning of a period appears on the statement of retained earnings while the ending balance of retained earnings appears on the statement of retained earnings and the balance sheet.

Answer: TRUE Diff: 3 Type: TF L.O.: 3-4 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

44 .

8) The adjusted trial balance for Fine Porter Inc. as of December 31, 2020, is shown below.

Prepare the income statement and statement of retained earnings for the year ended December 31, 2020.

Fine Porter Inc. Adjusted Trial Balance December 31, 2020 Debit Credit Cash $30,500 Accounts receivable 23,200 Supplies 3,950 Prepaid insurance 2,600 Equipment 48,500 Accumulated depreciation-equipment $18,800 Accounts payable 3,500 Unearned service revenue 8,700 Salary payable 1,650 Common shares 24,000 Retained earnings 20,000 Dividends 6,000 Service revenue 70,300 Salary expense 25,850 Supplies expense 1,850 Insurance expense 700 Depreciation expense-equipment 900 Utilities expense 2,900 ________ $146,950 $146,950

45 .

Answer:

Fine Porter Inc. Income Statement For the Year Ended December 31, 2020

Service revenue Expenses: Salary expense $25,850 Supplies expense 1,850 Insurance expense 700 Depn. expense-equipment 900 Utilities expense 2,900 Net income Fine Porter Inc. Statement of Retained Earnings For the Year Ended December 31, 2020 Retained earnings, January 1, 2020 Add: Net income

$70,300

32,200 $38,100

$20,000 38,100 58,100 Less: Dividends (6,000) Retained earnings, December 31, 2020 $ 52,100 Diff: 2 Type: ES L.O.: 3-4 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

46 .

9) The unadjusted trial balance for Water & Malt Inc. appears below as of December 31, 2020.

Water & Malt Inc. Unadjusted Trial Balance December 31, 2020 Debit Credit Cash $35,300 Accounts receivable 16,000 Prepaid insurance 5,000 Supplies 1,500 Equipment 20,000 Accumulated depreciation-equipment $3,200 Accounts payable 11,000 Unearned service revenue 9,800 Common shares 27,000 Retained earnings 17,000 Dividends 1,000 Service revenue 24,600 Salary expense 8,200 Utilities expense 800 Rent expense 3,600 Advertising expense 1,200 ________ $92,600 $92,600 Additional data is as follows: ∙ Supplies used during the current year amount to $700. ∙ Accrued salaries on December 31, 2020, amount to $500. ∙ Unearned service revenue earned during the year amounts to $3,500. ∙ Depreciation for the current year amounts to $2,000. ∙ Prepaid insurance on hand on December 31, 2020, amounts to $800.

Based on the unadjusted trial balance and the additional data, prepare a balance sheet for Water & Malt Inc. dated December 31, 2020.

47 .

Answer:

Water & Malt Inc. Balance Sheet December 31, 2020

Assets Cash $35,300 Accounts receivable 16,000 Prepaid insurance 800 Supplies 800 Equipment $20,000 Less: Accumulated depreciation 5,200 14,800

Liabilities Accounts payable $11,000 Salary payable 500 Unearned service revenue 6,300 Total liabilities 17,800 Shareholders' Equity Common shares 27,000 Retained earnings 22,900 Total S/H equity 49,900 Total liabilities and S/H equity $67,700

Total assets $67,700 Diff: 2 Type: ES L.O.: 3-4 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

48 .

10) Given the adjusted trial balance for Destiny Inc. below as of December 31, 2020 prepare the income statement and statement of retained earnings for the year ended December 31, 2020.

Destiny Inc. Adjusted Trial Balance December 31, 20120 Debit Credit Cash $62,500 Accounts receivable 40,200 Supplies 550 Prepaid insurance 820 Equipment 36,000 Accumulated depreciation-equipment $8,800 Accounts payable 6,500 Unearned service revenue 15,700 Salary payable 42,650 Common shares 23,295 Retained earnings 10,000 Dividends 8,000 Service revenue 82,200 Salary expense 32,850 Supplies expense 3,200 Insurance expense 800 Depreciation expense-equipment 925 Utilities expense 3,300 ________ $189,145 $189,145

49 .

Answer:

Destiny Inc. Income Statement For the Year Ended December 31, 2020

Service revenue $82,200 Expenses: Salary expense $32,850 Supplies expense 3,200 Insurance expense 800 Depn. expense-equipment 925 Utilities expense 3,300 41,075 Net income $41,125 Destiny Inc. Statement of Retained Earnings For the Year Ended December 31, 2020 Retained earnings, January 1, 2020 Add: Net income

$10,000 41,125 51,125 (8,000) $43 ,125

Less: Dividends Retained earnings, December 31, 2020 Diff: 2 Type: ES L.O.: 3-4 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

50 .

11) The unadjusted trial balance for Peanut Butter & Jam Inc. appears below as of December 31, 2020.

Peanut Butter & Jam Inc. Unadjusted Trial Balance December 31, 2020 Debit Credit Cash $55,500 Accounts receivable 6,000 Prepaid insurance 15,000 Supplies 3,000 Equipment 40,000 Accumulated depreciation-equipment $4,000 Accounts payable 21,000 Unearned service revenue 10,500 Common shares 48,250 Retained earnings 12,000 Dividends 5,000 Service revenue 44,600 Salary expense 7,200 Utilities expense 1,200 Rent expense 5,250 Advertising expense 2,200 ________ $140,350 $140,350 Additional data is as follows: ∙ Unearned service revenue earned during the year amounts to $8,500. ∙ Depreciation for the current year amounts to $4,000. ∙ Prepaid insurance consists of a policy purchased on January 1, 2020 for a 15 months coverage. ∙ Supplies used during the current year amount to $1,500. ∙ Accrued salaries on December 31, 2020, amount to $2,500.

Based on the unadjusted trial balance and the additional data, prepare a balance sheet for Peanut Butter & Jam Inc. dated December 31, 2020.

51 .

Answer:

Peanut Butter & Jam Inc. Balance Sheet December 31, 2020

Assets Cash $55,500 Accounts receivable 6,000 Prepaid insurance 3,000 Supplies 1,500 Equipment $40,000 Less: Accumulated depreciation 8,000 32,000

Total assets

$98,000

Liabilities Accounts payable Salary payable Unearned service revenue Total liabilities Shareholders' Equity Common shares Retained earnings Total S/H equity Total liabilities and S/H equity

$21,000 2,500 2,000 25,500 48,250 24,250 72,500 $98,000

Net Income $17,250 = $44,600 + $8,500 - $4,000 - $12,000 - $1,500 -$ 2,500 - $7,200 - $1,200 - $5,250 $2,200 Retained Earnings $24,250 = $12,000 + $17,250 - $5,000 Diff: 2 Type: ES L.O.: 3-4 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

52 .

12) A classified balance sheet: A) uses report format.

B) separates current assets from non-current assets and currents liabilities from non-current liabilities.

C) does not separate current and non-current assets or liabilities.

D) uses account format.

Answer: B Diff: 1 Type: MC L.O.: 3-4 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) A multi-step income statement typically includes the calculation of gross profit.

Answer: TRUE Diff: 2 Type: TF L.O.: 3-4 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3.5

Record closing journal entries

1) Assume the beginning balance in the Retained Earnings account is zero. If a debit balance exists in Retained Earnings after closing out revenues and expenses at the end of the current period, it indicates: A) the company had net income for the current period B) an increase in cash for the current period C) the company incurred a net loss for the current period D) a decrease in cash for the current period Answer: C Diff: 2 Type: MC L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

53 .

2) On a cash flow statement, closing entries will: A) be shown in the operating activities B) be shown in the investing activities C) be shown in the financing activities D) not appear on the statement Answer: D Diff: 2 Type: MC L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Which of the following accounts is not considered a "permanent" account?

A) Inventory B) Rent Expense C) Accounts Payable D) Common Shares Answer: B Diff: 2 Type: MC L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) The entry made to close service revenue would include: A) a debit to Service Revenue and a credit to Dividends B) a debit to Service Revenue and a credit to net income C) a debit to Retained Earnings and a credit to Service Revenue D) a debit to Service Revenue and a credit to Retained Earnings Answer: D Diff: 2 Type: MC L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

54 .

5) The closing entry for utilities expense would include: A) a debit to Utilities Expense and a credit to Retained Earnings B) a debit to net income and a credit to Utilities Expense C) a debit to Utilities Expense and a credit to net income D) a debit to Retained Earnings and a credit to Utilities Expense Answer: D Diff: 2 Type: MC L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Accounts which are closed at the end of an accounting period include: A) revenues, expenses, and dividends B) assets, revenues, and dividends C) revenues, dividends, and liabilities D) assets, revenues, and expenses Answer: A Diff: 2 Type: MC L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) The closing entry made for dividends would include: A) a debit to Dividends and a credit to net income B) a debit to Retained Earnings and a credit to Dividends C) a debit to net income and a credit to Dividends D) a debit to Dividends and a credit to Retained Earnings Answer: B Diff: 2 Type: MC L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

55 .

8) The post closing trial balance for a company will not contain an account balance for: A) retained earnings B) assets C) revenues D) liabilities Answer: C Diff: 2 Type: MC L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) Closing entries transfer the balances of revenue, expense, and dividends accounts to which account?

A) Share Capital B) Net Income C) Common Shares D) Retained Earnings Answer: D Diff: 2 Type: MC L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) The post closing trial balance contains which of the following accounts?

A) Service Revenue B) Cost of Goods Sold C) Retained Earnings D) Depreciation Expense Answer: C Diff: 2 Type: MC L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

56 .

11) The post closing trial balance contains which of the following accounts?

A) Depreciation Expense B) Service Revenue C) Accumulated Depreciation D) Dividends Answer: C Diff: 2 Type: MC L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) Which of the accounts listed below is a permanent (or real) account?

A) Dividends B) Rent Expense C) Sales Revenue D) Salary Payable Answer: D Diff: 2 Type: MC L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) Salaries expense is a permanent account, so it is not closed as the end of the period.

Answer: FALSE Explanation: Expenses are temporary accounts closed at the end of the year.

Diff: 2 Type: TF L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

57 .

14) To close the revenue account a credit is required to retained earnings.

Answer: TRUE Diff: 2 Type: TF L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) Most balance sheet accounts must be closed at the end of the accounting period after preparation of the financial statements.

Answer: FALSE Explanation: Balance sheet accounts are permanent accounts because their balances carry forward from year to year.

Diff: 2 Type: TF L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) If the balance in Retained Earnings on January 1, 2020 was zero, then a credit balance in Retained Earnings on December 31, 2020 (after closing revenue and expense accounts) represents net income for the accounting period providing that no dividends were declared.

Answer: TRUE Diff: 3 Type: TF L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 17) "Closing the books" adjusts the balances of asset and liability accounts back to zero for the next accounting period.

Answer: FALSE Explanation: Closing entries transfer the balances in all revenue, expense, and dividend accounts into the Retained Earnings account.

Diff: 2 Type: TF L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 58 .

18) The closing entry required to reset the dividends account for the next accounting period includes a debit to dividends and a credit to retained earnings.

Answer: FALSE Explanation: Credit the Dividends account for the amount of its debit balance, and debit Retained Earnings for the same amount.

Diff: 2 Type: TF L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

59 .

19) Given the following year end balances for Guest Inc. as of December 31, 2020, prepare the closing entries for Guest.

Cash $26,350 Accounts receivable 8,400 Supplies 350 Prepaid insurance 4,100 Building 60,350 Accumulated depreciation-building 5,500 Equipment 43,300 Accumulated depreciation-equipment 6,400 Accounts payable 9,330 Unearned service revenue 25,900 Salary payable 1,900 Common shares 40,200 Retained earnings 12,250 Dividends 5,500 Service revenue 22,900 Advertising expense 2,800 Utilities expense 1,900 Insurance expense 850 Supplies expense 450 Depreciation expense-building 2,200 Depreciation expense-equipment 650 Salary expense 8,900 Answer: Service Revenue 22,900 Retained Earnings $22,900 Retained Earnings 17,750 Advertising Expense $2,800 Utilities Expense 1,900 Insurance Expense 850 Supplies Expense 450 Depn Expense — building 2,200 Depn Expense — equipment 650 Salary Expense 8,900 Retained Earnings 5,500 Dividends $5,500 Diff: 2 Type: ES L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

60 .

20) Selected accounts from the general ledger of MacLays Ltd. as of December 31, 2020, are shown below. Prepare the necessary closing entries.

Cash $23,000 Accounts receivable 7,800 Supplies 900 Prepaid insurance 1,750 Building 30,500 Accumulated depreciation-building 3,500 Office equipment 20,000 Accumulated depreciation-office equipment4,500 Accounts payable 6,450 Unearned service revenue 3,500 Salary payable 1,700 Common shares 39,000 Retained earnings 9,800 Dividends 2,000 Service revenue 30,400 Depreciation expense-building 700 Depreciation expense-office equipment 400 Insurance expense 250 Supplies expense 300 Utilities expense 2,600 Salary expense 9,850 Answer: Dec. 31 Service Revenue 30,400 Retained Earnings 31 Retained Earnings 14,100 Depreciation Expense -Building Depreciation Expense -Office Equipment Insurance Expense Supplies Expense Utilities Expense Salary Expense

30,400

700 400 250 300 2,600 9,850

31 Retained Earnings 2,000 Dividends 2,000 Diff: 2 Type: ES L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 61 .

21) Prohibition Ltd. trial balance at December 31, 20207, is shown below. Prepare the closing entries.

Prohibition Ltd. Trial Balance December 31, 2020 Debit Credit Cash $16,400 Accounts receivable 2,500 Prepaid insurance 3,400 Prepaid rent 6,500 Supplies 3,700 Equipment 27,500 Accumulated depreciation-equipment $10,200 Furniture 15,000 Accumulated depreciation-furniture 7,600 Accounts payable 5,400 Salary payable 1,400 Unearned revenue 6,500 Common shares 20,600 Retained earnings 15,800 Dividends 3,000 Fees earned 28,900 Salary expense 4,900 Depreciation expense-equipment 3,800 Depreciation expense-furniture 2,500 Rent expense 4,800 Insurance expense 1,200 Supplies expense 500 Advertising expense 700 ________ $96,400 $96,400

62 .

Answer: Dec. 31 Fees Earned Retained Earnings

28,900 28,900

Dec. 31 Retained Earnings 18,400 Salary Expense Depreciation Expense-Equipment Depreciation Expense-Furniture Rent Expense Insurance Expense Supplies Expense Advertising Expense

4,900 3,800 2,500 4,800 1,200 500 700

Dec. 31 Retained Earnings 3,000 Dividends 3,000 Diff: 2 Type: ES L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

63 .

22) The trial balance for RC Stables Ltd. at December 31, 2020, is shown below; prepare the closing entries for 2020.

RC Stables Ltd. Trial Balance December 31, 2020 Debit Credit Cash $31,400 Accounts receivable 1,500 Prepaid insurance 2,750 Prepaid rent 4,250 Supplies 3,330 Equipment 17,500 Accumulated depreciation-equipment $5,200 Furniture 25,000 Accumulated depreciation-furniture 4,250 Accounts payable 8,400 Salary payable 10,400 Unearned revenue 8,500 Common shares 41,767 Retained earnings 16,800 Dividends 5,000 Stable Revenue 33,500 Salary expense 24,387 Depreciation expense-equipment 1,200 Depreciation expense-furniture 3,300 Rent expense 5,500 Insurance expense 2,200 Supplies expense 700 Advertising expense 800 ________ $128,817 $128,817

64 .

Answer: Dec. 31 Stable Revenue Retained Earnings Dec.

33,500 33,500

31 Retained Earnings 38,087 Salary Expense Depreciation Expense-Equipment Depreciation Expense-Furniture Rent Expense Insurance Expense Supplies Expense Advertising Expense

24,387 1,200 3,300 5,500 2,200 700 800

Dec.

31 Retained Earnings 5,000 Dividends 5,000 Diff: 2 Type: ES L.O.: 3-5 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3.6

Analyze and evaluate a company's debt-paying ability

1) The current ratio is computed by: A) dividing current assets by current liabilities B) dividing current assets by non-current liabilities C) dividing current liabilities by current assets D) dividing current assets by non-current assets Answer: A Diff: 2 Type: MC L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

65 .

2) Which of the four accounts listed below would be considered the most liquid?

A) Inventory B) Equipment C) Land D) Accounts Receivable Answer: D Diff: 2 Type: MC L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Interest Payable, Salaries Payable, and Accounts Payable are: A) current assets B) current liabilities C) non-current assets D) non-current liabilities Answer: B Diff: 1 Type: MC L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) Non-current assets: A) are held for sale by the business B) generally are not subject to depreciation C) include Inventory, Equipment, and Land D) are used in the operations of the business Answer: D Diff: 1 Type: MC L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

66 .

5) Current assets include: A) Cash, Receivables, and Inventory B) Cash, Receivables, and Payables C) Cash, Receivables, and Equipment D) Cash, Payables, and Retained Earnings Answer: A Diff: 1 Type: MC L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) An improvement in the proportion of a company's assets that are financed with debt would be shown by: A) an increase in the debt ratio B) a decrease in the debt ratio C) an increase in the current ratio D) a decrease in the current ratio Answer: B Diff: 2 Type: MC L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) The debt ratio is computed by: A) dividing total liabilities by total assets B) dividing total assets by total liabilities C) dividing current liabilities by total assets D) dividing total assets by current liabilities Answer: A Diff: 1 Type: MC L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

67 .

8) Which of the following combinations of ratios is preferable?

A) a high current ratio and a low debt ratio B) a low current ratio and a high debt ratio C) a high current ratio and a high debt ratio D) a low current ratio and a low debt ratio Answer: A Diff: 2 Type: MC L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) When considering making a loan to a company, a bank will look for: A) a high debt ratio and a low current ratio B) a high debt ratio and a high current ratio C) a low debt ratio and a low current ratio D) a low debt ratio and a high current ratio Answer: D Diff: 2 Type: MC L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Current assets are assets that the business plans to sell, consume, or convert to cash within 12 months or less.

Answer: TRUE Diff: 1 Type: TF L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

68 .

11) Current assets are typically more liquid than non-current assets and therefore harder to convert into cash.

Answer: FALSE Explanation: Liquidity measures how quickly current assets can be converted to cash, the most liquid asset.

Diff: 2 Type: TF L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) Non-current assets are those debts payable in longer than 1 year or the entity's operating cycle which ever is longer.

Answer: FALSE Explanation: A non-current asset is any asset that does not qualify as a current asset.

Diff: 2 Type: TF L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) The term liquidity refers to non-current items such as a building.

Answer: FALSE Explanation: Liquidity refers to current assets such as inventory.

Diff: 2 Type: TF L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) The debt ratio is calculated as follows: total assets divided by total liabilities.

Answer: FALSE Explanation: Total liabilities divided by total assets.

Diff: 2 Type: TF L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 69 .

15) The current ratio is calculated as follows: current liabilities divided by current assets.

Answer: FALSE Explanation: Current assets divided by current liabilities.

Diff: 2 Type: TF L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) A higher current ratio is correlated with a stronger debt-paying ability.

Answer: TRUE Diff: 2 Type: TF L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 17) A low debt ratio is preferable to a high debt ratio, whereas a high current ratio is preferable to a low current ratio.

Answer: TRUE Diff: 2 Type: TF L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

70 .

18) Adam Samuel Corporation has the following list of accounts and balances after posting its closing entries: Adam Samuel Corporation Trial Balance December 31, 2020 Debit Cash $24,500 Accounts receivable 5,400 Supplies 850 Prepaid insurance 2,100 Building 40,500 Accumulated depreciation-building $7,500 Equipment 22,300 Accumulated depreciation-equipment Accounts payable Unearned service revenue Salary payable Common shares Retained earnings ______ $95,650

Credit

3,400 6,500 8,400 900 50,200 18,750 $95,650

a. Calculate the current ratio and the debt ratio. Assume the unearned service revenue will be earned within six months. Round to two decimals. b. Assume on December 31, 2020, Adam Samuel Corporation borrows $50,000 from the First Street Bank and issues a 6%, 6-month note. Recalculate the current ratio and the debt ratio.

Round to two decimals.

71 .

Answer: a. current ratio current ratio

= current assets / current liabilities = (24,500 + 5,400 + 850 + 2,100) / (6,500 + 8,400 + 900) = 32,850/15,800 = 2.08

debt ratio = total liabilities / total assets = (6,500 + 8,400 + 900) / (24,500 + 5,400 + 850 + 2,100 + 40,500 - 7,500 + 22,300 - 3,400) = 15,800/84,750 = 0.19 b. current ratio

= (74,500 + 5,400 + 850 + 2,100) / (6,500 + 50,000 + 8,400 + 900) = 82,850/65,800 = 1.26

debt ratio = (6,500 + 50,000 + 8,400 + 900) / (74,500 + 5,400 + 850 + 2,100 + 40,500 - 7,500 + 22,300 - 3,400) = 65,800/134,750 = 0.49 Diff: 2 Type: ES L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 19) Finest Ingredients Corporation has current assets of $180,000, total assets of $210,000, current liabilities of $110,000, and total liabilities of $115,000. The company is trying to obtain a bank loan for $40,000 which would be financed over six months. The terms of the loan agreement specify that the company's current ratio cannot fall below 1.5. Calculate the current ratio before and after the loan. Do you think the loan will be granted?

Answer: Current ratio before the bank loan = $180,000 / $110,000 = 1.64 Current ratio after the bank loan = $220,000 / $150,000 = 1.47 The loan will not be granted to Finest Ingredients since the current ratio would fall below the minimum ratio specified in the loan agreement of 1.5.

Diff: 2 Type: ES L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

72 .

20) Explain the significance of the current ratio.

Answer: The current ratio deals with the relationship between current assets and current liabilities. It is calculated by dividing current assets by current liabilities. The current ratio measures the ability to pay current liabilities with current assets. A high current ratio is preferable to a low current ratio. A high current ratio means a company has plenty of current assets to pay current liabilities. An increasing current ratio from one period to the next indicates an improvement in financial position.

Diff: 2 Type: ES L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 21) Low Carb Corp. has current assets of $160,000, total assets of $200,000, current liabilities of $85,000, and total liabilities of $100,000. The company is trying to negotiate a bank loan of $75,000. The terms of the loan require repayment over two years and state that the debt ratio cannot exceed 0.60. Calculate the debt ratio before and after the bank loan. Do you think the loan will be granted?

Answer: Debt ratio before the bank loan = $100,000 / $200,000 = 0.50 Debt ratio after the bank loan = $175,000 / $275,000 = 0.64 The loan will not be granted since the debt ratio would exceed the amount specified in the loan agreement of 0.60.

Diff: 2 Type: ES L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 22) Explain the significance of the debt ratio.

Answer: The debt ratio deals with the relationship between total debt and total assets. It is calculated by dividing total liabilities by total assets. The debt ratio indicates the proportion of a company's assets that are financed with debt and measures the ability of a business to pay both current and long-term debts. A low debt ratio is preferable to a high debt ratio. A company with a small amount of liabilities has low required payments on debt. Such a company is unlikely to get into financial difficulties.

Diff: 2 Type: ES L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 73 .

23) Bottoms Up Corporation has current assets of $90,000, total assets of $210,000, current liabilities of $50,000, and total liabilities of $57,500. The company is trying to obtain a bank loan for $20,000 which would be financed over six months. The terms of the loan agreement specify that the company's current ratio cannot fall below 1.5. Calculate the current ratio before and after the loan. Do you think the loan will be granted?

Answer: Current ratio before the bank loan = $90,000 / $50,000 = 1.80 Current ratio after the bank loan = $110,000 / $70,000 = 1.57 The loan will be granted to Bottoms Up since the current ratio would not fall below the minimum ratio specified in the loan agreement of 1.5.

Diff: 2 Type: ES L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 24) One of the most widely used financial ratios is the: A) debt ratio B) current ratio C) working capital D) none of the above Answer: B Diff: 1 Type: MC L.O.: 3-6 CPA COMPETENCIES: Chapter 3 1.2.1 Develops or evaluates appropriate accounting policies and procedures 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

74 .

Financial Accounting, Cdn. Ed., 7CE (Harrison/Horngren) Chapter 4 Cash and Receivables 4.1

Report cash on the balance sheet

1) Which of the following items can be included as cash equivalents on the balance sheet?

A) inventory B) prepaid expenses C) accounts receivable D) short-term investments Answer: D Diff: 2 Type: MC L.O.: 4-1 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) The asset requiring the highest level of safekeeping is: A) Cash B) Accounts Receivable C) Inventory D) Capital Assets Answer: A Diff: 3 Type: MC L.O.: 4-1 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) As they are less liquid than cash, cash equivalents cannot be reported on the same line as cash.

Answer: FALSE Explanation: Slightly less liquid than cash, cash equivalents are sufficiently similar to be reported along with cash.

Diff: 2 Type: TF L.O.: 4-1 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

1 .

4) On the balance sheet numerous bank accounts and time deposits can be combined and identified on one line as cash and cash equivalents.

Answer: TRUE Diff: 2 Type: TF L.O.: 4-1 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) One of the benefits of using cheques is the payment record it provides.

Answer: TRUE Diff: 1 Type: TF L.O.: 4-1 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4.2

Prepare a bank reconciliation

1) When preparing a bank reconciliation, which of the following items would be subtracted from the bank balance on the bank statement?

A) deposits in transit B) bank service charges C) EFT cash payments D) outstanding cheques Answer: D Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

2 .

2) When preparing a bank reconciliation, which of the following items would be added to the book balance?

A) EFT payments B) deposits in transit C) NSF cheques D) EFT cash receipts Answer: D Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Cheques that have been written by the company but not received by the bank are called: A) cancelled cheques B) cheques in transit C) NSF cheques D) outstanding cheques Answer: D Diff: 1 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) If the balance on the bank statement does not equal the balance in the company's Cash account, then you can conclude that: A) the company accountant made an error in the accounting process B) the bank made an error C) both the company accountant and the bank made errors D) there are some reconciling items that, when identified, will explain the differences between the balances Answer: D Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

3 .

5) Which of the following items will not cause a difference between the book balance and the bank balance?

A) deposits in transit B) bank collections C) cancelled cheques D) outstanding cheques Answer: C Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Which of the following, when prepared correctly, ensures that all cash transactions have been accounted for and that the bank and book records of cash are correct?

A) bank reconciliation B) bank statement C) bank remittance D) setting up a lock-box system Answer: A Diff: 1 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) In a bank reconciliation, bank service charges are: A) added to the bank balance on the bank statement B) deducted from the bank balance on the bank statement C) added to the bank balance in the general ledger D) deducted from the bank balance in the general ledger Answer: D Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

4 .

8) In a bank reconciliation, a deposit in transit is: A) added to the bank balance in the general ledger B) added to the bank balance on the bank statement C) deducted from the bank balance in the general ledger D) deducted from the bank balance on the bank statement Answer: B Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) In a bank reconciliation, outstanding cheques are: A) added to the bank balance on the bank statement B) added to the bank balance in the general ledger C) deducted from the bank balance on the bank statement D) deducted from the bank balance in the general ledger Answer: C Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) In a bank reconciliation, a bank error: A) must be added to the bank balance on the bank statement B) must be deducted from the bank balance on the bank statement C) may be added or deducted from the bank balance on the bank statement D) may be added or deducted from the bank balance in the general ledger Answer: C Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

5 .

11) In a bank reconciliation, a book error: A) may be added or deducted from the bank balance in the general ledger B) may be added or deducted from the bank balance on the bank statement C) must be added to the bank balance in the general ledger D) must be deducted from the bank balance in the general ledger Answer: A Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) In a bank reconciliation, there might be items which have been recorded by the company that have not yet been recorded by the bank. Examples of such items would include: A) NSF cheques B) deposits in transit C) bank collections D) bank service charges Answer: B Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) In a bank reconciliation, items recorded by the bank but not yet recorded by the company include: A) bank collections B) deposits in transit C) outstanding cheques D) deposits in transit and outstanding cheques Answer: A Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

6 .

14) In a bank reconciliation, an NSF cheque is: A) added to the bank balance on the bank statement B) deducted from the bank balance in the general ledger C) added to the bank balance in the general ledger D) deducted from the bank balance on the bank statement Answer: B Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) In a bank reconciliation, an EFT cash receipt is: A) added to the bank balance on the bank statement B) added to the bank balance in the general ledger C) deducted from the bank balance in the general ledger D) deducted from the bank balance on the bank statement Answer: B Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) In a bank reconciliation, an EFT cash payment is: A) deducted from the bank balance in the general ledger B) added to the bank balance in the general ledger C) deducted from the bank balance on the bank statement D) added to the bank balance on the bank statement Answer: A Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

7 .

17) In a bank reconciliation, interest revenue is: A) added to the bank balance on the bank statement B) deducted from the bank balance on the bank statement C) deducted from the bank balance in the general ledger D) added to the bank balance in the general ledger Answer: D Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18) In a bank reconciliation, a bank collection is: A) added to the bank balance on the bank statement B) deducted from the bank balance on the bank statement C) added to the bank balance in the general ledger D) deducted from the bank balance in the general ledger Answer: C Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 19) If a bookkeeper mistakenly recorded a disbursement of $63 instead of the correct amount of $36, the error would be shown on the bank reconciliation as a: A) $36 addition to the books B) $36 deduction from the books C) $27 addition to the books D) $27 deduction from the books Answer: C Diff: 3 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

8 .

20) If a bookkeeper mistakenly recorded a disbursement of $48 instead of the correct amount of $84, the error would be shown on the bank reconciliation as a: A) $36 addition to the books B) $36 deduction from the books C) $48 addition to the books D) $48 deduction from the books Answer: B Diff: 3 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 21) If the bank records a deposit of $50 as $150, the error would be shown on a bank reconciliation as: A) a deduction from the book balance of $100 B) an addition to the book balance of $100 C) a deduction from the bank balance of $100 D) an addition to the bank balance of $100 Answer: C Diff: 3 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 22) If the bank records a deposit of $3,300 as $330, the error would be shown on a bank reconciliation as: A) a deduction from the book balance of $2,970 B) a deduction from the bank balance of $2,970 C) an addition to the bank balance of $2,970 D) an addition to the book balance of $2,970 Answer: C Diff: 3 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

9 .

23) What is an example of an item recorded by the company but not yet recorded by the bank?

A) an electronic funds transfer B) a deposit in transit C) a service charge D) an NSF cheque Answer: B Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 24) If the bookkeeper mistakenly records a deposit of $530 as $350, the error would be shown on the bank reconciliation statement as a: A) $180 deduction from the book balance B) $180 deduction from the bank balance C) $180 addition to the bank balance D) $180 addition to the book balance Answer: D Diff: 3 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 25) If the bookkeeper mistakenly records a deposit of $360 as $630, the error would be shown on the bank reconciliation statement as a: A) $270 deduction from the bank balance B) $270 deduction from the book balance C) $270 addition to the book balance D) $270 addition to the bank balance Answer: B Diff: 3 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

10 .

26) Which of the following items below may be made to reconcile a book balance to a bank balance?

A) a deposit in transit B) an EFT receipt C) outstanding cheques D) an addition or subtraction to correct a bank error, as appropriate Answer: B Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 27) If a bank reconciliation included $600 of outstanding cheques, the journal entry to record this reconciling item would include: A) a credit to Cash of $600 B) a debit to Cash of $600 C) a credit to Accounts Payable of $600 D) no entry is required Answer: D Diff: 3 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 28) If a bank statement included an NSF cheque for $450, the journal entry to record this reconciling item would include a: A) debit to Cash for $450 B) credit to Cash for $450 C) credit to Accounts Receivable for $450 D) debit to Accounts Payable for $450 Answer: B Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

11 .

29) If a bank statement included a bank collection and related interest revenue, the journal entry to record this reconciling item would include a: A) debit to Note Receivable B) credit to Cash C) debit to Cash D) debit to Note Payable Answer: C Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 30) If a bank reconciliation included deposits in transit amounting to $1,500, the journal entry to record this reconciling item would include: A) no entry is required B) a credit to Accounts Receivable for $1,500 C) a debit to Cash for $1,500 D) a credit to Cash for $1,500 Answer: A Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 31) If a bank statement included an EFT payment of $670 for insurance, the journal entry to record this reconciling item would include a: A) debit to Cash for $670 B) debit to Accounts Payable for $670 C) credit to Cash for $670 D) credit to Prepaid Insurance for $670 Answer: C Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

12 .

32) Which of the following does not require a journal entry for a bank reconciliation?

A) outstanding cheques B) bank service charge C) collection by the bank of a note receivable D) NSF cheque returned by the bank Answer: A Diff: 2 Type: MC L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 33) When preparing a bank reconciliation, deposits in transit are added to the balance shown on the bank statement.

Answer: TRUE Diff: 2 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 34) All cash receipts should be deposited for safekeeping in the bank.

Answer: TRUE Diff: 1 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 35) To maintain effective controls for cash, the majority of all payments in an organization should be made using cash.

Answer: FALSE Explanation: Payments made by cheque are used to control bank accounts.

Diff: 1 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

13 .

36) Signature cards are one example of a bank account control document.

Answer: TRUE Diff: 1 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 37) One of the benefits of using cheques is the payment record it provides.

Answer: TRUE Diff: 1 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 38) Outstanding cheques are deposits that a company has recorded but the bank has not.

Answer: FALSE Explanation: Outstanding cheques are payments that a company has recorded but the bank has not.

Diff: 2 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 39) The cost of printing cheques should be deducted from the bank side of a bank reconciliation.

Answer: FALSE Explanation: This cash payment is handled like a service charge, and deducted from the book side.

Diff: 2 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

14 .

40) Once the bank reconciliation has been completed, journal entries must be made for the book side of the reconciliation.

Answer: TRUE Diff: 2 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 41) In a bank reconciliation, interest revenue earned on a chequing account would be deducted from the book balance.

Answer: FALSE Explanation: Interest revenue earned would be added to the book side.

Diff: 1 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 42) The journal entry for an NSF (nonsufficient funds) cheque involves a debit to Accounts Payable.

Answer: FALSE Explanation: The journal entry to record an NSF cheque is a debit to the Accounts Receivable to reinstate the receivable.

Diff: 2 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 43) The journal entry for a note collected by the bank with interest requires a debit to Cash and a credit to both Note Receivable and Interest Revenue.

Answer: TRUE Diff: 2 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

15 .

44) Outstanding cheques are added to the ending bank balance on the bank statement when preparing the bank reconciliation.

Answer: FALSE Explanation: Outstanding cheques are subtracted from the bank side of the reconciliation.

Diff: 2 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 45) Bank charges are deducted from the ending bank balance in the general ledger when preparing the bank reconciliation.

Answer: TRUE Diff: 2 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 46) In a bank reconciliation, adjustments to the bank balance always require preparation of journal entries.

Answer: FALSE Explanation: Only items on the book side of the bank reconciliation require journal entries.

Diff: 1 Type: TF L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 47) Briefly describe how the payment of expenses by cheque is used to control bank accounts.

Answer: Payment of expenses by cheque is an important internal control as: the cheque provides a record of the payment; the cheque must be signed by an authorized official; and before signing the cheque the authorized officer would normally study the evidence supporting the payment to verify the legitimacy of same.

Diff: 2 Type: ES L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

16 .

48) What is a bank reconciliation? Why is it important to prepare a bank reconciliation every month when the bank statement is received from the bank?

Answer: A bank reconciliation is an internal control procedure that is used to explain differences between the accounting records and the bank records. A bank reconciliation is important because: (1) it helps determine the cash balance that should be reported on the balance sheet at the end of a period; (2) it serves to identify accounting and bank errors; and (3) it may help detect theft of cash by employees.

Diff: 2 Type: ES L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 49) Prepare a bank reconciliation dated December 31, 2020, for Welcome Inc. based on the following information. ∙ Balance per bank statement is $21,200.68. ∙ Balance per books is $20,559.40. ∙ The December bank statement indicated a service charge of $35. ∙ Cheque #1169 for $410.50 and cheque #1183 for $2,150.00 were not returned with the bank statement. ∙ The bank had not received a deposit in transit of $3,443.22 when the bank statement was generated. ∙ A bank debit memo indicated an NSF cheque written by Bill Broke to Welcome Inc. on December 11, 2020, for $169. ∙ A bank credit memo indicated a bank collection of $1,700 and interest revenue of $28 on December 15, 2020.

Answer: Welcome Inc. Bank Reconciliation December 31, 2020 Bank Balance $21,200.68 Add: Deposit in transit 3,443.22

Book Balance Add: Bank collection Interest revenue Deduct: NSF cheque

$20,559.40 1,700.00 28.00

Deduct: Outstanding cheques (169.00) #1169 (410.50) #1183 (2,150.00) Service charge (35.00) Reconciled Balance$22,083.40 Reconciled Balance $22,083.40 Diff: 2 Type: ES L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 17 .

50) The following data have been gathered for Rocky Candi Corporation for the month ended September 30, 2020. Prepare a bank reconciliation based on the following information: ∙ The bank statement reveals a balance of $8,936. ∙ The September 30, 2020, book balance was $3,200. ∙ There was an EFT deposit of $1,800 on the bank statement for the monthly rent from a tenant. ∙ The bookkeeper had erroneously recorded a $50 cheque as $500. The cheque was to settle an account payable. ∙ The bank statement revealed $50 in service charges. ∙ Cheques #322 and #330 for $260 and $285 were not returned with the bank statement. ∙ A deposit made on September 29, 2020, for $1,250 did not appear on the bank statement. ∙ A deposit of $500 made on September 10 was erroneously credited to Rocky Candi's account by the bank for $5,000. ∙ A bank debit memo indicated an NSF cheque for $259.

Answer: Rocky Candi Corporation Bank Reconciliation September 30, 2020 Bank Balance Add: Deposit in transit

$8,936 1,250

Book Balance Add: EFT collection Book error

$3,200 1,800 450

Deduct: Deduct: Bank error (4,500) Outstanding cheques: #322 (260) NSF cheque (259) #330 (285) Service charge (50) Reconciled Balance $5,141 Reconciled Balance $5,141 Diff: 2 Type: ES L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

18 .

51) Prepare a bank reconciliation for Living Life Company as of September 30, 2020, based on the following information. (Hint: you will need to compute Living Life Company's cash balance per books as of September 30, 2020 using the data below.) ∙ The balance per the September 30, 2020 bank statement is $27,419.55. ∙ Living Life Company's bookkeeper mistakenly recorded an $885.00 cash disbursement as $855.00. ∙ The bank mistakenly recorded a deposit of $3,000 made by Living Life Company on September 10 as $300. ∙ The bank statement indicated bank service charges of $35.00 in September. ∙ Outstanding cheques as of September 30, 2020, amount to $6,400.10. ∙ Deposits in transit as of September 30, 2020, amount to $3,405.65.

Answer: Living Life Company Bank Reconciliation September 30, 2020 Bank balance as of Sept. 30$27,419.55 Book balance as Sept. 30 X Add: Deposits in transit 3,405.65 Bank error 2,700.00 Deduct: Deduct: Outstanding cheques (6,400.10) Service charge $(35.00) Book error (30.00) Reconciled Balance $27,125.10 Reconciled Balance$27,125.10 X = $27,125.10 + $30.00 + $35.00 = $27,190.10 Diff: 2 Type: ES L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

19 .

52) Prepare any journal entries based on the following data regarding the bank reconciliation prepared by Corruption Company on July 31, 2020. a. A customer's cheque for $260 was returned with the bank statement and stamped NSF. b. Outstanding cheques amount to $650. c. Service charges for July per bank statement are $25. d. Cheque #925 for $3,250 for office equipment was erroneously recorded by the bookkeeper as $2,350. e. The bank erroneously credited Corruption Company's account for a $575 deposit made by Bribe and Bilk Inc. f. A deposit ticket correctly prepared for $695 appeared on the bank statement as a deposit for $965. g. Cheque #930 for $900 for rent expense was erroneously recorded by the bookkeeper as $90.

Answer: a. July 31 Accounts Receivable 260 Cash 260 b. no entry c. July 31 Bank Service Fees 25 Cash 25 d. July 31 Office Equipment 900 Cash 900 e. no entry (but inform the bank) f. no entry (but inform the bank) g. July 31 Rent Expense 810 Cash 810 Diff: 2 Type: ES L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

20 .

53) Prepare a bank reconciliation for Big Blue Company for November 30, 2020 using the following information: ∙ The balance per the November 30, 2020 bank statement is $35,416.65 ∙ The bookkeeper mistakenly recorded an $225.00 cash disbursement as $255.00. ∙ The bank mistakenly recorded a deposit of $8,000 made by Big Blue Company on November 10 into the Big Two Company account. ∙ The bank statement indicated bank service charges of $25.00 for November. ∙ Outstanding cheques as of November 30, 2020, amount to $2,500.15. ∙ Deposits in transit as of November 30, 2020, amount to $1,000. ∙ The balance per the November 30, 2020 books is $ 40,911.50.

Answer: Big Blue Company Bank Reconciliation September 30, 2020 Bank balance as of Nov. 30$35,416.65 Add: Deposits in transit 1,000.00 Bank error 8,000.00 Deduct: Outstanding cheques (2,500.15)

Book balance Nov.30$40,911.50

Adjustments: Service charge $(25.00) Book error 30.00 Reconciled Balance$40,916.50

Reconciled Balance $40,916.50 Diff: 1 Type: ES L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

21 .

54) Prepare the bank reconciliation and adjusting entries for Mac Moose Company for April 30 , 2020 using the following information: ∙ The balance per the April 30, 2020 bank statement is $25,500.01. ∙ Outstanding cheques as of April 30, 2020, amount to $13,655.00. ∙ Deposits in transit as of April 30, 2020, amount to $8,730.00. ∙ The balance per the April 30, 2020 books is $20,652.01. ∙ The bookkeeper mistakenly recorded a $330.00 cash disbursement for utilities as $303.00. ∙ The bank statement indicated bank service charges of $15.00 for April. ∙ The bank statement indicated a NSF return of $25.00 plus additional services charges of $10.00.

Answer: Mac Moose Bank Reconciliation April 30, 2020 Bank balance as of Apr. 30$25,500.01 Add: Deposits in transit 8,730.00 Deduct: Outstanding cheques

(13,655.00)

Reconciled Balance

$20,575.01

Book balance Nov.30$20,652.01 Adjustments: NSF Cheque

$(25.00)

Service charge $(25.00) Book error (27.00) Reconciled Balance $20,575.01

Journal Entries: A/R $25.00 Service Fees $10.00 Cash $25.00 Service Fees $15.00 Cash $15.00 Utilities Exp $27.00 Cash $27.00 Diff: 1 Type: ES L.O.: 4-2 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

22 .

4.3

Account for accounts receivable

1) A ledger that contains a separate account for each customer is called an accounts receivable: A) control ledger B) current ledger C) trade ledger D) subsidiary ledger Answer: D Diff: 2 Type: MC L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) The journal entry to record receivables is a debit to: A) revenue B) cash C) notes receivable D) accounts receivable Answer: D Diff: 2 Type: MC L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) The expense of not collecting from customers is called: A) allowance for uncollectibles B) net receivables C) net realizable value D) bad debt expense Answer: D Diff: 2 Type: MC L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

23 .

4) With regard to notes receivable, which of the following statements is correct?

A) Notes receivable are less formal contracts than accounts receivable.

B) Notes receivable are also called promissory notes because a written promise to pay is not required.

C) All notes receivable require the borrower to pledge collateral.

D) The borrower signs a written promise to pay the lender a definite sum at the maturity date, with interest.

Answer: D Diff: 2 Type: MC L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) The category "Other Receivables" on the balance sheet includes: A) Accounts Receivable, Interest Receivable B) Notes Receivable, Accounts Receivable, Interest Receivable C) Interest Receivable, Dividend Receivable, Advances to Employees D) Notes Receivable Answer: C Diff: 2 Type: MC L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Receivables are monetary claims against others.

Answer: TRUE Diff: 1 Type: TF L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) Two major types of receivable include: account receivables and notes payable.

Answer: FALSE Explanation: Two major types of receivables are accounts receivable and notes receivable.

Diff: 2 Type: TF L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 24 .

8) Accounts (trade) receivable are amounts to be collected from customers from the sale of goods or services.

Answer: TRUE Diff: 1 Type: TF L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) One of the benefits of extending credit to customers is the possibility of increased sales.

Answer: TRUE Diff: 2 Type: TF L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) For good internal control over cash, the handling of cash and the record keeping for receivables should be separated.

Answer: TRUE Diff: 1 Type: TF L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) Net accounts receivable is equal to accounts receivable less the allowance for uncollectible accounts.

Answer: TRUE Diff: 1 Type: TF L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

25 .

12) Explain how net receivables is calculated. On which financial statement is net realizable value shown?

Answer: Net receivables is calculated by subtracting the allowance for uncollectible accounts from accounts receivable. Net realizable value for accounts receivable appears on the balance sheet as a current asset.

Diff: 2 Type: ES L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) Briefly state the two main issues in accounting for receivables.

Answer: 1. How should receivables be reported?

Report receivables at net realizable value.

2. How should the bad debt expense be reported?

This expense of not collecting from customers is called bad debt expense and is reported on the income statement.

Diff: 2 Type: ES L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) Briefly state the three main issues in managing receivables.

Answer: 1. What are the benefits and the costs of extending credit to customers? Benefit—increase in sales. Cost—risk of not collecting.

2. Extend credit only to credit worthy customers. The company should strive to select and extend credit to those customers who are credit-worthy and have the ability to pay, while minimizing the extension of credit to customers whose ability to pay is questionable.

3. Pursue collection from customers to maximize cash flow. Accounts receivable should be tracked via an aging schedule, and management should begin calling customers who are delinquent after a certain period of time, as established by corporate policy. Communicating with customers will help stimulate collections, or allow the company to work with those customers who are having legitimate problems in paying their debts.

Diff: 2 Type: ES L.O.: 4-3 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 26 .

4.4

Evaluate collectibility using the allowance for uncollectible accounts

1) The aging-of-receivables method of estimating uncollectible accounts is: A) not an acceptable method of estimating bad debts B) a balance sheet approach, since it focuses on accounts receivable C) an income statement approach, since it focuses on the amount of expense to be reported on the income statement D) is required to be used by all companies because it focuses on what should be the most relevant and faithful representation of accounts receivable on the balance sheet Answer: B Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) Estimating uncollectible accounts by analyzing receivables from specific customers according to how long each has been outstanding is known as the: A) direct write-off method B) percent-of-sales method C) indirect write-off method D) aging-of-receivables method Answer: D Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

27 .

3) A year-end review of Accounts Receivable and estimated uncollectible percentages revealed the following:

Days Outstanding 1-30 days 31-60 days 61-90 days Over 90 days

Accounts Est. Percent Receivable Uncollectible $62,000 2% $40,000 4% $23,000 11% $9,000 50%

Before the year-end adjustment, the credit balance in Allowance for Uncollectible Accounts was $1,000. Under the aging-of-receivables method, the Uncollectible-Account Expense at year-end is: A) $1,240 B) $8,870 C) $9,870 D) $10,870 Answer: B Explanation: (62,000 × 0.02) + (40,000 × 0.04) + (23,000 × 0.11) + (9,000 × 0.5) = 9,870 9,870 - 1,000 = 8,870 Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) An aging-of-accounts-receivable indicates that the amount of uncollectible accounts is $3,410. The Allowance for Uncollectible Accounts prior to adjustment has a credit balance of $500. The Accounts Receivable balance is $44,820. The amount of the adjusting entry for uncollectible accounts should be for: A) $500 B) $2,910 C) $3,910 D) $3,410 Answer: B Explanation: 3,410 - 500 = 2,910 Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

28 .

5) The following account balances were extracted from the accounting records of Thomas Corporation at the end of the year: Accounts Receivable Allowance for Uncollectible Accounts (Credit) Uncollectible-Account Expense

$1,104,000 $39,000 $63,000

What is the net realizable value of the accounts receivable?

A) $1,065,000 B) $1,104,000 C) $1,143,000 D) $1,167,000 Answer: A Explanation: $1,104,000 - $39,000 = 1,065,000 Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) The balance in Accounts Receivable was $700,000 at the beginning of the year and $780,000 at the end of the year. Credit sales for the year totaled $4,110,000. During the year, $430,000 in customer accounts were written off. How much cash was collected from customers during the period?

A) $3,600,000 B) $4,030,000 C) $4,460,000 D) $4,620,000 Answer: A Explanation: 700,000 + 4,110,000 - 430,000 - x = 780,000 x = 3,600,000 Diff: 3 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

29 .

7) On December 31, 2020, James Company has an accounts receivable balance of $324,000 before any year-end adjustments. The Allowance for Doubtful Accounts has a $1,100 credit balance. The company prepares the following aging schedule for accounts receivable:

Total Balance $324,000 Percent uncollectible

1-30 31-60 days days $157,000 $89,000 1%

2%

61-90 days $51,000

over 90 days $27,000

4%

21%

What is the Uncollectible-Account Expense at December 31, 2020?

A) $1,570 B) $9,960 C) $11,060 D) $12,160 Answer: B Explanation: (157,000 × 0.01) + (89,000 × 0.02) + (51,000 × 0.04) + (27,000 × 0.21) = 11,060 11,060 - 1,100 = 9,960 Diff: 3 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) The Bad Debt Expense account is classified: A) as a contra-asset account B) as part of cost of goods sold C) as the cost to the seller of extending credit D) deducted from Accounts Receivable account on the balance sheet Answer: C Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

30 .

9) What category of account is the Allowance for Uncollectible Accounts account?

A) contra-asset account B) contra-revenue account C) contra-expense account D) expense account Answer: A Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Under the allowance method, the entry to record the bad debts estimate includes a: A) debit to Accounts Receivable B) credit to Accounts Receivable C) debit to Allowance for Uncollectible Accounts D) debit to Bad Debt Expense Answer: D Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) The account that shows the amount of accounts receivable that the business does not expect to collect is: A) Allowance for Uncollectible Accounts B) net Accounts Receivable C) Sales Returns and Allowances D) Sales Discounts Answer: A Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

31 .

12) Net accounts receivable is calculated as: A) sales less sales returns and allowances B) accounts receivable less bad debt expense C) accounts receivable less allowance for uncollectible accounts D) accounts receivable plus allowance for uncollectible accounts Answer: C Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) Which of the following accounts is a contra-account to Accounts Receivable?

A) Sales Discounts B) Sales Returns and Allowances C) Allowance for Uncollectible Accounts D) Bad Debt Expense Answer: C Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) Under the allowance method for estimating uncollectible accounts, the entry to write off an account: A) reduces total assets B) reduces net income C) has no effect on total assets D) increases net income Answer: C Diff: 3 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

32 .

15) Under the allowance method for estimating uncollectible accounts, the entry to record the estimated bad debts: A) increases total assets B) reduces net income C) has no effect on total assets D) has no effect on net income Answer: B Diff: 3 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) Under the allowance method, the entry to reinstate an account previously written off: A) increases total assets B) increases net income C) decreases net income D) has no effect on net income Answer: D Diff: 3 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 17) Managers estimate bad debt expense based on: A) the cost constraint B) historical-cost assumption C) revenue recognition principle D) their professional judgment Answer: D Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

33 .

18) After a customer's account has been written off under the allowance method, the customer sends the company the amount owed. Before the receipt of cash can be recorded, the company must first: A) debit Allowance for Uncollectible Accounts B) credit Bad Debt Expense C) debit Accounts Receivable D) credit Accounts Receivable Answer: C Diff: 3 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 19) Under the allowance method, the entry to write off a $1,425 uncollectible account includes: A) a debit to Accounts Receivable for $1,425 B) a credit to Bad Debt Expense for $1,425 C) a credit to Allowance for Uncollectible Accounts for $1,425 D) a debit to Allowance for Uncollectible Accounts for $1,425 Answer: D Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 20) Under the aging-of-accounts-receivable method: A) the balance in accounts receivable prior to adjustment must be considered B) the balance in Allowance for Uncollectible Accounts prior to adjustment is ignored C) the balance in Allowance for Uncollectible Accounts prior to adjustment must be considered D) the balance in Bad Debt Expense prior to adjustment must be considered Answer: C Diff: 3 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

34 .

21) Using the aging-of-accounts-receivable method, you estimate that total uncollectible accounts are $3,800. The Allowance for Uncollectible Accounts prior to adjustment has a credit balance of $1,100. The amount of the adjusting entry should be: A) $4,900 B) $3,800 C) $2,700 D) $1,100 Answer: C Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 22) Using the aging-of-accounts-receivable method, you estimate that total uncollectible accounts are $3,800. The Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $1,100. The amount of the adjusting entry should be: A) $4,900 B) $3,800 C) $2,700 D) $1,100 Answer: A Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 23) Under the allowance method, if bad debt write-offs during the year exceed the allowance amount, the balance in Allowance for Uncollectible Accounts at year end prior to adjustment: A) should be deducted from Accounts Receivable B) will be zero C) will be a debit D) should be adjusted by debiting it to bring the balance back to zero Answer: C Diff: 2 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

35 .

24) Using the aging-of-accounts-receivable method to estimate uncollectible receivables, CMU Corporation estimates that $3,750 of its accounts receivable will be uncollectible. Prior to adjustment, the Allowance for Uncollectible Accounts has a credit balance of $600. Bad debt expense to be reported on the income statement is: A) $4,350 B) $3,750 C) $3,150 D) $600 Answer: C Diff: 3 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 25) Smart-T Corporation uses the aging-of-accounts-receivable method to estimate uncollectible receivables. At year end Smart-T estimates that $4,750 of its accounts receivable will be uncollectible. Prior to adjustment, the Allowance for Uncollectible Accounts has a credit balance of $200. Bad debt expense to be reported on the income statement is: A) $4,750 B) $4,950 C) $4,550 D) $200 Answer: C Diff: 3 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 26) Using the aging-of-accounts-receivable method to estimate uncollectible receivables, Records Management Corp. estimates that $8,000 of its accounts receivable will be uncollectible. Prior to adjustment, the Allowance for Uncollectible Accounts has a debit balance of $2,000. Bad debt expense to be reported on the income statement is: A) $10,000 B) $8,000 C) $6,000 D) $2,000 Answer: A Diff: 3 Type: MC L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 36 .

27) Under the allowance method, the entry to record the estimated bad debts for the period includes a credit to Accounts Receivable.

Answer: FALSE Explanation: Allowance for Uncollectible Accounts.

Diff: 2 Type: TF L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 28) The allowance method of accounting for bad debts records collection losses on the basis of estimates rather than waiting to determine which customers will not pay.

Answer: TRUE Diff: 2 Type: TF L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 29) Under the allowance method, the entry to write off an account that has been deemed uncollectible has no impact on the net income of the firm.

Answer: TRUE Diff: 3 Type: TF L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

37 .

30) Record entries for the following transactions for UTF-8 Corp. UTF-8 Corp. maintains an Allowance for Uncollectible Accounts. a. Sold merchandise on account to Java Ltd., $1,800. b. Sold merchandise on account to Centera, $759. c. Wrote off both the Java Ltd. and the Centera accounts. d. Centera unexpectedly paid off his account in full.

Answer: a. Accounts Receivable-Java Ltd. 1,800 Sales 1,800 b. Accounts Receivable-Centera Sales

759 759

c. Allowance for Uncollectible Accounts 2,559 Accounts Receivable-Java Ltd. Accounts Receivable-Centera

1,800 759

d. Accounts Receivable-Centera 759 Allowance for Uncollectible Accounts 759 Cash 759 Accounts Receivable-Centera 759 Diff: 2 Type: ES L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

38 .

31) Prepare adjusting journal entries for the following independent situations. a. The Allowance for Uncollectible Accounts has a $400 debit balance prior to adjustment.

Based on an aging schedule of accounts receivable prepared on December 31, $11,800 of accounts receivable are estimated to be uncollectible. b. The Allowance for Uncollectible Accounts has a $900 credit balance prior to adjustment.

Based on an aging schedule of accounts receivable prepared on December 31, $14,500 of accounts receivable are estimated to be uncollectible.

Answer: a. Dec. 31 Bad Debt Expense 12,200 Allowance for Uncollectible Accounts 12,200 b. Dec. 31 Bad Debt Expense 13,600 Allowance for Uncollectible Accounts 13,600 Diff: 3 Type: ES L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 32) For each of the following independent situations, compute net accounts receivable. a. Accounts Receivable has a balance of $14,000. The Allowance for Uncollectible Accounts has a credit balance prior to adjustment of $300. An aging schedule prepared on December 31 reveals $1,100 of uncollectible accounts. b. Accounts Receivable has a balance of $25,700. The Allowance for Uncollectible Accounts has a debit balance prior to adjustment of $400. An aging schedule prepared on December 31 reveals $2,300 of uncollectible accounts.

Answer: a. $14,000 - $1,100 = $12,900 b. $25,700 - $2,300 = $23,400 Diff: 3 Type: ES L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

39 .

33) Describe the effect on the financial statements of each of the following transactions, assuming the allowance method of estimating bad debts is used: a. adjusting the books to record the estimated bad debts b. writing off an account as uncollectible c. recovery of an account previously written off as uncollectible Answer: a. The entry to record the estimated bad debts debits an expense account and credits a contraasset account. Thus, this entry increases expenses, reducing both net income and owners' equity, as well as decreasing assets by reducing the amount of the net accounts receivable. b. Writing off an account under the allowance method has no effect on the net financial statement amounts. Accounts Receivable and Allowance for Uncollectible Accounts are both reduced by this entry, which has no other effect on the net accounts receivable whatsoever. Net income and owners' equity are both unaffected. c. The collection of an account previously written off has very little effect on the financial statements in total. Net income and owners' equity and total assets are unaffected. However, the composition of the assets is altered. The Cash account increases and Allowance for Uncollectible Accounts increases. Accounts Receivable will be increased and decreased for the same amount.

Diff: 3 Type: ES L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

40 .

34) Optura Computer Company uses the allowance method to account for bad debts. Indicate the effect of each of the following transactions on Accounts Receivable, the Allowance for Uncollectible Accounts, net Accounts Receivable, and Bad Debt Expense. Use (+) for increase, (-) for decrease, and (0) for no effect.

Allowance for Net Bad AccountsUncollectible Accounts Debt Receivable Accounts Receivable Expense a. A customer pays his account receivable. ________ ________ ________ ________ b. 5% of $100,000 in Accounts Receivable is estimated to be uncollectible (the balance in allowance for uncollectible accounts is a debit of $400. ________ ________ ________ ________ c. An account receivable is reinstated. ________ ________ ________ ________ Answer: Gross Allowance for Net Bad Accounts Uncollectible Accounts Debt Receivable Accounts Receivable Expense a. A customer pays his account receivable.

0 0 b. 5% of $100,000 in Accounts Receivable is estimated to be uncollectible (the balance in allowance for uncollectible accounts is a debit of $400.

0 + + c. An account receivable is reinstated. + + 0 0 Diff: 3 Type: ES L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

41 .

35) The December 31, 2020 unadjusted trial balance of Eel Creek Ltd. (Eel) disclosed the following balances: Accounts receivable Allowance for doubtful accounts Net Credit Sales

$400,000 24,000 Cr. 1,400,000

Additionally, the firm has given up trying to collect on $19,000 from a customer who recently declared bankruptcy. Eel's management has not yet written off the amount but intends to do so before the company's books are closed for the year. The firm uses the allowance method to estimate bad debt expense.

Provide the entry for the write-off.

Answer: Allowance for doubtful accounts 19,000 Accounts receivable 19,000 Diff: 3 Type: ES L.O.: 4-4 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4.5

Account for notes receivable and interest revenue

1) When a note matures, the payee should record: A) interest payable B) interest expense C) interest revenue D) unearned revenue Answer: C Diff: 1 Type: MC L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

42 .

2) When a note matures, the maker should record: A) interest expense B) interest revenue C) interest receivable D) unearned revenue Answer: A Diff: 1 Type: MC L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) A written promise to pay a specified amount of money at a particular future date is called a(n): A) account receivable B) promissory note C) maturity note D) unearned revenue Answer: B Diff: 1 Type: MC L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) IXOS Ltd. accepted an eighteen-month, $15,000, 8% note from ECM Corporation on June 1, 2020. The amount of interest to be accrued on December 31, 2020, is: A) $1,800 B) $1,200 C) $700 D) $600 Answer: C Diff: 3 Type: MC L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

43 .

5) The person or business to whom the signer of a promissory note promises a future payment is called the: A) maker B) payee C) principal party D) drawer Answer: B Diff: 1 Type: MC L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) The interest on a $50,000 note at 9% for 4 months is: A) $1,500 B) $1,125 C) $4,500 D) $18,000 Answer: A Diff: 2 Type: MC L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) The interest on a $50,000 note at 12% for 60 days is: A) $56,000.00 B) $1,000.00 C) $44,000.00 D) $986.30 Answer: D Diff: 2 Type: MC L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

44 .

8) Waterloo Limited accepts a note to settle an overdue account from a customer. The journal entry on Waterloo Limited's books will include a: A) debit to Accounts Receivable B) debit to Note Receivable C) credit to Note Receivable D) debit to Note Payable Answer: B Diff: 2 Type: MC L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) On the maturity date, the payee of a note will: A) debit Cash, credit Note Receivable and Interest Revenue B) debit Cash, credit Note Payable and Interest Expense C) debit Cash, credit Note Receivable and Interest Expense D) debit Cash, credit Note Payable and Interest Revenue Answer: A Diff: 2 Type: MC L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) The entry to record accrued interest on a note receivable at year end includes a: A) debit to Note Receivable B) debit to Interest Receivable C) debit to Interest Revenue D) debit to Cash Answer: B Diff: 3 Type: MC L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

45 .

11) The formula for computing interest expense is equal to: A) principal × interest rate × time B) (interest rate × principal) / time C) (principal × time) / interest rate D) principal / (interest rate + time) Answer: A Diff: 1 Type: MC L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) The payee of the note records interest on a note receivable as interest expense.

Answer: FALSE Explanation: The payee of the note records interest on a note receivable as interest revenue.

Diff: 2 Type: TF L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) Financing expenses are typically classified as an operating expense.

Answer: TRUE Diff: 2 Type: TF L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

46 .

14) Eloquent Media Ltd. completed the following transactions: Sept. 14, 2019 Provided services to Inga Corporation on account, $3,000, terms 30 days.

Nov. 1, 2019 Accepted a one-year, 12% note from Inga Corporation to settle its account.

Dec. 31, 2019 Accrued interest on the note from Inga Corporation. (Round to the nearest dollar.)

Nov. 1, 2020 Received amount due from Inga Corporation.

Record entries for the above transactions.

Answer: Sept. 14 Accounts Receivable-Inga Corporation 3,000 Service Revenue 3,000 Nov. 1 Note Receivable-Inga Corporation 3,000 Accounts Receivable-Inga Corp.

3,000 Dec. 31 Interest Receivable Interest Revenue ($3,000 × 0.12 × 2/12)

60 60

Nov. 1 Cash 3,360 Note Receivable 3,000 Interest Receivable 60 Interest Revenue 300 ($3,000 × 0.12 × 10/12) Diff: 3 Type: ES L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

47 .

15) Compute the unknowns for the following transactions dealing with interest on notes receivable. Use a 365-day year. Round answers to the nearest dollar.

Principal Interest Duration Interest Maturity Rate Value a. $10,000 10% 120 days ________ ________ b. $25,000 12% ________ $2,515 ________ c. ________ 6% 180 days $2,959 ________ d. $50,000 ________ 60 days $493 ________ e. $36,000 9% ________ ________ $36,710 Answer: Principal Interest Duration Interest Maturity Rate Value a. $10,000 10% 120 days $329 $ 10,329 b. $25,000 12% 306 days $2,515 $27,515 c. $100,000 6% 180 days $2,959 $102,959 d. $50,000 6% 60 days $493 $50,493 e. $36,000 9% 80 days $710 $36,710 Diff: 3 Type: ES L.O.: 4-5 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4.6

Explain how to improve cash flows from sales and receivables

1) On a statement of cash flows, collection of accounts receivable are classified as: A) a financing activity B) an investing activity C) an operating activity D) a noncash investing and financing activity Answer: C Diff: 2 Type: MC L.O.: 4-6 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

48 .

2) In 2020, Digital Asset Management Corp. (DAM) collected $2,500,000 from its customers.

These cash receipts would be reported on DAM's 2020 cash flow statement as a(n): A) financing activity B) operating activity C) investing activity D) operating and investing activities Answer: B Diff: 3 Type: MC L.O.: 4-6 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Trevino Company has decided to factor its accounts receivable in order to get the immediate receipt of cash. The journal entry to record the factoring of the receivables would include: A) a debit to Accounts Receivable and a credit to Cash B) a debit to Cash and a credit to Accounts Receivable C) a debit to Cash, debit to Financing Expense and credit to Accounts Receivable D) a debit to Cash, credit to Interest Revenue and credit to Accounts Receivable Answer: C Diff: 2 Type: MC L.O.: 4-6 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) Ace has just signed up for a KD Trust debit card machine (interact) which charges a $1 fee for transactions up to $200 and a $3 fee for transactions over that amount. On September 15th a customer makes a $150 purchase plus a cash back request of $40. Record the journal entry.

Answer: Sept 15 Cash $189 Interact Fee 1 Sales Revenue $150 Cash 40 Diff: 3 Type: ES L.O.: 4-6 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

49 .

5) Selling accounts receivable typically: A) decreases total assets and increases revenues B) decreases total assets and increases expenses C) increases total assets and increases revenues D) has no effect on total assets and decreases expenses Answer: B Diff: 2 Type: MC L.O.: 4-6 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Stelloh's Berry Farm accepted a bank-issued credit card in payment of a $1,300 sales transaction. Stelloh's bank charges 3% to process the transaction. The journal entry to record the sales transaction will include (Ignore cost of goods sold.): A) a debit to Accounts Receivable for $1,261 and a credit to Sales Revenue for $1,261 B) a debit to Cash for $1,300 and a credit to Sales Revenue for $1,300 C) a debit to Cash for $1,261, a debit to Credit Card Fee for $39 and a credit to Sales Revenue for $1,300 D) a debit to Accounts Receivable for $1,300, a debit to Credit Card Revenue for $39 and a credit to Sales Revenue for $1,339 Answer: C Explanation: 1,300 × 3% = 39 Diff: 2 Type: MC L.O.: 4-6 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) Which of the following is a correct statement regarding methods to speed up the collection of cash from receivables?

A) Factoring is used frequently by companies since it is an inexpensive way to raise cash.

B) Credit card companies will charge a fee of 20-30% of the total amount of the sale.

C) The company that factors its receivables maintains control over the collection process.

D) Credit Card Fee is reported on the income statement.

Answer: D Diff: 2 Type: MC L.O.: 4-6 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

50 .

8) Factoring receivables involves selling them at a discounted price.

Answer: TRUE Diff: 2 Type: TF L.O.: 4-6 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) Lincoln Company sold $50,000 of accounts receivable and received $46,750. Prepare the journal entry for this sale. Omit the explanation.

Account

Debit

Credit

Answer: Account Debit Credit Cash 46,750 Financing Expense 3,250 Accounts Receivable 50,000 Diff: 3 Type: ES L.O.: 4-6 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Identify and briefly describe three ways to improve cash flows from sales and receivables.

Answer: 1) Credit card sales - permitting customers to pay with credit cards usually improves sales and the credit card provider promptly remits the net amount owing to the company.

2) Debit card sales - monies are taken directly from the customers' account and credited to the company account.

3) Selling (factoring) receivables - the company sells its accounts receivables to a factor who pays the company the amount due now, charging a fee for the service.

Diff: 3 Type: ES L.O.: 4-6 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

51 .

11) Smart-T has just sold their accounts receivables of $260,000 to a factor for 95% of their balance. Prepare the journal entry for this transaction.

Answer: Cash $247,000 Financing Expenses 13,000 Accounts Receivable $260,000 260,000 x 95% = $247,000 Diff: 3 Type: ES L.O.: 4-6 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) Smart-T has just signed up for a BK Trust debit card machine (interact) which charges a 1% fee. On March 15th Smart-T has debit card transactions totaling $15,550. Record the journal entry for this day's sales.

Answer: March 15 Cash $15,394.50 Interact Fee 155.50 Sales Revenue $15,550 15,550 x 1% = 155.50 Diff: 3 Type: ES L.O.: 4-6 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) Vance Inc. has just agreed to accept a new credit card VISTA as payment for services rendered. VISTA charges a 2.5% fee on all transactions. The sale placed on VISTA credits for the month of April totaled $330,000. Prepare the required journal entry.

Answer: Cash $321,750 Credit Card Fee 8,250 Service Revenue $330,000 $330,000 x 2.5% = $8,250 Diff: 3 Type: ES L.O.: 4-6 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

52 .

4.7

Evaluate liquidity using ratios

1) The current ratio measures which of the following: A) The company's ability to pay all liabilities with current assets.

B) The company's ability to pay current liabilities with current assets.

C) The company's ability to pay all liabilities with all assets.

D) How long in takes to collect the average level of receivables.

Answer: B Diff: 3 Type: MC L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) Which of the following ratios is considered to be a more stringent measure of a company's ability to pay its current liabilities than the current ratio?

A) acid-test ratio B) equity ratio C) debt ratio D) days' sales in receivables Answer: A Diff: 1 Type: MC L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) A company has $50,000 in cash, $85,000 in short-term investments, $120,000 in net current receivables, and $145,000 in inventory. The total current liabilities of the firm are $275,000. The acid-test ratio of the company is: A) 0.64 B) 0.93 C) 1.45 D) 1.76 Answer: B Explanation: 50,000 + 85,000 + 120,000/275,000 Diff: 2 Type: MC L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

53 .

4) The number of days it takes to collect the average amount of receivables is called: A) the quick ratio B) the acid-test ratio C) the current ratio D) days' sales in receivables Answer: D Diff: 1 Type: MC L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) A company with net sales of $850,000, a beginning balance of net receivables of $230,000, and an ending balance of net receivables of $190,000 has a days' sales in receivables of: A) 99 days B) 92 days C) 90 days D) 82 days Answer: C Explanation: 850,000/(230,000 + 190,000)/2 = 4.05; 365/4.05 Diff: 2 Type: MC L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Content Integration Inc. has $25,000 in cash, $40,000 in short-term investments, $55,000 in net current receivables, and $12,000 in prepaid expenses. The total current liabilities of the firm are $190,000. Jupiter Precision's acid-test ratio is: A) 0.69 B) 0.63 C) 0.42 D) 0.34 Answer: B Explanation: 25,000 + 40,000 + 55,000/190,000 Diff: 2 Type: MC L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

54 .

7) A company with net sales of $500,000, a beginning balance of net receivables of $80,000, and an ending balance of net receivables of $90,000 has a collection period of: A) 197 days B) 62 days C) 54 days D) 6 days Answer: B Explanation: 500,000/(80,000 + 90,000)/2 = 5.88; 365/5.88 Diff: 2 Type: MC L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Which of the following are excluded from the numerator in the calculation of the acid-test ratio?

A) inventory and accounts receivable B) prepaid expenses and cash C) inventory and prepaid expenses D) inventory and short-term investments Answer: C Diff: 2 Type: MC L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) Cash collected from accounts receivable is shown on the cash flow statement as a(n): A) operating activity B) investing activity C) financing activity D) either as an operating activity or as a financing activity Answer: A Diff: 2 Type: MC L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

55 .

10) The days' sales in receivables ratio is computed as average net accounts receivable divided by 365 days.

Answer: FALSE Explanation: 365 divided by average net accounts receivable.

Diff: 2 Type: TF L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) The current ratio is calculated by taking the total of all current assets except inventory divided by the total of all current liabilities.

Answer: FALSE Explanation: Total current assets divided by total current liabilities.

Diff: 2 Type: TF L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) A decrease in the acid-test ratio from one year to the next indicates the company's liquidity position is likely improving.

Answer: FALSE Explanation: The higher the acid-test ratio, the easier it is to pay current liabilities.

Diff: 2 Type: TF L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) An increase in the acid-test ratio from one year to the next indicates the company's liquidity position is likely improving.

Answer: TRUE Diff: 2 Type: TF L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

56 .

14) The quick ratio helps investors measure the organization's liquidity.

Answer: TRUE Diff: 2 Type: TF L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) The acceptable acid-test ratio varies by industry.

Answer: TRUE Diff: 2 Type: TF L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) Generally, the higher the acid-test ratio the easier it is for an organization to pay its current liabilities.

Answer: TRUE Diff: 2 Type: TF L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

57 .

17) The accountant at Intellectual Property Inc. gathered the following selected accounting information: 2019 Cash $ 35,000 Short-term investments 28,000 Accounts receivable (net) 33,000 Inventory 47,000 Prepaid expenses 7,000 Accounts payable 55,000 Salaries payable 10,000 Income taxes payable 3,000 Bonds payable (due 2019) 90,000 Sales 250,000 Cost of goods sold 180,000

2020 $33,000 29,000 30,000 50,000 5,500 62,000 8,000 2,500 90,000 230,000 165,000

Required: a. Compute the acid-test ratio for 2019 and 2020. b. Compute the days' sales in average receivables for 2019 and 2020.

Net accounts receivable on December 31, 2018 was $27,000.

Answer: a.

2019 ($35,000 + $28,000 + $33,000) / ($55,000 + $10,000 + $3,000) = 1.41 2020 ($33,000 + $29,000 + $30,000) / ($62,000 + $8,000 + $2,500) = 1.27 b.

2019 ($27,000 + $33,000) / 2 = $30,000; ($30,000/ $250,000) × 365 = 44 days 2020 ($33,000 + $30,000) / 2 = $31,500; ($31,500/ $230,000) × 365 = 50 days Diff: 3 Type: ES L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

58 .

18) Vista Inc. had the following balances in selected accounts at the end of 2019 and 2020.

2019 2020 Cash $58,000 $45,000 Short-term investments 46,000 39,000 Accounts receivable 54,000 61,000 Allowance for uncollectible accounts3,500 5,000 Inventory 78,000 98,000 Accounts payable 91,000 102,000 Wages payable 17,000 25,000 Income taxes payable 4,500 6,500 Note payable (due 2019) 100,000 100,000 Sales 415,000 525,000 Cost of goods sold 225,000 304,000 The accounts receivable at the end of 2018 were $50,000 and the allowance for uncollectible accounts was $2,500.

Required: a. Calculate the acid test ratio for 2019 and 2020 for Vista Inc. b. Calculate the days' sales in receivables for 2019 and 2020 for Vista Inc. c. Determine whether the acid-test ratio improved or deteriorated from 2019. d.

Determine whether the collection period increased or decreased from 2019 to 2020.

Answer: a. 2019 ($58,000 +$46,000 + $54,000 - $3,500) / ($91,000 + $17,000 + $ 4,500) = 1.37 2020 ($45,000 + $39,000 + $61,000 - $5,000) / ($102,000 + $25,000 + $6,500) = 1.05 b. 2019 ($50,000 - $2,500 + $54,000 - 3,500) / 2 = $49,000 ($49,000 / $415,000) × 365 = 43 days 2020 ($54,000 - $3,500 + $61,000 - $5,000) / 2 = $53,250 ($53,250 / $525,000) × 365 = 37 days c. The acid test ratio deteriorated from 2019 to 2020. d. The collection period decreased from 2019 to 2020.

Diff: 3 Type: ES L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

59 .

19) Given the following information calculate the 2019 and 2020 acid-test ratios for Smart-T. : 2019 Cash $ 15,000 Short-term investments 48,000 Accounts receivable (net) 45,000 Inventory 9,000 Prepaid expenses 5,000 Accounts payable 40,000 Salaries payable 8,000 Income taxes payable 5,000 Bonds payable (due 2019) 80,000 Sales 250,000 Cost of goods sold 180,000

2020 $66,000 29,000 45,000 13,000 5,500 43,000 9,000 5,500 80,000 230,000 165,000

Is Smart-T's liquidity situation improving?

Note: 2018 net accounts receivables = $40,000 Answer: Smart-T's liquidity has improved.

2019 ($15,000 + $48,000 + $45,000) / ($40,000 + $8,000 + $5,000) = 2.04 2020 ($66,000 + $29,000 + $45,000) / ($43,000 + $9,000 + $5,500) = 2.43 Diff: 3 Type: ES L.O.: 4-7 CPA COMPETENCIES: Chapter 4 1.2.2 Evaluate treatment for routine transactions 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

60 .

Financial Accounting, Cdn. Ed., 7CE (Harrison/Horngren) Chapter 5 Inventory and Cost of Goods Sold 5.1

Show how to account for inventory

1) The largest expense category on the income statement of most merchandising companies is: A) cost of goods sold B) other expenses C) selling expenses D) administrative expenses Answer: A Diff: 1 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) The following data are for Upholstery Limited for January 2020: Beginning inventory $25,000 Net sales revenue 85,000 Net purchases 35,000 Gross profit percentage 30% What is the company's estimated cost of goods sold for the month?

A) $59,500 B) $25,500 C) $42,000 D) $15,000 Answer: A Explanation: $85,000 x 70% Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

1 .

3) Which of the following would be included in the Inventory account on a merchandising company's balance sheet?

A) advertising costs B) delivery costs C) shipping costs from the manufacturer to the merchandising company D) sales commissions Answer: C Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) In a merchandising business, gross profit is equal to sales revenue minus: A) the sum of cost of goods sold, operating expenses, and prepaid expenses B) the sum of cost of goods sold and operating expenses C) cost of goods sold D) the sum of cost of goods sold and sales commissions Answer: C Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) A perpetual inventory system offers all the following advantages except: A) inventory balances are always current B) it enhances internal control C) it is less expensive than a periodic system D) it helps salespeople determine whether there is a sufficient supply of inventory on hand to fill customer orders Answer: C Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

2 .

6) All of the following are deducted from the purchase price of inventory in determining cost of goods sold except: A) purchase returns B) purchase allowances C) freight in D) purchase discounts Answer: C Explanation: Freight in is added to the purchase price of inventory in determining cost of goods sold, not deducted.

Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) Perpetual inventory records provide information helpful in making all the following decisions except: A) whether immediate delivery of merchandise is possible B) when to reorder C) how quickly items of merchandise are selling D) whether to extend credit to a customer Answer: D Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Computer software used in a perpetual inventory system: A) still requires an inventory count on hand annually B) completely eliminates the need to physically count inventory C) makes journal entries for inventory purchases unnecessary D) makes journal entries for the cost of goods sold unnecessary Answer: A Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

3 .

9) If a company uses a periodic inventory system, it will maintain all of the following accounts except: A) Cost of Goods Sold B) Purchases C) Sales D) Inventory Answer: A Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) King Size International buys beds from a manufacturer for sale overseas. A shipment of beds to King Size was received slightly damaged. The manufacturer agreed to take an extra 10% off of its invoice price to King Size if it will keep and sell the beds to its customers. In this situation, King Size has received a: A) purchase return B) purchase discount C) purchase allowance D) sales allowance Answer: C Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) Using a perpetual inventory system, which of the following entries would record the cost of merchandise sold on credit?

A) Credit Sales and debit Accounts Receivable B) Debit Cost of Goods Sold and credit Purchases C) Debit Cost of Goods Sold and credit Inventory D) Debit Inventory and credit Cost of Goods Sold Answer: C Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

4 .

12) Under a perpetual inventory system, which of the following entries would record the purchase of merchandise on credit?

A) Debit Inventory and credit Accounts Payable B) Credit Purchases and Debit Cost of Goods Sold C) Credit Sales and debit Accounts Receivable D) Debit Purchases and credit Accounts Payable Answer: A Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) Under a periodic inventory system, which of the following entries would record the purchase of merchandise on credit?

A) Debit Inventory and credit Accounts Payable B) Credit Purchases and debit Cost of Goods Sold C) Credit Sales and debit Accounts Receivable D) Debit Purchases and credit Accounts Payable Answer: D Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) If a company is using a perpetual inventory system, the balance in its inventory account three-quarters of the way through an accounting period would be equal to: A) the total of the beginning inventory plus goods purchased during the accounting period B) the inventory on hand at the beginning of the period C) the amount of inventory on hand at that date D) the amount of goods purchased during the period Answer: C Diff: 3 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

5 .

15) Which of the following would be included in the Cost of Goods Sold account on a merchandising company's income statement?

A) shipping costs from the manufacturer to the merchandiser B) sales commissions C) costs of advertising D) sales taxes Answer: A Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) A business offers credit terms of 2/15, n/30. These terms indicate that: A) the total amount of the invoice must be paid within 15 days of the invoice date B) a discount of 2% can be taken if the invoice is paid within 15 days of the invoice date C) the buyer can take a 2% discount if the bill is paid within 30 days of the invoice date D) no discount is offered for early payment Answer: B Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 17) A company has gross revenue of $502,000; sales discounts of $2,900; and sales returns and allowances of $3,300. Net revenue is: A) $495,800 B) $498,700 C) $499,100 D) $502,000 Answer: A Explanation: 502,000 - 2,900 - 3,300 = 495,800 Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

6 .

18) On December 2, a customer returned merchandise, with a selling price of $1,200 purchased on account, to a department store. Ignoring cost of goods sold, which journal entry should the department store prepare? Assume no sales discount was offered for early payment.

A) Debit Sales Revenue for $1,200 and credit Accounts Receivable for $1,200.

B) Debit Sales Revenue for $1,200 and credit Cash for $1,200.

C) Debit Sales Revenue for $1,200 and credit Sales Returns and Allowances for $1,200.

D) Debit Sales Returns and Allowances for $1,200 and credit Accounts Receivable for $1,200.

Answer: D Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 19) The Tasty Shrimp Limited's warehouse was recently flooded. The controller has asked you to estimate the inventory loss. You have managed to salvage the following number from the general office for the month of July.

Sales $660,000 Inventory June 30 $500,000 Purchases July $125,500 Purchases June $110,250 Gross Profit Percentage 45% Answer: Beginning inventory $500,000 Purchases 125,500 Cost of goods available for sale 625,500 Less: Cost of goods sold 363,000* Ending inventory $262,500 * Cost of goods sold = $660,000 × 55% = $363,000 Diff: 2 Type: ES L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

7 .

20) Given the following data, what is the cost of purchases?

Sales revenue $725,000 Cost of goods sold 345,000 Ending inventory 250,000 Beginning inventory 120,000 A) $370,000 B) $465,000 C) $595,000 D) $475,000 Answer: D Explanation: $120,000 + 475,000 - 250,000 = 345,000 Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 21) Given the following data, what is the cost of goods sold?

Sales revenue $1,980,000 Beginning inventory 380,000 Ending inventory 340,000 Purchases 1,250,000 A) $690,000 B) $770,000 C) $1,290,000 D) $1,210,000 Answer: C Explanation: $380,000 + 1,250,000 - 340,000 = 1,290,000 Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

8 .

22) Given the following data, what is the cost of beginning inventory?

Sales revenue $1,450,000 Cost of goods sold 845,000 Ending inventory 310,000 Purchases 950,000 A) $1,485,000 B) $415,000 C) $1,035,000 D) $205,000 Answer: D Explanation: $845,000 + 310,000 - 950,000 = 205,000 Diff: 2 Type: MC L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 23) Sales commissions are not normally included in the cost of goods sold account.

Answer: TRUE Diff: 2 Type: TF L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 24) Freight-in is the transportation cost, paid by the buyer, to move goods from the seller to the buyer.

Answer: TRUE Diff: 2 Type: TF L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 25) Sales taxes (GST/HST) paid by a merchandising company on its sales are normally included in the cost of goods sold account.

Answer: FALSE Explanation: The purchase price of inventory does not include Canada's GST/HST. Diff: 2 Type: TF L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

9 .

26) A purchase allowance is a decrease in the cost of purchases because the purchaser returned goods to the supplier.

Answer: FALSE Explanation: A purchase allowance decreases the cost of inventory because the buyer receives an allowance e (a deduction) from the amount owed-often for defective merchandise.

Diff: 1 Type: TF L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 27) In a perpetual inventory system, businesses maintain a continuous record for each inventory item.

Answer: TRUE Diff: 1 Type: TF L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 28) Historically, perpetual inventory systems have been used to account for inventory items with a low unit cost.

Answer: FALSE Explanation: Perpetual inventory systems are used for all types of goods.

Diff: 1 Type: TF L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 29) In a merchandising business, gross profit is the difference between sales revenue and the cost of goods sold.

Answer: TRUE Diff: 2 Type: TF L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

10 .

30) The following data pertains to Home Office Company for the year ended December 31, 2020: Sales (25% were cash sales) during the year $1,100,600 Cost of goods sold during the year 690,300 Beginning inventory 319,800 Purchases (10% were cash purchases) during the year 738,200 a. Prepare journal entries to record sales, cost of goods sold, and the purchase of inventory during 2020 using the perpetual inventory system. b. Compute the balance in the inventory account on December 31, 2020.

Answer: a. Accounts Receivable 825,450 Cash 275,150 Sales Revenue 1,100,600 Cost of Goods Sold Inventory

690,300

Inventory Cash Accounts Payable

738,200

690,300

73,820 664,380

b. $319,800 + $738,200 - $690,300 = $367,700 Diff: 2 Type: ES L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

11 .

31) The following data pertain to Stainless Steel Enterprises for the year ended December 31, 2020: Beginning inventory $188,200 Purchases on credit during the year 400,500 Cost of goods sold during the year 500,600 Sales (70% on credit) during the year755,400 a. Prepare entries to record the purchase of inventory, cost of goods sold, and sales during 2020 using the perpetual inventory system. b. Compute the balance in the inventory account on December 31, 2020.

Answer: a. Inventory 400,500 Accounts Payable 400,500 Cost of Goods Sold Inventory

500,600

Accounts Receivable 528,780 Cash 226,620 Sales Revenue

500,600

755,400

b.$188,200 + $400,500 - $500,600 = $88,100 Diff: 2 Type: ES L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

12 .

32) The following information is available for Don't Pay a Cent Corporation for the year ended December 31, 2020: Sales revenue $300,000 Sales commissions $7,500 Purchases (cost) $200,000 Advertising $6,000 Freight-out $700 Freight-in $800 Sales returns $3,000 Purchase returns $2,000 Sales allowances $1,000 Purchase allowances $1,500 Sales discounts $7,000 Purchase discounts $8,000 Calculate the following for Don't Pay a Cent Corporation: a. Net sales for 2020 b. Net purchases for 2020.

Answer: a.

Sales revenue $300,000 Sales returns -3,000 Sales allowances -1,000 Sales discounts -7,000 Net sales $289,000 b.

Purchases $200,000 Freight-in 800 Purchase returns -2,000 Purchase allowances -1,500 Purchase discounts -8,000 Net purchases $189,300 Diff: 2 Type: ES L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

13 .

33) What is the most important asset of a merchandising business?

Answer: Inventory is the most important asset in a merchandising business. The primary activity of a merchandising business is the selling of its inventory to customers. Proper management of inventory and managing costs are at the heart of earning profits for a merchandising business. Therefore, we can say that inventory is the most important asset of a merchandising business.

Diff: 1 Type: ES L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 34) What is the major expense shown on the income statement for a merchandising business?

Answer: The major expense shown on an income statement for a merchandising business is cost of goods sold. This represents the cost of the inventory sold by the business. As indicated in the opening vignette, the cost of goods sold (or the cost of sales) is the most important expense for a company that sells goods rather than services (such as Leon's Furniture). The difference between the revenue generated from selling the inventory and the cost of the inventory sold is gross profit , or gross margin.

Diff: 2 Type: ES L.O.: 5-1 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5.2

Apply and compare various inventory costing methods

1) Given the following data, what is the weighted-average cost of ending inventory for a periodic inventory system rounded to the nearest whole dollar? (Do not round in the process of your calculations, only round your final answer.)

Sales revenue 100 units at $15 per unit Beginning inventory 40 units at $9 per unit Purchases 80 units at $10 per unit A) $300 B) $200 C) $193 D) $180 Answer: C Explanation:

[(40 x $9) + (80 x $10)]/120 x 20 = $193

Diff: 2 Type: MC L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14 .

2) Given the following data, what is cost of goods sold as determined under the FIFO method?

Sales revenue 350 units at $35 per unit Beginning inventory 120 units at $15 per unit Purchases 400 units at $20 per unit A) $6,400 B) $5,250 C) $4,600 D) $7,000 Answer: A Explanation: (120 x $15) + (230 x $20) = $6,400 Diff: 2 Type: MC L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Given the following data, calculate the cost of ending inventory using the FIFO costing method: 1/1 Beginning inventory 2/25 Purchases 6/15 Purchases 9/20 Purchases 12/31 Ending inventory

45 units at $10 per unit 40 units at $12 per unit 30 units at $13 per unit 25 units at $14 per unit 40 units

A) $400 B) $545 C) $480 D) $560 Answer: B Explanation: (15 x $13) + (25 x $14) = $545 Diff: 2 Type: MC L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

15 .

4) Given the following data, calculate the cost of ending inventory using the weighted-average method for a periodic inventory system, rounding to the nearest dollar. (Do not round in the process of your calculations, only round your final answer.)

1/1 3/5 5/30 10/25 12/31

Beginning inventory 50 units at $10 per unit Purchases 30 units at $14 per unit Purchases 25 units at $15 per unit Purchases 20 units at $16 per unit Ending inventory 45 units

A) $720 B) $619 C) $581 D) $450 Answer: C Explanation: [(50 x $10) + (30 x $14) + (25 x $15) + (20 x $16)]/125 x 45 = $581 Diff: 2 Type: MC L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Given the following data, calculate the cost of goods sold for the 04/15 sale using the weighted-average method for a perpetual inventory system, rounding to the nearest dollar. (Do not round in the process of your calculations, only round your final answer.)

1/1 3/5 4/15 5/30 10/25 11/15 12/31

Beginning inventory 50 units at $10 per unit Purchases 30 units at $14 per unit Sale 20 units at $30 per unit Purchases 25 units at $15 per unit Purchases 20 units at $16 per unit Sale 60 units at $32 per unit Ending inventory 45 units

A) $200 B) $230 C) $280 D) $600 Answer: B Explanation: [(50 × $10) + (30 × $14)]/80 × 20 = $230 Diff: 2 Type: MC L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

16 .

6) Given the following data, calculate the cost of goods sold for the 11/15 sale using the weighted-average method for a perpetual inventory system, rounding to the nearest dollar. (Do not round in the process of your calculations, only round your final answer.)

1/1 3/5 4/15 5/30 11/15 12/31

Beginning inventory 50 units at $10 per unit Purchases 30 units at $14 per unit Sale 20 units at $30 per unit Purchases 50 units at $15 per unit Sale 60 units at $32 per unit Ending inventory 50 units

A) $720 B) $771 C) $785 D) $1,920 Answer: C Explanation: [(50 × $10) + (30 × $14) - (20 × $11.50) + (50 × $15)]/110 × 60 = $785 Diff: 3 Type: MC L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) Given the following data, calculate the cost of goods sold for the period using the weightedaverage method for a periodic inventory system, rounding to the nearest dollar. (Do not round in the process of your calculations, only round your final answer.)

1/1 3/5 4/15 5/30 11/15 12/31

Beginning inventory 40 units at $12 per unit Purchases 20 units at $14 per unit Sale 30 units at $30 per unit Purchases 40 units at $11 per unit Sale 50 units at $32 per unit Ending inventory 20 units

A) $960 B) $966 C) $980 D) $2,500 Answer: A Explanation: [(40 × $12) + (20 × $14)) + (40 × $11)]/100 × 80 =$ 960 Diff: 3 Type: MC L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

17 .

8) FIFO tends to increase cost of goods sold when: A) costs are increasing B) costs are declining C) costs are constant D) FIFO will always yield the lowest possible cost of goods sold Answer: B Diff: 2 Type: MC L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) FIFO tends to decrease cost of goods sold when: A) costs are constant B) costs are decreasing C) costs are increasing D) taxes are decreasing Answer: C Diff: 2 Type: MC L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) When the FIFO method is used, cost of goods sold is assumed to consist of: A) the most recently purchased units B) the units with the lowest per unit cost C) the units with the highest per unit cost D) the oldest units Answer: D Diff: 1 Type: MC L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) When using the weighted-average cost method to determine the cost of inventory sold, the weighted-average cost per unit is calculated as the: A) cost of goods available for sale divided by the number of units available for sale B) cost of goods sold divided by the average number of units in inventory C) cost of goods sold divided by the number of units sold D) cost of goods in ending inventory divided by the number of units in ending inventory Answer: A Diff: 2 Type: MC L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 18 .

1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) In a time of increasing inventory costs, FIFO gives us a higher COGS number compared to the weighted average method.

Answer: FALSE Explanation: FIFO COGS is lowest because it's based on oldest costs, which are low.

Diff: 1 Type: TF L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) FIFO income typically is less realistic compared to the net income under weighted-average cost.

Answer: TRUE Diff: 1 Type: TF L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) A company may use more than one type of inventory method. For example it may use specific identification for one type of inventory and FIFO for another.

Answer: TRUE Diff: 1 Type: TF L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) FIFO uses "old" inventory costs for revenue.

Answer: TRUE Diff: 1 Type: TF L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

19 .

16) The specific identification cost method is frequently used for items with common characteristics, such as gallons of paint.

Answer: FALSE Explanation: The specific identification cost method is used for unique inventory items at the cost of the particular unit.

Diff: 1 Type: TF L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 17) When using the weighted-average cost method to determine the cost of inventory sold, the weighted-average cost per unit is calculated as the cost of goods available for sale divided by the number of units available for sale.

Answer: TRUE Diff: 2 Type: TF L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18) Ending inventory under FIFO reflects the cost of goods most recently acquired.

Answer: TRUE Diff: 1 Type: TF L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

20 .

19) State which of the following inventory methods would best attain the goals of management.

Indicate your answer by writing the proper letter in the blank beside each specific goal. a. FIFO b. Weighted-averaged. c. Specific identification 1. ________ Management wants to report approximate current inventory replacement costs on its year-end balance sheet during a period of rising prices.

2. ________ Management wants to maximize net income during a period of rising prices.

3. ________ The company sells yachts, deep-sea fishing boats, and off-shore speed boats.

4. ________ Management wants to minimize net income during a period of falling prices.

Answer: 1. a 2. a 3. c 4. a Diff: 2 Type: ES L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 20) State some guidelines a company's management could use to determine the most desirable inventory costing method.

Answer: Specific identification: ∙ use for unique or high-cost inventory items, such as automobiles, jewellery, or expensive electronics FIFO: ∙ ending inventory is reported at its most current cost ∙ maximizes reported income when inventory costs are rising ∙ minimizes reported income when inventory costs are falling Weighted-average: ∙ "middle-of-the-road" approach for reported income and ending inventory values Diff: 2 Type: ES L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

21 .

21)

Purchase January 1st Purchase January 15th Purchase January 25th

Key West Group Ltd. Inventory Information For January 2020 Numbers of units Price paid per unit 500 $50 1,000 $60 2,000 $70

*** There were no units on hand at the beginning of January 2020.

On January 31st, 2020 Key West Group sold 1,500 units of inventory at $100 each to customers.

Calculate cost of goods sold using FIFO. Answer: FIFO 500 units × $50= $25,000 1,000 units × $60 = 60,000 COGS $85,000 Diff: 2 Type: ES L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

22 .

22) Inventory data for Freezer Burn Corporation for the year ended December 31, 2020, are as follows: Beginning inventory 50 units at $150 each March 31 purchase 50 units at $155 each 1st quarter sales 60 units June 30 purchase 55 units at $160 each 2nd quarter sales 70 units September 30 purchase 60 units at $170 each Compute the perpetual ending inventory balance on December 31, 2020, using: a.

FIFO b.

Weighted-average Answer: a. FIFO (25 × $160)+ (60 × 170) = $14,200 b. Weighted-average 50 × $150 = $7,500 50 × $155 = $7,750 100 $15,250 = $152.50 less sales 60 remainder 40 × 152.50 = $6,100 purchases

55 × $160 = $8,800 95 $14,900 = $156.84 less sale 70 remainder 25 × 156.84= $3,921 60 × $170 = $10,200 85 $14,121 $166.13 Diff: 2 Type: ES L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

23 .

23) Inventory data for Hot Buys Company for January 2020 are as follows: January 1 balance January 10 purchase January 15 sale January 21 purchase January 28 sale

80 units at $25 100 units at $28 120 units 90 units at $32 110 units

Using FIFO, compute ending inventory as of January 31, 2020, and determine cost of goods sold for January.

Answer: Ending inventory (40 × $32) = $1,280 Cost of goods sold (80 × $25) + (100 × $28) + (50 × $32) = $6,400 Diff: 2 Type: ES L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 24)

West Life Group Ltd. Inventory Information For January 2020

Numbers of units Purchase January 1st 500 Purchase January 15th 1,000 Purchase January 25th 2,000

Price paid per unit $50 $60 $70

*** There were no units on hand at the beginning of January 2020. On January 31st, 2020, West Life Group sold 1,500 units of inventory at $100 each to customers.

Calculate cost of goods sold using the weighted average method.

Answer: Weighted Average 500 × 50 = $25,000 1,000 × 60 = $60,000 2,000 × 70 = $140,000 3500 225,000 or $64.29 per unit COGS: $64.29 × 1,500 = $96,435 Diff: 2 Type: ES L.O.: 5-2 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 24 .

5.3

Explain how accounting standards apply to inventory

1) If year-end inventory is reduced from cost to a lower net realizable value, which of the following accurately depicts the results?

A) Year-end inventory is reduced and cost of goods sold is reduced by the same amount.

B) Cost of goods sold is reduced and beginning inventory of the next period is reduced by the same amount.

C) The capital account balance is increased and beginning inventory of the next period is reduced by the same amount.

D) Cost of goods sold is increased and beginning inventory of the next period is decreased by the same amount.

Answer: D Diff: 3 Type: MC L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) Note disclosure relating to inventory requires that management prepare financial reports that disclose all of the following types of information except: A) the method of inventory costing used B) forecasts of expected future earnings to help investors decide whether to invest in the company C) information that facilitates comparison with other companies' financial reports D) information that is relevant to decision making Answer: B Diff: 2 Type: MC L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) The journal entry to write inventory up to the net realizable value would be: A) a debit to COGS B) a debit to Inventory C) a credit to Inventory D) a credit to Losses Answer: B Diff: 2 Type: MC L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

25 .

4) Consider the following data: Ending inventory at cost Ending inventory at market Cost of goods sold (before consideration of LCNRV rule)

$115,000 119,000 165,000

Which of the following depicts the proper account balance after the application of the LCNRV rule?

A) Ending Inventory balance will be $119,000.

B) Ending Inventory balance will be $115,000.

C) Cost of Goods Sold will be $161,000.

D) Cost of Goods Sold will be $169,000.

Answer: B Diff: 2 Type: MC L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Sales Company Ltd. paid $10 wholesale for one unit of inventory for resale in the retail market. The same inventory can now be purchased for $9. The retail sales price of the inventory is $13, however, it normally costs $2 to sell each unit. Using the lower-of-cost-and-netrealizable-value rule the inventory would be reported on Sales Company Ltd.'s balance sheet at: A) $9 B) $10 C) $11 D) $13 Answer: B Explanation: Inventory is valued at the lower of cost ($10) or net realizable value ($13 - $2 = $11). The lower of these two amounts is $10 so inventory is value at cost.

Diff: 2 Type: MC L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) A firm can change their inventory costing method if it provides more reliable and relevant information.

Answer: TRUE Diff: 2 Type: TF L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

26 .

7) Companies are required to disclose the inventory accounting methods in the notes as well as the substance of all material transactions that affect the proper valuation of the inventory.

Answer: TRUE Diff: 3 Type: TF L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Previously written down inventory does not need to be reassessed as it is at its lowest value.

Answer: FALSE Explanation: Inventory that has been written down to net realizable value should be reassessed each period. If the net realizable value has increased, the previous write-down should be reversed up to the new net realizable value.

Diff: 2 Type: TF L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) Comparability in accounting means that a company must strictly perform proper accounting only for items and transactions that are significant to the financial statements of a business.

Answer: FALSE Explanation: For accounting information to be comparable, it must be reported in a way that makes it possible to compare it to similar information being reported by other companies and by comparing it with its own financial statements from one period to the next.

Diff: 2 Type: TF L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) When applying the lower-of-cost-or-net-realizable-value rules to ending inventory valuation, net realizable value generally refers to the cost at which the company could sell a unit of inventory.

Answer: FALSE Explanation: Net realizable value (NRV) is the amount the business could get if it sold the inventory, less any costs incurred to sell it.

Diff: 2 Type: TF L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

27 .

11) The lower-of-cost-or-net-realizable-value rule applies only when a company uses the FIFO inventory valuation method.

Answer: FALSE Explanation: The lower-of-cost-and-net-realizable-value (LCNRV) rule is based on the premise that inventory can become obsolete or damaged or its selling price can decline.

Diff: 2 Type: TF L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) The following information is available for Digital Image Corporation for the year ended December 31, 2020: Sales revenue $600,000 Beginning inventory (at cost)200,000 Net purchases 250,000 Ending inventory: Historical cost 170,000 Net realizable value 155,000 a. Compute gross profit as it would appear on the income statement valuing ending inventory at historical cost. b. Compute gross profit as it would appear on the income statement valuing ending inventory at lower-of-cost-or-net-realizable-value.

Answer: a.

Sales revenue $600,000 Cost of goods sold Beginning inventory $200,000 Net purchases 250,000 Cost of goods available for sale 450,000 Less: Ending inventory 170,000 Cost of goods sold 280,000 Gross profit $320,000

28 .

b.

Sales revenue $600,000 Cost of goods sold Beginning inventory $200,000 Net purchases 250,000 Cost of goods available for sale 450,000 Less: Ending inventory 155,000 Cost of goods sold 295,000 Gross profit $305,000 Diff: 2 Type: ES L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) Roughrider Ltd. (Roughrider) uses the lower of cost and net realizable value rule to value its football equipment inventory. Roughrider defines market as net realizable value. Roughrider's inventory on January 31, 2020 had a cost of $1,200,000 and an NRV of $1,125,000.

Required: a. By how much should Roughrider's inventory be written down? b. Prepare the journal entry that Roughrider should prepare to record the write-down. c. What amount should be reported for inventory on Roughrider's January 31, 2020 balance sheet?

Answer: a. The inventory should be written down by $1,200,000 - $1,125,000 = $75,000. b. Dr. Cost of sales Cr. Inventory

75,000 75,000

c. The inventory should be presented on the balance sheet at $1,125,000.

Diff: 2 Type: ES L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

29 .

14) The Key West Group uses the lower of cost and net realizable value rule to value its kayak inventory. The Kayaks in inventory were purchased on January 1, 2019 for $12,000. At year end December 31, 2019 the net realizable value of Key West's inventory dropped to $9,000. At the end of 2020 due to a shortage of Kayaks this inventory increased in value to $15,000.

Required: Prepare the required journal entries (if any) required at the 2019 and 2020 year end.

Answer: December 31, 2019 Cost of Goods Sold $3,000 Inventory $3,000 December 31, 2020 Inventory $3,000 Cost of Goods Sold $3,000 Diff: 2 Type: ES L.O.: 5-3 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5.4 Compute and evaluate gross profit percentage, inventory turnover, and days' inventory outstanding 1) Inventory turnover is calculated by: A) dividing average inventory by cost of goods sold B) dividing cost of goods sold by average inventory C) multiplying average inventory by cost of goods sold D) subtracting ending inventory from cost of goods sold Answer: B Diff: 1 Type: MC L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) Average inventory is equal to: A) beginning inventory plus cost of goods sold divided by two B) beginning inventory plus ending inventory divided by two C) cost of goods sold plus purchases divided by two D) ending inventory plus cost of goods sold divided by two Answer: B Diff: 2 Type: MC L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 30 .

3) The gross profit rate is equal to: A) net sales revenue minus cost of goods sold B) gross profit divided by net sales revenue C) net sales revenue minus gross profit on sales D) cost of goods sold divided by net sales revenue Answer: B Diff: 1 Type: MC L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) Data for Flat Panel Ltd. for the year ended December 31, 2020, are as follows: Sales revenue Cost of goods sold Beginning inventory Ending inventory

$130,000 90,000 35,000 40,000

Inventory turnover for 2020 is: A) 2.40 B) 2.25 C) 1.07 D) 3.47 Answer: A Explanation: 90,000/(35,000 + 40,000) = 2.40 Diff: 2 Type: MC L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

31 .

5) Victory Stables Ltd. for the year ended December 31, 2020, are as follows: Sales revenue Cost of goods sold Beginning inventory Ending inventory

$550,000 110,000 80,000 60,000

The Gross Profit percentage for 2020 is: A) 0.80 B) 1.57 C) 0.20 D) 1.83 Answer: A Explanation: 550,000 - 110,000 = 440,000/550,000 = 0.80 Diff: 2 Type: MC L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) The gross profit percentage is one of the most closely watched profitability measures. It can be calculated by: A) dividing cost of goods sold by average inventory B) dividing gross profit by net sales revenue C) dividing gross profit by net accounts receivable D) dividing cost of goods sold by net sales revenue Answer: B Diff: 2 Type: MC L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) A sharp decrease in the gross profit percentage is a potential indicator of trouble.

Answer: TRUE Diff: 2 Type: TF L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

32 .

8) The gross profit percentage can be calculated by dividing cost of goods sold by net sales revenue.

Answer: FALSE Explanation: The gross profit percentage is calculated by dividing gross profit by net sales revenue.

Diff: 2 Type: TF L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) Inventory turnover is calculated by dividing average inventory by cost of goods sold.

Answer: FALSE Explanation: Inventory turnover is calculated by dividing cost of goods sold by average inventory.

Diff: 1 Type: TF L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

33 .

10) The following data are available for Big Box Corporation: Beginning inventory $12,500 Purchases returns and allowances 800 Purchases 45,000 Sales 85,400 Purchases discounts 1,200 Sales returns 2,000 Sales discounts 1,300 Operating expenses 31,700 Ending inventory 15,000 Compute: a. Net purchases b. Net sales c. Cost of goods sold d. Gross profit e. Gross profit percentage f. Net income Answer: a. Net purchases = $45,000 - ($800 + $1,200) = $45,000 - $2,000 = $43,000 b. Net sales = $85,400 - ($2,000 + $1,300) = $85,400 - $3,300 = $82,100 c. Cost of goods sold = $12,500 + $43,000 - $15,000 = $40,500 d. Gross profit = $82,100 - $40,500 = $41,600 e. Gross profit percentage = $41,600 / $82,100 = 50.7% f. Net income = $41,600 - $31,700 = $9,900 Diff: 2 Type: ES L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

34 .

11) You are provided with the following information about the bookstore at your university: Cost of sales for the year ended June 30, 2020$ 510,000 Inventory balance on June 30, 2019 125,000 Inventory balance on June 30, 2020 165,000 Required: a. Calculate the inventory turnover ratio for the year ended June 30, 2020. b. What is the average length of time that it took to sell its inventory in 2020? c. Is the inventory turnover ratio satisfactory? What would you need to know to fully answer this question?

Answer: a. Average inventory = ($125,000 + 165,000)/2 = $145,000.

Inventory turnover = cost of sales / average inventory = $510,000 / $145,000 = 3.52 b. The average length of time to sell inventory = 365 / 3.52 = 103.7 days. c. You cannot assess whether the turnover is satisfactory without having benchmarks.

Information that could be helpful includes the typical turnover for other university bookstores and the turnover for your bookstore in recent years, to identify trends. Also, any changes in the accounting environment that might explain or affect the turnover period would be useful.

Diff: 2 Type: ES L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) In 2020, Norwood Limited had sales and cost of sales of $250,000 and $62,500 respectively.

The company had shareholders equity of $100,000 and its assets were $125,000. The company's gross profit for 2020 was: Answer: gross profit = Sales - Cost of Sales = $250,000 - $62,500 = $187,500 Diff: 2 Type: ES L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

35 .

13) Calculate gross profit percentage for the following independent situations. a. Net sales Purchases during the year Ending inventory Beginning inventory

$500,000 340,700 35,000 28,000

b. Net sales Beginning inventory Ending inventory Purchases during the year

$650,000 37,500 42,000 270,000

c. Net sales Purchases during the year Beginning inventory Ending inventory

$880,000 420,000 60,000 52,500

d. Net sales $232,000 Ending inventory 25,000 Purchases during the year 127,000 Beginning inventory 30,000 Answer: a. $28,000 + $340,700 - $35,000 = $333,700 cost of goods sold $500,000 - $333,700 = $166,300 gross profit $166,300 / $500,000 = 0.33 b. $37,500 + $270,000 - $42,000 = $265,500 cost of goods sold $650,000 - $265,500 = $384,500 gross profit $384,500 / $650,000 = 0.59 c. $60,000 + $420,000 - $52,500 = $427,500 cost of goods sold $880,000 - $427,500 = $452,500 gross profit $452,500 / $880,000 = 0.51 d. $30,000 + $127,000 - $25,000 = $132,000 cost of goods sold $232,000 - $132,000 = $100,000 gross profit $100,000 / $232,000 = 0.43 Diff: 2 Type: ES L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

36 .

14) State some methods retailers might use to increase the gross profit on sales.

Answer: ∙ Conduct market research to pinpoint the products that sell well to particular groups of customers. ∙ Increase advertising to help boost sales. ∙ Increase the selling price of the products. ∙ Cut the cost of inventory purchases by taking advantage of purchase discounts, purchasing in large quantities, and searching for economical shipping rates.

Diff: 2 Type: ES L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) Discuss methods companies could use to increase the rate of inventory turnover.

Answer: ∙ Conduct market research to pinpoint which products sell the best to particular groups of customers. ∙ Decrease the selling price of products. ∙ Reduce the amount of inventory kept on hand.

Diff: 2 Type: ES L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) Victory Stables had sales and cost of sales of $600,000 and $450,000 respectively in 2020.

The company had shareholders' equity of $750,000 and its assets were $1,125,000. Calculate the company's gross profit and gross profit percentage for 2020.

Answer: Gross Profit = Sales - Cost of Sales = $600,000 - $450,000 = $150,000 Gross Profit Percentage = Gross Profit/ Sales Revenue $150,000/$600,000 = 25% Diff: 2 Type: ES L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

37 .

17) Smart-T Incorporated had sales and cost of sales of $1,850,000 and $1,100,000 respectively in 2020. The company had shareholders equity of $925,000, liabilities of $775,000 and assets of $1,700,000. Included in Smart-T's assets was inventory valued at $100,000 which was a $50,000 increase from the previous year's holdings.

Calculate Smart-T's gross profit percentage and inventory turnover for 2020.

Answer: Gross profit = $1,850,000 - $1,100,000 = $750,000 Gross profit percentage = $750,000/1,850,000 = 40.5% Average Inventory = $75,000 Inventory Turnover = 1,100,000/75,000 = 14.7 times per year or every 24.8 days.

Diff: 2 Type: ES L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18) Calculate inventory turnover for the following independent situations. a. Ending inventory Purchases during the year Beginning inventory

$25,000 127,000 30,000

b. Purchases during the year Beginning inventory Ending inventory

$350,000 50,000 42,500

c. Beginning inventory Ending inventory Purchases during the year

$37,500 42,000 270,000

d. Purchases during the year Ending inventory Beginning inventory

$335,700 32,000 27,000

38 .

Answer: a. $30,000 + $127,000 - $25,000 = $132,000 cost of goods sold ($30,000 + $25,000) / 2 = $27,500 average inventory $132,000 / $27,500 = 4.8 b. $50,000 + $350,000 - $42,500 = $357,500 cost of goods sold ($50,000 + $42,500) / 2 = $46,250 average inventory $357,500 / $46,250 = 7.73 c. $37,500 + $270,000 - $42,000 = $265,500 cost of goods sold ($37,500 + $42,000) / 2 = $39,750 average inventory $265,500 / $39,750 = 6.68 d. $27,000 + $335,700 - $32,000 = $330,700 cost of goods sold ($27,000 + $32,000) / 2 = $29,500 average inventory $330,700 / $29,500 = 11.21 Diff: 2 Type: ES L.O.: 5-4 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5.5

Analyze the effects of inventory errors

1) An error in the ending inventory for the year ended December 31, 2019: A) automatically creates errors in cost of goods in the 2019 and 2020 financial statements B) has no effect on the 2019 financial statements but will create an error in the 2020 financial statements C) automatically creates errors in the ending inventory balance in the 2019 and 2020 financial statements D) affects only the 2019 financial statements Answer: A Diff: 2 Type: MC L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

39 .

2) If ending inventory for the year ended December 31, 2019, is overstated by $25,000: A) net income for 2020 will be understated by $25,000 B) net income for 2020 will be overstated by $25,000 C) ending inventory for 2020 will be understated by $25,000 D) beginning inventory for 2020 will be understated by $25,000 Answer: A Diff: 2 Type: MC L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) If ending inventory on December 31, 2019, is overstated, then: A) cost of goods sold for the year ended December 31, 2020, will be understated B) cost of goods sold for the year ended December 31, 2019, will be overstated C) gross profit for the year ended December 31, 2019, will be understated D) gross profit for the year ended December 31, 2020, will be understated Answer: D Diff: 3 Type: MC L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) If ending inventory for the year ended December 31, 2019, is understated, this error will cause shareholders' equity to be: A) overstated at the end of 2019 and understated at the end of 2020 B) understated at the end of 2019 and overstated at the end of 2020 C) correctly stated at the end of 2019 and overstated at the end of 2020 D) understated at the end of 2019 and correctly stated at the end of 2020 Answer: D Diff: 3 Type: MC L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

40 .

5) If ending inventory is overstated, then: A) cost of goods sold and ending inventory will both be overstated B) cost of goods sold and ending inventory will both be understated C) cost of goods sold will be overstated and ending inventory will be understated D) cost of goods sold will be understated and ending inventory will be overstated Answer: D Diff: 2 Type: MC L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Payment for the acquisition of inventory is shown on a cash flow statement as a(n): A) investing activity B) operating activity C) financing activity D) does not appear on a cash flow statement Answer: B Diff: 2 Type: MC L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) Cash received from the sale of inventory is shown on a cash flow statement as: A) an investing activity B) a financing activity C) an operating activity D) either an operating activity or a financing activity Answer: C Diff: 2 Type: MC L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Inventory errors counter balance in two consecutive periods.

Answer: TRUE Diff: 1 Type: TF L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

41 .

9) An understatement in ending inventory results in an overstatement of gross profit.

Answer: FALSE Explanation: There is a direct relationship between ending inventory and gross profit. An understatement in ending inventory results in an understatement of gross profit.

Diff: 1 Type: TF L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Inventory errors can be ignored because they counterbalance.

Answer: FALSE Explanation: After two periods an inventory accounting error counterbalances.

Diff: 1 Type: TF L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) Overstating ending inventory in the current period will understate the following year's net income.

Answer: TRUE Diff: 3 Type: TF L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) An error in the valuation of beginning inventory in the current period will affect the following year's net income.

Answer: FALSE Explanation: An error in beginning inventory affects the cost of goods and gross profit in the current period.

Diff: 3 Type: TF L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) If a company makes an error when counting ending inventory in 2019, the effect of the error will cancel out at the end of 2020.

Answer: TRUE Diff: 3 Type: TF L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 42 .

14) Understating ending inventory in the current period will understate cost of goods sold in the following period.

Answer: TRUE Diff: 3 Type: TF L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) Determine the effect on cost of goods sold, total assets, and gross profit for 2019 and 2020 if the following inventory errors are not corrected. Indicate your answer with (+) for overstated, (-) for understated, and (0) for no effect. a. Beginning inventory for 2019 is understated b. Beginning inventory for 2019 is overstated c. Ending inventory for 2019 is understated d. Ending inventory for 2019 is overstated Effect in 2019 on Cost of Goods Sold Total Assets Gross Profit a. b. c. d.

Effect in 2020 on Cost of Goods Sold Total Assets Gross Profit a. b. c. d.

43 .

Answer: Effect in 2019 on Cost of Goods Sold Total Assets Gross Profit a. b. c. d.

+ + -

0 0 +

+ +

Effect in 2020 on Cost of Goods Sold Total Assets Gross Profit a.

0 0 0 b.

0 0 0 c.

0 + d. + 0 Diff: 3 Type: ES L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) The following data are available for Franchise Corporation: Product A Product B Product C Beginning inventory $ 5,000 $20,000 $15,000 Net purchases 45,000 55,000 53,000 Goods available for sale 50,000 75,000 68,000 Ending inventory 17,000 15,000 7,000 Cost of goods sold 33,000 60,000 61,000 You discover the following errors: a. Ending inventory for product A was overstated by $7,000. b. Ending inventory for product B was understated by $4,000. c. Beginning inventory for product C was overstated by $5,000.

Considering these errors, recalculate cost of goods sold for all products.

Answer: a. 33,000 + 7,000 = 40,000 b. 60,000 - 4,000 = 56,000 c. 61,000 - 5,000 = 56,000 Diff: 2 Type: ES L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

44 .

17) One of the most common ways to “cook the books” with inventory is to: A) overstate ending inventory B) understate ending inventory C) understate ending inventory unit prices D) overstate cost of goods sold Answer: A Diff: 2 Type: MC L.O.: 5-5 CPA COMPETENCIES: Chapter 5 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

45 .

Financial Accounting, Cdn. Ed., 7CE (Harrison/Horngren) Chapter 6 Property, Plant, and Equipment, and Intangible Assets 6.1

Explain how to account for the cost of property, plant, and equipment

1) Which of the following is not a long-lived asset?

A) supplies B) furniture C) buildings D) land Answer: A Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) All amounts paid to acquire a long lived-asset and to get it ready for its intended use are referred to as: A) immediate expenses B) net book value C) salvage value D) the cost of an asset Answer: D Diff: 1 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) The cost of land would include all of the following except: A) purchase price B) back property taxes C) clearing the land D) sidewalks and curbs Answer: D Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

1 .

4) The cost of paving a parking lot should be charged to: A) land B) land improvements C) immediate expense D) repairs and maintenance expense Answer: B Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Which of the following would not be included in the Land account?

A) brokerage commissions connected with the purchase of the land B) survey fees connected with the purchase of the land C) paving costs for a driveway D) back property taxes paid Answer: C Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Land, buildings, and equipment are acquired for a lump sum of $950,000. The fair values of the three assets are respectively, $200,000, $500,000, and $300,000. What is the cost assigned to the building?

A) $190,000 B) $475,000 C) $500,000 D) $555,556 Answer: B Explanation: $500,000/1,000,000 = 50% x $950,000 Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

2 .

7) Land is purchased for $60,000. Back taxes paid by the purchaser were $2,400, clearing and grading costs were $3,000, fencing costs were $2,500, and lighting costs were $500. What is the cost of the land?

A) $60,000 B) $65,400 C) $66,400 D) $68,400 Answer: B Explanation: $60,000 + 2,400 + 3,000 = $65,400 Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Which of the following would not be included in the Machinery account?

A) cost of transporting the machinery to its setup location B) cost of a maintenance insurance plan after the machinery is up and running C) cost of installing the machinery D) cost of insurance while the machinery is in transit Answer: B Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) Bavarian Purity Corporation purchased equipment for $32,000. Bavarian Purity also paid $400 for freight and insurance while the equipment was in transit. Sales tax amounted to $240.

Insurance, taxes, and maintenance the first year of use cost $1,000. How much should Bavarian Purity Corporation capitalize as the cost of the equipment?

A) $32,000 B) $32,400 C) $32,640 D) $31,640 Answer: C Explanation: $32,000 + 400 + 240 = $32,640 Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

3 .

10) The removal of an old building to make land suitable for its intended use is charged to: A) land B) land improvements C) land improvements expense D) renovation and restoration expense Answer: A Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) Grasshopper Room Company acquired land and buildings for $1,500,000. The land is appraised at $475,000 and the buildings are appraised at $775,000. The debit to the Buildings account will be: A) $930,000 B) $775,000 C) $1,025,000 D) $570,000 Answer: A Explanation: $775,000/1,250,000 = 62% x 1,500,000 = $930,000 Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) Which expense below would not be considered part of the cost of a tangible long-lived asset?

A) the price paid for the property, plant, and equipment when purchased from the manufacturer B) taxes paid on the purchase price of property, plant, and equipment C) commissions paid to the salesperson that sold the property, plant, and equipment D) repaving a driveway to the building where the property, plant, and equipment is housed Answer: D Diff: 1 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

4 .

13) The Loft Corporation purchased land and a building for $700,000. An appraisal indicates that the land's value is $400,000 and the building's value is $350,000. The amount that The Loft Corporation should debit to the Building account is: A) $326,667 B) $350,000 C) $373,333 D) $375,000 Answer: A Explanation: $350,000/750,000 = 46.66% x 700,000 = 326,667 Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) The Warthog Company purchased land, buildings, and equipment for $2,400,000. The land has been appraised at $865,000, the buildings at $1,175,000, and the equipment at $510,000. The equipment account will be debited for: A) $525,000 B) $500,000 C) $480,000 D) $410,156 Answer: C Explanation: $510,000//2,550,000 = 20% x 2,400,000 = $480,000 Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) A major expenditure made to equipment that extends its useful life beyond the original estimate is journalized by: A) crediting Depreciation Expense B) debiting Equipment C) debiting Depreciation Expense D) debiting Repair Expense Answer: B Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

5 .

16) Expenditures that increase the efficiency of an asset or extend its useful life are referred to as: A) immediate expenses B) capital expenditures C) equity expenditures D) ordinary repairs Answer: B Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 17) Expenditures of a periodic, routine nature incurred to maintain the asset in its existing condition are referred to as: A) capital expenditures B) equity expenditures C) betterments D) immediate expenses Answer: D Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18) Repairs made to equipment as part of a yearly maintenance project would be recorded in the journal by: A) debiting Equipment B) debiting Repair Expense C) debiting Depreciation Expense D) debiting Accumulated Depreciation Answer: B Diff: 2 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

6 .

19) Treating a capital expenditure as an immediate expense: A) understates expenses and overstates owners' equity B) understates expenses and understates assets C) overstates assets and overstates owner's equity D) overstates expenses and understates net income Answer: D Diff: 3 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 20) The cost of land would include all of the following except: A) survey and legal fees incurred B) costs of removing any unwanted building on the land C) paving and fencing D) costs to grade and clear the land Answer: C Diff: 1 Type: MC L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 21) The cost of a tangible long-lived asset includes the purchase price, applicable taxes, purchase commissions, and all other amounts paid to acquire the asset and get it ready for its intended use.

Answer: TRUE Diff: 1 Type: TF L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 22) The cost of land does not include the cost of paving to construct a parking lot.

Answer: TRUE Diff: 2 Type: TF L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

7 .

23) Of the tangible long-lived assets, buildings are unique because they are not amortized.

Answer: FALSE Explanation: Land has an unlimited life and is not depreciated for accounting purposes.

Diff: 2 Type: TF L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 24) Land improvements are subject to depreciation.

Answer: TRUE Diff: 2 Type: TF L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 25) Costs of land improvements are not included in the Land account.

Answer: TRUE Diff: 2 Type: TF L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 26) Improvements to land are considered part of the cost of land since they are tied directly to the use of the land itself.

Answer: FALSE Explanation: Improvements are not included in the land's cost, because they wear out over time.

Diff: 2 Type: TF L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 27) Immediate expenses are those that maintain the existing condition of an asset or restore an asset to good working order.

Answer: TRUE Diff: 2 Type: TF L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

8 .

28) Discuss the type of tangible long-lived assets Dollarama owns and controls, and how they are typically recorded on the balance sheet.

Answer: Dollarama's assets include buildings, equipment, furniture and fixtures. Dollarama's property, plant, and equipment are stated at cost less accumulated depreciation.

Diff: 1 Type: ES L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 29) Rocky Mountain Water Corporation paid $270,000 to purchase equipment for use in its manufacturing operations. In addition, Rocky Mountain Water Corporation incurred the following expenditures relating to the equipment: ∙ $1,500 freight to have the equipment shipped to its manufacturing facility ∙ $750 insurance while the equipment was in transit ∙ $3,200 for special steel and concrete reinforcements used to house the equipment in the factory ∙ $1,200 for a one-year insurance policy on the equipment after it has been installed ∙ $300 to test the equipment before it is placed in service ∙ $400 for maintenance costs during the first year of service Calculate the cost of the equipment.

Answer: $270,000 + $1,500 + $750 + $3,200 + $300 = $275,750 Diff: 2 Type: ES L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

9 .

30) Thompson Glacier Limited purchased a tract of land and contracted with a commercial developer to build an office building. Thompson Glacier Limited also engaged other contractors for fencing, paving, lighting, and landscaping.

Based on the following data, determine the cost of the land, the building, and the land improvements. ∙ Purchased land for $100,000. ∙ Paid $2,000 for seller's back property taxes. ∙ Paid a builder $225,000 to design and build the office building. ∙ Paid an excavation company $6,000 to grade and clear the land to make it suitable for building purposes. ∙ Paid a landscaping company $6,500 for trees and shrubs. ∙ Paid a lighting contractor $10,000 for outside lighting around the parking area and sidewalks. ∙ Paid $15,000 to have the parking lot paved. ∙ Paid a fence builder $12,000 to construct a security fence around the property.

Answer: Land = $100,000 + $2,000 + $6,000 = $108,000 Building = $225,000 Land improvements = $6,500 + $10,000 + $15,000 + $12,000 = $43,500 Diff: 2 Type: ES L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

10 .

31) Glenmore Reservoir Corporation paid $4,000,000 in a lump-sum purchase of land, a building, and equipment. The payment consisted of $1,500,000 cash and a note payable for the balance. An appraisal indicated the following fair values at the time of the purchase: Land $ 1,600,000 Building 2,500,000 Equipment 500,000 Prepare the journal entry to record this lump-sum purchase (round all percentage calculations to two decimal places).

Answer: Asset FV Total FV % Cost Allocated cost Land 1.6M 4.6M 35% 4.0M $1.4M Building 2.5 4.6 54% 4.0 2.16 Equipment 0.5 4.6 11% 4.0 0.44 Land 1,400,000 Building 2,160,000 Equipment 440,000 Cash 1,500,000 Note Payable 2,500,000 Diff: 2 Type: ES L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 32) On October 15, 2020, Out West Enterprises purchased new factory equipment for its manufacturing facilities. The new equipment had an invoice price of $16,000, plus a 6% sales tax. In addition, the purchaser was responsible for $950 of freight charges. The sale was subject to 2/10, n/45 credit terms. Upon receipt of the new equipment Out West Enterprises paid $1,200 to have the equipment installed. To finance the purchase, Out West Enterprises borrowed $17,000 from the First Street Bank for 60 days at 12% interest. Out West Enterprises paid the invoice within 9 days.

Calculate the cost of the factory equipment to be capitalized on the books.

Answer: ($16,000 × 1.06) + $950 + $1,200 - ($16,000 × 0.02) = $16,960 + $950 + $1,200 - $320 = $18,790 Diff: 2 Type: ES L.O.: 6-1 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

11 .

6.2

Explain how to account for depreciation on property, plant, and equipment

1) Which of the following expenses is most closely associated with tangible long-lived assets?

A) accumulation B) depreciation C) interest D) depletion Answer: B Diff: 2 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) The process of allocating property, plant, and equipment's cost to expense over the period the asset is used is called: A) accumulation B) depreciation C) interest D) repairs expense Answer: B Diff: 1 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Which of the following depreciation methods best fits those assets that tend to wear out before they become obsolete?

A) depletion method B) straight-line method C) double-diminishing-balance method D) units-of-production method Answer: D Diff: 2 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

12 .

4) For most property, plant, and equipment, depreciation is caused by which of the following: A) changes in fair value B) setting aside cash to replace assets as they wear out C) the process of valuation D) obsolescence Answer: D Diff: 1 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Which of the following statements is true?

A) Depreciation is a process of objective valuation.

B) Depreciation means that a business sets aside cash to replace assets as they become fully amortized.

C) Accumulated depreciation represents a growing amount of cash to be used to replace the existing asset.

D) Accumulated depreciation is that portion of property, plant, and equipment's cost that has already been recorded as an expense.

Answer: D Diff: 3 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Which of the following depreciation methods best applies to those assets that generate greater revenue earlier in their useful lives?

A) depletion method B) double-diminishing-balance method C) units-of-production method D) straight-line method Answer: B Diff: 2 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

13 .

7) To measure depreciation for a tangible long-lived asset, all of the following must be known except: A) estimated useful life B) current market value C) estimated residual value D) historical cost Answer: B Diff: 2 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) One of several terms can be used to identify the expected cash value of a tangible long-lived asset at the end of its useful life. Which term below is not used in this sense?

A) residual value B) scrap value C) current carrying amount D) salvage value Answer: C Diff: 2 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) Depreciable cost is defined as: A) book value B) salvage value C) cost minus accumulated depreciation D) asset's cost minus estimated residual value Answer: D Diff: 2 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

14 .

10) In which of the following depreciation methods is annual depreciation calculated as the difference between the asset's historical cost and its residual value, divided by the asset's useful life in years?

A) double-diminishing-balance B) straight-line C) units-of-production D) depletion Answer: B Diff: 2 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) Carrying amount is defined as: A) cost less salvage value B) cost less accumulated depreciation C) current market value less salvage value D) current market value less accumulated depreciation Answer: B Diff: 2 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) On January 2, 2019 McNally's Extra Corporation acquired equipment for $120,000. The estimated life of the equipment is 5 years or 20,000 hours. The estimated residual value is $20,000. If McNally's Extra Corporation uses the straight-line method of depreciation, what will be the debit to Depreciation Expense for the year ended December 31, 2020, during which period the asset was used 4,500 hours?

A) $20,000 B) $22,500 C) $24,000 D) $27,000 Answer: A Explanation: ($120,000 - 20,000)/5 = 20,000 Diff: 2 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

15 .

13) On January 2, 2019, McNally's Extra Corporation acquired equipment for $120,000. The estimated life of the equipment is 5 years or 20,000 hours. The estimated residual value is $20,000. What is the balance in Accumulated Depreciation on December 31, 2020, if McNally's Extra Corporation uses the double-diminishing-balance method of depreciation?

A) $23,200 B) $36,000 C) $43,200 D) $76,800 Answer: D Explanation: $120,000 x 2/5 = $48,000; ($120,000 - $48,000) x 2/5 = $28,800; $48,000 + $28,800 = $76,800 Diff: 3 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) On January 2, 2019 McNally's Extra Corporation acquired equipment for $120,000. The estimated life of the equipment is 5 years or 20,000 hours. The estimated residual value is $20,000. What is the amount of depreciation expense for 2020, if McNally's Extra Corporation uses the asset 4,000 hours and uses the units-of-production method of depreciation?

A) $20,000 B) $24,000 C) $25,000 D) $30,000 Answer: A Explanation: ($120,000 - 20,000)/20,000 = 5/hr x 4,000 = $20,000 Diff: 2 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) The double-diminishing-balance method of depreciation causes: A) less depreciation in early years of an asset's use as compared to other depreciation methods B) more depreciation in early years of an asset's use as compared to other depreciation methods C) the same amount of depreciation in early years of an asset's use as compared to other depreciation methods D) is not an acceptable depreciation method according to GAAP Answer: B Diff: 2 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

16 .

16) At the end of an asset's useful life, the balance in Accumulated Depreciation will: A) be greater under units-of-production depreciation than under straight-line depreciation B) be the same amount under all the depreciation methods C) be a greater amount under straight-line depreciation than under double-diminishing-balance depreciation D) be a lesser amount under double-diminishing-balance depreciation than under units-ofproduction depreciation Answer: B Diff: 3 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 17) To measure depreciation, all of the following must be known except: A) the asset's useful life in terms of years, hours, or units B) the estimated residual value of the asset C) the cost of the asset D) the current market value of the asset Answer: D Diff: 1 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18) Depreciation computed under double-diminishing-balance will decrease each year because: A) the book value used in the computation each year increases B) the rate used in the computation each year increases C) the rate used in the computation each year decreases D) the book value used in the computation each year decreases Answer: D Diff: 2 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

17 .

19) Which accounting principle directs the depreciation process?

A) historical cost B) going concern C) revenue recognition D) expense recognition Answer: D Diff: 2 Type: MC L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 20) The Accumulated Depreciation account represents a source of cash to be used to replace the asset in the future.

Answer: FALSE Explanation: The Accumulated Depreciation account shows the sum of all depreciation expense from the date of acquiring a capital asset.

Diff: 2 Type: TF L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 21) In order to calculate depreciation, the cost of the asset, the estimated useful life, and the estimated residual value of the asset must be known.

Answer: TRUE Diff: 1 Type: TF L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 22) When using the diminishing-balance depreciation method, the asset's residual value is used in computing the first year of depreciation.

Answer: FALSE Explanation: Under the diminishing-balance method the residual value of the asset is ignored in computing depreciation.

Diff: 2 Type: TF L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

18 .

23) Book value is determined by subtracting the salvage value from the cost of an asset.

Answer: FALSE Diff: 2 Type: TF L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 24) The terms residual value and carrying value are synonymous.

Answer: FALSE Explanation: Residual value is the expected cash value of an asset at the end of its useful life.

Diff: 2 Type: TF L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 25) Double-diminishing-balance depreciation computes annual depreciation by multiplying the asset's carrying value by two times the straight-line rate.

Answer: TRUE Diff: 3 Type: TF L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 26) Regardless of the method of depreciation used, accumulated depreciation will be the same when the asset is fully amortized.

Answer: TRUE Diff: 2 Type: TF L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

19 .

27) Big Valley Ltd. purchased machinery on January 2, 2019, at a total cost of $85,000. The machinery's estimated useful life is 8 years or 60,000 hours, and its residual value is $5,000.

During 2019 and 2020, the machinery was used 7,000 and 7,500 hours, respectively.

Compute depreciation under straight-line, units-of-production, and double-diminishing-balance methods for 2019 and 2020.

2019 2020 Straight-line depreciation ________ ________ Units-of-production depreciation ________ ________ Double-diminishing-balance depreciation ________ ________ Answer: 2019 2020 Straight-line depreciation $10,000 $10,000 Units-of-production depreciation $9,333 $10,000 Double-diminishing-balance depreciation $21,250 $15,938 Diff: 2 Type: ES L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 28) Explain the concept of depreciation. Include in your discussion one common misconception regarding depreciation and its impact on the finances of a business.

Answer: Depreciation is the process of allocating property, plant, and equipment's cost to expense over the period the asset is used. It follows the expense recognition principle.

Depreciation apportions the cost of using property, plant, and equipment over time by allocating a portion of that cost against the revenue the asset helps earn each period. The primary purpose of depreciation is to help measure income properly.

Depreciation is not a process of valuation, and depreciation does not mean that the business sets aside cash to replace assets as they become fully amortized.

Depreciation is also a noncash expense. Depreciation does not impact cash flows from operations. It is a tax-deductible expense, thus decreasing the income tax payment.

Diff: 2 Type: ES L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

20 .

29) For each of the independent situations below, determine the age of the asset in question. All assets were acquired at the beginning of the year. a.

The balance in the Buildings account is $400,000 while the balance sheet shows the book value of the buildings at $217,600. The notes to the financial statements indicate that straightline depreciation is used for all property, plant, and equipment and that residual values are estimated at 5% of cost. The estimated life of the buildings is 25 years. b. The book value of the delivery equipment is $51,520. The cost of the delivery equipment was $80,500. The company uses the straight-line method of depreciation for delivery equipment and estimates life at 5 years or 50,000 units. So far, 27,000 units have been produced. Residual value is 10% of cost. c. The balance in the Accumulated Depreciation account for furniture is $21,875. The furniture has been amortized a total of 43.75% of its original cost. The company's notes to the financial statements indicate that double-diminishing-balance depreciation is used for all furniture. The company estimates useful life at 8 years and residual value at 20% of cost.

Answer: a. $400,000 × 0.95 = $380,000 amortizable amount $380,000/25 = $15,200 annual depreciation $400,000 - $217,600 = $182,400 balance in accumulated depreciation $182,400/$15,200 = 12 years old b. $80,500 × 0.90 = $72,450 amortizable amount $72,450/5 = $14,490 annual depreciation $80,500 - $51,520 = $28,980 balance in accumulated depreciation $28,980/$14,490 = 2 years old c. $21,875/0.4375 = $50,000 original cost $50,000 × 0.25 = $12,500 first year's depreciation expense $37,500 × 0.25 = $9,375 second year's depreciation expense $12,500 + $9,375 = $21,875 = balance in accumulated depreciation Furniture is 2 years old Diff: 3 Type: ES L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

21 .

30) Carleton Corporation purchased machinery on October 1, 2019, at a total cost of $98,000.

Estimated residual value is $8,000, estimated life of the machinery is 6 years or 50,000 hours.

During 2019 and 2020, the machinery was used 1,400 and 8,760 hours, respectively.

Compute depreciation under straight-line, units-of-production, and double-diminishing-balance methods for 2019 and 2020.

2019 2020 Straight-line depreciation ________ ________ Units-of-production depreciation ________ ________ Double-diminishing-balance depreciation ________ ________ Answer: 2019 2020 Straight-line depreciation $ 3,750 $15,000 Units-of-production depreciation $ 2,520 $15,768 Double-diminishing-balance depreciation $ 8,167 $29,944 Diff: 3 Type: ES L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 31) Seasons Limited paid $135,000 to purchase equipment at the beginning of 2017. Seasons Limited estimated the useful life of the equipment to be 4 years or 200,000 units. The equipment will be considered fully amortized when the balance in the Accumulated Depreciation account reaches $120,000. The equipment produced 52,000 units in 2020.

Required: a. Determine the estimated residual value of the equipment. b. What is the amortizable cost of the equipment? c. Calculate depreciation expense for 2020 under each of the following methods: i. straight-line ii. units-of-production iii. double-diminishing-balance Answer: a. $135,000 - $120,000 = $15,000 b. $120,000 c. i. $120,000/4 = $30,000 ii. $120,000/200,000 = $0.60; $0.60 × 52,000 = $31,200 iii. 2017 $135,000 × 0.5 = $67,500 2018 $67,500 × 0.5 = $33,750 2019 $33,750 × 0.5 = $16,875 2020 $120,000 - 67,500 - 33,750 - 16,875 = $1,875 Diff: 3 Type: ES L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 22 .

32) Explain how a company should decide which depreciation method to use for financial reporting purposes.

Answer: IFRS directs a business to choose a depreciation method that reflects the pattern in which the asset will be used. For an asset that generates revenue evenly over time, the straightline method best meets this criterion. The units-of-production method best fits those assets that wear out because of physical use rather than obsolescence. The accelerated method (DDB) applies best to assets that generate greater amounts of revenue earlier in their useful lives and less in later years.

Diff: 1 Type: ES L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 33) Rainier Corporation purchased five automobiles at the beginning of 2019 for a total cost of $125,000. Rainier Corporation estimates the total residual value of the five automobiles to be $25,000 and their estimated useful life at 5 years. Use the double-diminishing-balance method to calculate the depreciation expense for 2019 and 2020.

Answer: Estimated life: 5 years, so 20%. Double diminishing balance = 40% per year.

2019: 0.4 × $125,000 = $50,000 2020: 0.4 × $75,000 = $30,000 Diff: 2 Type: ES L.O.: 6-2 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6.3

Explain additional topics in accounting for long-lived tangible assets

1) Rhoundakona Corporation bought property, plant, and equipment on January 1, 2017, at a cost of $35,000. Estimated residual value is $5,000 and the estimated useful life is 8 years. The company uses straight-line depreciation. On January 1, 2020, Rhoundakona's management sells the asset for $25,000. The balance in Accumulated Depreciation on January 1, 2020, is: A) $3,750 B) $4,375 C) $11,250 D) $13,125 Answer: C Explanation: ($35,000 - 5,000)/8 = 3,750 x 3 = $11,250 Diff: 2 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

23 .

2) Hot Wort Ltd. purchased equipment on April 1, 2020, for $140,000. The residual value is $20,000 and the estimated life is 6 years or 55,000 hours. Compute depreciation expense for the year ending December 31, 2020 if Hot Wort Ltd. uses the straight-line method of depreciation.

A) $15,000 B) $20,000 C) $14,988 D) $19,983 Answer: A Explanation: ($140,000 - 20,000)/6 x 9/12 = $15,000 Diff: 2 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) The Mash Tun Corp. purchased equipment on September 1, 2019 for $200,000. The residual value is $20,000 and the estimated life is 5 years or 60,000 hours. Compute depreciation expense for the year ending December 31, 2020, if the Mash Tun Corp. uses the double-declining-balance method of depreciation.

A) $69,333 B) $48,000 C) $43,200 D) $62,400 Answer: A Explanation: $200,000 x 2/5 x 4/12 = 26,666 173,333 x 2/5 = $69,333 Diff: 3 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

24 .

4) Kegging & Canning Inc. acquired equipment on June 30, 2018, for $175,000. The residual value is $35,000 and the estimated life is 5 years or 40,000 hours. Compute the balance in Accumulated Depreciation as of December 31, 2020, if Kegging & Canning Inc. uses the double-declining-balance method of depreciation.

A) $99,680 B) $105,840 C) $124,600 D) $117,600 Answer: C Explanation: $175,000 x 2/5 x 6/12 = 35,000 140,000 x 2/5 = 56,000 84,000 x 2/5 = 33,600 Diff: 3 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Lauter Tun Corporation acquired equipment on January 1, 2017, for $300,000. The equipment had an estimated useful life of 10 years and an estimated salvage value of $25,000. On January 1, 2020, Lauter Tun Corporation revised the total useful life of the equipment to 8 years and the estimated salvage value to be $10,000. Compute depreciation expense for the year ending December 31, 2020, if Lauter Tun Corporation uses straight-line depreciation.

A) $25,938 B) $38,500 C) $41,500 D) $43,500 Answer: C Explanation: ($300,000 - 82,500) - 10,000/5 = $41,500 Diff: 3 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

25 .

6) Big Rock Times Corporation (BRT) acquired equipment on January 1, 2017, for $300,000.

The equipment had an estimated useful life of 10 years and an estimated salvage value of $25,000. On January 1, 2020, BRT Corporation revised the total useful life of the equipment to 6 years and the estimated salvage value to be $10,000. Compute the carrying amount of the equipment as of December 31, 2020, if BRT Corporation uses straight-line depreciation.

A) $148,333 B) $151,667 C) $155,000 D) $190,000 Answer: A Explanation: $300,000 - 25,000/10 = 27,500 300,000 - 82,500 = 217,500 217,500 - 10,000/3 = 69,166 217,500 - 69,166 = $148,333 Diff: 3 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) A revision of an estimate which extends the asset's useful life: A) is ignored until the last year of the asset's life B) requires restatement of prior years' financial statements C) increases depreciation expense and decreases owners' equity D) decreases depreciation expense and increases owners' equity Answer: D Diff: 3 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) A fully amortized asset is an asset: A) whose carrying amount value has reached zero, and therefore has no market value B) whose amortizable cost has reached its salvage value, and therefore is of no further use to the company C) that has reached the end of its estimated useful life D) that has reached the end of its actual useful life Answer: C Diff: 3 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

26 .

9) Barlow Trail Corporation purchased office equipment on September 30, 2018, for a total cost of $50,500. Management estimated useful life at 15 years and residual value at $5,500. Straightline depreciation is used and computed to the nearest whole month. Barlow Trail Corporation's year end is December 31.

Required: a. Prepare the adjusting entry for depreciation on December 31, 2018. b. Early in 2020, management revised its estimates of useful life and residual value for the office equipment. Useful life was reduced to a total of 10 years, and residual value was reduced to $2,000. Prepare the adjusting entry for depreciation on December 31, 2020, using the revised estimate.

Answer: a. Depreciation Expense 750 Accumulated Depreciation -Office Equipment 750 b. Depreciation Expense 5,114 Accumulated Depreciation -Office Equipment 5,114 Diff: 3 Type: ES L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Victory Stables purchased new equipment for their barn on January 1, 2019. The new equipment had a cost of $100,000, estimated salvage of $20,000 and an expected useful life of 10 years. On January 1, 2020 the equipment is not working out to be as durable as first thought so management has now revised its useful life down to 5 years. Prepare the journal entry for the December 31, 2020 depreciation.

Answer: a. Depreciation Expense $18,000 Accumulated Depreciation-Barn Equipment $18,000 Diff: 3 Type: ES L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

27 .

11) Victory Stables purchased new equipment for their barn on July 1, 2019. The new equipment had a cost of $100,000, estimated salvage of $20,000 and an expected useful life of 10 years.

Prepare the journal entry for the December 31, 2019 and 2020 depreciation. Note: Victory Stables uses the straight-line method of depreciation.

Answer: 2019 Depreciation Expense $4,000 Accumulated Depreciation-Barn Equipment $4,000 2020 Depreciation Expense $8,000 Accumulated Depreciation-Barn Equipment $8,000 Diff: 3 Type: ES L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) Blockware Corporation has selected to use the revaluation model for its assets. Recently it had its building appraised. The appraiser placed a $5,000,000 value on the building. Back in 2017 this building was purchased for $4,000,000. This increase in value over cost requires a: A) debit to accumulated depreciation B) credit to the building account C) credit to revaluation surplus D) debit to revaluation surplus Answer: C Diff: 2 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) When an organization has determined that a piece of equipment is impaired the journal entry to record an impairment of $1,000 would require: A) a cr edit to the equipment account B) a debit to accumulated depreciation C) a credit to accumulated depreciation D) a credit to impairment loss Answer: C Diff: 2 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

28 .

14) Rhoundakona Corporation bought property, plant, and equipment on January 1, 2017, at a cost of $35,000. Estimated residual value is $5,000 and the estimated useful life is 8 years. The company uses straight-line depreciation. On January 1, 2020, Rhoundakona's management sells the asset for $25,000. The gain or loss on disposal is: A) $1,250 loss B) $1,250 gain C) $10,000 loss D) $25,000 gain Answer: B Explanation: $25,000 - (35,000 - 11,250) = $1,250 Diff: 2 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) When property, plant, and equipment is sold: A) depreciation should be recorded through the date of sale B) the carrying amount of the asset should be credited to the asset account C) no gain or loss should be recognized if depreciation was taken on the asset D) a loss should be recognized but not a gain if depreciation was taken on the asset Answer: A Diff: 2 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) A loss is recorded on the sale of property, plant, and equipment when: A) the asset is sold for a price greater than the asset's carrying amount B) the asset's carrying amount is less than the balance in Accumulated Depreciation C) the asset's carrying amount is greater than the amount of cash received from the sale D) a loss on the sale of property, plant, and equipment is not allowed according to GAAP Answer: C Diff: 1 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

29 .

17) Sowthoveer Company sold some office furniture for $4,500 cash. The furniture cost $24,000 and had accumulated depreciation through the date of sale totaling $21,700. The journal entry to record the sale of the furniture will include a: A) credit to Office Furniture for $2,300 B) debit to Gain on Sale of Furniture for $2,200 C) credit to Gain on Sale of Furniture for $2,200 D) credit to Accumulated Depreciation for $21,700 Answer: C Explanation: $4,500 - (24,000 - 21,700) = $2,200 Diff: 2 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18) Bock Corporation sold equipment costing $30,000 with $28,000 of accumulated depreciation for $5,000 cash. Bock's journal entry to record this sale will involve a: A) credit to Equipment for $2,000 B) debit to Depreciation Expense for $28,000 C) debit to Gain on Sale of Equipment for $3,000 D) debit to Accumulated Depreciation for $28,000 Answer: D Diff: 2 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 19) Equipment costing $35,000 with a carrying amount of $12,000 is sold for $11,500. The journal entry will involve: A) credit to Accumulated Depreciation for $23,000 B) debit to Accumulated Depreciation for $12,000 C) debit to Accumulated Depreciation for $23,000 D) credit to Equipment for $12,000 Answer: C Explanation: $35,000 - 12,000 = $23,000 Diff: 2 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

30 .

20) Equipment acquired on January 1, 2017, is sold on June 30, 2020, for $4,500. The equipment cost $10,000, had an estimated residual value of $3,000, and an estimated useful life of 5 years.

The equipment has been depreciated using the straight-line method. The journal entry to record the sale of the equipment involves a: A) credit to Accumulated Depreciation for $4,900 B) credit to Gain on Sale of Asset for $600 C) debit to Accumulated Depreciation for $4,900 D) credit to Equipment for $3,000 Answer: C Explanation: ($10,000 - 3,000)/5 x 3.5 = $4,900 Diff: 3 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 21) Stout Corp. sold some fully amortized equipment for $2,600 cash. The equipment had been purchased for $26,500 and Stout Corp. had estimated the useful life at 8 years and residual value at $3,500. The journal entry to record the sale of the equipment will include a: A) debit to Loss on Sale of Equipment for $900 B) credit to Accumulated Depreciation for $23,000 C) credit to Equipment for $2,700 D) credit to Equipment for $3,500 Answer: A Explanation: $2,600 - 3,500 = $900 Diff: 2 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 22) Rooster Ltd. sells a printing press for $10,000 in order to purchase a newer model. The cost of the old printing press was $45,000, and accumulated depreciation up to date is $33,000. The journal entry to record the sale of the old printing press will require a: A) credit to Cash for $10,000 B) credit to Loss on Sale of Equipment for $6,000 C) debit to Equipment for $45,000 D) debit to Accumulated Depreciation for $33,000 Answer: D Diff: 2 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

31 .

23) The journal entry to sell property, plant, and equipment for cash will always include a: A) debit to Accumulated Depreciation and a debit to property, plant, and equipment B) debit to Accumulated Depreciation and a credit to Cash C) debit to Cash and a debit to Accumulated Depreciation D) debit to property, plant, and equipment and a credit to Cash Answer: C Diff: 2 Type: MC L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 24) Most companies use an accelerated depreciation method for income tax and financial statement purposes.

Answer: FALSE Explanation: A company may use one method of depreciation for accounting purposes and another method for tax purposes.

Diff: 2 Type: TF L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 25) Depreciation is calculated using full years only.

Answer: FALSE Explanation: Companies purchase property, plant, and equipment whenever they need them.

They do not wait until the beginning of a year or a month. Therefore, companies must compute depreciation for partial years.

Diff: 3 Type: TF L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 26) An asset's useful life can be subsequently revised requiring a recalculation of depreciation.

Answer: TRUE Diff: 3 Type: TF L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

32 .

27) A change in useful life estimate is very common in Canada.

Answer: FALSE Explanation: A change in accounting estimate is very rare in Canada.

Diff: 3 Type: TF L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 28) IFRS requires significant components of a building to be depreciated separately.

Answer: TRUE Diff: 2 Type: TF L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 29) The capital cost allowance form of depreciation is used for income tax purposes.

Answer: TRUE Diff: 1 Type: TF L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 30) GAAP require that companies use the same depreciation method for financial reporting purposes that they use for income tax purposes.

Answer: FALSE Explanation: A company may use one method of depreciation for accounting purposes and another method for tax purposes.

Diff: 2 Type: TF L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 31) The sale of a property, plant, and equipment item may result in a gain but not a loss.

Answer: FALSE Explanation: The sale of a property, plant, and equipment item may result in a gain or a loss and appears on the income statement.

Diff: 2 Type: TF L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

33 .

32) If an organization selects the revaluation model, it should revise its depreciation amount with each new carrying amount.

Answer: TRUE Diff: 2 Type: TF L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 33) When recording the sale of property, plant, and equipment, the balance in the related accumulated depreciation account is not removed from the accounting records.

Answer: FALSE Explanation: The asset and its related accumulated depreciation are removed from the books.

Diff: 2 Type: TF L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 34) A gain will result when the cash received on the sale of property, plant, and equipment exceeds the carrying amount of the asset.

Answer: TRUE Diff: 2 Type: TF L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 35) A loss will result on the sale of property, plant, and equipment when the carrying amount of the asset exceeds the cash received.

Answer: TRUE Diff: 2 Type: TF L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

34 .

36) Foothills Industries gathered the following data for the year ended December 31, 2020 related to its equipment.

Accumulated Equipment Depreciation January 1, 2020, balance $88,000 $40,000 Total debits to the account 55,000 ?

Total credits to the account ?

56,000 December 31, 2020, balance 92,000 57,000 Based on the above data, prepare the journal entry to record the sale of equipment during the year for $9,000 cash.

Answer: Cash 9,000 Loss on Sale of Equipment 3,000 Accumulated Depreciation-Equipment 39,000 Equipment 51,000 Diff: 2 Type: ES L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 37) Prepare journal entries for the following independent transactions. a.

Terrain Corporation sold office equipment for $10,000 cash. The original cost of the equipment was $15,000; accumulated depreciation up to the date of sale had a balance of $6,900. b. Glacial Limited disposed of fully amortized office furniture. The office furniture had a cost of $10,200 and no residual value.

Answer: a. Cash 10,000 Accumulated Depreciation-Office Equipment 6,900 Office Equipment 15,000 Gain on Sale of Office Equipment 1,900 b. Accumulated Depreciation-Office Furniture10,200 Office Furniture 10,200 Diff: 2 Type: ES L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

35 .

38) On January 1, 2018, Kamloops Corporation purchased equipment for $15,500. Kamloops Corporation expected the equipment to remain in service for 4 years and have a residual value of $1,500. Kamloops Corporation amortized the equipment using double-diminishing-balance depreciation. On June 30, 2020, Kamloops Corporation sold the equipment for $3,750 cash.

Prepare journal entries on June 30, 2020, to record depreciation expense for the six months ended June 30, 2020, and to sell the equipment.

Answer: June 30 Depreciation Expense 969 Accumulated Depreciation-Equipment 969 June 30 Cash 3,750 Accumulated Depreciation-Equipment 12,594 Equipment 15,500 Gain on Sale of Equipment 844 Diff: 3 Type: ES L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 39) Most companies use straight-line depreciation for their books but an accelerated method (CCA depreciation) for the tax return. Explain why companies use these two different methods that result in the need for two sets of records.

Answer: The straight-line method is easy to compute and follows the expense recognition principle according to GAAP. Therefore, many businesses use it to report to creditors and shareholders.

The Income Tax Act requires taxpayers to use accelerated and sometimes straight-line depreciation (up to specified capital cost allowance [CCA] maximums) for tax purposes.

For income tax purposes, a company desires to decrease its income tax payments as quickly as possible. The accelerated method of depreciation does just that. By recording depreciation expense as quickly as possible, a company is able to decrease its immediate tax payments. This conserves the cash for use in the business.

Regardless of which method is used to depreciate property, plant, and equipment, over the life of the asset, depreciation expense in total is the same under all methods.

Diff: 3 Type: ES L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

36 .

40) Explain how a company should decide which depreciation method to use for income tax purposes.

Answer: A company should use the method that produces the fastest tax deduction. CCA, or Capital Cost Allowance, is the method which produces the fastest tax deductions.

A company can use different depreciation methods for financial reporting purposes and for income tax reporting purposes. In Canada, this is considered ethical and is allowed by federal law.

Diff: 2 Type: ES L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 41) At year end the Carleton Corporation reviewed all of its property, plant, and equipment assets for impairment. It discovered that its boiler's carrying amount exceeded its recoverable amount by $5,500. Prepare the required adjusting entry. Note Carleton Corporation is a publicly traded corporation.

Answer: Dr. Loss on Impairment $5,500 Cr. Accumulated Depreciation $5,500 IFRS does permit a company to reverse the impairment loss by writing the asset up to its carrying amount.

Diff: 3 Type: ES L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 42) Key West Corporation, a public company determined its plant has an impairment due to a loss in market value. The impairment amount calculated by the controller totals $22,650. Prepare the required journal entry.

Answer: Dr. Loss on Impairment $22,650 Cr. Accumulated Depreciation - Plant $22,650 Diff: 3 Type: ES L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

37 .

43) Key West Corporation, a public company purchased its plant at a cost of $10.7 million, with no residual value. The plant is to be depreciated over 20 years. At this time the company selected the revaluation method.

December 31, 2020 a real estate expert determined this building is now worth $18.6 million.

Prepare the required journal entry if any.

Answer: Dr. Building $7,900,000 Cr. Revaluation Surplus $7,900,000 Diff: 3 Type: ES L.O.: 6-3 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6.4

Explain how to account for intangible assets

1) Which of the following is not an intangible asset?

A) accounts receivable B) patent C) copyright D) goodwill Answer: A Diff: 2 Type: MC L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) Which of the following is not an intangible asset?

A) Copyright B) Patent C) Leasehold improvement D) Trademark Answer: C Explanation: Leasehold improvements are tangible assets Diff: 2 Type: MC L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

38 .

3) All of the following are intangible assets except: A) trademarks B) natural gas C) goodwill D) copyrights Answer: B Diff: 1 Type: MC L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) Copyrights are granted for the life of the author plus: A) 10 years B) 40 years C) 50 years D) 100 years Answer: C Diff: 2 Type: MC L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Goodwill is equal to the excess of the cost of an acquired company over the sum of the: A) carrying amount of its assets B) market value of its assets C) carrying amount of its net assets D) market value of its net assets Answer: D Diff: 2 Type: MC L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

39 .

6) The cost of a trademark should be amortized over its useful life. The maximum time period for trademark amortization is: A) 20 years B) 30 years C) 40 years D) The maximum amortization period is whatever the useful life of the trademark is itself.

Answer: D Diff: 2 Type: MC L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) The cost of a patent should be amortized over: A) the lesser of 20 years or its economic useful life B) the greater of 20 years or its economic useful life C) the lesser of 40 years or its economic useful life D) the greater of 40 years or its economic useful life Answer: A Diff: 2 Type: MC L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Research costs incurred by a company should be: A) capitalized and amortized over a period greater than 25 years B) capitalized and amortized over 20 years or less C) expensed on the current year's income statement D) either capitalized and amortized or expensed immediately at the option of the accountant Answer: C Diff: 2 Type: MC L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

40 .

9) Yeast Corporation purchased Bitter Ltd. on August 31, 2020. Yeast Corporation recorded goodwill in the purchase of Bitter. Yeast has determined that the Bitter goodwill will have an indefinite life. How will Yeast account for the Bitter goodwill in future accounting periods?

A) Yeast will amortize the Bitter goodwill over a 50-year life.

B) If the value of the Bitter goodwill increases in subsequent years, Yeast will increase the value in the Bitter Goodwill account.

C) If the value of the Bitter goodwill decreases in subsequent years, Yeast will decrease the value in the Bitter Goodwill account.

D) Yeast is not allowed to change the value of the Bitter Goodwill account regardless of any future increase or decrease in the value of Bitter Goodwill.

Answer: C Diff: 3 Type: MC L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Goodwill is an intangible asset that has special features. Which statement below is true regarding the special nature of goodwill?

A) Goodwill is recorded in the books of a company as the company creates it.

B) Goodwill is amortized over a period not to exceed 40 years.

C) Goodwill is recorded only when it is purchased in the acquisition of another company.

D) Goodwill is amortized over a period not to exceed 20 years.

Answer: C Diff: 3 Type: MC L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) Amortization of an intangible asset is similar to which amortization method?

A) CCA amortization B) units-of-production C) double-diminishing-balance D) straight-line Answer: D Diff: 1 Type: MC L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

41 .

12) Which of the following intangible assets is subject to impairment?

A) only indefinite life intangibles B) only definite life intangibles C) only goodwill D) all intangibles Answer: D Diff: 2 Type: MC L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) Except for goodwill, the accounting for intangibles is similar to accounting for tangible longlived assets.

Answer: TRUE Diff: 1 Type: TF L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) Under federal law a patent is granted to the holder for 25 years.

Answer: FALSE Explanation: Patents are federal government grants giving the holder the exclusive right for 20 years to produce and sell an invention.

Diff: 3 Type: TF L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) Amortization is not recorded on intangible assets.

Answer: FALSE Explanation: Amortization is recorded for intangibles with finite lives that can be measured.

Diff: 3 Type: TF L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) Intangibles with finite lives are amortized.

Answer: TRUE Diff: 3 Type: TF L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 42 .

17) Intangibles with indefinite lives are never amortized.

Answer: TRUE Diff: 3 Type: TF L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18) Amortization for intangibles decreases both assets and liabilities.

Answer: FALSE Explanation: Amortization for an intangible decreases both assets and equity exactly as it does for equipment.

Diff: 3 Type: TF L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 19) Intangibles are considered long-lived assets even though they do not have a physical form.

Answer: TRUE Diff: 3 Type: TF L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 20) All intangibles must be written down when their recognizable amount is less than their carrying amount.

Answer: TRUE Diff: 3 Type: TF L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 21) An example of an intangible asset is a franchise.

Answer: TRUE Diff: 3 Type: TF L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

43 .

22) Prepare adjusting journal entries dated December 31 of the current year for the following independent situations. a. Hops Corporation acquired several patents on March 1 of the current year for a total price of $48,000. The patents have an estimated remaining legal life of 15 years and an estimated useful, economic life of 8 years. b. Goodwill amounting to $180,000 was purchased in a company acquisition on July 1 of the current year. The goodwill is believed to have an indefinite benefit.

Answer: a. Amortization Expense-Patents 5,000 Patents 5,000 b. No entry required Diff: 2 Type: ES L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 23) Prepare journal entries for 2020 for the following independent situations. Assume each organization has a December 31 year end. a. Keepers Inc. purchases a patent for $225,000 on January 1st. Keepers estimates this patent to have a 5 year useful life. b. Blue Bat Corporation purchases one of their main competitors on March 31, 2020. Blue Bat paid $160,000 for this purchase which included assets of $120,000 and liabilities of $10,000. The goodwill is believed to have an indefinite benefit.

Answer: a. Jan.1 Patent $225,000 Cash $225,000 Dec. 31 Amortization Expense-Patents Accum. Amort. Patents

45,000 45,000

b. Mar 31 Assets $120,000 Goodwill 50,000 Cash 160,000 Liabilities 10,000 Diff: 2 Type: ES L.O.: 6-4 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

44 .

6.5

Analyze a company's return on assets

1) Calculate Company Y's return on assets based on the following information for the current year: (Round your final answer to two decimal places.)

Net income Assets at the beginning of the year Assets at the end of the year Net sales

$800,000 $100,000 $120,000 $900,000

A) 7.50 B) 7.27 C) 8.18 D) 9.00 Answer: B Diff: 2 Type: MC L.O.: 6-5 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) Return on assets measures: A) how much the entity earned for each dollar of assets invested by both shareholders and creditors B) how much every sales dollar generates in profit C) profitability of a company's core business operations D) measures how many sales dollars are generated for each dollar of assets invested Answer: A Diff: 2 Type: MC L.O.: 6-5 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Return on assets measures how profitably management has used its assets.

Answer: TRUE Diff: 1 Type: TF L.O.: 6-5 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

45 .

4) Select financial information for Fried Banana's Inc. appears below: 2019 2020 Net sales $1,000,000 $1,200,000 Net income 100,000 130,000 Net assets 2,000,000 2,500,000 interest expense 9,000 10,000 What is the company's return on assets for 2020?

Answer: Average assets = $2,250,000 [($2,000,000 + $2,500,000 )/2] Return on assets = net income + interest expense/average total assets = $130,000 + 10,000/ 2,250,000 = 6.2%(rounded) Diff: 2 Type: ES L.O.: 6-5 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6.6

Analyze the cash flow impact of long-lived asset transactions

1) Equipment is acquired by issuing a note payable for $50,000 and a making a down payment of $20,000. The statement of cash flows will report a: A) $20,000 outflow in the operating activities section B) $70,000 outflow in the investing activities section C) $50,000 inflow in the financing activities section D) $20,000 outflow in the investing activities section Answer: D Diff: 3 Type: MC L.O.: 6-6 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) Equipment with a carrying amount of $8,000 is sold for $1,000 cash. The statement of cash flows will report a: A) $1,000 cash inflow in the operating activities section B) $1,000 cash inflow in the investing activities section C) $7,000 cash outflow in the operating activities section D) $7,000 cash outflow in the financing activities section Answer: B Diff: 2 Type: MC L.O.: 6-6 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

46 .

3) The disposition of a plant asset is reported on the statement of cash flows as a financing activity.

Answer: FALSE Explanation: On the statement of cash flows, acquisitions and sales of property, plant, and equipment and intangibles are recorded under investing activities.

Diff: 2 Type: TF L.O.: 6-6 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) Acquisitions and sales of long-term assets are reported as investing activities on the statement of cash flows.

Answer: TRUE Diff: 2 Type: TF L.O.: 6-6 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Depreciation is reported under which activity on the statement of cash flows?

A) operating B) investing C) financing D) not reported on the statement of cash flows because it does not affect cash Answer: A Diff: 2 Type: MC L.O.: 6-6 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Where would the gain or loss on the sale of capital assets be reported on the statement of cash flows?

A) gains or losses are not reported B) operating C) investing D) financing Answer: B Diff: 2 Type: MC L.O.: 6-6 CPA COMPETENCIES: Chapter 6 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

47 .

Financial Accounting, Cdn. Ed., 7CE (Harrison/Horngren) Chapter 7 Liabilities 7.1

Explain and account for current liabilities

1) Current liabilities are obligations due within: A) one year or within the company's normal operating cycle if it is longer than one year B) one year or within the company's normal operating cycle if it is shorter than one year C) one month or within the company's normal operating cycle if it is longer than one month D) one month or within the company's normal operating cycle if it is shorter than one month Answer: A Diff: 2 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) Failure to record an accrued liability causes a company to: A) overstate assets B) overstate expenses C) overstate liabilities D) overstate owners' equity Answer: D Diff: 2 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Warranty expense should be recorded in the period: A) that the product sold is repaired or replaced B) the product is sold C) immediately following the period in which the product is sold D) that the product is paid for by the customer Answer: B Diff: 1 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

1 .

4) On December 16, 2020, the ACE Corporation purchases $15,000 of equipment by issuing a 30-day, 12% note payable. The total amount of interest due on the note is: A) $73.97 B) $147.95 C) $800.00 D) $1,800.00 Answer: B Explanation: $15,000 x 12% = 1,800/365 x 30 = $147.95 Diff: 2 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) The journal entry to record accrued interest on a short-term note payable must include a: A) debit to Interest Payable B) debit to Note Payable C) debit to Interest Expense D) credit to Interest Expense Answer: C Diff: 2 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Current liabilities fall into two categories, which are referred to as: A) contra liabilities and contingent liabilities B) contingent liabilities and non contingent liabilities C) liabilities of a known amount and liabilities whose amount must be estimated D) liabilities of a known amount and contingent liabilities Answer: C Diff: 2 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

2 .

7) Airport Software Ltd. includes an 5% sales tax in the amount credited to the sales account. If the sales account has a balance of $675,250, the amount of the sales tax payable to the government is: A) $29,347 B) $29,450 C) $32,155 D) $33,763 Answer: C Explanation: $675,250/1.05 = 643,095 675,250 - 643,095 = $32,155 Diff: 2 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Short-term notes payable: A) are generally due within three months, with a maximum time period of six months B) are shown as a reduction to notes receivable on the balance sheet, with an appropriate footnote disclosure C) are shown on the balance sheet with current liabilities D) are shown on the balance sheet after bonds payable Answer: C Diff: 1 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) Aviation Holdings Corporation's sales for the day totalled $10,552. Jensen collected an additional 5% in sales tax. The entry to record the day's sales includes a: A) debit to Sales Tax Expense B) debit to Sales Tax Payable C) credit to Sales Tax Expense D) credit to Sales Tax Payable Answer: D Diff: 2 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

3 .

10) Dreams Take Flight Ltd. includes the sales tax in the amount recorded in the Sales account.

The adjusting entry at the end of the period includes a: A) debit to Sales Tax Payable B) debit to Sales Tax Expense C) credit to Sales D) debit to Sales Answer: D Diff: 2 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) Potential liabilities that depend on future events arising out of past events are called: A) long-term liabilities B) estimated liabilities C) actual liabilities D) contingent liabilities Answer: D Diff: 1 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) A repair to an appliance under warranty occurs within the warranty period. What adjustment is made?

A) Warranty Expense is debited.

B) Repair Expense is debited.

C) Estimated Warranty Payable is debited.

D) Estimated Warranty Payable is credited.

Answer: C Diff: 2 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

4 .

13) Accrued interest on a short-term note payable is recorded by: A) debiting Interest Expense and crediting Interest Payable B) debiting Cash and crediting Interest Payable C) debiting Interest Payable and crediting Cash D) debiting Interest Payable and crediting Interest Expense Answer: A Diff: 2 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) Revaluation Magazine receives $90 in advance from a customer for a 3-year subscription.

Revaluation Magazine's entry to record this transaction would include: A) debit to Unearned Subscription Revenue for $90 B) credit to Unearned Subscription Revenue for $90 C) debit to Subscription Revenue for $90 D) credit to Subscription Revenue for $90 Answer: B Diff: 2 Type: MC L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) Current liabilities are obligations due within one year or within the company's normal operating cycle if it is longer than one year.

Answer: TRUE Diff: 1 Type: TF L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) The adjusting entry to accrue interest on a note payable requires a credit to Interest Payable.

Answer: TRUE Diff: 1 Type: TF L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

5 .

17) The account Sales Tax Payable represents a company's liability to the government for sales taxes collected.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18) An unearned revenue arises when a company receives cash from its customers in advance of earning the revenue.

Answer: TRUE Diff: 1 Type: TF L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 19) An accrued expense is an expense incurred by the company but not yet paid in cash.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 20) A contingent liability that has a remote chance of occurrence should be disclosed in the financial statement notes.

Answer: FALSE Explanation: Note disclosure is not required if there is only a remote chance the contingent liability will occur.

Diff: 2 Type: TF L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 21) Failure to accrue interest expense results in an overstatement of net income and an understatement of liabilities.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

6 .

22) Solvency Limited purchased equipment costing $150,000 on October 1, 2019, by paying 10% down and signing an 8%, 9-month note payable for the balance. Solvency Limited's year end is December 31. a. Prepare journal entries to record the purchase of the equipment, the accrual of interest on December 31, and the payment of the note at maturity. For ease of computation assume that Solvency calculates interest expense based on the number of months outstanding, rather than the number of days. b. Determine the balance of any current liabilities associated with the note as of December 31, 2019.

Answer: a. 2019 Oct.1 Equipment 150,000 Cash 15,000 Note Payable 135,000 Dec.31 Interest Expense 2,700 Interest Payable 2,700 ($135,000 × 0.08 × 3/12) 2020 June 30 Interest Expense 5,400 ($135,000 × 0.08 × 6/12) Interest Payable 2,700 Note Payable 135,000 Cash 143,100 b. Current liabilities on December 31, 2019: Note Payable $135,000 Interest Payable 2,700 Diff: 2 Type: ES L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

7 .

23) Chapter 11 Inc. entered into the following transactions relating to notes payable: Sept. 1 Nov. 1

Purchased inventory costing $48,000 by signing an 8-month, 6% note payable.

Purchased inventory costing $30,000 by signing a 1-year, 7% note payable.

a. Prepare journal entries to record the above transactions. b. Assuming Chapter 11 Inc. has a December 31 year end, prepare any adjusting entries needed for the accrual of interest. For ease of computation assume that Chapter 11 Inc. calculates interest expense based on the number of months outstanding, rather than the number of days.

Answer: a. Sept.1 Inventory 48,000 Note Payable 48,000 Nov.1 Inventory 30,000 Note Payable 30,000 b. Dec. 31 Interest Expense 1,310 Interest Payable 1,310 ($48,000 × 0.06 × 4/12) + ($30,000 × 0.07 × 2/12) = $1,310 Diff: 2 Type: ES L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 24) Unsecured Ltd. had sales of $175,600 during the month of August. All sales are for cash.

Included in this amount is 5% sales tax required by the federal government for collection of GST. On August 31, Unsecured Ltd. must remit the appropriate amount of sales tax due.

Prepare all entries for August for the above transactions.

Answer: Cash 175,600 Sales 175,600 Sales 8,362 GST Payable 8,362 GST Payable 8,362 Cash 8,362 Diff: 2 Type: ES L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

8 .

25) Explain the accounting process for warranties. Be specific and include in your discussion the reason that governs the accounting method.

Answer: A warranty is a company's guarantee of its product against defects. If a repair is necessary within the warranty period, the company will generally fix the product at no cost to the customer.

When the product is sold, the company does not know the exact amount of warranty costs it will incur. Despite this uncertainty, IFRS require the business to estimate and record a provision for this obligation in its financial statements. Therefore, the company must estimate warranty costs at the time the sale is recorded and make an entry as follows: Warranty Expense Estimated Warranty Payable Upon repair or replacement of the defective inventory, the company would make the following entry: Estimated Warranty Payable or Estimated Warranty Payable Cash Inventory Diff: 2 Type: ES L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

9 .

26) R. Milton Products Inc. generated sales for the current month of 200 units at $225 each, subject to sales tax of 7.5%. All sales are on account. Each unit carries a 6-month warranty. R. Milton Products Inc. promises to repair the unit should it become defective. The estimated cost to the company to honour the warranty is $60 and past experience has shown that approximately 7% of all units will have to be repaired during the warranty period.

Prepare journal entries for the following transactions: a. Record sales for the current month including the taxes collected in the revenue account. b. Record the estimated warranty liability associated with the current month's sales. c. Adjust the revenue account for the proper amount of sales tax payable.

Answer: a. Accounts Receivable 48,375 Sales 48,375 ($225 × 200 × 1.075) b. Warranty Expense 840 Estimated Warranty Payable 840 ($60 × 200 × 0.07) c. Sales 3,375 Sales Tax Payable 3,375 ($48,375 - [$225 × 200]) Diff: 1 Type: ES L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 27) On April 1, JetNew sells 1,000 round trip tickets to Montreal at $770 each. On May 25th 250 of these outstanding tickets are used. Prepare the required journal entries for JetNew. Answer: April 1 Cash $770,000 Unearned Ticket Revenue $770,000 May 25

Unearned Ticket Revenue $192,500 Ticket Revenue $192,500 Type: ES

Diff: 1 L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

10 .

28) New Growth greenhouse purchases 500 watering cans for $1,500 plus 13% HST for a total of $1,695.

In the spring New Growth sells these watering cans for $3,000 plus HST for a total of $3,390.

Prepare the following journal entries: a. The purchase of the watering cans by New Growth. b. The sale of the watering cans. c. The remittance of the HST. Answer: a. Inventory 1,500 HST — input tax credit 195 Cash 1,695 b. Cash Cost of Goods Sold Sales Inventory HST payable

3,390 1,500 3,000 1,500 390

c. HST payable 390 HST — input tax credit 195 Cash 195 Diff: 1 Type: ES L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

11 .

29) During its first year of operations Keene Limited had sales of $76,500. The company offers a 2- year limited warranty on all sales and expects that warranty costs for the first year will average 0.5% of sales with an additional 1.5% in the second year. During the current year the company spent $1,200 on warranty repairs.

Required: 1. Prepare all journal entries related to the warranty for the current year.

2. How will the warranty liability be reported on the company's year-end balance sheet?

Answer: 1.

Dr. Warranty expense 1,530 Cr. Estimated Warranty Payable.

1,530 Dr. Estimated Warranty Payable 1,200 Cr. Cash 1,200 2. Current Assets: Estimated Warranty Payable $330 Diff: 1 Type: ES L.O.: 7-1 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7.2

Explain the types, features, and pricing of bonds payable

1) Secured bonds are also called: A) mortgage bonds B) callable bonds C) debenture bonds D) convertible bonds Answer: A Diff: 1 Type: MC L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

12 .

2) Bonds which are backed only by the good faith of the borrower are referred to as: A) mortgage bonds B) secured bonds C) registered bonds D) debenture bonds Answer: D Diff: 1 Type: MC L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Bonds which mature at the same time are called: A) serial bonds B) callable bonds C) convertible bonds D) term bonds Answer: D Diff: 1 Type: MC L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) Bonds in a particular issue which mature in installments over a period of time are called: A) serial bonds B) callable bonds C) term bonds D) convertible bonds Answer: A Diff: 1 Type: MC L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

13 .

5) The cash proceeds received from issuing a bond are less than the face value of the bond. It is apparent that the bond was issued at: A) par value B) a discount C) a premium D) face value Answer: B Diff: 1 Type: MC L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) A $1,500 bond quoted at 98 1/2 is selling for: A) $1,500 B) $1,518 C) $1,492 D) $1,478 Answer: D Explanation: $1,500 x .985 = $1,478 Diff: 1 Type: MC L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) A $10,000 bond quoted at 103 1/2 is selling for: A) $9,662 B) $9,897 C) $10,104 D) $10,350 Answer: D Explanation: $10,000 x 1.035 = $10,350 Diff: 1 Type: MC L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

14 .

8) The excess of a bond's issue price over its face value is known as the: A) discount B) premium C) contract interest D) effective-interest Answer: B Diff: 1 Type: MC L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) The interest rate that determines the amount of cash paid to the bondholder is referred to as the: A) effective interest rate B) market interest rate C) contract interest rate D) market price rate Answer: C Diff: 1 Type: MC L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Bonds with a face value of $100,000 were sold at an effective rate of 10% to yield cash proceeds in excess of $100,000. It is apparent the bonds had a: A) market rate greater than 10% B) market rate less than 10% C) stated rate less than 10% D) stated rate greater than 10% Answer: D Diff: 2 Type: MC L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

15 .

11) The interest rate that investors demand for loaning their money is referred to as the: A) stated interest rate B) contract interest rate C) effective interest rate D) coupon interest rate Answer: C Diff: 1 Type: MC L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) The phrase term bonds applies when all the bonds in a particular issue mature in installments over a period of time.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) A bond issued at a premium typically has a market price that decreases towards maturity value.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) A bond issued at a discount typically has a market price that decreases towards maturity value.

Answer: FALSE Explanation: A bond issued at a discount typically has a market price that increases towards maturity value.

Diff: 2 Type: TF L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

16 .

15) A dollar received today is worth more than a dollar to be received 5 years from now.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) Debentures carry a lower interest rate than secured bonds because of the risk associated with them.

Answer: FALSE Explanation: Debentures carry a higher rate of interest than secured bonds because debentures are riskier investments.

Diff: 2 Type: TF L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 17) A bond issued at a price above its maturity or par value is sold at a premium.

Answer: TRUE Diff: 1 Type: TF L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18) Another name for the effective interest rate is the market interest rate.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 19) The market or effective rate of interest is used to calculate the actual amount of interest bondholders will receive from a company issuing bonds.

Answer: FALSE Explanation: The stated interest rate determines the amount of interest the borrower pays— and the investor receives—each year.

Diff: 2 Type: TF L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 17 .

20) Describe the two interest rates included in setting the price of a bond.

Answer: The first is the stated interest rate which indicates that amount of cash the investor will receive (and the issuer pays) each year. The second rate is the market interest rate. This rate is the one that investors demand for loaning their funds. Typically these two interest rates will differ as there is a time lapse between the printing/finalizing of the bond details and their release into the market place.

Diff: 2 Type: ES L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 21) On January 1, 2020, JetNew Corp. issued $550,000 of 6%, 5-year bonds, with annual interest payments on December 31. The bonds were issued at face value. Note JetNew uses the effectiveinterest method of amortization. a. Prepare the necessary journal entries to record the issuance of the bonds and the first interest payment. b. Determine the carrying value of the bonds on December 31, 2020.

Answer: a. Jan.1 Cash 550,000 Bonds Payable 550,000 Dec.31 Interest Expense 33,000 ($550,000 × 0.06) Cash 33,000 b. $550,000 Diff: 2 Type: ES L.O.: 7-2 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7.3

Account for bonds payable

1) The carrying amount of bonds issued at a discount is calculated by: A) subtracting Discount on Bonds Payable from Bonds Payable B) subtracting Interest Payable from Bonds Payable C) subtracting the sum of Discount on Bonds Payable and Interest Payable from Bonds Payable D) subtracting Interest Expense from Bonds Payable Answer: A Diff: 2 Type: MC L.O.: 7-3 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18 .

2) On a bond's maturity date, its carrying value will equal the: A) maturity value less all interest payments B) maturity value plus all interest payments C) maturity value D) present value of the bond on its issuance date Answer: C Diff: 2 Type: MC L.O.: 7-3 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) The carrying amount of bonds is equal to: A) the face value of the bonds less the premium on bonds payable B) the face value of the bonds plus the premium on bonds payable C) the face value of the bonds less the discount on bonds payable D) the face value of the bonds plus the premium on bonds payable or the face value of the bonds less the discount on bonds payable Answer: D Diff: 2 Type: MC L.O.: 7-3 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) Market conditions may force a company to issue its bonds at less than the face value of the bonds. The Discount on Bonds Payable account is used in this situation. This account: A) is an expense account B) is a liability account C) is a contra asset account D) is a contra liability account Answer: D Diff: 2 Type: MC L.O.: 7-3 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) The account Discount on Bonds Payable is a contra account to the account Bonds Payable.

Answer: TRUE Diff: 1 Type: TF L.O.: 7-3 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

19 .

6) The carrying amount of bonds issued at a discount is calculated by subtracting Discount on Bonds Payable from Bonds Payable.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-3 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) On January 1, 2020, JetNew Corp. issued $300,000 of 8%, 5-year bonds, with annual interest payments on January 1. The bonds were issued at face value. Note JetNew uses the effectiveinterest method of amortization. a. Prepare the necessary journal entries to record the issuance of the bonds, December 31, 2020 year-end entries if required and the first interest payment. b. Prepare the journal entry to record the bond's maturity.

Answer: a. Jan.1 Cash 300,000 Bonds Payable 300,000 Dec.31 Interest Expense 24,000 ($300,000 × 0.08) Interest Payable 24,000 b. Jan.1 Bonds Payable 300,000 Cash 300,000 Jan.1 Interest Payable 24,000 Cash 24,000 Diff: 2 Type: ES L.O.: 7-3 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

20 .

8) On January 1, 2020, JetNew Corp. issued $300,000 of 8%, 5-year bonds, with annual interest payments on January 1. The bonds were issued when the market rate was higher than 8% and thus JetNew received $265,000 for this bond. Prepare the journal entry to record the issuance of this bond on January 1, 2020. Show how this bond would appear on the balance sheet.

Answer: Jan.1 Cash 265,000 Discount on Bonds Payable 35,000 Bonds Payable 300,000 Long-term Liabilities: Bonds Payable 8% due 2025 Less: Discount on bonds payable

$300,000 35,000

$265,000 Diff: 2 Type: ES L.O.: 7-3 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) New Shu Corporation issued $100,000 worth of bonds on January 1, 2020. These bonds had a 5 year term with a stated rate of 9%. At the time of sale the market rate was 10% so New Shu received $96,149 for this sale. Record the issuance of this bond.

Answer: Jan. 1 Cash 96,149 Discount on Bonds Payable 3,851 Bonds Payable 100,000 Diff: 2 Type: ES L.O.: 7-3 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7.4

Calculate and account for interest expense on bonds payable

1) Under the effective-interest method of amortizing bond premiums, the interest expense recorded for each semi-annual interest payment: A) will increase over the life of the bond B) is equal to the carrying value of the bond times the contract rate of interest for each semiannual interest period C) is at the same percentage of the bond's carrying value for every interest payment D) will equal the amount of cash paid for each semi-annual interest payment Answer: C Diff: 3 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 21 .

2) Under the effective-interest method of amortization for bonds, the cash payment on each interest payment date: A) increases over the first half of the life of the bond, and then decreases thereafter B) increases over the life of the bond C) decreases over the life of the bond D) is constant Answer: D Diff: 2 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Under the effective-interest method of amortization, the cash payment on each interest payment date is calculated by multiplying the: A) carrying value of the bonds times the effective-interest rate for the appropriate time period B) face value of the bonds times the stated interest rate for the appropriate time period C) face value of the bonds times the effective-interest rate for the appropriate time period D) carrying value of the bonds times the stated interest rate for the appropriate time period Answer: B Diff: 2 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) Under the effective-interest method of amortization, the cash payment on each interest payment date will: A) remain the same for each interest period B) decrease if bonds are issued at a premium C) increase if bonds are issued at par D) increase if bonds are issued at a discount Answer: A Diff: 2 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

22 .

5) Under the effective-interest method of amortizing a bond premium, the interest expense recorded for each semi-annual interest payment: A) will increase over the life of the bond B) will decrease over the life of the bond C) will equal the amount of cash paid for each semi-annual interest payment D) is at a different percentage of the bond's carrying value for every interest payment Answer: B Diff: 3 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Under the effective-interest method of amortization, interest expense each period can be calculated by multiplying the: A) face value of the bonds times the stated interest rate for the appropriate time period B) carrying value of the bonds times the stated interest rate for the appropriate time period C) face value of the bonds times the effective-interest rate for the appropriate time period D) carrying value of the bonds times the effective-interest rate for the appropriate time period Answer: D Diff: 3 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) Under the effective-interest method of amortization, the amount of discount amortized each interest period is equal to the: A) amount of interest expense plus the cash paid B) total discount divided by the number of interest payments to be made C) amount of interest expense less the cash paid D) total amount of interest expense divided by the number of interest payments to be made Answer: C Diff: 3 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

23 .

8) On July 1, 2020, the Jazz Corporation issues $4,000,000 of 10-year bonds dated July 1, 2020, at 89 when the market rate of interest was 8%. Jazz Corporation uses the effective-interest method of amortization. Interest is paid each June 30 and December 31. The entry to record the first semi-annual interest payment on December 31, 2020, will include a: A) debit to Interest Expense for $142,400 B) credit to Discount on Bonds Payable for $284,800 C) debit to Premium on Bonds Payable for $160,000 D) credit to Interest Payable for $320,000 Answer: A Explanation: ($4,000,000 x .89 x .08)/ 2 = $142,400 Diff: 2 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) On July 1, 2020, Cargo Corporation issues $4,000,000 of 10-year bonds dated July 1, 2020, at 100 1/2 when the market rate of interest was 8%. Cargo Corporation uses the effective-interest method of amortization. Interest is paid each June 30 and December 31. The entry to record the first semi-annual interest payment on December 31, 2020, will include a: A) debit to Premium on Bonds Payable for $321,600 B) credit to Premium on Bonds Payable for $320,000 C) debit to Interest Expense for $160,800 D) credit to Interest Payable for $160,000 Answer: C Explanation: ($4,000,000 x 1.005 x .08)/2 = $160,800 Diff: 2 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Arrowplan Inc. prepares its financial statements in accordance with ASPE. It issued $800,000 of 7.5%, 15-year bonds dated March 1, 2020, on May 1, 2020, at 97 1/2 plus accrued interest. If Arrowplan Inc. uses the straight-line method of amortization, the entry to retire the bonds on the maturity date would include a: A) debit to Bonds Payable for $780,000 B) credit to Cash for $800,000 C) credit to Discount on Bonds Payable for $20,000 D) debit to Premium on Bonds Payable for $20,000 Answer: B Diff: 2 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 24 .

11) The carrying amount of bonds issued at a premium is calculated by: A) adding Premium on Bonds Payable to Bonds Payable B) subtracting Interest Payable from Bonds Payable C) adding Interest Payable to Bonds Payable D) subtracting Premium on Bonds Payable from Bonds Payable Answer: A Diff: 2 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) When using the effective-interest method of amortizing a discount or premium, interest expense is calculated by multiplying the: A) contract interest rate by the face value of the bonds B) effective-interest rate by the face value of the bonds C) contract interest rate by the carrying value of the bonds D) effective-interest rate by the carrying value of the bonds Answer: D Diff: 3 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) When the discount on bonds payable is amortized, the carrying value of the bonds: A) will always remain unchanged B) will increase C) will decrease D) may increase or decrease depending on the face value of the bonds Answer: B Diff: 3 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

25 .

14) Amortizing the discount on a bond payable: A) increases the face value of the bonds B) decreases the face value of the bonds C) increases the carrying amount of the bonds D) decreases the carrying amount of the bonds Answer: C Diff: 3 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) The discount on bonds payable: A) reduces interest expense on the income statement B) increases interest expense on the income statement C) increases the amount of cash paid to bondholders over the stated rate of interest D) decreases the amount of cash paid to bondholders over the stated rate of interest Answer: B Diff: 3 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) The premium on bonds payable: A) reduces interest expense on the income statement B) increases interest expense on the income statement C) increases the amount of cash paid to bondholders over the stated rate of interest D) decreases the amount of cash paid to bondholders over the stated rate of interest Answer: A Diff: 3 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

26 .

17) How does a company account for the difference between interest expense and the cash payment of interest when bonds are issued at less than their face value?

A) The difference is accounted for using Amortization of Bond Discount.

B) The difference is accounted for using Amortization of Bond Premium.

C) In this situation the cash payment of interest will exceed interest expense.

D) The difference is accounted for using Bonds Payable.

Answer: A Diff: 1 Type: MC L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18) The effective-interest method of amortization keeps interest expense at the same dollar amount of the bond's carrying value for every interest payment over the bond's life.

Answer: FALSE Explanation: The amount of interest expense increases each period as the bond carrying amount moves upward toward maturity.

Diff: 1 Type: TF L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 19) Interest expense will decrease each period if a company uses the effective-interest method of amortization and the bonds are issued at a discount.

Answer: FALSE Explanation: The amount of interest expense increases each period as the bond carrying amount moves upward toward maturity.

Diff: 3 Type: TF L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 20) The carrying amount of bonds issued at a premium is calculated by subtracting Premium on Bonds Payable from Bonds Payable.

Answer: FALSE Explanation: The premium is added to the balance of bonds payable to determine the carrying amount.

Diff: 2 Type: TF L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

27 .

21) The carrying value of bonds will decrease each interest period if the bonds were issued at a premium.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 22) Using the effective-interest method of amortization, interest expense is based on the carrying amount of the bonds times the effective-interest rate for the interest period.

Answer: TRUE Diff: 3 Type: TF L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 23) On January 1, 2020, Tranche Corp. issued $750,000 of 8%, 10-year bonds, with annual interest payments on December 31. The bonds were issued for $657,831 yielding an effectiveinterest rate of 10%. Tranche Corp. uses the effective-interest method of amortization. a. Prepare the necessary journal entries to record the issuance of the bonds and the first interest payment. b. Determine the carrying value of the bonds on December 31, 2020.

Answer: a. Jan.1 Cash 657,831 Discount on Bonds Payable 92,169 Bonds Payable 750,000 Dec.31 Interest Expense 65,783 ($657,831 × 0.10) Discount on Bonds Payable 5,783 Cash 60,000 ($750,000 × 0.08) b. $750,000 - $92,169 + $5,783 = $663,614 Diff: 2 Type: ES L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

28 .

24) On January 1, 2020, Flight International, Incorporated, issued $300,000 face value, 5-year bonds with a stated rate of 8% at an effective rate of 10% to yield $277,255. Interest is paid annually on December 31. Flight International, Incorporated, uses the effective-interest method of amortization.

Prepare entries for the following transactions: a. Issuance of the bonds on January 1, 2020. b. Payment of interest and amortization of discount or premium on December 31, 2020.

Answer: a. Jan.1 Cash 277,255 Discount on Bonds Payable 22,745 Bonds Payable 300,000 b. Dec.31 Interest Expense 27,726 ($277,255 × 0.10) Discount on Bonds Payable 3,726 ($27,726 - $24,000) Cash 24,000 ($300,000 × 0.08) Diff: 3 Type: ES L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 25) On January 1, 2020, JetNew, issued $1,000,000 face value, 5-year bonds with a stated rate of 5% at an effective rate of 4% which brought in $1,044,913. Interest is paid semi-annually on July 1 and December 31. JetNew uses the effective-interest method of amortization.

Prepare entries for the following transactions: a. Issuance of the bonds on January 1, 2020. b. Payment of interest and amortization of discount or premium on July 1, 2020.

Answer: a. Jan. 1 Cash 1,044,913 Premium on Bonds Payable 44,913 Bonds Payable 1,000,000 b. July 1 Interest Expense 20,898 ($1,044,913 × 0.04 × 6/12) Premium on Bonds Payable 4,102 Cash 25,000 ($1,000,000 × 0.05 × 6/12) Diff: 3 Type: ES L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

29 .

26) On January 1, 2020, JetNew, issued $1,000,000 face value, 5-year bonds with a stated rate of 5% at an effective rate of 4% which brought in $1,044,913. Interest is paid semi-annually on July 1 and December 31. JetNew uses the effective-interest method of amortization.

Prepare the amortization table for the first 3 payment periods.

Answer: Semi Annual Interest Interest Prem Amort Prem Carrying Interest Date Payment Expense Amount Balance Amount Jan 1 2020 44,913 1,044,913 Jul 1 2020 $25,000 $20,898 $4,102 40,811 1,040,811 Dec 31 2020 $25,000 $20,816 $4,184 36,627 1,036,627 Jul 1 2021 $25,000 $20,733 $4,267 32,360 1,032,360 Diff: 3 Type: ES L.O.: 7-4 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7.5

Explain the advantages and disadvantages of financing with debt versus equity

1) All of the following are advantages of issuing stock except: A) less risky to the issuing corporation B) creates no liabilities for the corporation C) creates no interest expense which must be paid D) generally results in a higher earnings per share Answer: D Diff: 1 Type: MC L.O.: 7-5 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) All of the following are advantages of issuing bonds except: A) interest expense reduces income tax B) does not dilute control of the corporation C) less risky to the issuing corporation D) generally results in higher earnings per share Answer: C Diff: 1 Type: MC L.O.: 7-5 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

30 .

3) Earnings per share (EPS) is calculated by: A) dividing the average number of common shares outstanding throughout the year by net income B) dividing net income by the average number of common shares outstanding throughout the year C) dividing net income by the number of common shares outstanding at the end of the year D) dividing the number of common shares outstanding at the end of the year by net income Answer: B Diff: 2 Type: MC L.O.: 7-5 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) The dollar amount of a company's net income for each common share outstanding is referred to as: A) the price-to-earnings ratio B) income as a percentage of equity C) earnings per share D) cumulative retained earnings ratio Answer: C Diff: 1 Type: MC L.O.: 7-5 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Earnings per share is the amount of a company's net income earned by each of its common shares outstanding.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-5 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) One advantage of borrowing from bondholders is that they have no vote in the management of the company.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-5 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

31 .

7) A good credit rating makes it easier to issue shares.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-5 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Alliance Agreement Corporation is considering two plans for raising $2,500,000 to expand its current operations. The first plan involves the sale of $2,500,000, 8%, 10-year bonds sold at face value. The second plan involves selling 50,000 common shares at $50 each. Alliance Agreement Corporation currently has outstanding 200,000 shares of stock and a net income of $900,000.

Either plan is expected to generate additional income of $400,000 before interest and taxes. The income tax rate is 30%. Calculate earnings per share for both plans.

Answer: Sale of bonds Net income before expansion $900,000 Additional income before interest and taxes $400,000 Less interest expense ($2,500,000 × 0.08) 200,000 Additional income before taxes 200,000 Less income tax expense 60,000 Additional net income 140,000 Total company net income $1,040,000 Earnings per share ($1,040,000/200,000) $5.20 Sale of stock Net income before expansion $900,000 Additional income before interest and taxes $400,000 Less interest expense 0 Additional income before taxes 400,000 Less income tax expense 120,000 Additional net income 280,000 Total company net income $1,180,000 Earnings per share ($1,180,000/250,000) $4.72 Diff: 3 Type: ES L.O.: 7-5 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

32 .

7.6

Analyze and evaluate a company's debt-paying ability

1) The debt ratio is computed by dividing: A) total assets by long-term liabilities B) total assets by total debt C) total debt by total assets D) long-term liabilities by total assets Answer: C Diff: 1 Type: MC L.O.: 7-6 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) The leverage ratio is equal to total ________ divided by total ________.

A) debt; total assets B) debt; common shareholders' equity C) long-term debt; common shareholders' equity D) assets; common shareholders' equity Answer: D Diff: 1 Type: MC L.O.: 7-6 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) The accounts payable turnover ratio is equal to ________ divided by average ________.

A) debt; total assets B) debt; common shareholders' equity C) long-term debt; common shareholders' equity D) cost of goods sold; accounts payable Answer: D Diff: 1 Type: MC L.O.: 7-6 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

33 .

4) The times interest earned ratio is calculated by taking interest expense divided by operating income.

Answer: FALSE Explanation: The times interest earned ratio is calculated by taking operating income divided by interest expense.

Diff: 2 Type: TF L.O.: 7-6 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Given the following information calculate each organization's times-interest-earned ratio and debt ratio. Which organization is in the stronger position?

Newer Older Net Income $95,000 $95,000 Interest Expense $45,000 $53,000 Total Assets $950,000 $635,000 Total Liabilities $699,000 $547,000 Operating Income $235,000 $255,000 Answer: Time-interest-earned Newer: $235,000/$45,000= 5.22 Older: 255,000/53,000= 4.81 Debt Newer: 699,000/950,000= .736

Older: 547,000/635,000= .861

Newer is in a less risky position than Older. They are able to cover their interest expense .41 times more than Older. Given the limited information presented Newer has a lower ratio of debt to assets which may be less risky however further research is needed.

Diff: 1 Type: ES L.O.: 7-6 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Trading on equity occurs when an organization earns more income on borrowed money than the related interest expenses.

Answer: TRUE Diff: 3 Type: TF L.O.: 7-6 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

34 .

7.7

Describe other types of long-term liabilities

1) Which type of lease will not increase a company's assets or liabilities?

A) a finance lease B) an operating lease C) a lease in which title is transferred to the lessee at the end of the lease term D) a lease that splits the obligations into their current and long-term portions Answer: B Diff: 2 Type: MC L.O.: 7-7 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) Which of the following best describes a term loan?

A) common form of long-term financing B) are not split between current and long-term portions C) allows a company to borrow a variable amount of money D) not usually secured by certain assets Answer: A Diff: 2 Type: MC L.O.: 7-7 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) An example of a post retirement benefit provided by a company is medical insurance for retired workers.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-7 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7.8

Report liabilities on the balance sheet

1) A company's payroll deductions of income tax, Canada Pension Plan, Employment Insurance, and benefits are all classified as current liabilities.

Answer: TRUE Diff: 2 Type: TF L.O.: 7-8 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

35 .

2) Details about a company's liabilities should be included in the notes to the financial statements.

Answer: TRUE Diff: 1 Type: TF L.O.: 7-8 CPA COMPETENCIES: Chapter 7 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

36 .

Financial Accounting, Cdn. Ed., 7CE (Harrison/Horngren) Chapter 8 Shareholders' Equity 8.1

Explain the main features of a corporation

1) Which of the following is not a characteristic that distinguishes corporations from proprietorships and partnerships?

A) Corporations are separate legal entities apart from the owners.

B) Corporate earnings are subject to double taxation.

C) Shareholders of a corporation are not permitted to transfer shares as they wish.

D) Corporations have continuous lives regardless of changes in ownership.

Answer: C Diff: 2 Type: MC L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) All of the following are advantages of the corporate form of business except: A) limited liability of shareholders B) continuous life C) ease of transferring ownership D) corporate taxation Answer: D Diff: 2 Type: MC L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) The number of shares currently in the hands of shareholders is the same as the number of shares: A) issued B) authorized C) outstanding D) proposed by the board of directors Answer: C Diff: 2 Type: MC L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

1 .

4) Which of the following types of business organizations terminates when its ownership structure changes?

A) partnerships and proprietorships B) partnerships and corporations C) proprietorships and corporations D) only corporations Answer: A Diff: 1 Type: MC L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Which of the following is a disadvantage of the corporate form of business organization?

A) ease of transferring ownership B) limited liability C) difficulty in transferring ownership D) governmental regulation at both the federal and provincial levels Answer: D Diff: 2 Type: MC L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) All of the following are basic rights of shareholders except: A) the right to sell the shares B) the right to vote C) the right to collect dividends D) the right to declare dividends Answer: D Diff: 2 Type: MC L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

2 .

7) Share capital is also known as: A) contributed capital B) retained earnings C) total shareholders' equity D) common shareholders' equity Answer: A Diff: 1 Type: MC L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) The ultimate control of the corporation rests with the: A) federal and provincial governments B) chief executive officer C) shareholders D) employees Answer: C Diff: 1 Type: MC L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) Share capital is: A) the amount of shareholders' equity that the corporation has earned through profitable operations B) the amount of shareholders' equity that the shareholders have contributed to the corporation C) the amount of shareholder's equity that the shareholders have contributed to the corporation less the amount of shareholders' equity that the corporation has given back to the shareholders (dividends) D) the amount of shareholders' equity that the shareholders have contributed to the corporation plus the amount of shareholders' equity that the corporation has earned through profitable operations Answer: B Diff: 2 Type: MC L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

3 .

10) All of the following are basic rights of a shareholder except: A) the right to vote B) the right to receive a proportionate share of any assets remaining before the corporation pays its liabilities in the event of liquidation C) the right to maintain one's proportionate ownership in the corporation D) the right to receive a proportionate part of any dividend Answer: B Diff: 2 Type: MC L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) If a corporation issues only one class of shares, it must be: A) par value B) preferred C) common D) common or preferred Answer: C Diff: 1 Type: MC L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) In a corporation, the two basic sources of shareholders' equity are: A) share capital and operating capital B) share capital and retained earnings C) donated capital and share capital D) donated capital and retained earnings Answer: B Diff: 2 Type: MC L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

4 .

13) A corporation is a separate legal entity that exists apart from its owners.

Answer: TRUE Diff: 1 Type: TF L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) Common shareholders, due to their increased risk, have first rights upon the organization's liquidation.

Answer: FALSE Explanation: Preferred shareholders receive assets before the common shareholders if the corporation liquidates.

Diff: 1 Type: TF L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) The term outstanding shares refers to the maximum number of shares a corporation is allowed to distribute to shareholders.

Answer: FALSE Explanation: Outstanding shares are those actually in the hands of shareholders.

Diff: 1 Type: TF L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) Under the Canada Business Corporation Act corporations can issue an unlimited number of shares.

Answer: TRUE Diff: 1 Type: TF L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

5 .

17) The board of directors elects the chairperson of a corporation.

Answer: TRUE Diff: 1 Type: TF L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18) One unique advantage given to preferred shareholders over common shareholders is the right to vote.

Answer: FALSE Explanation: Preferred shares are typically non-voting shares.

Diff: 2 Type: TF L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 19) Contributed capital as shown on a corporate balance sheet includes the share accounts and any contributed surplus as well as retained earnings.

Answer: FALSE Explanation: Contributed capital is amounts contributed by shareholders in exchange for shares in the corporation.

Diff: 2 Type: TF L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 20) Preferred shares are a hybrid between common shares and long-term debt.

Answer: TRUE Diff: 1 Type: TF L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

6 .

21) The president of the corporation can declare dividends.

Answer: FALSE Explanation: The corporation has no obligation to pay a dividend until the board declares one.

Diff: 1 Type: TF L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 22) Explain the fundamental difference between retained earnings and share capital.

Answer: Retained earnings consist of earnings from profitable operations that have not been given back to the shareholders. Share capital consists of shareholders' investments in the corporation.

Diff: 2 Type: ES L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 23) List several characteristics of a corporation. Indicate, wherever appropriate, if the characteristic is an advantage or a disadvantage of the corporate form of business.

Answer: a. separate legal entity-advantage (limits owner liability) b. ability to raise more capital-advantage c. continuous life-advantage d. ease of ownership transfer-advantage e. may enter into contracts, sue, and be sued-advantage/disadvantage f. limited liability of shareholders-advantage g. separation of management and ownership-disadvantage h. double taxation-disadvantage i. governmental regulation-disadvantage Diff: 2 Type: ES L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

7 .

24) Which of the following is not an advantage of owning preferred shares?

A) typically are non-voting B) receive dividends before the common shareholders C) pay a fixed dividend amount D) receive assets before the common shareholders if the corporation liquidates Answer: A Diff: 2 Type: MC L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 25) Explain the difference between par value and stated value.

Answer: Par value shares are shares of stock that have a value assigned to them by the articles of incorporation, which specify the legal details associated with a company’s incorporation. The Canada Business Corporations Act and most provincial incorporating acts now require common and preferred shares to be issued without par value. Shares are assigned a value when they are issued; this value is known as the stated value.

Diff: 1 Type: ES L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 26) Who stands to benefit the most if a corporation is successful?

Answer: In describing a corporation, we would say the common shareholders are the owners of the business. They stand to benefit the most if the corporation succeeds because they take the most risk by investing in common shares. The shares of a corporation may be either common shares or preferred shares.

Diff: 2 Type: ES L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

8 .

27) Name several accounts that would appear in the shareholders' equity section of a balance sheet.

Answer: ∙ Preferred shares ∙ Common shares ∙ Accumulated Other Comprehensive Income ∙ Retained earnings ∙ Contributed Surplus Diff: 1 Type: ES L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 28) Describe the rights typically enjoyed by common shareholders.

Answer: 1. The right to sell their shares.

2. The right to participate in voting on corporate matters.

3. The right to receive a proportionate part of any dividend payment.

4. The rights to receive a proportionate share of the organizations assets (after its liabilities have been satisfied) upon liquidation.

Diff: 2 Type: SA L.O.: 8-1 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8.2

Account for the issuance of shares

1) Assets received in exchange for the issuance of stock should be recorded at: A) historical cost B) historical cost less accumulated depreciation taken to date C) fair value as determined by a good-faith estimate from independent appraisers D) book value prior to the issuance Answer: C Diff: 2 Type: MC L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9 .

2) Quo Corporation issues 100 common shares for $12 per share. This transaction will include a: A) credit to Retained Earnings for $1,200 B) credit to Contributed Surplus for $1,200 C) debit to Common Shares for $1,200 D) credit to Common Shares for $1,200 Answer: D Explanation: 100 x $12 = $1,200 Diff: 2 Type: MC L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) The issuance of preferred shares requires a: A) debit to Retained Earnings B) credit to Retained Earnings C) debit to Share Capital, Preferred D) credit to Share Capital, Preferred Answer: D Diff: 1 Type: MC L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) What effect does an investment of cash in a corporation have on the corporation's balance sheet?

A) It increases assets and decreases liabilities.

B) It increases assets and increases liabilities.

C) It increases assets and increases shareholders' equity.

D) It increases assets and decreases shareholders' equity.

Answer: C Diff: 2 Type: MC L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

10 .

5) The issuance of common shares requires a: A) credit to Retained Earnings B) debit to Retained Earnings C) credit to Common Shares D) debit to Common Shares Answer: C Diff: 2 Type: MC L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) The entry to record the issuance of 12,500 common shares at $2.50 per share includes a: A) debit to Retained Earnings for $31,250 B) credit to Retained Earnings for $31,250 C) credit to Common Shares for $31,250 D) credit to Contributed Surplus for $31,250 Answer: C Explanation: 12,500 x $2.50 = $31,250 Diff: 2 Type: MC L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) Suppose 100 common shares are issued for $12.50 per share. The entry to record this issuance includes a: A) credit to Retained Earnings for $1,250 B) credit to Common shares for $1,250 C) credit to Contributed Surplus for $250 D) debit to Preferred Shares for $1,000 Answer: B Explanation: 100 x $12.50 = $1,250 Diff: 2 Type: MC L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

11 .

8) When 1,000 common shares are sold at $3.75 per share, Share Capital will: A) increase $1,000 B) increase $2,750 C) increase $3,750 D) not be affected Answer: C Explanation: 1,000 x $3.75 = $3,750 Diff: 2 Type: MC L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) The entry to record the sale of 100 shares for $2,500 would include a debit to Share Capital of $2,500.

Answer: FALSE Explanation: Credit to Share Capital.

Diff: 2 Type: TF L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Assets other than cash should be recorded at their current fair values when received from the issuance of shares.

Answer: TRUE Diff: 2 Type: TF L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) When shares are issued in exchange for a piece of equipment, the transaction is valued at the fair value of the equipment received.

Answer: TRUE Diff: 2 Type: TF L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

12 .

12) Blu Corporation issued 1,000 common shares in exchange for a new commercial band saw.

At the time of this transaction the shares were trading at $10 and the fair value of the saw was at $12,000. This transaction would be recorded at $10,000.

Answer: FALSE Explanation: The company is required to measure the transaction based on the fair value of the assets received.

Diff: 2 Type: TF L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) When shares are issued, their are assigned a stated value.

Answer: TRUE Diff: 2 Type: TF L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) Once a share is sold, it is consider issued.

Answer: TRUE Diff: 2 Type: TF L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) Companies sometimes issue shares in return for assets other than cash. When a transaction like this occurs, the company is required to measure the transaction based on the fair value of the assets received. If that fair value cannot be determined, what amount is assigned to the transaction?

Answer: If that fair value cannot be determined, the fair value of the shares given up will be the value assigned to the transaction.

Diff: 2 Type: ES L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

13 .

16) The following transactions took place in June for the Holista Corporation: June 1 Issued 1,000 shares of $100 preferred shares.

10

Issued 3,000 common shares for $18 per share.

15 Received land with a fair value of $60,000 and a building with a fair value of $180,000 in exchange for 15,000 common shares.

Prepare journal entries for the above transactions.

Answer: June 1 Cash 100,000 Preferred shares 100,000 10

Cash Common shares

54,000 54,000

15 Land 60,000 Building 180,000 Common shares 240,000 Diff: 2 Type: ES L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

14 .

17) Eastern Pacific Corporation lost some of its accounting records in a fire on August 10, 2020.

The following information has been salvaged from the rubble.

The preferred shares account has a balance of $251,900. The common shares were issued for an average price of $55 per share. There are 30,000 common shares issued. The Retained Earnings account has a balance of $172,000 on August 10, 2020. The preferred shares were issued for an average price of $110.

Required: a. Determine the number of preferred shares issued. b. What is the balance in the Common Shares account? c. What is total share capital? d. What is total shareholders' equity?

Answer: a. $251,900/$110 = 2,290 b. 30,000 × $55 = $1,650,000 c. $251,900 + $1,650,000 = $1,901,900 d. $1,901,900 + $172,000 = $2,073,900 Diff: 2 Type: ES L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

15 .

18) On June 30, 2020, Sneeze Limited was authorized to issue 60,000 shares of $5 cumulative preferred shares and 250,000 common shares. During its start-up phase, the company engaged in several transactions.

Prepare journal entries for the following transactions: June 30 Sold 40,000 preferred shares at $110 per share.

30 Sold 50,000 common shares at $30 per share.

July 5 Issued 5,000 common shares in exchange for equipment valued objectively at $165,000.

Answer: June 30 Cash 4,400,000 Preferred shares 4,400,000 ($110 × 40,000) 30 Cash Common shares ($30 × 50,000)

1,500,000 1,500,000

July 5 Equipment 165,000 Common shares 165,000 Diff: 2 Type: ES L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

16 .

19) JetNew issued 50,000 common shares on January 1, 2020 at $8 each. Preferred shares were issued on March 15, 2020 at $10 each with a dividend rate of $0.50. JetNew sold 20,000 of these shares. On November 15, in order to buy into the business, another shareholder offered up a building valued at $300,000 for 30,000 common shares. At the time of this transaction JetNew shares were trading at $9.

Prepare the required journal entries.

Answer: Jan 1 Cash 400,000 Common shares ($8 × 50,000) Mar 15 Cash Preferred shares ($10 × 20,000)

400,000

200,000 200,000

Nov15 Building 300,000 Common shares 300,000 Diff: 2 Type: ES L.O.: 8-2 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8.3

Explain why a company repurchases shares

1) Which statement below regarding a share repurchase is true?

A) A share repurchase grows a company's assets and equity.

B) The company repurchasing shares is not entitled to vote.

C) Repurchasing shares decreases assets and equity.

D) Repurchasing shares increases retained earnings.

Answer: C Diff: 3 Type: MC L.O.: 8-3 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

17 .

2) A company may repurchase their own shares for the following reasons except: A) the company needs the repurchased shares to fulfill future share issuance commitments B) the company needs more financing C) management wants to avoid a takeover by an outside party D) the purchase may help support the share's current market price by decreasing the supply of shares available to the public Answer: B Diff: 2 Type: MC L.O.: 8-3 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) A retirement of common shares: A) increases the number of common shares outstanding B) decreases the number of shares authorized C) increases share capital and total shareholders’ equity D) decreases share capital and total shareholders’ equity Answer: D Diff: 3 Type: MC L.O.: 8-3 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) One reason a company will repurchase its own shares is to help avoid a takeover of the company by an outside party.

Answer: TRUE Diff: 2 Type: TF L.O.: 8-3 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

18 .

8.4

Account for retained earnings, dividends, and stock splits

1) When a cash dividend is declared: A) the Cash account is debited B) the Cash account is credited C) the Retained Earnings account is debited D) the Retained Earnings account is credited Answer: C Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) A cash dividend becomes a legal liability of the corporation on the: A) date of payment B) date of declaration C) date of record D) date of distribution Answer: B Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Glow Corporation has 50,000 shares of preferred shares outstanding, with annual dividends paid at the rate of $1.50 per share. Glow also has 100,000 shares of common shares outstanding.

If Glow declares a $250,000 dividend in 2020, each outstanding share of common shares would receive: A) $1.17 B) $1.75 C) $1.50 D) $2.50 Answer: B Explanation: 50,000 x $1.50 = 75,000 250,000 - 75,000 =175,000 175,000/100,000 = $1.75 Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 19 .

4) The payment of a cash dividend previously recorded: A) reduces shareholders' equity and reduces assets B) increases liabilities and increases assets C) reduces liabilities and reduces assets D) increases shareholders' equity and reduces liabilities Answer: C Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) The entry to record the payment of a cash dividend previously declared includes a: A) debit to Retained Earnings B) credit to Retained Earnings C) credit to Dividends Payable D) debit to Dividends Payable Answer: D Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Before a company can pay dividends to the common shareholders, the owners of cumulative preferred shares must receive: A) the current year's dividend, but not dividends in arrears B) all dividends in arrears plus the current year's dividend C) dividends in arrears, but not the current year's dividends D) neither the current year's dividends nor dividends in arrears Answer: B Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

20 .

7) Passed dividends on cumulative preferred shares: A) are a liability until paid and may turn into a long-term liability with the passage of time B) are lost forever by the preferred shareholders C) must be paid by January 1 of the following year by law D) are referred to as dividends in arrears Answer: D Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) The declaration of a cash dividend: A) increases shareholders' equity and reduces liabilities B) increases liabilities and increases shareholders' equity C) increases liabilities and decreases shareholders' equity D) reduces assets and increases liabilities Answer: C Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) Before a company can pay dividends to the common shareholders, the owners of noncumulative preferred shares must receive: A) the current year's dividend, but not dividends in arrears B) all dividends in arrears plus the current year's dividend C) dividends in arrears, but not the current year's dividends D) neither the current year's dividends nor dividends in arrears Answer: A Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

21 .

10) Stock dividends: A) are distributions of cash to the shareholders B) reduce the total assets of the corporation C) have no effect on total shareholders' equity D) increase the total liabilities of the corporation, and decrease the total shareholders' equity Answer: C Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) Prevage Corporation has 10,000 shares of $10 cumulative preferred shares outstanding and 50,000 common shares outstanding. As of the beginning of this fiscal year, there were 2 years' dividends in arrears on the preferred shares. The board of directors wants to give the common shareholders a $1.50 dividend per share at the end of this fiscal year. The total dividends to be declared by the Prevage Corporation are: A) $105,000 B) $120,000 C) $175,000 D) $375,000 Answer: D Explanation: 10,000 x $10 =100,000 x 3 = 300,000 + (1.50 x 50,000) = $375,000 Diff: 3 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

22 .

12) Health & Wellness Corporation has had 7,500 shares of $3.00 cumulative preferred shares outstanding as well as 28,000 common shares issued at $10 outstanding since it was incorporated. During the first, second, and third years of operations, $15,000, $18,000, and $50,000 in dividends, respectively, were paid. The dividends paid to the common shareholders of Health & Wellness Corporation in year three amounted to: A) $0 B) $15,500 C) $27,500 D) cannot be determined from the given information Answer: B Explanation: 7,500 x $3 = 22,500 x 3 = 67,500 - 15,000 - 18,000 - 50,000 = $15,500 Diff: 3 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) A stock dividend is issued for the following reasons except: A) to continue dividends but conserve cash B) to reduce the per-share market price of the shares C) to reduce total shareholders' equity D) to increase the shares account and decrease Retained Earnings Answer: C Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) A stock dividend will: A) reduce total assets B) have no effect on total assets C) have no effect on total assets or total owners' equity D) increase total owners' equity Answer: C Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

23 .

15) When accounting for a stock dividend, Retained Earnings should be debited for: A) par value times the number of shares to be issued B) book value times the number of shares to be issued C) current market price times the number of shares to be issued D) liquidation value times the number of shares to be issued Answer: C Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) Which of the following statements regarding stock splits is incorrect?

A) A stock split increases total owners' equity.

B) A stock split involves a reduction in the share's issue value.

C) A stock split decreases the market price of the shares.

D) A stock split is an increase in the number of issued, and outstanding shares.

Answer: A Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

24 .

17) Following is the shareholders' equity section of the balance sheet of the Everslim Corporation: Share capital: Preferred shares, 420,000 shares authorized, 4,000 shares of $1.50 preferred issued $400,000 Common shares, 100,000 shares authorized, 30,000 shares issued 150,000 Total share capital $550,000 Retained earnings 267,000 Total shareholders' equity $817,000 The preferred shares are currently selling for $102.25 per share and the common shares are currently selling for $11.50 per share.

The entry to record the distribution of a $66,000 dividend includes a: A) credit to Dividends Payable, Preferred for $6,000 B) credit to Dividends Payable, Preferred for $66,000 C) debit to Common Shares for $6,000 D) debit to Common Shares for $66,000 Answer: A Explanation: 4,000 x $1.50 = $6,000 Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

25 .

18) Following is the shareholders' equity section of the balance sheet of the Everslim Corporation: Share capital: Preferred shares, 420,000 shares authorized, 4,000 shares of $1.50 preferred issued Common shares, 100,000 shares authorized, 30,000 shares issued Total share capital Retained earnings Total shareholders' equity

$400,000 150,000 $550,000 267,000 $817,000

The preferred shares are currently selling for $102.25 per share and the common shares are currently selling for $11.50 per share.

The total share capital after the distribution of a $66,000 dividend is: A) $400,000 B) $150,000 C) $550,000 D) $817,000 Answer: C Diff: 3 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

26 .

19) Following is the shareholders' equity section of the balance sheet of the Optimum Corporation: Share capital: Common shares, 100,000 shares authorized, 65,000 shares issued $650,000 Total share capital $650,000 Retained earnings 349,000 Total shareholders' equity $999,000 The common shares are currently selling for $15.50 per share.

The entry to record the declaration of a $0.75 per share cash dividend includes: A) debit to Dividends Payable for $48,750 B) credit to Common shares for $48,750 C) debit to Retained Earnings for $48,750 D) debit to Retained Earnings for $75,000 Answer: C Explanation: 65,000 x $0.75 = $48.750 Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

27 .

20) Following is the shareholders' equity section of the balance sheet of the Optimum Corporation: Share capital: Common shares, 100,000 shares authorized, 65,000 shares issued $650,000 Total share capital $650,000 Retained earnings 349,000 Total shareholders' equity $999,000 The common shares are currently selling for $15.50 per share.

The total shareholders' equity after the distribution of a $0.75 per share cash dividend is: A) $326,500 B) $575,000 C) $627,500 D) $950,250 Answer: D Explanation: $999,000 - 48,750 = $950,250 Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

28 .

21) Following is the shareholders' equity section of the balance sheet of the Everslim Corporation: Share capital: Common shares, 100,000 shares authorized, 65,000 shares issued $650,000 Total share capital $650,000 Retained earnings 349,000 Total shareholders' equity $999,000 The common shares are currently selling for $15.50 per share.

The balance in the Common Shares account after the distribution of a $0.75 per share cash dividend is: A) $575,000 B) $627,500 C) $650,000 D) $976,500 Answer: C Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

29 .

22) Following is the shareholders' equity section of the balance sheet of the Everslim Corporation: Share capital: Common shares, 100,000 shares authorized, 65,000 shares issued $650,000 Total share capital $650,000 Retained earnings 349,000 Total shareholders' equity $999,000 The common shares are currently selling for $15.50 per share.

The number of common shares authorized and issued after the distribution of a 15% common stock dividend is: A) 115,000 and 74,750 B) 115,000 and 65,000 C) 100,000 and 74,750 D) 100,000 and 65,000 Answer: C Explanation: 65,000 x 1.15% = 74,750 Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

30 .

23) Following is the shareholders' equity section of the balance sheet of the Everslim Corporation: Share capital: Common shares, 100,000 shares authorized, 65,000 shares issued $650,000 Total share capital $650,000 Retained earnings 349,000 Total shareholders' equity $999,000 The common shares are currently selling for $15.50 per share.

The balance in the Common Shares account after the distribution of a 15% common stock dividend is: A) $650,000 B) $747,500 C) $801,125 D) $1,150,125 Answer: C Explanation: $65,000 x $15.50 x .15 = $151,125; $151,125 + $650,000 = $801,125 Diff: 2 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 24) The market price of a share of Omega 3 Corporation's common shares is $110. If Omega 3 Corporation declares and issues a 30% stock dividend, the market price will, in theory, adjust to approximately: A) $33 B) $70 C) $85 D) $143 Answer: C Explanation: $110/1.30 = $85 Diff: 3 Type: MC L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

31 .

25) Stock dividends result in a reduction in the balance of the contributed capital account.

Answer: FALSE Explanation: A stock dividend has no impact on the total shareholders’ equity balance because Share Capital increases and Retained Earnings decreases by the same amount.

Diff: 2 Type: TF L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 26) The entry to record the declaration of a cash dividend includes a credit to retained earnings.

Answer: FALSE Explanation: Debit retained earnings and credit dividends payable.

Diff: 2 Type: TF L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

32 .

27) During 2016-2020, IPO Corporation had the following issuances of shares outstanding for the entire period: 20,000 shares of $5.00 cumulative preferred shares 50,000 common shares issued at $10 each Cash dividends declared by the board of directors during 2016 - 2020 were as follows: 2016 none 2017 $125,000 2018 $200,000 2019 $250,000 2020 $325,000 Required: Compute the amount of total dividends and dividends per share payable to each class of shares for 2016-2020.

Year 2016 2017 2018 2019 2020

Total Preferred

Per Share Preferred

Total Common

Per Share Common

Total Preferred $0 $125,000 $175,000 $100,000 $100,000

Per Share Preferred $0 $6.25 $8.75 $5.00 $5.00

Total Common $0 $0 $25,000 $150,000 $225,000

Per Share Common $0 $0 $0.50 $3.00 $4.50

Answer: Year 2016 2017 2018 2019 2020

Diff: 2 Type: ES L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

33 .

28) NewJet Ltd. has the following shares outstanding since its initial share offering: 30,000 shares of $2.00 cumulative preferred shares 60,000 common shares issued at $10 each The board of directors has declared the following dividends: 2016 none 2017 $50,000 2018 $80,000 2019 $150,000 2020 $260,000 What would the journal entry have looked like on the date of declaration for each year?

Answer: 2016 no entry 2017 Retained earnings $50,000 Dividends payable — preferred shares

$50,000

2018 Retained earnings $80,000 Dividends payable — preferred shares

$80,000

2019 Retained earnings $150,000 Dividends payable — preferred shares $110,000 Dividends payable — common shares $40,000 2020 Retained earnings $260,000 Dividends payable — preferred shares $60,000 Dividends payable — common shares $200,000 Diff: 2 Type: ES L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

34 .

29) NewJet Ltd. has the following shares outstanding since its initial share offering: 50,000 shares of $2.00 cumulative preferred shares 50,000 common shares issued at $15 each The board of directors has declared the following dividends: 2016 none 2017 $50,000 2018 $75,000 2019 $150,000 2020 $300,000 Prepare a table indicating the split of the declared dividends between the common shareholders and the preferred shareholders for each year.

Answer: Total Total Total Year Declared Common Preferred 2016 $0 $0 $0 2017 $50,000 $0 $50,000 2018 $75,000 $0 $75,000 2019 $150,000 $0 $150,000 2020 $300,000 75,000 $225,000 Diff: 2 Type: ES L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

35 .

30) Cough FX Limited reports the following shareholders' equity as of December 31, 2020: Preferred shares, $5.00, authorized 100,000 shares, issued 80,000 shares $4,400,000 Common shares, authorized 200,000 shares, issued 150,000 shares, 146,000 outstanding 2,190,000 Retained earnings 3,400,000 $9,990,000 Determine the following: a. What was the average issue price per common share? b. What was the average issue price per preferred share? c. Assume the board of directors declares dividends totaling $1,850,000 to the shareholders.

The preferred shares are cumulative, and no dividends were declared last year. Calculate the amount per share each class of shares will receive. d. Assume the board of directors authorizes a 2-for-1 split on the common shares. Calculate the number of shares outstanding after the split and the book value of Both classes of shares. e. Assume the board of directors authorizes a 15% stock dividend on the common shares after the stock split. The current selling price of the common shares is $9. Prepare the journal entry to distribute the stock dividend.

Answer: a. ($2,190,000) / 146,000 = $15 b. ($4,400,000) / 80,000 = $55 c. ($5 × 2 × 80,000) = $800,000; $800,000/80,000 = $10 $1,850,000 - $800,000 = $1,050,000; $1,050,000/146,000 = $7.19 d. 146,000 × 2 = 292,000 shares outstanding Preferred shares: $55.00 Common shares: $9,990,000 - $4,400,000 = $5,590,000; $5,590,000 / 292,000 = $19.14 e. Retained Earnings 394,200 Common shares 394,200 (292,000 × 0.15 × $9) Diff: 3 Type: ES L.O.: 8-4 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

36 .

8.5

Distinguish between fair value and book value per share

1) For a company that has only common shares outstanding, dividing total shareholders' equity by the number of shares outstanding determines the: A) liquidation value per share B) earnings per share C) market price per share D) book value per share Answer: D Diff: 2 Type: MC L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) When a company has both common shares and preferred shares, the book value per common share is calculated by: A) dividing total shareholders' equity less preferred equity by the number of common shares outstanding B) dividing the amount in the common shares account by the number of common shares outstanding C) dividing total shareholders' equity by the number of common shares outstanding D) dividing the amount in the common shares account by the sum of the number of common shares and preferred shares outstanding Answer: A Diff: 2 Type: MC L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

37 .

3) Book value is calculated by: A) dividing total preferred equity less dividends in arrears by the number of preferred shares outstanding B) dividing total shareholders' equity less preferred shareholders' equity by the number of common shares outstanding C) dividing total shareholders' equity by the number of common shares outstanding D) dividing total preferred equity plus dividends in arrears by the number of common shares outstanding Answer: B Diff: 2 Type: MC L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 4) The shareholders' equity section of the balance sheet for Vivitas Stevia Corporation is shown below: Share capital: Preferred shares, 10,000 shares authorized, 7,000 shares issued of $3.50 preferred $350,000 Common shares, 50,000 shares authorized, 18,000 shares issued 180,000 Total share capital $530,000 Retained earnings 300,000 Total share capital $830,000 Assume there are 2 years' dividends in arrears on the preferred shares, including the current year.

The book value per share for Vivitas Stevia common shares is: A) $23.94 B) $22.58 C) $26.47 D) $26.67 Answer: A Explanation: $830,000 - 350,000 - (7,000 x 3.50 x 2) = 431,000/18,000 = $23.94 Diff: 3 Type: MC L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

38 .

5) The book value of a share of a company’s common stock indicates the dollar value of net assets a common shareholder would receive for each share after any preferred shareholders have received their share of the company’s net assets.

Answer: TRUE Diff: 2 Type: TF L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Investors commonly use two share values to assist with investment decisions—fair value and book value.

Answer: TRUE Diff: 2 Type: TF L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) When a company has both common shares and preferred shares outstanding, the book value of the common shares is calculated by dividing total shareholders' equity less preferred equity by the number of common shares outstanding.

Answer: TRUE Diff: 2 Type: TF L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) The fair value (or market price) of a share of a company’s stock is the price that a willing buyer would pay a willing seller to acquire the share.

Answer: TRUE Diff: 2 Type: TF L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

39 .

9) The fair values of the shares of companies that are traded on public stock exchanges are easily determined.

Answer: TRUE Diff: 2 Type: TF L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Koffler Corp. reported the following shareholders' equity: Share capital: Preferred shares, 30,000 shares authorized, 7,500 shares issued 393,750 Common shares, 200,000 shares authorized, 135,000 shares issued Total share capital $1,001,250 Retained earnings Total shareholders' equity

$

607,500

218,500 $1,219,750

Required: a. The board of directors declared a 10% common stock dividend when the market price of the shares was $7 per share. Prepare the necessary journal entries to record the declaration and distribution of the common shares dividend. b. What effect did the distribution of the common shares dividend have on: 1. total assets 2. total liabilities 3. total share capital 4. total shareholders' equity c. Assuming all required preferred shares dividends have been paid, calculate the book value of a share of common shares before and after the common shares dividend. If Smith Jones owned 100 shares of Koffler's common shares before the stock dividend, what is the total book value of Smith's shares before and after the stock dividend?

Answer: a. Retained Earnings 94,500 Common shares 94,500 (135,000 × 10% × $7) b. 1. no effect 2. no effect 3. increase of $94,500 4. no effect

40 .

c. Book value before the stock dividend: $1,219,750 - $393,750 = $826,000 common $826,000/135,000 shares of common = $6.12 book value per share Book value after the stock dividend: $1,219,750 - $393,750 = $826,000 common 135,000 × 1.10 = 148,500 common shares after the stock dividend $826,000/148,500 = $5.56 book value per share Sam's total book value before the stock dividend: 100 shares × $6.12 = $612 Sam's total book value after the stock dividend: 100 × 1.10 = 110 shares × $5.58 = $612 (rounded) Diff: 3 Type: ES L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) Define and contrast market price and book value of a company's shares.

Answer: The market price of a share is the price that a willing buyer would pay a willing seller to acquire a share.

The book value of a share is the amount of owners’ equity on the company’s books for each share of its stock.

Diff: 2 Type: ES L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

41 .

12) IMA Believer Corp.'s balance sheet reported the following shareholders' equity as of December 31, 2020: Share capital: Preferred shares, $100 stated value, $5 cumulative, 10,000 shares authorized, 10,000 issued $1,000,000 Common shares 200,000 shares authorized, 50,000 shares issued 500,000 Total share capital $2,500,000 Retained earnings 500,000 Total shareholders' equity $3,000,000 Assuming there are 3 years' dividends in arrears (including that of the current year), determine (1) preferred equity and (2) book value per share of common shares.

Answer: ($5 × 3 years) = $15; $15 + $100 = $115 $115 × 10,000 = $1,150,000 preferred equity $3,000,000 - $1,150,000 = $1,850,000 $1,850,000/50,000 = $37.00 book value per common share Diff: 2 Type: ES L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

42 .

13) Pharmaprix Corporation's balance sheet reported the following shareholders' equity as of December 31, 2020: Share capital: Preferred shares, $5 cumulative, 10,000 shares authorized, 7,000 issued Common shares 200,000 shares authorized, 50,000 shares issued Total share capital Retained earnings Total shareholders' equity

$ 770,000 1,150,000 $1,920,000 450,000 $2,370,000

Assuming there are 2 years' dividends in arrears (including that of the current year), determine (1) preferred equity and (2) book value per share of common shares.

Answer: ($5 × 2 years) = $10 x 7,000 = $70,000; $70,000 + $770,000 = $840,000 preferred equity $2,370,000 - $840,000 = $1,530,000 $1,530,000/50,000 = $30.60 book value per common share Diff: 2 Type: ES L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

43 .

14) Given the following data for JetNew calculate the book value of a common share.

Share capital: Preferred shares, 30,000 shares authorized, 7,500 shares issued Common shares, 200,000 shares authorized, 105,000 shares issued Total share capital Retained earnings Total shareholders' equity

$ 525,000 682,500 $1,207,500 200,000 $1,407,500

Next calculate the book value of a common share if the preferred shares are $5 cumulative and have two years worth of dividends outstanding.

Answer: Book value: $1,407,500 - $525,000 = $882,500 $882,500/105,000 shares of common = $8.40 book value per share Book value: 7,500 × $5 × 2 = $75,000 $1,407,500 - $525,000 - $75,000 = $807,500 common $807,500/105,000 = $7.69 book value per share Diff: 3 Type: ES L.O.: 8-5 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8.6

Evaluate a company's return on assets and return on equity

1) Which of the following is the best measure as to whether a company is successful in using its assets to earn income for the individuals who finance the business?

A) current ratio B) acid-test ratio C) return on equity D) return on assets Answer: D Diff: 2 Type: MC L.O.: 8-6 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

44 .

2) Return on equity is a ratio that: A) is calculated by dividing net income plus preferred dividends by average common shareholders' equity B) shows the relationship between net income available for common shareholders and average common shareholders' equity C) cannot be calculated if the company has preferred shares in addition to common shares D) is calculated by dividing net income plus preferred dividends by average common shareholders' equity and shows the relationship between net income available for common shareholders and average common shareholders' equity Answer: B Diff: 2 Type: MC L.O.: 8-6 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Which of the following shows the relationship between net income and average common shareholders' equity?

A) current ratio B) acid-test ratio C) return on equity D) return on assets Answer: C Diff: 1 Type: MC L.O.: 8-6 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

45 .

4) The following information is available for Aerius Corporation for the current year: Net income Preferred dividends Interest expense

$160,000 30,000 18,000

Beginning of year: Total assets 900,000 Total liabilities 300,000 Total common shareholders' equity 375,000 End of year: Total assets 950,000 Total liabilities 350,000 Total common shareholders' equity 400,000 The return on assets for Aerius Corporation is: A) 19.2% B) 19.8% C) 17.3% D) 18.7% Answer: A Explanation: $160,000 + 18,000/(900,000 + 950,000)/2 = .192 Diff: 3 Type: MC L.O.: 8-6 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

46 .

5) The following information is available for Aerius Corporation for the current year: Net income Preferred dividends Interest expense

$160,000 30,000 18,000

Beginning of year: Total assets 900,000 Total liabilities 300,000 Total common shareholders' equity 375,000 End of year: Total assets 950,000 Total liabilities 350,000 Total common shareholders' equity 400,000 The return on equity for Aerius Corporation is: A) 41.3% B) 32.5% C) 33.5% D) 49.0% Answer: C Explanation: $160,000 - 30,000/(375,000 + 400,000)/2 = .335 Diff: 3 Type: MC L.O.: 8-6 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) The rate of return on common shareholders' equity is calculated by dividing net income less preferred dividends by average common shareholders' equity.

Answer: TRUE Diff: 2 Type: TF L.O.: 8-6 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

47 .

7) The rate of return on total assets is calculated by dividing net income plus interest expense by average total assets.

Answer: TRUE Diff: 2 Type: TF L.O.: 8-6 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Murray Corporation has gathered the following information for the current year: Net income Interest expense Income tax expense Preferred dividends

Current assets Current liabilities Plant and equipment Long-term liabilities Common shareholders' equity Preferred shareholders' equity

$40,000 5,150 15,250 4,500 Beginning of Year $ 70,000 45,000 400,000 125,000 225,000 75,000

End of Year $ 90,000 36,000 435,000 85,000 324,000 75,000

Required: a. Calculate the return on assets. b. Calculate the return on equity. c. Comment on how these measures are used.

48 .

Answer: a. $40,000 + $5,150 = $45,150 ($70,000 + $400,000 + $90,000 + $435,000)/2 = $497,500 $45,150/$497,500 = 9.1% b. $40,000 - $4,500 = $35,500 ($225,000 + $324,000)/2 = $274,500 $35,500/$274,500 = 12.9% c. The rate of return on assets is used as a standard profitability measure that shows the company's success in using its assets to generate income. It helps investors compare one company to another, especially within the same industry.

The rate of return on equity is used as a standard profitability measure which shows the relationship between net income and average common shareholders' equity. The higher the rate of return, the more successful the company.

Diff: 3 Type: ES L.O.: 8-6 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) Given the following information for Victory Stables calculate their return on assets, return on equity and comment on the use of these ratios.

Net income Interest expense Income tax expense Preferred dividends

Current assets Current liabilities Plant and equipment Long-term liabilities Common shareholders' equity Preferred shareholders' equity

$50,000 8,500 15,250 2,500 Beginning of Year $ 62,000 25,000 300,000 50,000 125,000 60,000

End of Year $ 82,000 55,000 350,000 75,000 225,000 85,000

49 .

Answer: Return on Assets $50,000 + $8,500 = $58,500 ($62,000 + $300,000 + $82,000 + $350,000)/2 = $397,000 $58,500/$397,000 = 14.7% Return on Equity $50,000 - $2,500 = $47,500 ($125,000+225,000)/2 = $175,000 $47,500/$175,000 = 27.1% The rate of return on assets is used as a standard profitability measure that shows the company's success in using its assets to generate income. It helps investors compare one company to another, especially within the same industry.

The rate of return on equity is used as a standard profitability measure which shows the relationship between net income and average common shareholders' equity. The higher the rate of return, the more successful the company.

Diff: 3 Type: ES L.O.: 8-6 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) What type of shares would an investor purchase if he or she were primarily interested in a safe investment?

Answer: An investor primarily interested in a safe investment would purchase preferred shares, which is safer than common shares. For even more safety, the investor should invest in highgrade corporate bonds or government securities.

Diff: 1 Type: ES L.O.: 8-6 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

50 .

11) What type of shares would an investor purchase if he or she were primarily interested in steady dividends?

Answer: An investor primarily interested in steady dividends would purchase cumulative preferred shares. However, the company is not obligated to declare preferred dividends, and the dividends are unlikely to increase.

Diff: 1 Type: ES L.O.: 8-6 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) What type of shares would an investor purchase if he or she were primarily interested in increasing dividends?

Answer: An investor primarily interested in increasing dividends would purchase common shares as long as the company's net income is increasing and its cash flow is sufficient to pay a dividend after meeting all other cash demands.

Diff: 2 Type: ES L.O.: 8-6 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8.7

Report equity transactions and events in the financial statements

1) All of the following might be found on a statement of changes in shareholders' equity except: A) earnings-per-share information B) cash dividends C) repurchased share purchases D) net income Answer: A Diff: 2 Type: MC L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

51 .

2) Repurchased share transactions are reported on the: A) statement of changes in shareholders' equity B) statement of retained earnings C) income statement D) income statement as a part of continuing operations Answer: A Diff: 2 Type: MC L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) January 1, 2020, Assembly System Corporation's Retained Earnings account had a balance of $675,000. During 2020, cash dividends of $25,000 and stock dividends with a market value of $55,000 were declared and distributed. Assembly System Corporation had a net loss of $5,000 in 2020. What is the balance in Retained Earnings that would appear on Assembly System Corporation's statement of shareholders' equity on December 31, 2020?

A) $670,000 B) $595,000 C) $615,000 D) $590,000 Answer: D Explanation: $675,000 - 5,000 -25,000 - 55,000 = $590,000 Diff: 2 Type: MC L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

52 .

4) On January 1, 2020, Balises Corporation's Retained Earnings account has a balance of $300,000. During 2020, cash dividends of $20,000 were declared and stock dividends with a market value of $40,000 were declared. Net income for 2020 amounted to $90,000. On June 30, 2020, Balises Corporation issued 5,000 shares of common shares at $10 per share. What is the balance in Retained Earnings appearing on the statement of shareholders' equity on December 31, 2020?

A) $420,000 B) $380,000 C) $330,000 D) $440,000 Answer: C Explanation: $300,000 + 90,000 - 20,000 - 40,000 = $330,000 Diff: 2 Type: MC L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) On January 1, 2020, Proven Technology Corporation's common shares account had a balance of $250,000, representing 25,000 shares issued at $10 per share. On May 15, 2020, 12,000 shares were issued for $150,000 cash. On August 31, 2020, a 10% stock dividend was declared and distributed. What is the balance in Common Shares appearing on the statement of shareholders' equity on December 31, 2020?

A) $440,000 B) $300,000 C) $400,000 D) $415,000 Answer: A Explanation: $250,000 + 150,000 = 400,000 x 1.1 = $440,000 Diff: 2 Type: MC L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

53 .

6) On January 1, 2020, Automatic Train Corporation had 30,000 common shares outstanding issued at $10 each. On June 1, 2020, Automatic Train Corporation issued 12,000 shares of its common shares at $15 per share. On November 30, 2020, Automatic Train Corporation repurchased 3,000 shares of its common shares for $17 per share. The balance in Common shares on December 31, 2020, as shown on the statement of shareholders' equity, is: A) $429,000 B) $445,200 C) $445,714 D) $480,000 Answer: A Explanation: 30,000 x $10 = $300,000 12,000 x $15 = 180,000 3,000 x $17 = (51,000) Diff: 2 Type: MC L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) On January 1, 2020, Bogie Corporation had 40,000 common shares outstanding issued at $16 each during 2020. On June 1, 2020, Bogie Corporation issued 5,000 shares of its common shares at $15 per share. On September 30, 2020, Bogie Corporation repurchased 3,000 shares of its common shares for $17 per share. On November 30, 2020, Bogie Corporation reissued 2,000 shares of repurchased shares at $18 per share. The balance in Share Capital on December 31, 2020, as shown on the statement of shareholders' equity, is: A) $640,000 B) $700,000 C) $703,333 D) $756,000 Answer: B Explanation: 40,000 x $16 = $640,000 5,000 x $15 = 75,000 3,000 x $17 = (51,000) 2,000 x $18 = 36,000 Diff: 3 Type: MC L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

54 .

8) On January 1, 2020, Guided Light Corporation's Retained Earnings account had a balance of $275,000. During 2020, cash dividends of $50,000 were declared and stock dividends with a market value of $40,000 were declared. Net income for 2020 amounted to $120,000. What is the balance in Retained Earnings appearing on the statement of shareholders' equity on December 31, 2020?

A) $305,000 B) $185,000 C) $395,000 D) $345,000 Answer: A Explanation: $275,000 + 120,000 - 50,000 - 40,000 = $305,000 Diff: 2 Type: MC L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) The financial statement that reports the changes in all categories of equity during the period is called the: A) statement of income B) statement of changes in shareholders' equity C) statement of retained earnings D) statement of changes in financial position Answer: B Diff: 1 Type: MC L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Which of the following would not be reported on the statement of changes in shareholders' equity?

A) interest expense B) net income C) repurchased share transactions D) cash dividends declared but not paid Answer: A Diff: 2 Type: MC L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

55 .

11) The statement of retained earnings reports the changes in all categories of equity during the period.

Answer: FALSE Explanation: The statement of changes in shareholders’ equity reports the details of all the changes in the shareholders’ equity section of the balance sheet during the period.

Diff: 2 Type: TF L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) Shareholder's equity does not include details about a company's issuance of stock.

Answer: TRUE Diff: 1 Type: TF L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) Scar Corporation obtained a charter from the province of Nova Scotia authorizing 500,000 common shares and 20,000 preferred shares.

Listed below are selected accounts from the general ledger of the Scar Corporation. Assuming all accounts have normal balances, prepare the shareholders' equity section of the balance sheet for the Scar Corporation as of December 31, 2020.

Common shares Cash Preferred shares Accounts receivable Land Equipment Retained earnings

$ 50,000 40,000 100,000 35,000 50,000 75,000 45,000

56 .

Answer: Shareholders' Equity Share capital: Preferred shares $100,000 Common shares 50,000 Total share capital $150,000 Retained earnings 45,000 Total shareholders' equity $195,000 Diff: 2 Type: ES L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) Listed below are selected accounts from the general ledger of the JetNew Corporation.

Assuming all accounts have normal balances, prepare the shareholders' equity section of the balance sheet for the JetNew Corporation as of December 31, 2020.

Common shares $ 50,000 Cash 40,000 Preferred shares 100,000 Accounts receivable 35,000 Contributed surplus-repurchase of common shares 15,000 Land 50,000 Equipment 75,000 Retained earnings 45,000 Accumulated other comprehensive income 50,000 Answer: Shareholders' Equity Share capital: Preferred shares $100,000 Common shares 50,000 Contributed surplus-repurchase common shares 15,000 Total share capital $165,000 Retained earnings 45,000 Accumulated other comprehensive income 50,000 Total shareholders' equity $260,000 In the real world format the two share categories would be combined into one called Share Capital referenced to a note for the details (Share capital (note 6) $150,000). If there was more than one contributed surplus account they too would be combined into one line.

Diff: 2 Type: ES L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 57 .

15) The following statement of shareholders' equity for the Q8 Corporation is missing explanations of the events that led to the changes in the shareholders' equity accounts. Write a brief explanation for each change.

Common Contributed Retained shares surplus Earnings Balance $190,000 $0 $65,000 a.

74,000 b.

86,500 c.

(12,800) d.

30,000 (30,000) e.

Balance $294,000 $0 $108,700

Accumulated Other Comprehensive Income Balance $255,000 74,000 86,500 (12,800) -03,000 3,000 $3,000 $405,700

Answer: a. Issued $74,000 of common shares. b. Income earned was $86,500. c. Cash dividends declared, $12,800. d. Distributed common shares dividend, $30,000 market value of common shares. e. Components of comprehensive income that affect the Accumulated Other Comprehensive Income.

Diff: 3 Type: ES L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

58 .

16) Given the following information prepare a Statement of Changes in Shareholders' Equity for Q8 Inc for 2020.

Common Shares Balance December 31, 2019 $22,000 (2,200 shares outstanding) Net Income 2020 15,350 Discontinued operations 5,700 New shares issued May 1, 2020 12,500 Share dividend issued September 30, 2020 8,500 Repurchase of common shares March 30, 2020 1,800 (200 shares) Cash dividends November 30, 2020 1,500 Retained earnings December 31, 2019 4,500 Answer: Q8 Inc. Statement of Changes in Shareholders' Equity For the Year Ended December 31, 2020

Common Contributed shares surplus Bal. Dec. 31 2019 $22,000 Net income Cash Dividends Repurchase of Shares (2,000) Issuance of Shares 12,500 Share dividend 8,500 OCI Bal. Dec. 31 2020 $41,000

Retained Earnings

Accum Other Comprehensive Income

Total

$4,500 15,350

$26,500 15,350

(1,500)

(1,500)

200

(1,800) 12,500

(8,500)

$10,050

5,700

0 5,700

$5,700

$56,750

Diff: 2 Type: ES L.O.: 8-7 CPA COMPETENCIES: Chapter 8 1.1.1 Evaluates financial reporting needs 1.2.2 Evaluates treatment for routine transactions 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

59 .

Financial Accounting, Cdn. Ed., 7CE (Harrison/Horngren) Chapter 9 The Statement of Cash Flows 9.1

Explain the uses of the statement of cash flows

1) A statement of cash flows: A) is prepared at the option of management B) may be combined with the balance sheet C) is a basic financial statement required for publicly held companies D) may be combined with the statement of retained earnings at the option of management Answer: C Diff: 1 Type: MC L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 2) Cash means more than just cash on hand and cash in the bank. Highly liquid, short-term investments that are easily convertible into cash are called: A) common shares B) cash equivalents C) promissory notes D) accounts receivable Answer: B Diff: 1 Type: MC L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 3) The statement of cash flows is designed to fulfill all of the following purposes except: A) to determine the company's ability to pay dividends to shareholders B) to assess the collectibility of accounts receivable C) to predict future cash flows D) to show the relationship of net income to changes in the company's cash Answer: B Diff: 2 Type: MC L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

1 .

4) All of the following are cash equivalents except: A) money market investments B) short-term investments C) notes receivable D) investments in Canadian Government Treasury bills Answer: C Diff: 2 Type: MC L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 5) The statement of cash flows is divided into three major sections.

Answer: TRUE Diff: 1 Type: TF L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 6) Sometimes income and cash flow follow different patterns.

Answer: TRUE Diff: 1 Type: TF L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 7) The statement of cash flows is a supplement to the balance sheet in a company's annual report.

Answer: FALSE Explanation: To gain insight into how a company’s cash flows affected its cash position during a reporting period, we need another financial statement: the statement of cash flows.

Diff: 1 Type: TF L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 8) The statement of cash flows reports the investments the company is making in non-current assets.

Answer: TRUE Diff: 2 Type: TF L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 2 .

9) Cash equivalents are highly liquid short-term investments that can be converted into cash quickly.

Answer: TRUE Diff: 2 Type: TF L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 10) Investments in Canadian Government Treasury bills are classified as cash equivalents.

Answer: TRUE Diff: 2 Type: TF L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 11) Cash equivalents would include money market accounts, Canadian Treasury bills, and notes receivable.

Answer: FALSE Explanation: Cash equivalents are short-term investments that are readily convertible to known amounts of cash. It does not include notes receivable.

Diff: 1 Type: TF L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 12) Why is the statement of cash flows of interest to investors, creditors, and management?

Answer: Understanding the statement of cash flows is vital in making good business decisions.

The statement of cash flows reports the entity's cash flows—cash receipts and cash revenues— during a period. The key element to be aware of is that this financial statement shows where cash came from and how it was spent. There is a saying in business that "happiness is positive cash flow." To remain solvent, a corporation must have a constant (or positive) cash flow from its operating activities so it can meet expenses, repay debt, and ultimately keep investors and creditors happy.

Diff: 1 Type: ES L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

3 .

13) Why is the statement of cash flows necessary?

Answer: Other financial statements give some information regarding cash, but they do not tell the entire story about where cash came from and how it was spent. The balance sheet reports the financial position of a company at a given date—cash is shown as a certain amount on such a date. The balance sheet does not tell us what happened during the period to arrive at the cash balance on the balance sheet date. The income statement shows revenues, expenses, and net income during a period, but again, it does not give the user an adequate picture of all of the changes in cash for the period. Only the statement of cash flows can provide management, investors, and creditors with a comprehensive look at the sources and uses of cash for a company over a given period of time.

Diff: 2 Type: ES L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 14) Your best friend just lost his job because the company he was working for went bankrupt. He was complaining to you that even though the company had been profitable for three years in a row, it still went out of business. He asks you how this can happen.

Explain the most likely reason for the company declaring bankruptcy. Could your best friend have seen it coming? How? Answer: A profitable company is a company whose revenues exceed expenses on an accrual basis. This does not necessarily mean that the company is generating enough cash to pay its bills.

The most likely reason the best friend's company went bankrupt is the lack of cash. If the friend had access to a statement of cash flows, he most likely would have seen the cash flow problem.

Preparation of the statement of cash flows is mandatory for publicly held companies to help investors, creditors, and management evaluate a company's cash position, and its financial health to continue operating in the future.

Diff: 2 Type: ES L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 15) What primary factor should a creditor consider when evaluating whether a corporation can pay the interest and principal on a loan at maturity?

Answer: Creditors should consider the expected future net cash flow from operating activities.

This can be determined in part by examining the statement of cash flows, since it is a predictor of future net cash flows.

Diff: 2 Type: ES L.O.: 9-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

4 .

9.2

Explain and classify cash flows from operating, investing, and financing activities

1) Proceeds from the issuance of shares appear in which, if any, section of the cash flow statement?

A) operating activities section B) investing activities section C) financing activities section D) Proceeds from the issuance of shares do not appear in the cash flow statement.

Answer: C Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 2) Stock dividends distributed appear in which, if any, section of the cash flow statement?

A) financing and investing activities section B) operating and investing activities section C) operating activities section only D) The distribution of a stock dividend does not appear anywhere in the cash flow statement.

Answer: D Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 3) Under ASPE interest paid on debt would be reported on a statement of cash flows under the: A) investing activities B) operating activities C) financing activities D) interest paid on debt would not be reported on a statement of cash flows Answer: B Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

5 .

4) The most important section of a statement of cash flows is the: A) operating activities B) investing activities C) financing activities D) all of the sections are equally important Answer: A Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 5) Which of the following activities increase and decrease the non-current assets available to a company?

A) operating activities B) investing activities C) financing activities D) warehousing activities Answer: B Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 6) Which of the following represents the correct order on the statement of cash flows?

A) Investing, operating and then financing activities B) Operating, investing then financing activities C) Operating, financing then investing activities D) Investing, financing then operating activities Answer: B Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

6 .

7) The issuance of bonds for cash would be reported on a statement of cash flows under the: A) operating activities B) investing activities C) financing activities D) no activities because issuing bonds for cash would not be reported on a statement of cash flows Answer: C Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 8) After a business is up and running, information about which of the following business activities is most important?

A) operating activities B) investing activities C) financing activities D) warehousing activities Answer: A Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 9) Which of the following activities creates revenues and expenses in a company's major line of business?

A) operating activities B) investing activities C) financing activities D) warehousing activities Answer: A Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

7 .

10) The payment of principal amounts (excluding interest) to creditors would be reported on a statement of cash flows under the: A) operating activities B) investing activities C) financing activities D) either investing activities or financing activities Answer: C Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 11) The issuance of common shares for cash would be reported on a statement of cash flows under: A) the operating activities B) the investing activities C) the financing activities D) either investing activities or operating activities Answer: C Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 12) Which of the following is a method for reporting cash flows from operating activities that begins with net income and reconciles to cash flows from operating activities?

A) cash-basis method B) direct method C) accrual method D) indirect method Answer: D Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

8 .

13) Under ASPE which of the following is not an example of an operating activity?

A) dividends declared B) dividend income C) interest income D) interest expense Answer: A Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 14) Activities which lead to an increase or decrease in long-term debt of a corporation are referred to as: A) operating activities B) investing activities C) financing activities D) future debt activities Answer: C Diff: 1 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 15) Under ASPE the receipt of interest on loans would be reported on a statement of cash flows under the: A) operating activities B) investing activities C) financing activities D) no activities because interest received on loans would not be reported on a statement of cash flows Answer: A Diff: 2 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

9 .

16) The indirect method of preparing the statement of cash flows: A) is more commonly used in practice than the direct method B) is preferred by IFRS and ASPE over the direct method C) produces a different amount for cash flows from operating activities than the direct method D) produces a different amount for cash flows from investing activities than the direct method Answer: A Diff: 1 Type: MC L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 17) Only the operating activities section of a statement of cash flows is prepared differently when using the indirect method.

Answer: TRUE Diff: 2 Type: TF L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 18) The payment of a stock dividend would appear as a cash outflow in the financing activities section on a cash flow statement.

Answer: FALSE Explanation: Stock dividends issue additional shares of a company instead of distributing cash.

Diff: 2 Type: TF L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 19) Only the investing activities section of a statement of cash flows differs between the direct and indirect methods.

Answer: FALSE Explanation: There are two methods of determining cash flows from operating activities on the statement of cash flows.

Diff: 1 Type: TF L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

10 .

20) The indirect method of computing cash flows from operating activities begins with net income and reconciles net income to operating cash flows.

Answer: TRUE Diff: 2 Type: TF L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 21) The main source of cash for a business must come from operating activities if it is to prosper in the future.

Answer: TRUE Diff: 2 Type: TF L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 22) Of the three types of business activities reported on a statement of cash flows—operating, investing, and financing—financing activities are the most important when evaluating a business that is up and running.

Answer: FALSE Explanation: A company that does not regularly generate sufficient cash flows from operating activities will eventually suffer liquidity and solvency problems.

Diff: 2 Type: TF L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 23) Under ASPE the payment of principal and interest on a loan would be reported in the investing activities section of a statement of cash flows.

Answer: FALSE Explanation: ASPE require that all interest paid and all interest and dividends received and included in the determination of net income, be classified as operating activities.

Diff: 2 Type: TF L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

11 .

24) The majority of organizations use the indirect method when preparing their statement of cash flows.

Answer: TRUE Diff: 1 Type: TF L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 25) The following equity transactions may affect the cash flow statement. For each transaction given, indicate the appropriate section of the cash flow statement where the transaction would appear and whether it would be a cash inflow (+) or a cash outflow (-). If a transaction doesn't appear on a cash flow statement, place an (X) in the "No Effect" column. Assume that the company is reporting its financial results in accordance with ASPE. a. Issuance of common shares b. Issuance of preferred shares c. Repurchase of common shares d. 2-for-1 stock split e. Payment of cash dividends f. Issuance of repurchased common shares at an amount above cost Transaction

Operating Activities

Investing Activities

Financing Activities

Operating Activities

Investing Activities

Financing Activities + + -

No Effect

a. b. c. d. e. f.

Answer: Transaction a. b. c. d. e. f.

No Effect

x +

Diff: 2 Type: ES L.O.: 9-2 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 12 .

9.3 Prepare a statement of cash flows using the indirect method of determining cash flows from operating activities 1) On an indirect method statement of cash flows, the purchase of machinery in exchange for common shares is: A) ignored B) shown in the schedule of noncash investing and financing activities which accompanies the statement of cash flows C) reflected in the operating activities section D) reflected in the investing activities section Answer: B Diff: 1 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 2) Phosphoric Company reported capital assets, net of accumulated depreciation, on January 1, 2020, at $645,000 and $732,500 on December 31, 2020. The income statement showed depreciation of $48,300 and a $5,600 loss on sale of capital assets. Phosphoric Company acquired $213,000 of capital assets during the year. The proceeds from the sale of capital assets were: A) $125,500 B) $89,900 C) $71,600 D) $77,200 Answer: C Explanation: $645,000 + 213,000 - 48,300 - x = 732,500 x = $77,200 77,200 - 5,600 = $71,600 Diff: 3 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

13 .

3) Jantzi Company reported capital assets, net of accumulated depreciation, on January 1, 2020, at $427,500 and $579,300 on December 31, 2020. The income statement showed depreciation of $38,700. Jantzi Company acquired $275,000 of capital assets during the year and reported proceeds from the sale of capital assets of $89,200 for the year. The gain or loss resulting from the sale of capital assets was: A) $3,400 loss B) $2,390 loss C) $4,700 gain D) $5,050 gain Answer: C Explanation: $427,500 + 275,000 - 38,700 - x = 579,300 x = $84,500 $89,200 − $84,500 = $4,700 Diff: 3 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 4) On January 1, 2020, Agronomist Inc. had a balance of $340,000 in the long-term investments account. During 2020, Agronomist Inc. sold long-term investments for $115,000 cash, resulting in a $13,000 gain. On December 31, 2020, the long-term investments account showed a balance of $380,000. The long-term investments purchased during 2020 totalled: A) $75,000 B) $265,000 C) $155,000 D) $142,000 Answer: D Explanation: $340,000 + x -115,000 = 380,000 x = $155,000 155,000 - 13,000 = $142,000 Diff: 3 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

14 .

5) The balance in Common Shares on January 1, 2020, and December 31, 2020, is respectively $145,000 and $172,500. During the year, $57,000 repurchase of shares was recorded. During the year, shares were issued. The proceeds from the issue of shares amounted to: A) $29,500 B) $64,500 C) $84,500 D) $260,500 Answer: C Explanation: $145,000 + x - 57,000 = 172,500 x = $84,500 Diff: 3 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 6) Retained Earnings had a balance on January 1, 2020, and December 31, 2020, respectively, of $234,500 and $411,000. Net income for the year was $199,500 and the only other event affecting Retained Earnings was the declaration of dividends. If there was no change in the Dividends account during the year, the payments for dividends was: A) $23,000 B) $176,500 C) $376,000 D) $0 Answer: A Explanation: $234,500 + 199,500 - x = 411,000 x = $23,000 Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 7) The amount of cash paid for dividends for the current year can be calculated by the following formula: A) beginning dividends payable minus ending dividends payable plus dividends declared B) beginning dividends payable plus ending dividends payable plus dividends declared C) beginning dividends payable minus ending dividends payable minus dividends declared D) beginning dividends payable plus ending dividends payable minus dividends declared Answer: A Diff: 3 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

15 .

8) The issuance of common shares in exchange for land and equipment will: A) affect the financing activities section of a cash flow statement B) affect the operating activities section of a cash flow statement C) not affect a cash flow statement D) affect the investing activities section of a cash flow statement Answer: C Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 9) Using the indirect method of preparing a statement of cash flows, a loss on the sale of a capital asset is: A) ignored B) added in the operating activities section C) added in the investing activities section D) subtracted in the operating activities section Answer: B Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 10) All of the following might appear on an indirect method statement of cash flows except: A) depreciation expense B) decrease in inventory C) loss on sale of capital assets D) interest received on notes receivable Answer: D Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

16 .

11) Cassidy Lake Corporation sold some of its used equipment for $65,000. The indirect method statement of cash flows shows an addition to net income of $6,000. The accumulated depreciation on the equipment to date of sale was $63,000. The original cost of the equipment was: A) $69,000 B) $71,000 C) $134,000 D) $122,000 Answer: C Explanation: 65,000 + 6000 + 63,000 = $134,000 Diff: 3 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 12) Under ASPE interest paid on debt would be reported on a statement of cash flows under the: A) investing activities B) operating activities C) financing activities D) interest paid on debt would not be reported on a statement of cash flows Answer: B Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 13) Under ASPE the receipt of interest on loans would be reported on a statement of cash flows under the: A) operating activities B) investing activities C) financing activities D) no activities because interest received on loans would not be reported on a statement of cash flows Answer: A Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

17 .

14) The purchase of land for cash and the sale of a capital asset are viewed as: A) a negative and positive item on the statement of cash flows B) a positive and negative item on the statement of cash flows C) both positive items on the statement of cash flows D) neither positive nor negative items on the statement of cash flows Answer: A Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 15) Which of the following transactions would not be shown on a statement of cash flows?

A) purchase of intangible assets for cash B) a stock split C) sale of equipment accepting 30% cash and a note receivable for the balance D) purchase of land by making a 25% down payment and issuing a note payable for the balance Answer: B Diff: 1 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 16) The repurchase of shares would be reported on a statement of cash flows under the: A) operating activities B) investing activities C) financing activities D) either investing activities or operating activities Answer: C Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

18 .

17) The sale of equipment at its carrying amount would be reported on a statement of cash flows under: A) the operating activities B) the investing activities C) the financing activities D) either investing activities or financing activities Answer: B Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 18) The sale of repurchased shares would be reported on a statement of cash flows as a: A) cash inflow under the operating activities B) cash outflow under the financing activities C) cash inflow under the financing activities D) cash inflow under the investment activities Answer: C Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 19) The declaration of dividends by the board of directors would be reported on a statement of cash flows as a(an): A) cash inflow under the financing activities B) cash outflow under the financing activities C) cash outflow under the investing activities D) activity that would not be reported on a statement of cash flows Answer: D Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

19 .

20) The amount of cash dividends declared during the period and the amount of cash dividends paid during the period are reflected in the: A) income statement and cash flow statement, respectively B) statement of shareholders' equity and income statement, respectively C) statement of shareholders' equity and the cash flow statement, respectively D) cash flow statement and statement of shareholders' equity, respectively Answer: C Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 21) The sale of repurchased shares is a(n) ________ on a statement of cash flows.

A) operating activity B) investing activity C) financing activity D) financing activity or an investing activity Answer: C Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 22) Which of the following would not appear on a statement of cash flows?

A) payments to a supplier B) cash sales C) cost of goods sold D) proceeds from issuance of common shares Answer: C Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

20 .

23) The operating activities section of an indirect method statement of cash flows includes: A) cash paid for inventory B) changes in current asset balances C) cash paid for operating expenses D) cash received from customers Answer: B Diff: 1 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 24) On an indirect method statement of cash flows, a gain on the sale of capital assets is: A) reflected in the investing activities section B) reflected in the financing activities section C) added to net income D) deducted from net income Answer: D Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 25) Under ASPE all of the following might appear as adjustments to net income on an indirect method statement of cash flows except: A) depreciation expense B) an increase in Accounts Receivable C) gain on sale of capital assets D) payment of dividends Answer: D Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

21 .

26) Under the indirect method of preparing a statement of cash flows, cash disbursed for the acquisition of a capital asset is: A) added in the investing activities section B) added in the financing activities section C) subtracted in the operating activities section D) subtracted in the investing activities section Answer: D Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 27) Beyond the Boardroom Corporation sold used equipment with a carrying amount of $25,000 for $29,000. The indirect method statement of cash flows will reflect: A) an addition of $29,000 in the investing activities section and an addition of $4,000 in the operating activities section B) an addition of $25,000 in the investing activities section and an addition of $4,000 in the operating activities section C) an addition of $29,000 in the investing activities section and a deduction of $4,000 in the operating activities section D) an addition of $25,000 in the investing activities section and a deduction of $4,000 in the operating activities section Answer: C Explanation: $29,000 - 25,000 = $4,000 gain on sale Diff: 3 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 28) Using the indirect method of preparing a statement of cash flows, depreciation expense for the current year is: A) added in the operating activities section B) added in the investing activities section C) added in the financing activities section D) subtracted in the operating activities section Answer: A Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

22 .

29) No Harm Corporation sold some of its used equipment with a carrying amount of $52,000 for $47,000. The indirect method statement of cash flows will reflect an addition in the investing activities section of: A) $47,000 and a deduction of $5,000 in the operating activities section B) $47,000 and an addition of $5,000 in the operating activities section C) $52,000 and an addition of $5,000 in the operating activities section D) $52,000 and a deduction of $5,000 in the operating activities section Answer: B Explanation: $47,000 - 52,000 = $5,000 loss on sale Diff: 3 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 30) Under ASPE on an indirect method statement of cash flows, dividends paid during the year are: A) added to net income B) deducted from net income C) reflected in the financing activities section D) reflected in the investing activities section Answer: C Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 31) On an indirect method statement of cash flows, an increase in accounts payable would be: A) reflected in the investing activities section B) netted against any decreases in accounts receivable C) added to net income D) deducted from net income Answer: C Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

23 .

32) On an indirect method statement of cash flows, a decrease in inventory would be: A) netted against any decreases in accounts payable B) deducted from net income C) reflected in the investing activities section D) added to net income Answer: D Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 33) Under the indirect method of preparing a statement of cash flows, a decrease in the balance in the Accounts Receivable account during the year is: A) added in the operating activities section B) added in the investing activities section C) subtracted in the operating activities section D) subtracted in the financing activities section Answer: A Diff: 2 Type: MC L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 34) A gain on sale of capital assets is added to net income when preparing the operating activities section of a statement of cash flows under the indirect method.

Answer: FALSE Explanation: Net income also includes the gain, so we must subtract the gain from net cash provided from operations.

Diff: 2 Type: TF L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 35) Loans and advances to others are financing activities on a statement of cash flows.

Answer: FALSE Explanation: Reported under investing activities.

Diff: 2 Type: TF L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

24 .

36) Non-cash activities such as an exchange of shares for a piece of equipment require note disclosure.

Answer: TRUE Diff: 1 Type: TF L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 37) Non-cash activities such as an exchange of shares for a piece of equipment do not need to be disclosed.

Answer: FALSE Explanation: IFRS and ASPE do require note disclosure.

Diff: 1 Type: TF L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 38) Negative free cash flow is considered a bad sign for investors.

Answer: FALSE Explanation: It could mean that the company has made a significant investment in property, plant, and equipment that will pay off in the form of increased future revenues and profits.

Diff: 1 Type: TF L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 39) Under the indirect method, depreciation expense must be added back to net income under the operating activities.

Answer: TRUE Diff: 1 Type: TF L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 40) The amount of cash dividends declared during the period and the amount of cash dividends paid during the period are reflected in the statement of shareholders' equity and the cash flow statement, respectively.

Answer: TRUE Diff: 2 Type: TF L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 25 .

41) Free cash flow is calculated by taking net cash flow for the year less planned investments in property, plant, equipment and other non-current assets.

Answer: FALSE Explanation: Free cash flow is the amount of cash available from operations after paying for property, plant, and equipment.

Diff: 1 Type: TF L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 42) When calculating cash flow from operations, an increase in prepaid expenses would be added in to the cash flow.

Answer: FALSE Explanation: Increases in prepaid expenses are deducted from net income under operating activities.

Diff: 1 Type: TF L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 43) An increase in common shares would be added into the cash flow from investing activities section of the Statement of Cash Flows.

Answer: FALSE Explanation: Added into the cash flow from financing activities.

Diff: 1 Type: TF L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 44) Free cash flow is calculated by taking net cash flow provided by operations less capital expenditures on property, plant, and equipment.

Answer: TRUE Diff: 1 Type: TF L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

26 .

45) Classify each of the following as an operating, investing, or financing activity under ASPE: a. Loaning money b. Receiving cash from customers c. Receiving interest revenue d. Payments for inventory e. Payments for interest f. Receipt of cash from issuance of bonds payable g. Receipt of cash from sale of equipment h. Payments for acquisition of land i. Receipt of cash from issuance of stock j. Receipt of dividend income k. Dividends paid to shareholders l. Payment of salaries to employees m. Payment of taxes Answer: a. Investing activity b. Operating activity c. Operating activity d. Operating activity e. Operating activity f. Financing activity g. Investing activity h. Investing activity i. Financing activity j. Operating activity k. Financing activity l. Operating activity m. Operating activity Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

27 .

46) Match these sections off of the balance sheet with their typical cash flow activity category.

Use O for operating, I for investing and F for financing.

1. Owners' Equity 2. Current Assets 3. Non-current Liabilities 4. Current Liabilities 5. Non-current Assets Answer: 1. F 2. O 3. F 4. O 5. I Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

28 .

47) Identify where each of the following items would appear on a cash flow statement under ASPE. Use (O) for the operating activities section, (I) for the investing activities section, (F) for the financing activities section, (NIF) for the schedule of noncash investing and financing activities, and (N) if the item does not appear anywhere on the cash flow statement. Assume the statement is prepared using the indirect method. ________ a. gain on sale of land ________ b. cash sales ________ c. sale of a long-term investment in stock ________ d. depreciation of a patent ________ e. payment of non-current debt ________ f. net income ________ g. payment of income taxes ________ h. conversion of preferred shares into common shares ________ i. sale of repurchased shares ________ j. increase in Inventory ________ k. purchase of equipment ________ l. cost of goods sold ________ m. exchange of common shares for a building ________ n. distribution of a 10% stock dividend ________ o. collection of accounts receivable Answer: a. O b. N c. I d. O e. F f. O g. N h. NIF i. F j. O k. I l. N m. NIF n. N o. N Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

29 .

48) The Corn Crop Corporation gathered the following data from its accounting records for the year ended September 30, 2020: Decrease in inventory $ 17,000 Acquisition of building 218,500 Issuance of bonds payable 525,000 Increase in accounts receivable 47,600 Cash sales 102,900 Net income 195,000 Payment of income taxes 27,200 Loss on sale of capital assets 7,300 Declaration of stock dividend 50,500 Decrease in prepaid expenses 8,500 Collection of dividend revenue 18,600 Increase in accrued liabilities 24,500 Depreciation expense 49,000 Repurchase of shares 56,000 Acquisition of machinery by issuing non-current note payable 35,000 Decrease in accounts payable 15,600 Prepare the operating activities section of the cash flow statement for the Corn Crop Corporation using the indirect method under ASPE. Answer: Cash flows from operating activities: Net income $195,000 Add (subtract) items that affect net income and cash flow differently: Depreciation $49,000 Loss on sale of capital assets 7,300 Decrease in inventory 17,000 Increase in accounts receivable (47,600) Decrease in prepaid expenses 8,500 Increase in accrued liabilities 24,500 Decrease in accounts payable (15,600) 43,100 Net cash inflow from operating activities $238,100 Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

30 .

49) As the accountant for Genetic Incorporated, you are responsible for preparing the cash flow statement. You have decided to prepare the statement using the indirect method and have gathered together the following data from the accounting records: Principal payments on non-current debt $ 50,000 Collections on accounts receivable 287,500 Increase in accounts payable 24,300 Acquisition of equipment by issuing non-current note payable70,000 Depreciation expense 71,300 Collection of loan principal 58,000 Proceeds from sale of investments, not including $5,100 gain49,100 Increase in accounts receivable 7,200 Cash payments to purchase capital assets 62,000 Decrease in accrued liabilities 30,600 Payment of cash dividends 46,500 Income tax expense and payments 39,300 Proceeds from sale of capital assets, not including $7,400 loss 22,600 Net income 147,100 Cash sales 217,400 Proceeds from issuance of common shares 300,000 Increase in inventory 41,700 Loan to another company 60,000 Bonds payable converted into common shares 130,000 Payments to suppliers 283,100 Decrease in prepaid expenses 12,800 Cash balance: December 31, 2019 62,500 Cash balance: December 31, 2020 452,000 Prepare the cash flow statement for the year ended December 31, 2020 under ASPE, using the indirect method and including a schedule of noncash investing and financing activities, if necessary.

31 .

Answer:

Genetic Incorporated Cash Flow Statement For the Year Ended December 31, 2020

Cash flows from operating activities: Net income $147,100 Add (subtract) items that affect net income and cash flow differently: Depreciation $71,300 Loss on sale of capital assets 7,400 Gain on sale of investments (5,100) Change in accounts receivable (7,200) Change in inventory (41,700) Change in prepaid expenses 12,800 Change in accounts payable 24,300 Decrease in accrued liabilities (30,600) 31,200 Net cash inflow from operating activities $178,300 Cash flows from investing activities: Loan collection Proceeds from sale of investments Cash payments to purchase capital assets Proceeds from sale of capital assets Loan to another company Net cash inflow from investing activities

$58,000 49,100 (62,000) 22,600 (60,000) 7,700

Cash flows from financing activities: Payments of non-current debt $(50,000) Payment of cash dividends (46,500) Proceeds from issuance of common shares 300,000 Net cash inflow from financing activities 203,500 Net increase in cash $389,500 Cash balance: December 31, 2019 62,500 Cash balance: December 31, 2020 $452,000 Noncash investing and financing activities: Acquisition of equipment by issuing note Bonds payable converted into common shares Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

32 .

$ 70,000 130,000

50) The following selected data for the Food Factory Corporation were gathered by the accountants for the year ended December 31, 2020, who are responsible for preparing the financial statements: Cost of goods sold Depreciation expense Other operating expenses Loss on sale of investments Gain on sale of capital assets Sales revenue Interest revenue Dividend revenue Salary expense Interest expense Income tax expense Net income

$47,300 14,100 15,700 1,900 6,200 99,700 7,100 3,200 24,700 5,200 2,700 4,600

The cash account began the year with a balance of $32,500 and ended the year with a balance of $191,500.

Other relevant data gathered by the accountants: Accounts receivable decreased Inventory increased Prepaid expenses decreased Accounts payable increased Salary payable increased Accrued liabilities decreased Income tax payable increased Acquisition of capital assets Issuance of common shares Proceeds from sale of investments Collection of loan principal Payment of dividends Purchased equipment by signing a note payable Proceeds from sale of capital assets Proceeds from sale of repurchased shares

$12,600 7,800 2,300 19,400 1,400 4,900 700 42,000 75,000 29,000 25,200 18,000 25,000 26,700 25,000

33 .

Prepare the cash flow statement for the year ended December 31, 2020 under ASPE, using the indirect method and including a schedule of noncash investing and financing activities, if necessary.

Answer: Food Factory Corporation Cash Flow Statement For the Year Ended December 31, 2020 Cash flows from operating activities: Net income Add (subtract) items that affect net income and cash flows differently: Depreciation Loss on sale of investments Gain on sale of capital assets Change in accounts receivable Change in inventory Change in prepaid expenses Change in accounts payable Change in salary payable Change in accrued liabilities Change in income tax payable Net cash inflow from operating activities

$4,600

$14,100 1,900 (6,200) 12,600 (7,800) 2,300 19,400 1,400 (4,900) 700

Cash flows from investing activities: Acquisition of capital assets Proceeds from sale of investments Collections on loans Proceeds from sale of investments Net cash inflow from investing activities

33,500 $38,100

$(42,000) 29,000 25,200 26,700 38,900

Cash flows from financing activities: Issuance of common shares Payment of dividends Proceeds from sale of repurchased shares Net cash inflow from financing activities Net increase in cash Cash balance: January 1, 2019 Cash balance: December 31, 2020

$75,000 (18,000) 25,000 82,000 $159,000 32,500 $191,500

Noncash investing and financing activities: Purchased equipment by signing note Diff: 3 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 34 .

$25,000

51) In what way is free cash flow different from net cash flows as shown on a statement of cash flows?

Answer: The statement of cash flows shows net cash flows from operating, investing, and financing activities for a given period of time. One can give some merit to the statement in that it can help predict future cash flows for a company, given current and prior historical data. The statement is based on data found on the comparative balance sheet and income statement. Free cash flow is a calculation that is found by determining the amount of cash available from operations after paying for planned investments in plant, equipment. This amount, in theory, could be used for acquisitions or other expansion activities. Net cash flows show "where it came from and where it went" regarding a company's cash for a given period. Free cash flow is the residual amount left to a company after the bills have been paid and amounts for capital investment have been set aside. These two types of cash flows are not the same, and have a somewhat different use in financial analysis.

Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 52) Given the following information for Cat Castle Incorporated prepare their statement of cash flows for December 31, 2020 under ASPE. 2020 375,000 85,000 5,000 80,000 48,000

Cash Accounts receivable Interest receivable Inventory Prepaid Expenses Non-current - Note receivable 90,000 Property, plant and Equipment 325,000 (net of depreciation) Accounts payable 33,000 Accrued liabilities 45,000 Common Shares 825,000 Retained Earnings 105,000 Net income 50,000 Depreciation expense 2,000 Gain on sale of property 1,500

2019 250,000 75,000 6,000 95,000 10,000 125,000 330,000 20,000 56,000 755,000 60,000

35 .

Answer:

Cat Castle Incorporated Cash Flow Statement For the Year Ended December 31, 2020

Cash flows from operating activities: Net income Add (subtract) items that affect net income and cash flows differently: Deprecation $2,000 Gain on sale of capital assets (1,500) Change in accounts receivable (10,000) Change in interest receivable 1,000 Change in inventory 15,000 Change in prepaid expenses (38,000) Change in accounts payable 13,000 Change in accrued liabilities (11,000) Net cash inflow from operating activities

(29,500) $20,500

Cash flows from investing activities: Collections on Note Receivable Proceeds from sale of capital asset Net cash inflow from investing activities

39,500

$50,000

35,000 4,500

Cash flows from financing activities: Issuance of common shares $70,000 Payment of dividends (5,000) Net cash inflow from financing activities Net increase in cash $125,000 Cash balance: January 1, 2020 Cash balance: December 31, 2020 Diff: 3 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

36 .

65,000

250,000 $375,000

53) Given the following information for Rat Rack Incorporated prepare their statement of cash flows for December 31, 2020 under ASPE. 2020 2019 Cash 550,000 365,000 Accounts receivable 75,000 85,000 Inventory 35,000 62,000 Prepaid Expenses 22,000 5,000 Non-current - Note receivable 112,000 300,000 Property, plant and Equipment 430,000 460,000 (net of depreciation) Accounts payable 13,000 40,000 Accrued liabilities 12,000 83,000 Common Shares 934,000 914,000 Retained Earnings 265,000 240,000 Net income 50,000 Depreciation expense 30,000 Answer: Rat Rack Incorporated Cash Flow Statement For the Year Ended December 31, 2020 Cash flows from operating activities: Net income Add (subtract) items that affect net income and cash flows differently: Deprecation $30,000 Change in accounts receivable 10,000 Change in inventory 27,000 Change in prepaid expenses (17,000) Change in accounts payable (27,000) Change in accrued liabilities (71,000) Net cash inflow from operating activities

(48,000) $2,000

Cash flows from investing activities: Collections on Note Receivable Net cash inflow from investing activities

188,000

$50,000

188,000

37 .

Cash flows from financing activities: Issuance of common shares $20,000 Payment of dividends (25,000) Net cash inflow from financing activities Net increase in cash Cash balance: January 1, 2020 Cash balance: December 31, 2020 Diff: 3 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

(5,000) $185,000 365,000 $550,000

54) Given the following information calculate JetNew's free cash flow for 2020.

Net Income $965,000 Depreciation Expense 330,500 Increase in Accounts Receivables 85,700 Planned investment in property 860,000 Planned investment in equipment 350,000 Increase in Accounts Payable 9,200 Decrease in inventory 260,000 Increase in Accrued liabilities 75,000 Increase in Prepaid Expenses 32,000 Decrease in Long-Term Investments 140,000 Increase in Common Shares 65,000 Gain on sale of Land 43,000 Answer: Net Cash Flow from Operations: Net Income Depreciation Expense Increase in Accounts Receivables Increase in Accounts Payable Decrease in Inventory Increase in Accrued Liabilities Increase in Prepaid Expenses Gain on Sale of Land Net Cash Flow from Operations

$965,000 330,500 (85,700) 9,200 260,000 75,000 (32,000) (43,000)

514,000 $1,479,000

38 .

Less: planned investment in property planned investment in equipment

860,000 350,000

1,210,000

Free Cash Flow $269,000 Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 55) Given the following information calculate the cash flow from financing activities under ASPE for Rat Rack Corporation.

Net Income $965,000 Sale of previously repurchased shares 45,000 Depreciation Expense 330,500 Increase in Accounts Receivables 85,700 Decrease in Bonds Receivable 400,000 Planned investment in property 860,000 Planned investment in equipment 350,000 Increase in Accounts Payable 9,200 Decrease in inventory 260,000 Increase in Accrued Liabilities 75,000 Increase in Prepaid Expenses 32,000 Decrease in Long-Term Investments 140,000 Increase in Common Shares (excluding repurchase) 65,000 Gain on sale of Land 43,000 Purchase of Land 120,000 Increase in Bonds Payable 300,000 Dividends paid 120,000 Answer: Sales of previously repurchase shares $45,000 Sale of common shares 65,000 New bond payable 300,000 Dividends paid (120,000) Net Cash Flow from Financing Activities 290,000 Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

39 .

56) Identify three statement of cash flows user groups and identify what they would be using this statement for.

Answer: Managers — to assess if the cash flow from operations is enough to fund planned investment activities or if they need to raise additional funds.

Investors — aids in deciding whether or not to invest. The current statement of cash flows may provide hints on potential future dividends, expected share price trend, how an organization is growing, and if the company is issuing shares to fund operations or borrowing.

Creditors — aids in evaluating if an organization is likely to pay the interest on their debts or if the organization will have to make additional borrowings to repay their debt when due.

Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

40 .

57) You are reviewing the financial statements of three companies in the same industry.

Specifically, you are interested in the transactions surrounding capital assets during the past year.

The following information is available for the three companies. Compute the unknowns.

Sunlight Co. Photo Co. Synthesis Co. Beginning capital assets, net $850,500 $712,200 $488,300 of depreciation Ending capital assets, net of 960,000 706,800 284,400 depreciation Depreciation expense 65,200 49,300 (c) Gain (loss) on sale of capital 5,500 (b) (16,800) assets Costs of capital assets 230,600 128,000 55,600 acquired Proceeds from sale of capital (a) 72,500 184,900 assets Answer: a. $850,500 + $230,600 - $65,200 - $960,000 = $55,900 net assets sold $55,900 + $5,500 gain = $61,400 cash proceeds b. $712,200 + $128,000 - $49,300 - $706,800 = $84,100 net assets sold $84,100 - $72,500 cash received = $11,600 loss c. $184,900 + $16,800 = $201,700 net assets sold $488,300 + $55,600 - $201,700 - $284,400 = $57,800 depreciation expense Diff: 3 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

41 .

58) Omemee Company had the following transactions during the year: Net Loss Depreciation Increase in accounts receivable Decrease in inventories Increase in accounts payable Decrease in income taxes payable Decrease in wages payable Proceeds on Sale of Equipment Repayment of bonds Issuance of Common shares.

Proceeds on sale of land Gain on sale of land Payment of dividends.

($36,000) $28,000 $35,000 $14,500 $34,000 $6,700 $1,800 $380,000 $250,000 $100,000 $150,000 $20,000 $10,000

Determine the cash flows from operations under ASPE: Answer: = ($23,000) = ($36,000) + 28,000 - 35,000 + 14,500 + 34,000 - 6,700 - 1,800 - 20,000 Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

42 .

59) Omemee Company had the following transactions during the year: Net Loss Depreciation Increase in accounts receivable Decrease in inventories Increase in accounts payable Decrease in income taxes payable Decrease in wages payable Proceeds on Sale of Equipment Repayment of bonds Issuance of Common shares Proceeds on sale of land Gain on sale of land Payment of dividends

($36,000) $28,000 $35,000 $14,500 $34,000 $6,700 $1,800 $380,000 $250,000 $100,000 $150,000 $20,000 $10,000

Determine the cash from investing activities under ASPE: Answer: = $530,000 = $380,000 + $150,000 Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

43 .

60) Omemee Company had the following transactions during the year: Net Loss Depreciation Increase in accounts receivable Decrease in inventories Increase in accounts payable Decrease in income taxes payable Decrease in wages payable Proceeds on Sale of Equipment Repayment of bonds Issuance of Common shares Proceeds on sale of land Gain on sale of land Payment of dividends

($36,000) $28,000 $35,000 $14,500 $34,000 $6,700 $1,800 $380,000 $250,000 $100,000 $150,000 $20,000 $10,000

Determine the cash from financing activities under ASPE: Answer: = ($160,000) = ($250,000) + 100,000 - 10,000 Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 61) Minden Company purchased a piece of land in 2014 for $120,000. At the end of 2019 the land was appraised and valued at $200,000. In 2020, due to water quality issues Minden Company sold the land for $55,000. On its 2020 income statement and statement of cash flows how should the company record this sale transaction?

Answer: Income statement: = $65,000 loss = cost - proceeds of asset = $120,000 - $55,000 Statement of cash flows: 1) Add back $65,000 loss in cash flow from operations.

2) Add $55,000 to investing activities (sale of asset).

Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

44 .

62) Lindsay Limited had the following transactions during the year: Proceeds from the sale of land $100,000 Gain on the sale of land $50,000 Proceeds from the issue of common shares $800,000 What was the cash from investing activities?

Answer: Only the proceeds from the sale of land would be considered an investing activity.

Thus, the sale of land would increase cash from investing activities by $100,000.

The gain on the sale of land is not considered a cash flow.

Proceeds from the issuance of common shares would be a financing activity.

Diff: 2 Type: ES L.O.: 9-3 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 9.4 (A-1) Prepare a statement of cash flows using the direct method of determining cash flows from operating activities 1) Which of the following would appear on a direct method statement of cash flows?

A) Depreciation Expense B) loss on sale of assets C) increase in Accounts Receivable D) cash payments for inventory Answer: D Diff: 2 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

45 .

2) Fertilizer Incorporated reports an increase in Accounts Payable of $9,200 and an increase in inventory of $45,000 for the current year. Accounts Payable relates solely to the purchase of merchandise. Sales on account were $532,100 and cost of goods sold was $358,000. The total purchases of merchandise for the period were: A) $174,100 B) $313,000 C) $358,000 D) $403,000 Answer: D Explanation: $358,000 + 45,000 = $403,000 Diff: 3 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 3) During 2020, Toxic Release LLC paid a total of $64,000 in cash for insurance. Toxic Release's Prepaid Insurance account had a balance on January 1, 2020, of $8,000 and a balance on December 31, 2020, of $5,500. The amount of Insurance Expense to be reported on Toxic Release's income statement for the year ended December 31, 2020, is: A) $58,500 B) $66,500 C) $64,000 D) $61,500 Answer: B Explanation: $8,000 + 64,000 - 5,500 = $66,500 Diff: 3 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 4) Cash collected from customers can be computed by the following formula: A) ending accounts receivable plus beginning accounts receivable minus sales B) ending accounts receivable minus beginning accounts receivable plus sales C) beginning accounts receivable minus ending accounts receivable plus sales D) beginning accounts receivable minus ending accounts receivable minus sales Answer: C Diff: 3 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

46 .

5) Fertilizer Incorporated reports an increase in Accounts Payable of $9,200 and an increase in inventory of $45,000 for the current year. Accounts Payable relates solely to the purchase of merchandise. Sales on account were $532,100 and cost of goods sold was $358,000. The payments to suppliers for inventory during the period were: A) $393,800 B) $322,200 C) $412,200 D) $303,800 Answer: A Explanation: $358,000 + 45,000 - 9,200 = $393,800 Diff: 3 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 6) Given the following information for Rat Rack Corporation: cost of goods sold $35,500, sales $65,000, increase in accounts receivables $4,200. Their receipts from customers total would be: A) $60,800 B) $69,200 C) $33,700 D) $25,300 Answer: A Explanation: $65,000 - 4,200 = $60,800 Diff: 3 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 7) In 2020, Nutrient Company reported sales of $725,000 and cost of goods sold of $480,000.

During 2020, Nutrient's Inventory account increased $25,000 and its Accounts Payable account (which relates solely to the purchase of merchandise) decreased $18,000. Nutrient Company's payments to suppliers for inventory during 2020 were: A) $437,000 B) $523,000 C) $487,000 D) $473,000 Answer: B Explanation: $480,000 + 25,000 + 18,000 = $523,000 Diff: 3 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

47 .

8) Geographic Enterprise's Inventory account decreased $37,500 and its Accounts Payable account (which relates solely to the purchase of merchandise) decreased $13,760 during the year.

Geographic also reported sales of $856,000 and cost of goods sold of $597,600 during the same period. Geographic's payments to suppliers for inventory during the year were: A) $621,340 B) $573,860 C) $805,740 D) $648,860 Answer: B Explanation: $597,600 - 37,500 + 13,760 = $573,860 Diff: 3 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 9) Salary Expense on the income statement was $264,780 for the year ended December 31, 2020.

The Salary Payable account decreased $24,370 during the same period. The amount of cash payments to employees for the year ended December 31, 2020, is: A) $289,150 B) $264,780 C) $240,410 D) indeterminable from the information given Answer: A Explanation: $264,780 + 24,370 = $289,150 Diff: 2 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 10) The amounts in the Salaries Payable account for Ammonia Company were $14,500 and $16,000 on December 31, 2019, and December 31, 2020, respectively. Cash paid to employees for the years ended December 31, 2019, and December 31, 2020, were $255,000 and $280,000, respectively. Ammonia Company's Salary Expense for the year ended December 31, 2020, was: A) $253,500 B) $281,500 C) $278,500 D) $256,500 Answer: C Diff: 3 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

48 .

11) Nitrogen Company reported Insurance Expense for the year ended December 31, 2020, of $37,490. During the same period, the Prepaid Insurance account decreased $4,610. The payments for insurance during the year ended December 31, 2020, were: A) $32,880 B) $37,490 C) $42,100 D) $46,710 Answer: A Explanation: $37,490 -4,610 = $32,880 Diff: 3 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 12) On January 1, 2020, Prepaid Insurance had a balance of $6,700 and on December 31, 2020, a balance of $8,320. The income statement for the year reported Insurance Expense of $49,310.

Payments for insurance during the year amounted to: A) $49,310 B) $47,690 C) $50,930 D) $57,630 Answer: C Explanation: $8,320 - 6,700 + 49,310 = $50,930 Diff: 3 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 13) All of the following would appear on a direct method statement of cash flows except: A) cash payments for interest and taxes B) cash purchase of equipment C) cash receipts from customers D) net income Answer: D Diff: 2 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

49 .

14) Which of the following would not appear on a statement of cash flows prepared using the direct method?

A) cash receipt from repayment of a loan B) cash purchase of inventory C) depreciation expense D) cash payments for operating expenses Answer: C Diff: 2 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 15) Sustainability Enterprises uses the direct method when preparing its statement of cash flows.

Sustainability sold equipment with a carrying amount of $22,000 at a gain of $5,000. The amount to be reported on the statement of cash flows under "proceeds from the sale of capital assets" is: A) $27,000 B) $22,000 C) $17,000 D) $5,000 Answer: A Explanation: $22,000 + 5,000 = $27,000 Diff: 3 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 16) Governance Corporation uses the direct method when preparing its statement of cash flows.

Governance sold equipment with a carrying amount of $13,000 at a loss of $3,000. The amount to be reported on the statement of cash flows under "proceeds from the sale of capital assets" is: A) $16,000 B) $13,000 C) $10,000 D) $3,000 Answer: C Explanation: $13,000 - 3,000 = $10,000 Diff: 3 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

50 .

17) GRI Performance Enterprises uses the direct method when preparing its statement of cash flows. GRI Performance sold equipment with a carrying amount of $8,000 at a gain of $2,500.

The amount to be reported on the statement of cash flows in the operating activities section is: A) $0 B) ($2,500) C) $2,500 D) $10,500 Answer: A Explanation: Gains are not reported on the statement of cash flows operating activity using the direct method, they are reported using the indirect method.

Diff: 2 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 18) SHE Management Corporation had accounts receivable of $105,000 and $120,000 on January 1, 2020, and December 31, 2020, respectively. Sales on account in 2020 were $310,000.

The amount of collections o be reported on the statement of cash flows under the operating activities is: A) ($15,000) B) $15,000 C) $325,000 D) $295,000 Answer: D Explanation: $120,000 - 105,000 + 310,000 = $295,000 Diff: 2 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 19) Under ASPE all of the following would be reported in the financing activities section under the direct method statement of cash flows except: A) issuing a stock dividend B) paying a cash dividend C) issuing common shares D) repurchase of shares Answer: A Diff: 2 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

51 .

20) In 2020 Phosphate Aurora Inc. reported an increase in Accounts Receivable of $7,500 and cash collections on account of $430,000. Sales on account for the period were: A) $7,500 B) $437,500 C) $430,000 D) $422,500 Answer: B Explanation: $7,500 + 430,000 = $437,500 Diff: 2 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 21) Land Reclamation Industries began the year with $46,700 in Accounts Receivable and ended the year with $31,900 in Accounts Receivable. If sales for the year were $687,000, the cash collected from customers during the year amounted to: A) $655,100 B) $672,200 C) $701,800 D) $733,700 Answer: C Explanation: $46,700 + $687,000 - $31,900 = $701,800 Diff: 2 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 22) If the cash collections from customers amounted to $634,800 and the Accounts Receivable account decreased $19,400 during the same period, sales for the period were: A) $615,400 B) $634,800 C) $654,200 D) indeterminable from the information given Answer: A Explanation: $634,800 - 19,400 = $615,400 Diff: 3 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

52 .

23) Whitehurst Creek Shop reported interest revenue of $9,500 and its Interest Receivable account decreased $1,200 during the same period. Interest received for the period amounted to: A) $1,200 B) $10,700 C) $9,500 D) $8,300 Answer: B Explanation: $9,500 + 1,200 = $10,700 Diff: 2 Type: MC L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 24) Under the direct method, cash receipts from dividend revenue affect both the statement of cash flows and the income statement.

Answer: TRUE Diff: 2 Type: TF L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 25) Cost of Goods Sold and Inventory are the only two accounts needed to analyze the cash payments for inventory.

Answer: FALSE Explanation: Payments for inventory are computed by converting cost of goods sold to the cash basis. We use Cost of Goods Sold, Inventory, and Accounts Payable.

Diff: 2 Type: TF L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements 26) Cash collections from customers during the period can be computed as the ending balance in Accounts Receivable plus Sales during the period minus the beginning balance in Accounts Receivable.

Answer: FALSE Explanation: Computed as the beginning balance in Accounts Receivable plus Sales during the period minus the ending balance in Accounts Receivable.

Diff: 2 Type: TF L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

53 .

27) If Dividends Payable decreased during the period, then cash paid for dividends exceeded dividends declared during the current year.

Answer: TRUE Diff: 3 Type: TF L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

54 .

28) For each of the following items, identify the section of the cash flow statement where it would appear. Use (O) for operating activities, (I) for investing activities, (F) for financing activities, (NIF) for the schedule of noncash investing and financing activities, and (N) if the item does not appear anywhere on the cash flow statement. Assume the statement is prepared using the direct method under ASPE. ________ a. repurchase of shares ________ b. sale of land for cash ________ c. depreciation of machinery ________ d. conversion of bonds into common shares ________ e. net income ________ f. payment of cash dividends ________ g. accrual of interest expense ________ h. loss on sale of equipment ________ i. issuance of preferred shares for cash ________ j. purchase of stock as a long-term investment ________ k. distribution of a 10% stock dividend ________ l. sales on account ________ m. payment of income taxes ________ n. interest received on notes receivable ________ o. collection of accounts receivable Answer: a. F b. I c. O d. NIF e. O f. F g. N h. N i. F j. I k. N l. N m. O n. O o. O Diff: 2 Type: ES L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

55 .

29) Vegetable Inc. gathered the following data from its accounting records for the year ended December 31, 2020: Net income Increase in accounts payable Payments to suppliers Collections of accounts receivable Depreciation expense Payment of income taxes Cash sales Repurchase of shares Declaration of stock dividend Loss on sale of capital assets Issuance of bonds payable Acquisition of equipment by issuing non-current note payable Collection of dividend revenue Payment of salaries and wages Acquisition of land Payment of interest Interest received on investments

$ 75,000 25,600 172,500 201,700 16,900 23,500 115,900 50,000 70,000 8,900 600,000 60,000 4,500 101,200 54,500 4,800 1,300

Use the direct method to prepare the operating activities section of Vegetable Inc.'s 2020 cash flow statement under ASPE. Answer: Cash flows from operating activities: Receipts: Collections from customers $ 317,600 Dividends received 4,500 Interest received 1,300 Total cash receipts $ 323,400 Payments: To suppliers $172,500 To employees 101,200 For interest 4,800 For income taxes 23,500 Total cash payments 302,000 Net cash inflow from operating activities$ 21,400 Diff: 2 Type: ES L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

56 .

30) As the accountant at Soil Test Corporation, you are responsible for preparing the cash flow statement. You have decided to prepare the statement using the direct method and have gathered together the following data from the accounting records: Payments of non-current debt $220,000 Collections on accounts receivable 215,600 Acquisition of equipment by issuing non-current note payable 90,000 Interest revenue 15,600 Credit sales 350,600 Loan collections 48,200 Proceeds from sale of investments, not including $4,200 gain 38,200 Salary expense 105,700 Cash payments to purchase capital assets 72,000 Cost of goods sold 425,000 Collection of interest revenue 15,500 Payment of cash dividends 36,200 Income tax expense and payments 41,500 Proceeds from sale of capital assets, not including $7,200 loss 32,500 Cash receipt of dividend revenue 20,200 Payment of salaries 95,600 Depreciation expense 72,500 Cash sales 208,000 Proceeds from issuance of common shares 350,000 Loan to another company 50,000 Interest expense and payments 61,000 Bonds payable converted into common shares 250,000 Payments to suppliers 285,000 Cash balance: December 31, 2019 55,500 Cash balance: December 31, 2020 122,400 Prepare the cash flow statement for the year ended December 31, 2020 using the direct method under ASPE and including a schedule of noncash investing and financing activities, if necessary.

57 .

Answer:

Soil Test Corporation Cash Flow Statement For the Year Ended December 31, 2020

Cash flows from operating activities: Receipts: Collections from customers $423,600 Interest received 15,500 Dividends received 20,200 Total cash receipts Payments: To suppliers $285,000 To employees 95,600 For interest 61,000 For income taxes 41,500 Total cash payments Net cash outflow from operating activities Cash flows from investing activities: Loan collections $48,200 Proceeds from sale of investments 38,200 Purchase of capital assets (72,000) Proceeds from sale of capital assets 32,500 Loan to another company (50,000) Net cash outflow from investing activities Cash flows from financing activities: Payment of non-current debt $(220,000) Payment of cash dividends (36,200) Proceeds from issuing common shares 350,000 Net cash inflow from financing activities Net increase in cash Cash balance, December 31, 2019 Cash balance, December 31, 2020 Noncash investing and financing activities: Acquisition of equipment by issuing note Conversion of bonds into common shares Diff: 2 Type: ES L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

58 .

$459,300

483,100 $(23,800)

$(3,100)

$93,800 $66,900 55,500 $122,400 $90,000 250,000

31) The following selected data for Flower Bed Inc. for 2020 were gathered by its accountants, who are responsible for preparing the financial statements: Cost of goods sold Depreciation expense Other operating expenses Loss on sale of investments Gain on sale of capital assets Sales revenue Interest revenue received Dividend revenue received Salary expense Interest expense paid Income tax expense

$56,500 14,000 17,700 1,500 8,500 95,600 5,200 2,500 27,200 5,900 2,400

The cash account on January 1, 2020, had a balance of $15,000 and a balance of $208,500 on December 31, 2020.

Other data gathered by the accountants for 2020: Accounts receivable decreased $13,600 Inventory increased 6,800 Prepaid expenses decreased 2,700 Accounts payable increased 21,400 Salary payable increased 1,500 Accrued liabilities decreased 4,300 Income tax payable increased 800 Acquisition of capital assets 46,000 Issuance of common shares 80,000 Proceeds from sale of investments 35,000 Collection of loan principal 22,600 Payment of dividends 15,000 Proceeds from sale of capital assets 31,700 Proceeds from sale of repurchase of shares 45,000

59 .

Prepare the cash flow statement for the year ended December 31, 2020, using the direct method under ASPE. Answer: Flower Bed Inc. Cash Flow Statement For the Year Ended December 31, 2020 Cash flows from operating activities: Receipts: Collections from customers Interest received Dividends received Total cash receipts Payments: To suppliers To employees For interest For income taxes Total cash payments Net cash inflow from operating activities

$109,200 5,200 2,500 $116,900

$43,500 * 25,700 5,900 1,600 76,700 $40,200

Cash flows from investing activities: Acquisition of capital assets $(46,000) Proceeds from sale of investments 35,000 Collections on loans 22,600 Proceeds from sale of capital assets 31,700 Net cash inflow from investing activities

43,300

Cash flows from financing activities: Issuance of common shares $80,000 Payment of dividends (15,000) Proceeds from sale of repurchase of shares 45,000 Net cash inflow from financing activities 110,000 Net increase in cash $193,500 Cash balance: January 1, 2020 15,000 Cash balance: December 31, 2020 $208,500 *$56,500 + $6,800 - $2,700 - $21,400 + $4,300 = $43,500 Diff: 3 Type: ES L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

60 .

32) Selected data from three companies appear below:

Sales Cost of goods sold Increase (decrease) in inventory Increase (decrease) in accounts receivable Increase (decrease) in accounts payable

Ashpot Co. Potassium Co. Phosphate Co. $425,000 $325,000 $300,000 280,000 230,000 200,000 (40,000)

25,000

42,000

63,000

(20,000)

22,000

37,000

30,000

(16,000)

Determine the cash paid to suppliers for inventory during the year for each company. The Accounts payable account relates solely to the purchase of inventory.

Answer: Ashpot Company $280,000 - $40,000 - $37,000 = $203,000 Potassium Company $230,000 + $25,000 - $30,000 = $225,000 Phosphate Company $200,000 + $42,000 + $16,000 = $258,000 Diff: 2 Type: ES L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

61 .

62 .

33) The accountant for Soybean Products gathered the following information from the accounting records for the year ended December 31, 2020: Cash collections from customers $520,000 Cash payments to suppliers for inventory 350,000 Cash payments to employees 62,000 Cash payments for insurance 17,000 Increase in inventory 8,700 Decrease in salary payable 1,500 Increase in accounts receivable 42,800 Increase in accounts payable * 31,600 Decrease in prepaid insurance 2,000 *Relates solely to the purchase of inventory Calculate the following: a. Sales b. Cost of goods sold c. Salary expense d. Insurance expense Answer: a. $520,000 + $42,800 = $562,800 b. $350,000 + $31,600 - $8,700 = $372,900 c. $62,000 - $1,500 = $60,500 d. $17,000 + $2,000 = $19,000 Diff: 3 Type: ES L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

63 .

34) Nitrogen Inc. had the following events occur in 2020. Calculate the cash receipts or cash disbursements for each event. a. Taxes Payable on January 1 was $12,400 and on December 31 was $13,600. Income Tax Expense on the income statement was reported at $39,000. b. Cost of goods sold on the income statement was reported at $50,000. Accounts Payable increased $5,000 and Inventory decreased $7,000. c. Sales were reported on the income statement at $100,000. Accounts Receivable increased $5,700. d. Interest Revenue on the income statement was reported at $12,000. Interest Receivable decreased $3,600. e. Salary Expense on the income statement was reported at $55,000. Salary Payable increased $3,900.

Answer: a. $12,400 + $39,000 - $13,600 = $37,800 b. $50,000 - $7,000 - $5,000 = $38,000 c. $100,000 - $5,700 = $94,300 d. $12,000 + $3,600 = $15,600 e. $55,000 - $3,900 = $51,100 Diff: 3 Type: ES L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

64 .

35) The controller of the Rat Rack Corporation has provided you with the following information: Payments of non-current debt $130,000 Collections on accounts receivable 114,200 Interest revenue 6,600 Credit sales 265,600 Loan collections 125,200 Salary expense 140,700 Proceeds from sale of capital assets, not including $7,200 loss 33,500 Cash receipt of dividend revenue 20,200 Payment of salaries 99,600 Depreciation expense 55,500 Cash sales 325,000 Proceeds from issuance of common shares 450,000 Loan to another company 60,000 Interest expense and payments 41,000 Bonds payable converted into common shares 140,000 Payments to suppliers 255,000 Cash payments to purchase capital assets 62,000 Cost of goods sold 325,000 Collection of interest revenue 15,500 Acquisition of equipment by issuing non-current note payable 185,000 Payment of cash dividends 36,200 Income tax expense and payments 51,500 Cash balance: December 31, 2019 65,500 Cash balance: December 31, 2020 413,800 Prepare the cash flow statement for the year ended December 31, 2020 using the direct method under ASPE and including a schedule of noncash investing and financing activities, if necessary.

65 .

Answer:

Rat Rack Corporation Cash Flow Statement For the Year Ended December 31, 2020

Cash flows from operating activities: Receipts: Collections from customers $439,200 Interest received 15,500 Dividends received 20,200 Total cash receipts Payments: To suppliers $255,000 To employees 99,600 For interest 41,000 For income taxes 51,500 Total cash payments Net cash flow from operating activities Cash flows from investing activities: Loan collections $125,200 Purchase of capital assets (62,000) Proceeds from sale of capital assets 33,500 Loan to another company (60,000) Net cash flow from investing activities Cash flows from financing activities: Payment of non-current debt $(130,000) Payment of cash dividends (36,200) Proceeds from issuing common shares 450,000 Net cash inflow from financing activities Net increase in cash Cash balance, December 31, 2019 Cash balance, December 31, 2020 Noncash investing and financing activities: Acquisition of equipment by issuing note Conversion of bonds into common shares Diff: 2 Type: ES L.O.: 9A-1 CPA COMPETENCIES: Chapter 9 1.2.2 Evaluates treatment for routine transactions 1.3.1 Prepares financial statements

66 .

$474,900

447,100 $27,800

36,700

283,800 $348,300 65,500 $413,800 $185,000 140,000

Financial Accounting, Cdn. Ed., 7CE (Harrison/Horngren) Chapter 10 Financial Statement Analysis 10.1

Perform horizontal analysis

1) Horizontal analysis involves the study of: A) percentage changes in comparative financial statements B) percentage and/or dollar amount changes in various financial statement amounts from year to year C) the change in key financial statement ratios over a certain time frame or horizon D) the changes in individual financial statement amounts as a percentage of some related total Answer: A Diff: 1 Type: MC L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) The percentage change in any individual item shown on comparative financial statements is calculated by dividing the dollar amount of the change from the base period to the current period by: A) 100 B) the amount shown for the current period C) the average of the amounts shown for the base and the current periods D) the base-period amount Answer: D Diff: 2 Type: MC L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) The analysis of percentage changes in comparative statements is known as: A) economic value added analysis B) benchmarking analysis C) horizontal analysis D) vertical analysis Answer: C Diff: 2 Type: MC L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

1 .

4) The form of analysis that looks at trend percentages over a representative period is known as: A) trend analysis, which is considered a form of horizontal analysis B) trend analysis, which is considered a form of vertical analysis C) ratio analysis D) economic value added analysis Answer: A Diff: 1 Type: MC L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) A company reported $75,000 of income for 2018, $80,000 for 2019, and $90,000 for 2020.

The percentage change in net income from 2019 to 2020 was: A) 9.1% B) 11.1% C) 12.5% D) 16.7% Answer: C Explanation: $10,000/80,000 = .125 Diff: 2 Type: MC L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) A company reported $75,000 of income for 2018, $80,000 for 2019, and $90,000 for 2020.

The percentage change in net income from 2018 to 2019 was: A) 6.7% B) 6.25% C) 5.9% D) 10.7% Answer: A Explanation: $5,000/75,000 = .067 Diff: 2 Type: MC L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

2 .

7) Given the following data for total sales: 2017 2018 2019 2020

$50,000 $55,000 $56,000 $53,000

A table showing trend percentages for 2017-2020, respectively, using 2017 as the base year, would show: A) 100%, 110%, and 95% B) 100%, 110%, 112%, and 106% C) 100%, 10%, 2%, and (5%) D) 94%, 1.04%, 1.06%, and 100% Answer: B Explanation: $50,000/50,000, 55,000/50,000, 56,000/50,000, 53,000/50,000 Diff: 2 Type: MC L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Which of the following would be most likely to reveal that cost of goods sold is 125% of the amount shown for a base year?

A) trend analysis B) ratio analysis C) vertical analysis D) horizontal analysis Answer: A Diff: 2 Type: MC L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) When calculating trend percentages, all percentages shown are relative to: A) the current year B) the base year C) the immediately preceding year D) the average index calculated for all the years shown Answer: B Diff: 1 Type: MC L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

3 .

10) Which of the following would be most likely to reveal that cost of goods sold increased by $75,000 from 2019 to 2020?

A) horizontal analysis B) trend analysis C) vertical analysis D) ratio analysis Answer: A Diff: 2 Type: MC L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) Hamilton Corporation reports the following data: Net sales $ 370,000 Cost of goods sold 250,000 Gross margin $ 120,000 If net sales increases by 15%, and cost of goods sold increases by 20%, gross margin would: A) increase by 4.6% B) decrease by 4.6% C) decrease by 4.4% D) increase by 4.4% Answer: A Explanation: $370,000 x 1.15 = 425,500, 250,000 x 1.2 = 300,000, 425,500 - 300,000 = 125,500 5,500/120,000 = .046 Diff: 3 Type: MC L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

4 .

12) Given the following data: Net sales $100,000 Cost of goods sold 60,000 Gross margin $ 40,000 If net sales decreases by 10%, and cost of goods sold increases by 15%, gross margin would: A) increase by 40% B) decrease by 40% C) increase by 47.5% D) decrease by 47.5% Answer: D Explanation: $90,000 - 69,000 = 21,000, 19,000/40,000 = .475 Diff: 3 Type: MC L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) Most investors only need one year's worth of financial information to evaluate an organization.

Answer: FALSE Explanation: Most financial analysis covers periods of three to five years.

Diff: 1 Type: TF L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) Horizontal analysis is the study of percentage changes in financial statement balances from one year to the next.

Answer: TRUE Diff: 1 Type: TF L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) Most financial analyses cover trends of three, five, or even 10 years.

Answer: TRUE Diff: 1 Type: TF L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

5 .

16) It is generally considered more useful to know the absolute dollar amount of change in financial statement amounts from year to year than to know the percentage change.

Answer: FALSE Explanation: Considered alone this fact is not very informative, but the percentage change over time helps a lot.

Diff: 2 Type: TF L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 17) The analysis of trend percentages is a form of vertical analysis.

Answer: FALSE Explanation: Trend percentages are a form of horizontal analysis.

Diff: 2 Type: TF L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 18) The percentage change in financial statement balances is computed by dividing the dollar amount of the change from the base (earlier) period to the later period by the base-period amount.

Answer: TRUE Diff: 2 Type: TF L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

6 .

19) Prepare a horizontal analysis of the following comparative income statement for Westwind Corporation. Round percentage changes to the nearest one-tenth percent.

Westwind Corporation Comparative Income Statement For the Years Ended December 31, 2020 and 2019 2020 2019 Total revenue $1,400,000 $1,250,000 Expenses: Cost of goods sold $925,000 $830,000 Operating expenses 313,000 280,000 Interest expense 14,000 12,000 Income tax expense 48,300 38,000 Total expenses $1,300,300 $1,160,000 Net income $99,700 $90,000 Answer: Westwind Corporation Comparative Income Statement For the Years Ended December 31, 2020 and 2019 2020

2019

Amount

Percent

Total revenue $1,400,000 $1,250,000 $150,000 12.0% Expenses: Cost of goods sold $ 925,000 $ 830,000 95,000 11.4% Operating expenses 313,000 280,000 33,000 11.8% Interest expense 14,000 12,000 2,000 16.7% Income tax expense 48,300 38,000 10,300 27.1% Total expenses $1,300,300 $1,160,000 140,300 12.1% Net income $99,700 $90,000 9,700 10.8% Diff: 2 Type: ES L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

7 .

20) Data for the most recent four fiscal years of Burleigh Falls Corp. are given below: 2020 Net sales $83,000 Cost of goods sold 34,000 Gross margin $49,000 Operating expenses 26,000 Net income $23,000

2019 $75,000 32,000 $43,000 22,000 $21,000

2018 $67,000 30,000 $37,000 19,000 $18,000

2017 $60,000 26,000 $34,000 14,000 $20,000

Required: a. Prepare an analysis showing the trend percentages for the four-year period using 2017 as the base year. b. What do the trend percentages indicate regarding Burleigh Falls Corp.'s income statement data?

Answer: a.

2020 2019 2018 2017 Net sales 138% Cost of goods sold 131% Gross margin 144% Operating expenses 186% Net income 115%

125% 123% 126% 157% 105%

112% 115% 109% 136% 90%

100% 100% 100% 100% 100%

b. Net sales have been increasing at a fairly constant rate, which is a positive sign. Both cost of goods sold and gross margin have been increasing at rates that are in line with the increased sales. However, operating expenses have been increasing much faster than any other income statement item. This development is having a negative effect on net income, so further investigation is necessary.

Diff: 2 Type: ES L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

8 .

21) Following is a comparative balance sheet for Barking Shark International Corporation: Barking Shark International Corporation Balance Sheet December 31, 2020 and 2019 2020

2019

$ 10,000 7,000 30,000 37,000 4,000 $ 88,000

$ 5,000 10,000 23,000 35,000 3,000 $ 76,000

Property, plant, and equipment, net 33,300 Other assets 27,000 Total assets $148,300

35,000 22,500 $133,500

Current liabilities Short-term borrowings Accounts payable Total current liabilities

$ 28,400 20,000 $48,400

$ 13,900 22,500 $36,400

Non-current debt Total liabilities

37,500 $85,900

33,000 $69,400

Current assets Cash Short-term investments Accounts receivable, net Inventory Prepaid expenses Total current assets

Shareholders' equity Common shares $20,000 Retained earnings 42,400 Total shareholders' equity $62,400 Total liabilities and shareholders' equity $148,300

$20,000 44,100 $64,100 $133,500

Required: a. Calculate and show the percentages that would appear in a horizontal analysis for this balance sheet. b. Indicate any positive or negative developments from one year to the next.

9 .

Answer: Requirement a.

Barking Shark International Corporation Balance Sheet December 31, 2020 and 2019 % Increase 2019 (Decrease)

2020 Current assets Cash Short-term investments Accounts receivable, net Inventory Prepaid expenses Total current assets

$10,000 7,000 30,000 37,000 4,000 $88,000

$5,000 10,000 23,000 35,000 3,000 $76,000

100.0% (30.0%) 30.4% 5.7% 33.3% 15.8%

Property, plant, and equipment, net 33,300 35,000 Other assets 27,000 22,500 Total assets $148,300 $133,500

(4.9%) 20.0% 11.1%

Current liabilities Short-term borrowings Accounts payable Total current liabilities

$28,400 20,000 $48,400

$13,900 22,500 $36,400

104.3% (11.1%) 33.0%

Non-current debt Total liabilities

37,500 $85,900

33,000 $69,400

13.6% 23.8%

Shareholders' equity Common shares, no par $20,000 $20,000 Retained earnings 42,400 44,100 Total shareholders' equity $62,400 $64,100 Total liab. and shareholders' equity$148,300 $133,500

0.0% (3.9%) (2.7%) 11.1%

b. Students' answers will vary, but they should include some or all of the following: 1. While current assets have increased by 15.8%, current liabilities have increased by 33.0%.

Thus, the company's short-term liquidity position has declined.

2. At the same time that short-term liquidity has worsened, non-current debt has increased by 13.6%. Because this may have been used to help finance the increase in other assets, it is not necessarily a bad sign, but it should still be investigated.

10 .

3. Retained earnings have decreased by only 3.9%. When combined with the possibility of a worsening debt situation, the company appears to be going in the wrong direction.

The percentage changes only indicate areas of concern. They do not prove that good or bad things are happening, but only indicate things that should be investigated.

Diff: 3 Type: ES L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 22) Prepare a horizontal analysis for 2020 using the information provided by Rat Rack Incorporated below. What do these numbers tell you about Rat Rack's 2020 year? Using 2018 as the base year for Rat Rack prepare the trend percentages for the three year period 2018-2020.

What do these trend percentages indicate about Rat Rack?

2020 2019 2018 Net sales $98,000 $88,000 $89,000 Cost of goods sold 44,000 35,000 38,000 Gross margin $54,000 $53,000 $51,000 Operating expenses 32,000 31,000 30,000 Net income $22,000 $22,000 $21,000 Answer: Horizontal Analysis 2020 Net Sales 11.4% Cost of goods sold 25.7% Gross margin 1.9% Operating expenses 3.2% The increase in sales is small compared to the increase in cost of goods sold.

Trend Percentages 2020 2019 2018 Net Sales 110% 99% 100% COGS 116% 92% 100% Gross Margin 106% 104% 100% Operating exp 107% 103% 100% Net Income 105% 105% 100% b. Net sales have taken a slight dip in 2019 then rebounded in 2020. Cost of goods sold has experienced an increase rate higher than sales in 2020. The good news is gross margin has consistently increased over the three years. Operating expenses have been increasing each year which has contributed to the consistent rate of Net Income. In some years the rate of increase in operating expenses has surpassed that of sale or gross margin. Both cost of goods sold and operating expenses are the first areas where further investigation is likely needed provided sales show a more consistent growth pattern.

Diff: 2 Type: ES L.O.: 10-1 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11 .

10.2

Perform vertical analysis

1) When performing vertical analysis of an income statement, which of the following is usually used as the base?

A) gross sales B) net sales C) net income D) gross margin Answer: B Diff: 2 Type: MC L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) Expressing gross margin for 2020 as a percentage of net sales in 2020 is an example of: A) vertical analysis B) horizontal analysis C) ratio analysis D) economic value added Answer: A Diff: 1 Type: MC L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Vertical analysis looks at: A) percentage changes in the balances shown in comparative financial statements B) the change in key financial statement ratios over a specified period of time C) the dollar amount of the change in various financial statement amounts from year to year D) individual financial statement items expressed as a percentage of a base (which represents 100%) Answer: D Diff: 2 Type: MC L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

12 .

4) Assume you are using net sales as the base in vertical analysis. Cost of goods sold in 2019 is 67%, and is 70% in 2020. This would always indicate that: A) gross margin has declined B) cost of goods sold as a percentage of net sales has increased C) the dollar amount of cost of goods sold has increased D) gross margin has declined, cost of goods sold as a percentage of net sales has increased, and the dollar amount of cost of goods sold has increased Answer: B Diff: 3 Type: MC L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) If the assets shown on a balance sheet are subjected to vertical analysis (using total assets as the base), an increase in the figure for non-current assets from 40% to 55% would always mean that: A) total non-current assets have increased as a percentage of total assets B) the dollar amount of current assets has decreased C) total current assets have decreased as a percentage of total assets D) total non-current assets have increased as a percentage of total assets and total current assets have decreased as a percentage of total assets Answer: D Diff: 3 Type: MC L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) If a balance sheet is subjected to vertical analysis which shows that current assets (using total assets as the base) have decreased from 53% to 36%, this would always mean that: A) the dollar amount of current assets has decreased B) current assets have decreased as a percentage of total assets C) the dollar amount of total assets has decreased D) the dollar amount of total assets has increased Answer: B Diff: 3 Type: MC L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

13 .

7) Assume you are using total assets as the base in vertical analysis. Current assets in 2019 are 42%, and are 36% in 2020. This would always indicate that: A) the current ratio has decreased B) the dollar amount of current assets has decreased C) total non-current assets have increased as a percentage of total assets D) the dollar amount of non-current assets has increased Answer: C Diff: 3 Type: MC L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Vertical analysis could be used to determine what is happening to cost of goods sold from one year to the next.

Answer: FALSE Explanation: Vertical analysis shows the relationship of a financial statement item to its base, which is the 100% figure.

Diff: 2 Type: TF L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) When performing vertical analysis of an income statement, net income is usually used as the base.

Answer: FALSE Explanation: For the income statement, total revenue (sales) is usually the base.

Diff: 2 Type: TF L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) Vertical analysis highlights changes in an item on the financial statements over time.

Answer: FALSE Explanation: Vertical analysis shows the relationship of a financial statement item to its base, which is the 100% figure.

Diff: 1 Type: TF L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

14 .

11) When performing vertical analysis, each financial statement item is shown as a percentage of the base amount.

Answer: TRUE Diff: 1 Type: TF L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 12) When performing vertical analysis on a balance sheet, the current liabilities are compared typically to total liabilities.

Answer: FALSE Explanation: Total assets is the base for the balance sheet.

Diff: 1 Type: TF L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) When performing vertical analysis on a balance sheet, share capital is calculated as a percentage of total shareholders' equity.

Answer: FALSE Explanation: Total assets is the base for the balance sheet.

Diff: 1 Type: TF L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) When performing vertical analysis on a balance sheet, non-current debt is calculated as a percentage of total liabilities and shareholders' equity.

Answer: TRUE Diff: 1 Type: TF L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 15) When performing vertical analysis on a balance sheet, cash is compared to the total assets.

Answer: TRUE Diff: 1 Type: TF L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

15 .

16) When performing vertical analysis on a balance, accounts receivable is calculated as a percentage of total assets.

Answer: TRUE Diff: 1 Type: TF L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 17) Prepare a vertical analysis for Young's Point Corporation's balance sheet to determine the component percentages of its assets, liabilities, and shareholders' equity. Round percentages to the nearest one-tenth percent.

Young's Point Corporation Balance Sheet December 31, 2020 Assets Total current assets $ 320,000 Long-term investments 100,000 Property, plant, and equipment, net 855,000 Total assets $1,275,000 Liabilities Total current liabilities Non-current debt Total liabilities

$210,000 480,000 $690,000

Shareholders' equity Total shareholders' equity $585,000 Total liabilities and shareholders' equity$1,275,000

16 .

Answer:

Young's Point Corporation Balance Sheet December 31, 2020 Percent

Assets Total current assets Long-term investments Property, plant, and equipment, net Total assets Liabilities Total current liabilities Non-current debt Total liabilities

$ 320,000 100,000 855,000 $1,275,000

25.1% 7.8% 67.1% 100.0%

$210,000 480,000 $690,000

16.5% 37.6% 54.1%

Shareholders' equity Total shareholders' equity $585,000 45.9% Total liabilities and shareholders' equity $1,275,000 100.0% Diff: 2 Type: ES L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

17 .

18) Prepare vertical analysis calculations by filling in the far right column of the following balance sheet with the appropriate percentages.

Treetops Corporation Balance Sheet December 31, 2020 Percent Current assets Cash Short-term investments Accounts receivable, net Inventory Prepaid expenses Total current assets

$10,000 7,000 30,000 37,000 4,000 $ 88,000

Property, plant, and equipment, net Other assets Total assets

33,300 37,000 $158,300

Current liabilities Short-term borrowings Accounts payable Total current liabilities

$ 28,400 20,000 $ 48,400

Non-current debt Total liabilities

37,500 $ 85,900

Shareholders' equity Common shares Retained earnings Total shareholders' equity Total liabilities and shareholders' equity

$20,000 52,400 $72,400 $158,300

18 .

Answer:

Treetops Corporation Balance Sheet December 31, 2020 Percent

Current assets Cash Short-term investments Accounts receivable, net Inventory Prepaid expenses Total current assets

$ 10,000 7,000 30,000 37,000 4,000 $ 88,000

6.3% 4.4% 19.0% 23.4% 2.5% 55.6%

Property, plant, and equipment, net Other assets Total assets

33,300 37,000 $158,300

21.0% 23.4% 100.0%

Current liabilities Short-term borrowings Accounts payable Total current liabilities

$ 28,400 20,000 $ 48,400

18.0% * 12.6% 30.6%

Non-current debt Total liabilities

37,500 $ 85,900

23.7% 54.3%

Shareholders' equity Common shares $20,000 12.6% Retained earnings 52,400 33.1% Total shareholder' equity $72,400 45.7% Total liabilities and shareholders' equity $158,300 100.0% * rounded up Diff: 2 Type: ES L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

19 .

19) Following is the income statement for Lovesick Lake Group Inc., for the year ended December 31, 2020: Lovesick Lake Group Inc. Income Statement For the Year Ended December 31, 2020 Net sales Expenses: Cost of goods sold Selling expenses General expenses Interest expense Income tax expense Total expenses Net income

$3,470,000 $2,082,000 105,000 291,000 10,000 265,000 2,753,000 $ 717,000

Required: a. Prepare a vertical analysis of the income statement showing appropriate percentages for each item listed above. Round percentages to one-tenth percent. b. What additional information would you need to determine whether these percentages are good or bad?

Answer: a.

Lovesick Lake Inc. Income Statement For the Year Ended December 31, 2020 Amount Net sales $3,470,000 Expenses: Cost of goods sold 2,082,000 Selling expenses 105,000 General expenses 291,000 Interest expense 10,000 Income tax expense 265,000 Total expenses $2,753,000 Net income $ 717,000

Percent 100.0% 60.0% 3.0% 8.4% 0.3% 7.6% 79.3% 20.7%

b. To help determine whether these percentages are good or bad, the analyst would need to know: ∙ industry averages ∙ what the change in each percentage has been over some relevant period of time Diff: 2 Type: ES L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 20 .

20) Prepare vertical analysis calculations by filling in the far right column of the following balance sheet with the appropriate percentages.

Rat Rack Corporation Balance Sheet December 31, 2020 Percent Current assets Cash Accounts receivable, net Inventory Prepaid expenses Total current assets

$35,000 42,000 61,000 7,000 $ 145,000

Property, plant, and equipment, net Other assets Total assets Current liabilities Short-term borrowings Accounts payable Total current liabilities

45,700 20,000 $210,700

Non-current debt Total liabilities

50,250 $ 97,550

Shareholders' equity Common shares Retained earnings Total shareholders' equity Total liabilities and shareholders' equity

$100,000 13,150 $113,150 $210,700

$ 29,300 18,000 $ 47,300

21 .

Answer:

Rat Rack Corporation Balance Sheet December 31, 2020 Percent

Current assets Cash Accounts receivable, net Inventory Prepaid expenses Total current assets

$35,000 42,000 61,000 7,000 $ 145,000

16.9% 19.9% 29.0% 3.3% 68.8%

Property, plant, and equipment, net Other assets Total assets Current liabilities Short-term borrowings Accounts payable Total current liabilities

45,700 20,000 $210,700

21.7% 9.5% 100.0%

$ 29,300 18,000 $ 47,300

13.9% 8.5% 22.4%

Non-current debt Total liabilities

50,250 $ 97,550

23.8% 46.3%

Shareholders' equity Common shares $100,000 47.5% Retained earnings 13,150 6.2% Total shareholders' equity $113,150 53.7% Total liabilities and shareholders' equity $210,700 100.0% Diff: 2 Type: ES L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

22 .

21)

Snowy Lane Inc. Statement of Earnings For the Year Ended December 31, 2020

Net sales Expenses: Cost of goods sold Selling expenses General expenses Interest expense Income tax expense Total expenses Net income

$4,880,000 $3,250,000 270,000 145,000 8,900 230,000 3,903,900 $ 976,100

Required: a. Prepare a vertical analysis of the Statement of Earnings showing appropriate percentages for each item listed above. Round percentages to one-tenth percent. b. What additional information would you need to determine whether these percentages are good or bad?

Answer: a.

Snowy Lane Inc. Statement of Earnings For the Year Ended December 31, 2020 Net sales Expenses: Cost of goods sold Selling expenses General expenses Interest expense Income tax expense Total expenses Net income

$4,880,000

100.0%

$3,250,000 270,000 145,000 8,900 230,000 3,903,900 $976,100

66.6% 5.5% 3.0% 0.2% 4.7% 80% 20%

b. ∙ industry averages ∙ what the change in each percentage has been over some relevant period of time Diff: 2 Type: ES L.O.: 10-2 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

23 .

10.3

Prepare common-size financial statements

1) Of the items listed below, the one most helpful in the comparison of different size companies is: A) horizontal analysis B) comparison of their net incomes C) preparation of common-size financial statements D) comparison of their working capital balances Answer: C Diff: 2 Type: MC L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) Common-size financial statements represent a form of: A) ratio analysis B) vertical analysis C) trend analysis D) horizontal analysis Answer: B Diff: 2 Type: MC L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) Which of the following would be most likely to reveal that net income represented 7% of total net sales in 2020, but only 4% in 2019?

A) common-size financial statements B) horizontal analysis C) trend analysis D) ratio analysis Answer: A Diff: 3 Type: MC L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

24 .

4) Benchmarking is the process of comparing a company to a standard set by one or more other companies, with a view toward improvement.

Answer: TRUE Diff: 2 Type: TF L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Common-size statements aids the comparison of different companies because their amounts are stated in percentages.

Answer: TRUE Diff: 1 Type: TF L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 6) Common-size financial statements may identify the need for corrective action.

Answer: TRUE Diff: 2 Type: TF L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 7) Benchmarking is the practice of comparing a company to a standard set by other companies with similar characteristics.

Answer: TRUE Diff: 2 Type: TF L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Benchmarking involves comparing a company's results against a key competitor.

Answer: TRUE Diff: 2 Type: TF L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

25 .

9) A common-size income statement reports each item as a percentage of the previous year's figure.

Answer: FALSE Explanation: On common-size income statements each item is expressed as a percentage of the net sales amount.

Diff: 2 Type: TF L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) A common-size statement aids in comparing different companies as their amounts are stated in percentages of the total base rather than numbers.

Answer: TRUE Diff: 2 Type: TF L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 11) Common-size income statements include the relation of each item on the statement of earnings to net sales.

Answer: TRUE Diff: 2 Type: TF L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

26 .

12) Use the following data to prepare a common-size comparative income statement for Old Mill Corporation on December 31, 2020. Round percentages to one-tenth percent.

Old Mill Corporation Comparative Income Statement For the Years Ended December 31, 2020 and 2019 2020 2019 Net sales $1,400,000 $1,200,000 Expenses: Cost of goods sold $900,000 $780,000 Selling and general expenses 250,000 220,000 Interest expense 55,000 52,000 Income tax expense 64,000 48,000 Total expenses $1,269,000 $1,100,000 Net income $131,000 $100,000 Answer: Old Mill Corporation Common-Size Comparative Income Statement For the Years Ended December 31, 2020 and 2019 2020 Net sales 100.0% Expenses: Cost of goods sold 64.3% Selling and general expenses 17.9% Interest expense 3.9% Income tax expense 4.6% Total expenses 90.6% * Net income 9.4%

2019 100.0% 65.0% 18.3% 4.3% 4.0% 91.7% * 8.3%

* Percentages adjusted due to rounding.

Diff: 2 Type: ES L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

27 .

13) Horizontal analysis and vertical analysis, including the preparation of common-size financial statements, are important analytical techniques used to evaluate the strength of published financial statements.

Required: a. Define: 1. horizontal analysis 2. vertical analysis 3. common-size financial statements b. How is each of these techniques helpful in the analysis of financial statements?

Answer: a.

1. Horizontal analysis involves the presentation of the percentage change in reported amounts from year to year. Sometimes the dollar amount of a change and the percentage change are reported together.

2. Vertical analysis involves the presentation of financial statements along with a column showing each item as a percentage of some 100% figure. On the income statement, this 100% figure is generally net sales. On the balance sheet, it is usually total assets or total liabilities plus shareholders' equity.

3. Common-size financial statements represent a form of vertical analysis. They are financial statements prepared reporting only the percentage of each item compared to some 100% figure. b. The dollar amounts of changes occurring from year to year are important to know, but the calculation of the percentage change improves our ability to use the dollar amounts for analysis.

For example, if sales, cost of goods sold, and gross margin have all increased over a three-year period, presentation of the percentage change for each item helps determine whether each of these items is increasing at approximately the same rate.

Likewise, presentation of each financial statement item as a percentage of a total helps determine how relationships change from year to year. It also facilitates comparison with other companies or with industry averages.

Diff: 2 Type: ES L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

28 .

14)

Snowy Lane Inc. Comparative Income Statement For the Years Ended December 31, 2020 and 2019

Net sales Expenses: Cost of goods sold Selling and general expenses Interest expense Income tax expense Total expenses Net income

2020 $3,500,000

2019 $2,200,000

$1,200,000 350,000 42,000 337,000 $1,929,000 $1,571,000

$680,000 300,000 35,000 270,000 $1,285,000 $915,000

Prepare a common-size comparative income statement for Snowy Lake Incorporated on December 31, 2019 and 2020. Note: round percentages to one-tenth percent.

Answer: Snowy Lane Inc. Comparative Income Statement For the Years Ended December 31, 2020 and 2019 2020 100.0%

2019 100.0%

Net sales Expenses: Cost of goods sold 34.3% 30.9% Selling and general expenses 10.0% 13.6% Interest expense 1.2% 1.6% Income tax expense 9.6% 12.3% Total expenses 55.1% 58.4% Net income 44.9% 41.6% Diff: 2 Type: ES L.O.: 10-3 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

29 .

10.4

Analyze the statement of cash flows

1) Analyzing the cash flow statement may help analysts determine the financial health of a company. Which of the following signs below is not an indicator of a financially healthy company?

A) The company's operations are a major source (not a use) of cash.

B) The company's operations are a major use (not a source) of cash.

C) The company's investing activities include more purchases than sales of non-current assets.

D) The company's financing activities are not dominated by borrowing.

Answer: B Diff: 2 Type: MC L.O.: 10-4 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) On a statement of cash flows of a healthy company, net income would ordinarily be: A) less than depreciation expense B) more than depreciation expense C) greater than net cash provided by operating activities D) less than net cash provided by operating activities Answer: D Diff: 2 Type: MC L.O.: 10-4 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 3) On a statement of cash flows, which of the following is a sign of a healthy company?

A) Investing activities include more sales of long-term assets than purchases.

B) Financing activities are dominated by borrowing.

C) Operating activities are the major source of cash.

D) Net cash provided by operating activities is less than net income.

Answer: C Diff: 2 Type: MC L.O.: 10-4 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

30 .

4) A company reports the following information from the statement of cash flows: Net cash provided by operating activities Net income Net cash provided by investing activities Net cash used by financing activities

$50 million 20 million 400 million (30 million)

Which line item provides a signal that the company may have cash flow problems?

A) net cash provided by operating activities B) net income C) net cash provided by investing activities D) net cash used by financing activities Answer: C Explanation: Investing activities result in a large cash inflow which indicates that the company is selling long-term plant assets, which is a negative sign. The company should be investing in the future by purchasing long-term plant assets.

Diff: 2 Type: MC L.O.: 10-4 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 5) Analysts find the cash flow statement more helpful for spotting weakness in a company than for gauging success.

Answer: TRUE Diff: 2 Type: TF L.O.: 10-4 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

31 .

6) Discuss any strengths and/or weaknesses disclosed by the following cash flow statement: Apsley Corporation Cash Flow Statement For the Year Ended December 31, 2020 Operating activities: Income from operations Add (subtract) non-cash items: Depreciation Net reduction in current assets other than cash Net reduction in current liabilities Net cash inflow from operating activities

$ 27,500 $ 13,400 5,300 (4,900)

Investing activities: Purchase of equipment $(85,000) Net cash outflow from investing activities

13,800 $ 41,300

$(85,000)

Financing activities: Issuance of bonds payable $120,000 Payment of dividends (40,000) Net cash inflow from financing activities $ 80,000 Increase in cash $ 36,300 Answer: 1. Successful companies generate the greatest percentage of their cash from operating activities.

This company had to borrow $120,000 and only generated $41,300 from operations.

2. The company borrowed $120,000 by issuing bonds payable, yet it only invested $85,000 in equipment. This may indicate future expansion plans, or it may indicate the company is borrowing to meet current operating needs. Given that operations only generated $41,300, the company may have trouble paying off the bonds when they mature.

3. The company paid out almost all of its cash from operations in dividends, in spite of the fact that it had to purchase $85,000 of equipment during the year. This was probably not wise.

Diff: 3 Type: ES L.O.: 10-4 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

32 .

7) Identify three cash flow signs of a healthy company.

Answer: The major source of cash is operations.

Investing activities show more purchases rather than sales of capital assets.

Financing activities are not dominated by borrowing.

Diff: 3 Type: ES L.O.: 10-4 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10.5

Use ratios to make business decisions

1) The current ratio is calculated as: A) total assets / total liabilities B) current assets / total liabilities C) current assets × current liabilities D) current assets / current liabilities Answer: D Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 2) Assume a company's current ratio is less than one. If the company pays current liabilities with cash, the new current ratio will: A) increase B) decrease C) remain the same D) cannot be determined with the information given Answer: B Diff: 3 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

33 .

3) Which of the following statements about current ratios is most appropriate?

A) The determination of whether a current ratio is acceptable is best made by reference to industry norms.

B) A current ratio less than 1.5 is unacceptable.

C) A current ratio greater than 1.0 is excellent.

D) The determination of whether a current ratio is acceptable is best made by reference to industry norms, a current ratio less than 1.5 is unacceptable and a current ratio greater than 1.0 is excellent.

Answer: A Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

34 .

4) The following data represent selected information from the comparative income statement and balance sheet for Hot Rolled Corporation for the years ended December 31, 2020 and 2019:

Cash Net accounts receivable Inventory Prepaid expenses Total current assets Total non-current assets Total current liabilities Total non-current liabilities Common shares Retained earnings Net credit sales Cost of goods sold Gross margin Income from operations Interest expense Net income

2020 $ 10,000 30,000 43,000 5,000 88,000 112,000 70,000 40,000 60,000 30,000 370,000 150,000 220,000 95,000 8,000 70,000

2019 $ 15,000 25,000 40,000 7,000 87,000 114,000 60,000 45,000 60,000 36,000 333,000 160,000 173,000 87,000 8,000 57,000

• 10,000 shares of common shares have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2019, and they were selling for $91.50 on December 31, 2020.

Refer to the table above. The current ratio for Hot Rolled Corporation on December 31, 2020, was: A) 0.80 B) 0.67 C) 1.45 D) 1.26 Answer: D Explanation: $88,000/70,000 = 1.26 Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

35 .

5) The following data represent selected information from the comparative income statement and balance sheet for Hot Rolled Corporation for the years ended December 31, 2020 and 2019:

Cash Net accounts receivable Inventory Prepaid expenses Total current assets Total non-current assets Total current liabilities Total non-current liabilities Common shares Retained earnings Net credit sales Cost of goods sold Gross margin Income from operations Interest expense Net income

2020 $ 10,000 30,000 43,000 5,000 88,000 112,000 70,000 40,000 60,000 30,000 370,000 150,000 220,000 95,000 8,000 70,000

2019 $ 15,000 25,000 40,000 7,000 87,000 114,000 60,000 45,000 60,000 36,000 333,000 160,000 173,000 87,000 8,000 57,000

•10,000 shares of common shares have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2019, and they were selling for $91.50 on December 31, 2020.

Refer to the table above. The acid-test ratio for Hot Rolled Corporation on December 31, 2020 as: A) 0.67 B) 0.57 C) 1.26 D) 1.45 Answer: B Explanation: $40,000/70,000 = 0.57 Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

36 .

6) The following data represent selected information from the comparative income statement and balance sheet for Hot Rolled Corporation for the years ended December 31, 2020 and 2019:

Cash Net accounts receivable Inventory Prepaid expenses Total current assets Total non-current assets Total current liabilities Total non-current liabilities Common shares Retained earnings Net credit sales Cost of goods sold Gross margin Income from operations Interest expense Net income

2020 $ 10,000 30,000 43,000 5,000 88,000 112,000 70,000 40,000 60,000 30,000 370,000 150,000 220,000 95,000 8,000 70,000

2019 $ 15,000 25,000 40,000 7,000 87,000 114,000 60,000 45,000 60,000 36,000 333,000 160,000 173,000 87,000 8,000 57,000

•10,000 shares of common shares have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2019, and they were selling for $91.50 on December 31, 2020.

Refer to the table above. The inventory turnover for Hot Rolled Corporation for the year ended December 31, 2020, was: A) 4.00 B) 3.86 C) 3.61 D) 3.49 Answer: C Explanation: $150,000/(43,000 + 40,000 )/2 = 3.61 Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

37 .

7) Accounts receivable turnover is calculated as: A) total cost of goods sold / 365 days B) total net credit sales / average net accounts receivable C) average net accounts receivable / 365 days D) total net credit sales / cost of goods sold Answer: B Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 8) Working capital is defined as: A) current liabilities - current assets B) current assets - current liabilities C) total assets - total liabilities D) current assets + current liabilities Answer: B Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 9) Inventory turnover is calculated as: A) average inventory for the period / cost of goods sold B) cost of goods sold / average inventory for the period C) gross margin for the period / average inventory for the period D) average inventory for the period / gross margin for the period Answer: B Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 10) The times-interest-earned ratio is calculated as: A) income from operations / interest expense B) net income / interest expense C) net income after taxes + interest expense/interest expense D) income from operations - interest expense/interest expense Answer: A Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 38 .

11) The following data represent selected information from the comparative income statement and balance sheet for Hot Rolled Corporation for the years ended December 31, 2020 and 2019:

Cash Net accounts receivable Inventory Prepaid expenses Total current assets Total non-current assets Total current liabilities Total non-current liabilities Common shares Retained earnings Net credit sales Cost of goods sold Gross margin Income from operations Interest expense Net income

2020 $ 10,000 30,000 43,000 5,000 88,000 112,000 70,000 40,000 60,000 30,000 370,000 150,000 220,000 95,000 8,000 70,000

2019 $ 15,000 25,000 40,000 7,000 87,000 114,000 60,000 45,000 60,000 36,000 333,000 160,000 173,000 87,000 8,000 57,000

•10,000 shares of common shares have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2019, and they were selling for $91.50 on December 31, 2020.

Refer to the table above. The accounts receivable turnover for Hot Rolled Corporation for the year ended December 31, 2020, was: A) 13.45 B) 13.32 C) 12.33 D) 12.11 Answer: A Explanation: $370,000/(30,000 + 25,000)/2 = 13.45 Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

39 .

12) If all else is held equal, an increase in the current ratio of a company is generally considered to be: A) an indication that current assets have decreased B) an indication that current liabilities have increased C) an indication that the company will have increased difficulty meeting short-term obligations D) an indication that the company will be better able to meet short-term debt obligations Answer: D Diff: 1 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 13) The rate of return on net sales is calculated as: A) gross margin / net sales B) net income / net sales C) operating income / net sales D) dividends paid during the year / net sales Answer: B Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 14) Trent Corporation has total current assets equal to $50,000 and working capital of $20,000.

Fleming Company has the same amount of working capital, but it has total current assets of $300,000. The company with the better working capital position is: A) Fleming Company B) Trent Corporation C) They both have equally good working capital positions.

D) indeterminable with the information given Answer: B Diff: 3 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

40 .

15) Which of the following ratios measures profitability?

A) rate of return on total assets B) times-interest-earned ratio C) inventory turnover D) book value per share of common shares Answer: A Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 16) A very high accounts receivable turnover would most likely indicate that: A) net credit sales for the year have been understated B) policies for extending credit to customers are too tight C) accounts receivable balances have been overstated D) the company is unsuccessful in its efforts to collect cash from customers Answer: B Diff: 3 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 17) Which of the following statements about inventory turnover is most appropriate?

A) Companies generally strive to have the highest possible inventory turnover ratio.

B) A high ratio indicates the company is having trouble selling its inventory.

C) The most profitable turnover ratio may not necessarily be the highest.

D) A low ratio generally means the company is not keeping enough inventory on hand.

Answer: C Diff: 3 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

41 .

18) Yukon Company has total current liabilities equal to $600,000 and working capital of $30,000. North Company has the same amount of working capital, but it has total current liabilities of $40,000. The company with the better working capital position is: A) North Company B) Yukon Company C) They both have exactly the same working capital position.

D) indeterminable with the information given Answer: A Diff: 3 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 19) From the list below, select the ratio(s) that help in the analysis of working capital: A) current ratio B) quick ratio C) debt ratio D) current ratio and quick ratio Answer: D Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 20) Which of the following is a measure of a company's ability to meet short-term obligations?

A) working capital B) book value per share of common shares C) accounts receivable turnover D) debt ratio Answer: A Diff: 1 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

42 .

21) Assume a company has a current ratio of 1.5 and working capital equal to $25,000. If the company's current liabilities are equal to $50,000, its total current assets are: A) $7,500 B) $25,000 C) $75,000 D) $37,500 Answer: C Explanation: $25,000 + 50,000 = $75,000 Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 22) Total revenues and net income for 2020 for Tiger-Cat Corporation is $3,000,000 and $200,000, respectively. Tiger-Cat Corporation has had 400,000 common shares of stock outstanding for all of 2020. The selling price of Tiger-Cat Corporation common shares on December 31, 2020, is $15. Earnings per share for 2020 is: A) $30.00 B) $7.50 C) $7.00 D) $0.50 Answer: D Explanation: $200,000/400,000 = $0.50 Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 23) The debt ratio is an indicator of a company's: A) relationship between current liabilities and current assets B) relationship between debt and interest expense C) relationship between interest expense and income D) percentage of assets financed with debt Answer: D Diff: 1 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

43 .

24) The following data represent selected information from the comparative income statement and balance sheet for Hot Rolled Corporation for the years ended December 31, 2020 and 2019:

Cash Net accounts receivable Inventory Prepaid expenses Total current assets Total non-current assets Total current liabilities Total non-current liabilities Common shares Retained earnings Net credit sales Cost of goods sold Gross margin Income from operations Interest expense Net income

2020 $ 10,000 30,000 43,000 5,000 88,000 112,000 70,000 40,000 60,000 30,000 370,000 150,000 220,000 95,000 8,000 70,000

2019 $ 15,000 25,000 40,000 7,000 87,000 114,000 60,000 45,000 60,000 36,000 333,000 160,000 173,000 87,000 8,000 57,000

•10,000 shares of common shares have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2019, and they were selling for $91.50 on December 31, 2020.

Refer to the table above. The debt ratio for Hot Rolled Corporation on December 31, 2020, was: A) 87 B) 1.82 C) 0.55 D) 0.54 Answer: C Explanation: $110,000/200,000 = 0.55 Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

44 .

25) The following data represent selected information from the comparative income statement and balance sheet for Hot Rolled Corporation for the years ended December 31, 2020 and 2019:

Cash Net accounts receivable Inventory Prepaid expenses Total current assets Total non-current assets Total current liabilities Total non-current liabilities Common shares Retained earnings Net credit sales Cost of goods sold Gross margin Income from operations Interest expense Net income

2020 $ 10,000 30,000 43,000 5,000 88,000 112,000 70,000 40,000 60,000 30,000 370,000 150,000 220,000 95,000 8,000 70,000

2019 $ 15,000 25,000 40,000 7,000 87,000 114,000 60,000 45,000 60,000 36,000 333,000 160,000 173,000 87,000 8,000 57,000

•10,000 shares of common shares have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2020, and they were selling for $91.50 on December 31, 2020.

Refer to the table above. Hot Rolled Corporation's times-interest-earned ratio for the year ended December 31, 2020, was: A) 22.75 B) 11.88 C) 11.38 D) 10.88 Answer: B Explanation: $95,000/8,000 = 11.88 Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

45 .

26) The following data represent selected information from the comparative income statement and balance sheet for Hot Rolled Corporation for the years ended December 31, 2020 and 2019:

Cash Net accounts receivable Inventory Prepaid expenses Total current assets Total non-current assets Total current liabilities Total non-current liabilities Common shares Retained earnings Net credit sales Cost of goods sold Gross margin Income from operations Interest expense Net income

2020 $ 10,000 30,000 43,000 5,000 88,000 112,000 70,000 40,000 60,000 30,000 370,000 150,000 220,000 95,000 8,000 70,000

2019 $ 15,000 25,000 40,000 7,000 87,000 114,000 60,000 45,000 60,000 36,000 333,000 160,000 173,000 87,000 8,000 57,000

•10,000 shares of common shares have been issued and outstanding since the company was established. They had a market value of $90 per share on December 31, 2019, and they were selling for $91.50 on December 31, 2020.

Refer to the table above. For the year ending on December 31, 2019, Hot Rolled Corporation's rate of return on net sales (rounded) was: A) 0.19 B) 0.18 C) 0.17 D) 0.21 Answer: A Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

46 .

27) The dividend yield is calculated as: A) dividends per share / market price per share of common shares B) dividends per share / earnings per share of common shares C) dividends per share / book value per share of common shares D) dividends per share / number of shares of common shares Answer: A Diff: 1 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 28) The dividend yield evaluates: A) a company's stock as an investment B) a company's ability to pay non-current debt C) a company's ability to convert receivables into cash D) a company's ability to finance assets Answer: A Diff: 2 Type: MC L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 29) The investment decision, whether in equity investments (shares), bonds, real estate, cash, or more exotic instruments, depends on one’s tolerance for risk.

Answer: TRUE Diff: 1 Type: TF L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 30) The acid-test ratio reflects the company's percentage of assets financed with debt.

Answer: FALSE Explanation: The quick (acid-test) ratio tells whether the entity could pass the acid test of paying all its current liabilities if they came due immediately (quickly).

Diff: 2 Type: TF L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

47 .

31) Inventory turnover measures the number of times a company sells its average inventory level during a year.

Answer: TRUE Diff: 2 Type: TF L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 32) A high current ratio means that a company's current assets represent a relatively large portion of total assets.

Answer: FALSE Explanation: The current ratio measures the ability to pay current liabilities with current assets.

Diff: 2 Type: TF L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 33) The rate of return on net sales shows the percentage of each sales dollar earned as net income.

Answer: TRUE Diff: 2 Type: TF L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 34) Earnings per common share measures the market value of one common share.

Answer: FALSE Explanation: EPS is the amount of net income earned for each share of outstanding common stock.

Diff: 2 Type: TF L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 35) If the current ratio increases from one year to the next, it does not necessarily follow that the amount of working capital will also increase.

Answer: TRUE Diff: 3 Type: TF L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 48 .

36) The dividend yield ratio shows the percentage of a stock's market value returned as dividends to shareholders each accounting period.

Answer: TRUE Diff: 2 Type: TF L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 37) The acid-test ratio shows the ability of a business to pay all of its current liabilities if they came due immediately.

Answer: TRUE Diff: 2 Type: TF L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 38) A sudden change in a financial ratio from one year to the next indicates a possible problem and provides some insight as to how to identify the problem and how to solve it.

Answer: FALSE Explanation: A sudden drop in a financial ratio signals that something is wrong, but it doesn’t identify the problem.

Diff: 1 Type: TF L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

49 .

39) Following is a comparative balance sheet for Wildfire Corporation: Wildfire Corporation Comparative Balance Sheet December 31, 2020 and 2019 2020 2019 Current assets: Cash $ 140,000 Short-term investments 90,000 Accounts receivable, net 350,000 Inventory 500,000 Prepaid expenses 30,000 Total current assets $1,110,000 Property, plant, and equipment, net 750,000 Other assets 280,000 Total assets $2,140,000 Current liabilities: Short-term notes payable $650,000 Accounts payable 200,000 Total current liabilities $850,000 Non-current debt 380,000 Total liabilities $1,230,000 Shareholders' equity: Common shares $500,000 Retained earnings 410,000 Total shareholders' equity $ 910,000 Total liabilities and shareholders' equity $2,140,000

$ 90,000 80,000 220,000 430,000 30,000 $ 850,000 500,000 300,000 $1,650,000 $670,000 225,000 $895,000 220,000 $1,115,000 $500,000 35,000 $535,000 $1,650,000

Notes: Net sales (all on credit) and cost of goods sold for the year ended December 31, 2020, were $2,000,000 and $1,200,000, respectively. The number of common shares outstanding has been 50,000 since the company began operations.

Required: Calculate the following ratios for the year ended December 31, 2020: a. current ratio b. acid-test ratio c. inventory turnover d. accounts receivable turnover e. debt ratio f. book value per common share of stock

50 .

Answer: a. $1,110,000/$850,000 = 1.31 b. $140,000 + $90,000 + $350,000 / $850,000 = $580,000 / $850,000 = 0.68 c. $1,200,000 / [($500,000 + $430,000) / 2] = $1,200,000 / $465,000 = 2.58 d. $2,000,000 / [($350,000 + $220,000) / 2] = $2,000,000 / $285,000 = 7.02 e. $1,230,000 / $2,140,000 = 0.57 f. $910,000 / 50,000 shares = $18.20 Diff: 3 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 40) Lucky Strike Tackle Inc. had the following results for 2020: Beginning inventory $ 35,000 Ending inventory 50,000 Cost of goods sold 375,000 Beginning accounts receivable 90,000 Ending accounts receivable 82,000 Net credit sales 825,000 Calculate: a. inventory turnover b. accounts receivable turnover c. days' sales in receivables Answer: a. $375,000/(($35,000 + $50,000)/2) = $375,000/$42,500 = 8.82 b. $825,000/((90,000 + $82,000)/2) = $825,000/$86,000 = 9.59 c. $86,000/$825,000 - 365 days = 38 days Diff: 2 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

51 .

41) The following balance sheet dated December 31, 2020, is available for Catchacoma Inc. Assets Cash Marketable securities Accounts receivable Inventory Equipment Total assets

$ 50,000 120,000 250,000 150,000 300,000 $870,000

Liabilities and shareholders' equity Accounts payable $120,000 Salary payable 10,000 Bonds payable 350,000 Common shares 200,000 Retained earnings 190,000 Total liabilities and shareholders' equity $870,000 Additional information: ∙ Net income for 2020 was $160,000. ∙ Dividends paid during 2020 amounted to $2 per share. ∙ No additional shares of stock were issued during the year. ∙ The shares were issued for $5 each ∙ The price/earnings ratio was 20.

Calculate for the year ended December 31, 2020: a. current ratio b. acid-test ratio c. debt ratio d. market price per share e. dividend yield Answer: a. ($50,000 + $120,000 + $250,000 + $150,000)/($120,000 + $10,000) = $570,000/$130,000 = 4.38 b. ($50,000 + $120,000 + $250,000)/($120,000 + $10,000) = $420,000/$130,000 = 3.23 c. ($120,000 + $10,000 + $350,000)/$870,000 = $480,000/$870,000 = 0.55 d. earnings per share = $160,000/40,000 shares = $4 X/$4 = 20 X = $4 × 20 = $80 e. $2/$80 = 0.025 = 2.5% Diff: 3 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

52 .

42) The current ratio and the acid-test ratio measure a company's ability to pay current liabilities.

State how each ratio is calculated and what it does to help in financial statement analysis.

Answer: ∙ The current ratio is calculated as current assets / current liabilities. This ratio is used to measure the ability of a company to pay current liabilities with current assets. ∙ The acid-test ratio is calculated as (cash + short-term investments + net current receivables) / current liabilities. This ratio shows the ability to pay all current liabilities if they come due immediately, hence the name "acid test."

Diff: 2 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 43) There are at least two ratios that are used to analyze the company's stock as an investment.

Identify two and state how each ratio is calculated.

Answer: ∙ The price/earnings ratio is calculated as the market price per share of common shares / earnings per share. ∙ The dividend yield is calculated as dividend per share of common or preferred shares / market price per share of common or preferred shares.

Diff: 2 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 44) Name some common financial ratios used by investors to compare different companies.

Answer: Financial ratios used by investors to compare different companies include the current ratio, the acid-test ratio, inventory turnover, accounts receivable turnover, days' sales in receivables, debt ratio, times-interest-earned ratio, rate of return on net sales, rate of return on total assets, rate of return on common shareholders' equity, earnings per share of common shares, price/earnings ratio, dividend yield, and book value per share of common shares.

Diff: 1 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

53 .

45) How is it possible for investors to compare two companies of different sizes or companies that operate in different industries?

Answer: Investors use ratios to compare different companies. The ratios are standard measures that allow investors to compare companies of different sizes or companies in different industries.

Investors can also use a form of vertical analysis by preparing common-size financial statements and using them to compare one company with another.

Diff: 1 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 46) For each of the following items, explain its significance and show how the ratio mentioned is calculated: a. A decrease in the current ratio b. An increase in inventory turnover c. An increase in the days' sales in receivables d. A decrease in the debt ratio e. An increase in the rate of return on net sales Answer: a. A decrease in the current ratio means the company's ability to pay short-term debts has declined. The current ratio is calculated as current assets / current liabilities. b. Inventory turnover measures the number of times average inventory was sold (or turned over) during the year. An increase is generally viewed as positive because, all else equal, it means inventory is selling faster. However, it also increases the chance of stock-outs and in this sense could be a negative factor. Inventory turnover is calculated as cost of goods sold / average inventory. c. Days' sales in receivables tells how many days' sales remain in accounts receivable. An increase is generally viewed as unfavourable because it means it is taking longer to collect accounts receivable balances. Days' sales in receivables is calculated as average net accounts receivable / [(net sales / 365)]. d. The debt ratio shows the proportion of total assets that is financed with debt. A decrease means there will be less risk involved in meeting debt obligations, so the company has become a less risky credit or investment opportunity. The debt ratio is calculated as total liabilities / total assets. e. An increase in the rate of return on net sales is generally viewed as favourable because it means a higher proportion of each sales dollar is being translated into net profit. The rate of return on net sales is calculated as net income / net sales.

Diff: 3 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

54 .

47) Briefly discuss what information is provided by the following ratios: a. inventory turnover b. accounts receivable turnover c. days' sales in receivables Answer: a. Inventory turnover indicates the salability of inventory, in other words, the number of times a company sells its average inventory during the year. b. Accounts receivable turnover measures a company's ability to collect cash from its credit customers. c. Days' sales in receivables shows how many days of sales remain in accounts receivable, in other words, how many days it takes to collect the average level of receivables.

Diff: 2 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 48) Define the following two ratios and briefly discuss the information provided by them: a. debt ratio b. times-interest-earned ratio Answer: a. The debt ratio is total liabilities / total assets. The debt ratio indicates the percentage of assets financed with debt. b. The times-interest-earned ratio is income from operations / interest expense. The timesinterest-earned ratio measures the number of times income from operations can cover interest expense.

Diff: 2 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

55 .

49) Briefly state the information provided by the following ratios and briefly discuss how they are used in financial analysis: a. price/earnings ratio b. dividend yield Answer: a. The price/earnings ratio indicates the market price of $1 of a company's earnings. The P/E ratio plays an important part in decisions to buy, hold, and sell stocks. The P/E ratio indicates how expensive a stock is relative to the company's earnings. For example, if Company A has an EPS of $5 and a share price of $50 per share, it has a price/earnings ratio of 10. If Company B has an EPS of $0.50 and a share price of $20, it has a price/earnings ratio of 40. Company A's shares are cheaper than Company B's shares. b. The dividend yield shows the percentage of a stock's market value returned as dividends to shareholders in a given period. This ratio is important to shareholders who want to know the percentage of a stock's market value that is returned annually as dividends. Preferred shareholders, who invest primarily to receive dividends, pay special attention to this ratio.

Diff: 2 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal) 50) Ratio analysis is one tool that managers, investors, and creditors use when analyzing a company. How do each of these users determine if a company is profitable?

Answer: Managers are evaluated based on how well a company has performed financially.

Investors look to see if a company is able to generate a profit, which could mean an increase in the price of their shares.

Creditors know that a profitable company is able to pay back their debt.

Diff: 2 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

56 .

51) The following data are taken from the financial statements of Big Cedar Company:

Average accounts receivable Net sales

2020 $ 280,000 2,985,000

2019 $ 225,000 2,340,000

70% of sales are on account. Terms for all credit sales are 2/10, n/30.

Instructions (a) Calculate the accounts receivable turnover and the average collection period for both years. (b) What conclusion can an analyst draw about the management of the accounts receivable?

Answer: (a) Accounts receivable turnover ratio for 2019: Accounts receivable turnover ratio for 2020 :

Average collection period

2020 2019 = 7.46 = 7.28 365 ÷ 7.46 365 ÷ 7.28 = 50 days = 50 .14 days

(b) The receivables are turning a little faster in 2020 than they did in 2019. However, there is still a problem since the normal credit period is 30 days, and the average collection period for both years exceeds this target. Therefore, improvement in the management of the receivables would appear to be desirable.

Diff: 2 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

57 .

52) Flynn's Corners Company (Flynn's) operates a large quarry in Central Ontario. Selected data from Flynn's for the year ended December 31, 2020 are presented below: Total assets $1,600,000 Average total assets 1,500,000 Net earnings 123,200 Net sales 1,200,000 Average common shareholders' equity 1,000,000 Net cash provided by operating activities 280,000 Required: 1. Calculate the profit margin and return on assets for Flynn's for the year ended December 31, 2020.

2. Comment on the ratios you prepared in part 1 assuming the following averages for the quarry industry: Profit margin — 8% Return on Assets — 14% Answer: 1. Profit margin = Net earnings ÷ Net sales = $123,200 ÷ $1,200,000 = 10.3% Return on assets = Net earnings ÷ Average assets = $123,200 ÷ $1,500,000 = 8.2%.

2. Flynn's return on assets is lower than the industry average. However, Flynn's profit margin is higher than the industry average. Compared to other companies in the industry, Flynn's appears to be more profitable.

Diff: 2 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

58 .

53) The following table shows selected data for Buckhorn Corporation for the past four years: 2020 Net credit sales $19,900 Cost of goods sold 10,000 Inventory 12,000 Net accounts receivable 7,600

2019

2018

2017

$17,600

$18,000

$16,300

9,300 11,000

9,800 9,500

7,900 9,900

6,700

7,000

7,100

Required: a. Prepare an analysis showing the trend percentages for the four years 2017 through 2020, using 2017 as the base year. b. What was the inventory turnover for 2019? c. What was the accounts receivable turnover for 2020?

Answer: a.

2020 2019 2018 2017 Net credit sales 122% 108% 110% 100% Cost of goods sold 127% 118% 124% 100% Inventory 121% 111% 96% 100% Net accounts receivable 107% 94% 99% 100% b. $9,300/[($11,000 + $9,500)/2] = $9,300/$10,250 = 0.91 c. $19,900/[($7,600 + $6,700)/2] = $19,900/$7,150 = 2.78 Diff: 2 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

59 .

54) Based upon recent accounting scandals, identify potential red flags that may be discovered in financial analysis.

Answer: Decreased cash flows cash flows consistently lower than net income sales of capital assets as a major source of cash flows Too much debt debt much higher than industry averages and/or major competitors Earnings problems significant reduction in income from continued operations and over all net income for several years in a row income trends turning to loss trends instead may be ok for cyclical industries but not sustainable in the long run if continues on a longer term basis Inability to collect receivables days sales in receivables growing faster than others in the same industry Build up of inventories a slow down in inventory turnover unable to move products or maybe overstating inventory?

Mismatched trends amongst sales, inventory and receivables generally all of these three move together need to investigate further if there are inconsistencies amongst these three; it could spell trouble Diff: 2 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

60 .

55)

Barking Shark International Corporation Balance Sheet December 31, 2020 and 2019 2020

2019

Current assets Cash Short-term investments Accounts receivable, net Inventory Prepaid expenses Total current assets

$ 10,000 7,000 30,000 37,000 4,000 $ 88,000

$ 5,000 10,000 23,000 35,000 3,000 $ 76,000

Property, plant, and equipment, net Other assets Total assets

33,300 27,000 $148,300

35,000 22,500 $133,500

Current liabilities Short-term borrowings Accounts payable Total current liabilities

$ 28,400 20,000 $48,400

$ 13,900 22,500 $36,400

Non-current debt Total liabilities

37,500 $85,900

33,000 $69,400

Shareholders' equity Common shares $20,000 $20,000 Retained earnings 42,400 44,100 Total shareholders' equity $62,400 $64,100 Total liabilities and shareholders' equity$148,300 $133,500 Additional information: Net income from operations 2020 22,400 Interest expense $2,650 Depreciation expense $1,700 Cost of goods sold $136,000 Net credit sales $375,000 Industry bench marks: current ratio 1.50 acid test 1.00 debt ratio .62 inventory turnover 4.10 receivable turnover 30.1

61 .

Calculate the following 2020 ratios for Barking Shark International: Current ratio Acid test Inventory turnover Accounts receivable turnover Debt ratio Times interest earned Based upon your calculations comment on Barking Sharks ability to: 1) pay their current liabilities 2) meet their overall liabilities 3) to sell inventory and collect accounts receivables.

Answer: Current ratio $88,000/48,400 = 1.82 Acid test ($10,000 + 7,000 + 30,000)/48,400 = .97 Ability to pay current liabilities: Most industries have a norm for the current ratio of 1.50. Barking Shark exceeds this benchmark indicating they are doing better than average overall. If however all of Barking Shark's liabilities came due immediately, their acid test score indicates they may have difficulty paying as their score is slightly less than 1.00.

Debt ratio $85,900/148,300 = .58 Times interest earned $22,400/2,650 = 8.45 Ability to pay over all liabilities: Barking Shark's debt ratio is under the typical average of .62 indicating a low risk position.

There is enough income to more than cover interest expense. In fact, they can cover it over eight times. Overall, Barking Shark appears to be able to meet their non-current debts.

Inventory turnover $136,000/$36,000 = 3.8 Barking Shark appears to be under the benchmark for this industry, indicating this is an area for improvement.

Account receivable turnover $375,000/26,500 = 14.15 Barking Shark's inventory turnover is much slower than the industry, indicating another area for improvement.

Diff: 2 Type: ES L.O.: 10-5 CPA COMPETENCIES: Chapter 10 1.3.1 Prepares financial statements 1.4.4 Interprets financial reporting results for stakeholders (external or internal)

62 .

Financial Accounting, Cdn. Ed., 7CE (Harrison/Horngren) Chapter 11 (Appendix B) Investments and the Time Value of Money 11.1

Analyze and report non-strategic investments

1) A short-term investment is not: A) referred to as a temporary investment B) referred to as a marketable security C) a current asset D) intended to be converted to cash in more than one year Answer: D Diff: 2 Type: MC L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 2) Corporations invest in a short-term investment: A) to park cash temporarily B) to sell it for more than its cost C) to generate a higher profile D) to invest excess cash temporarily and to increase income Answer: D Diff: 2 Type: MC L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 3) Long-term investments include which of the following?

A) shares and bonds that the investor expects to hold for longer than one year B) shares and bonds that the investor expects to convert to cash within one year C) marketable securities D) represent accounts receivable and notes receivable on the balance sheet Answer: A Diff: 2 Type: MC L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

1 .

4) The receipt of a cash dividend arising from an investment (5% ownership) held by a company requires a: A) credit to Cash B) debit to Retained Earnings C) credit to Retained Earnings D) credit to Dividend Revenue Answer: D Diff: 1 Type: MC L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 5) The unrealized Gain/Loss on Investment account may appear on which financial statement?

A) the balance sheet under the "liabilities" section B) the balance sheet as part of the shareholders' equity C) the balance sheet under the "assets" section as a contra asset D) the income statement under the "other income" section Answer: D Diff: 2 Type: MC L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 6) A long-term investment in common shares acquired during 2020 at a cost of $45,000 has a market value on December 31, 2020, of $45,725. The year-end adjusting entry requires a: A) credit to Allowance to Adjust Investment to Market for $725 B) debit to Unrealized Gain on Investment for $725 C) debit to Long-Term Investment for $725 D) no entry required Answer: C Diff: 2 Type: MC L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

2 .

7) The journal entry to record the sale of an investment includes a loss on sale of investment for $500. The income statement will reflect: A) nothing, since the entry impacts only asset accounts B) other income/loss of $500 C) a decrease in shareholders' equity $500 D) a decrease in net sales of $500 Answer: B Diff: 2 Type: MC L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 8) Investments with a cost of $12,000 have a current market value of $11,612. The adjusting entry will require a: A) credit to Investments for $388 B) debit to Investments for $388 C) credit to Unrealized Loss on Investment for $388 D) no entry required Answer: A Diff: 2 Type: MC L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 9) Investments at fair value through other comprehensive income with a cost of $22,000 have a current market value of $22,600. The adjusting entry will require a: A) credit to Investments for $600 B) debit to Investments for $22,600 C) credit to Gain on Investment for $600 D) credit to other comprehensive income for $600 Answer: D Diff: 3 Type: MC L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

3 .

10) The adjusting entry for investments at fair value through other comprehensive income contains a credit to Investments for $651. The income statement will reflect: A) revenue of $651 B) investment of $651 C) other comprehensive income/loss of $651 D) nothing, because gain/loss is not reported on the income statement Answer: C Diff: 2 Type: MC L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 11) Unrealized gains or losses on short-term investments are reported using: A) a liability account B) an asset account C) an expense account D) a revenue account Answer: D Diff: 2 Type: MC L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 12) Investment in subsidiaries involves purchasing 25% of the organization's shares.

Answer: FALSE Explanation: Generally a parent will own more than 50% of the voting shares of the subsidiary.

Diff: 2 Type: TF L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 13) With an investment in a subsidiary the financial statements of the investee are consolidated with those of the investor.

Answer: TRUE Diff: 2 Type: TF L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

4 .

14) The journal entry to record the receipt of a cash dividend will include a credit to Retained Earnings.

Answer: FALSE Explanation: Credit to Dividend Revenue.

Diff: 1 Type: TF L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 15) An investment in common shares at fair value through other comprehensive income acquired during 2020 at a cost of $46,000 has a market value on December 31, 2020, of $46,721. The adjusting entry requires a debit to long term investments (at fair value through other comprehensive income) for $721.

Answer: TRUE Diff: 2 Type: TF L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 16) All marketable securities are considered to be short-term investments.

Answer: TRUE Diff: 2 Type: TF L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 17) Short term investment purchases are initially recorded at their cost.

Answer: TRUE Diff: 2 Type: TF L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 18) Smart-T Corporation purchased an investment in April for $10,000. If Smart-T Corporation sold this investment on May 30th for $12,000. They would have a realized gain.

Answer: TRUE Diff: 2 Type: TF L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 5 .

19) Zeep Company purchased shares of Zoop Inc on June 30, 2020 for $7,500. At the end of August these shares are now worth $6,500. Zeep has an unrealized loss on this investment.

Answer: TRUE Diff: 2 Type: TF L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 20) Non-strategic investments are recorded at market value and are reported on the balance sheet at cost.

Answer: FALSE Explanation: The investor records the investment at the price paid and adjusts the investment account for changes in fair value either through net income (current assets) or through other comprehensive income (current or long-term assets).

Diff: 2 Type: TF L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 21) Why is understanding the extent to which ONEX Ltd. influences another company important for accounting purposes? What impact does the degree of influence ONEX Ltd. has over another company have on accounting?

Answer: The extent of influence of ONEX Ltd. has over another company (i.e. Canadian Utilities) determines how the investment is accounted for. If the influence is sufficient that ONEX makes the important decisions for the investee (control), that company is termed a subsidiary and the financial statements of both entities are aggregated to produce consolidated financial statements. When little or no influence can be exerted, the investment is accounted for at fair value. If the investor can influence decisions but not control them (significant influence), equity accounting is used.

Diff: 1 Type: ES L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

6 .

22) Olive Corporation purchases Branch Inc. shares on June 21 for $220,000 as a short-term investment. On October 1 Olive receives a cash dividend of $2,500 from Branch Inc. On December 31st the value of Olive Corporation's investment in Branch has decreased in value to $210,000.

Prepare journal entries needed on June 21, October 1, and December 31.

Answer: Jun. 21 Investment -Branch 220,000 Cash 220,000 Oct. 1

Cash Dividend Revenue

2,500 2,500

Dec. 31

Unrealized loss 10,000 Investment -Branch 10,000 ($220,000 - 210,000) Diff: 2 Type: ES L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 23) Prepare journal entries to record the following transactions associated with at fair value through other comprehensive income investments purchased by Spark Spread Corporation during 2020 Spark Spread Corporation had no investments prior to 2020. a. Purchased 1,500 shares of Mercury Coal Corporation common shares for $27.50 per share. b. Mercury Coal Corporation pays a $1.25 per share dividend to all common shareholders. c. On December 31, 2020, the market price of Mercury Coal Corporation stock is $28.00 per share.

Answer: a. Long-Term Investment at fair value through OCI 41,250 Cash (1,500 x $27.50) 41,250 b. Cash (1,500 x $1.25) 1,875 Dividend Revenue 1,875 c. Long-Term Investment at fair value through OCI 750 Other comprehensive income 750 ($27.50 - 28.00) x 1,500 Diff: 2 Type: ES L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

7 .

24) Prepare journal entries for the following transactions. Note that each item falls under the at fair value through other comprehensive income classification.

Jan. 1 Yellow-Snow Corporation purchased 200 shares of Dog-Dish Corporation common shares at $40.75.

June 10 Received a dividend of $0.75 per share.

Sept. 15 Sold 50 shares of Dog-Dish Corporation common shares at $43.00.

Dec. 31 Dog-Dish Corporation common shares closed at $43.75.

(Yellow-Snow Corporation had no prior investments to the investment in Dog-Dish Corporation) Answer: Jan. 1 Long-Term Investment at fair value through OCI 8,150.00 Cash ($40.75 × 200) 8,150.00 June 10 Cash (200 x $0.75) 150.00 Dividend Revenue 150.00 Sept. 15 Cash (50 × $43) 2,150.00 Other Comprehensive Income 112.50 Long-Term Investment at fair value through OCI 2,037.50 ($40.75 × 200) × (50/200) Dec. 31 Long-Term Investment at fair value through OCI 450.00 Other Comprehensive Income 450.00 (43.75-40.75) × 150 Diff: 2 Type: ES L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

8 .

25) On January 1, 2018 Blue Cat Corporation purchased 1,000 shares (5%) of Mike Mouse Co. for $10,000 as a long term investment. On March 31, 2019 Mike Mouse pays Blue Cat a $5,000 dividend. At year end December 31, 2019 Mike Mouse shares are trading at $12 per share. Blue Cat then sells their investment in Mike Mouse Co for $11,500 on February 4, 2020. Prepare Blue Cat's journal entries for 2018, 2019 and 2020.

Answer: Jan 1 2018 Long-term investment $10,000 Cash $10,000 Mar 31, 2019 Cash Dividend Revenue

5,000 5,000

Dec 31, 2019 Long-term investment 2,000 Unrealized gain on sale of investment ($10 - 12) x 1000 Feb 4, 2020 Cash 11,500 Loss on sale of investment 500 Long-term investment ($12,000 - 11,500) Diff: 2 Type: ES L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

9 .

2,000

12,000

26) On January 1, 2018 Blue Cat Corporation purchased 1,000 shares (5%) of Mike Mouse Co. for $14,000 as a long term investment. On May 31, 2019 Mike Mouse pays a $0.70 dividend. At year end December 31, 2019 Mike Mouse shares are trading at $15 per share. Blue Cat then sells their investment in Mike Mouse Co for $13,500 on February 20, 2020. Prepare Blue Cat's journal entries for 2018, 2019 and 2020.

Answer: Jan 1 2018 Long-term investment $14,000 Cash $14,000 May 31, 2019 Cash (1,000 x $0.70) Dividend Revenue Dec 31, 2019 Long-term investment Other Comprehensive Income ($14 - 15) x 1,000

700 700

1,000 1,000

Feb 4, 2020 Cash 13,500 Loss on sale of investment 1,500 Long-term investment ($15,000 - 13,500) Diff: 2 Type: ES L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

10 .

15,000

27) Vance Corporation purchases UXB shares on May 10 for $120,000 as a short-term investment. On October 15th Vance receives a cash dividend of $1,200 from UXB. On December 31st the value of Vance Corporation's investment in UXB has increased in value to $150,000.

Prepare journal entries needed on May 10, October 15, and December 31.

Answer: May 10 Investment -UXB 120,000 Cash 120,000 Oct. 15 Cash Dividend Revenue

1,200 1,200

Dec. 31 Investment -UXB 30,000 Unrealized gain ($150,000 - 120,000) Diff: 2 Type: ES L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

30,000

28) January 1, 2019 Orange Tree Spa invests in $100,000 worth of Apple Spa shares to hold as a short-term investment. On December 31, 2019, this investment now has a market value of $105,000.

On May 1, 2020 Orange Tree Spa sells their Apple Spa shares for $95,000. Prepare the required entries for Orange Tree Spa. Answer: Jan 1, 2019 Investment -Apple Spa $100,000 Cash $100,000 Dec 31, 2019

Investment -Apple Spa Unrealized gain ($105,000 - 100,000)

5,000 5,000

May 1, 2020 Cash Loss on Sale of Investments Investment -Apple Spa ($105,000 - 95,000) Diff: 2 Type: ES L.O.: Appendix B-1 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

11 .

95,000 10,000 105,000

11.2

Analyze and report strategic investments

1) Investments accounted for using the equity method are initially recorded at: A) fair market value of the investee company multiplied by the percentage of ownership acquired B) the total of the investee's equity accounts multiplied by the percentage of ownership acquired C) cost D) the lower of the cost or fair market value as of the balance sheet date Answer: C Diff: 1 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 2) The investor should generally use the equity method of accounting for the investee if the investor owns what percentage of the outstanding stock of the investee?

A) 0%-15% B) 20%-50% C) any percentage greater than 50% D) any percentage greater than 60% Answer: B Diff: 1 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 3) Under the equity method of accounting, the investor will: A) reduce the Investment account for investee dividends and increase the Investment account to record investee income B) increase the Investment account to record dividends and income of the investee C) reduce the Investment account to record dividends and income of the investee D) increase the Investment account for investee dividends, and reduce the Investment account to record investee income Answer: A Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

12 .

4) If an investor company owns between 20% and 50% of the common shares of another business, cash dividends received from the investee company are generally recorded by the investor company by: A) increasing the value of the investor's Investment account B) increasing the Dividend Revenue account C) decreasing the value of the investor's Investment account D) decreasing the investor company's Common Shares account Answer: C Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 5) The equity method of accounting for a stock investment should generally be used when the investor owns 20%-50% of the investee's stock, because that level of stock ownership: A) usually indicates a plan to acquire a controlling interest of the investee company B) requires the investor to notify the government of any plans to acquire a controlling interest in the investee company C) means the investor has a controlling interest in the investee company D) gives the investor significant influence over the investee company Answer: D Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 6) Power Generation Corp. owns 38% of Electric Limited. Net income for Electric Limited for the year ending December 31, 2020, is $450,000. The journal entry prepared by Power Generation Corp. on December 31, 2020, includes a: A) debit to Cash for $171,000 B) credit to Long-Term Investment for $171,000 C) debit to Long-Term Investment for $450,000 D) debit to Long-Term Investment for $171,000 Answer: D Explanation: 38% x $450,000 = $171,000 Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

13 .

7) Under the equity method of accounting for investments, dividends paid by the investee are recorded by the investor as: A) a credit to Dividend Revenue of the investor company B) a debit to the Investment account of the investor company C) a credit to the Investment account of the investor company D) no entry is made to record dividends in this accounting situation Answer: C Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 8) A gain or loss on sale of a long-term investment using the equity method is determined by comparing the cash received with the: A) cost of the long-term investment B) market value of the long-term investment C) cost of the long-term investment adjusted for the investor's share of the investee's net income and cash dividends while the investment was held by the investor company D) lower-of-cost-or-market value of the long-term investment Answer: C Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 9) Brighton Beach Limited owns 40% of Alberta Based Inc. Total cash dividends paid by Alberta Based Inc. for the year ending December 31, 2020, amount to $47,919. The journal entry prepared by Brighton Beach Limited on December 31, 2020, includes a: A) debit to Cash for $47,918 B) credit to Dividend Revenue for $19,168 C) credit to Long-Term Investment for $19,168 D) debit to Long-Term Investment for $19,168 Answer: C Explanation: 40% x $47,919 = $19,168 Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

14 .

10) Retail Energy Corporation paid $1,300,000 on January 1, 2020, to purchase 32% of the outstanding shares of Natural Gas Limited. In 2020 Natural Gas Limited reported $450,000 of net income and paid $100,000 in dividends. If this investment is accounted for using the equity method of accounting, what will be the impact on the books of Retail Energy Corporation?

A) income of $32,000 will be recorded B) income of $144,000 will be recorded C) the Investment account will be increased by $144,000 D) the Investment account will be decreased by $144,000 Answer: B Explanation: 32% x $450,000 = $144,000 Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 11) With an investment in a subsidiary, under Accounting Standards for Private Enterprise, the investment can be accounted for using consolidation, or the equity or cost method.

Answer: TRUE Diff: 1 Type: TF L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 12) Barking Power Company accounts for its 35% investment in Pipeline Corporation under the equity method of accounting. The investment was made on January 1, 2020, at a cost of $625,000. Pipeline Corporation reported net income of $85,000 for the year ended December 31, 2020, and paid total dividends of $20,000 during 2020. On December 31, 2020, after making all appropriate entries, the balance in Barking Power Company's Long-Term Investment account will equal: A) $647,750 B) $602,250 C) $583,000 D) $690,000 Answer: A Explanation: $625,000 + (35% x 85,000) - (35% x 20,000) = $647,650 Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

15 .

13) On January 1, 2019, TXU Europe Corporation purchased 40% of the outstanding stock of Alberta Power Pool Corporation for $800,000. Net income reported by Alberta Power Pool Corporation for 2019 and 2020 was, respectively, $100,000 and $125,000. Dividends paid by Alberta Power Pool Corporation during 2019 and 2020 were, respectively, $60,000 and $75,000.

The long-term investment will appear on TXU Europe Corporation's December 31, 2019, balance sheet at: A) $776,000 B) $840,000 C) $800,000 D) $816,000 Answer: D Explanation: $800,000 + (40% x 100,000) - (40% x 60,000) = $816,000 Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 14) On January 1, 2019, TXU Europe Corporation purchased 40% of the outstanding stock of Alberta Power Pool Corporation for $800,000. Net income reported by Alberta Power Pool Corporation for 2019 and 2020 was, respectively, $100,000 and $125,000. Dividends paid by Alberta Power Pool Corporation during 2019 and 2020 were, respectively, $60,000 and $75,000.

The long-term investment will appear on TXU Europe Corporation's December 31, 2020, balance sheet at: A) $746,000 B) $864,000 C) $836,000 D) $890,000 Answer: C Explanation: 816,000 + (40% x 125,000) - (40% x 75,000) = $836,000 Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

16 .

15) On January 1, 2019, TXU Europe Corporation purchased 40% of the outstanding stock of Alberta Power Pool Corporation for $800,000. Net income reported by Alberta Power Pool Corporation for 2019 and 2020 was, respectively, $100,000 and $125,000. Dividends paid by Alberta Power Pool Corporation during 2019 and 2020 were, respectively, $60,000 and $75,000.

Assume on December 31, 2020, TXU Europe Corporation sells 50% of its investment in Alberta Power Pool Corporation for $525,000. TXU Europe Corporation will report a: A) gain on sale of investment of $107,000 B) gain on sale of investment of $80,000 C) loss on sale of investment of $152,000 D) loss on sale of investment of $321,000 Answer: A Explanation: ($836,000/2) - 525,000 = $107,000 Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 16) In 2020, Gigajoule Corporation used the equity method to account for a 25% ownership interest in Megawatt Corporation. If Megawatt Corporation reports $400,000 of income and pays $80,000 of dividends in 2020, the net effect of the entries made by Gigajoule Corporation in 2020 will be to: A) reduce the Investment account by $320,000 B) reduce the Investment account by $80,000 C) increase the Investment account by $320,000 D) increase the Investment account by $80,000 Answer: D Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 17) An investor company with a 40% interest in an investee properly used the equity method to account for the investment. If the entries to the Investment account for the current year showed a debit of $45,000 and a credit of $22,000, the investee must have paid total dividends of: A) $55,000 B) $22,000 C) $45,000 D) $100,000 Answer: A Explanation: $22,000/0.40 = $55,000 Diff: 3 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 17 .

5.1.1 Evaluates the entity's financial state 18) Goodwill arises when a parent company: A) pays less to acquire a subsidiary company than the fair value of the subsidiary's net assets B) pays more to acquire a subsidiary company than the fair value of the subsidiary's net assets C) pays less to acquire a subsidiary company than the carrying amount of the subsidiary's net assets D) pays more to acquire a subsidiary company than the carrying amount of the subsidiary's net assets Answer: B Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 19) Goodwill is a(n) ________ on the ________.

A) current asset; subsidiary's balance sheet B) intangible asset; subsidiary's balance sheet C) intangible asset; consolidated balance sheet D) long-term investment; consolidated balance sheet Answer: C Diff: 1 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 20) A controlling interest is normally one where the investor: A) owns more than 20% of the investee's voting stock B) owns more than 50% of the investee's voting stock C) uses the equity method to account for the investment D) uses the market value method of accounting for the investment Answer: B Diff: 1 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

18 .

21) If a parent company and its subsidiary have accounts receivable from mutually exclusive external sources in the amounts of $35,000 and $20,000, respectively, the consolidated balance sheet for the parent and its subsidiary will show: A) one accounts receivable balance of $55,000 B) only the parent's accounts receivable balance C) net accounts receivable of $15,000 D) both amounts, but it will list them in two separate accounts Answer: A Explanation: $35,000 + 20,000 = $55,000 Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 22) When preparing a consolidated balance sheet: A) the shareholders' equity of the parent will be eliminated but investment in subsidiary will be presented B) both investment in subsidiary and the shareholders' equity of the parent will be eliminated C) neither investment in subsidiary nor the subsidiary's shareholders' equity will be presented D) investment in subsidiary will be presented but the shareholders' equity of the subsidiary will be eliminated Answer: C Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 23) When a parent acquires 100% of the voting stock of a subsidiary, that subsidiary: A) automatically becomes part of one large legal entity that consists of the parent and the subsidiary together B) lives on as a separate legal entity C) continues to exist as an accounting entity, but it ceases to exist in any legal form D) ceases to exist as a separate legal entity, but it is still accounted for as a separate accounting entity Answer: B Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

19 .

24) When a parent-subsidiary relationship exists between two companies: A) the parent company must use the cost method to account for the subsidiary B) the parent company will keep one set of accounting records covering both companies C) the subsidiary company will keep one set of accounting records covering both companies D) both the parent and the subsidiary will continue to keep their own separate accounting records as if the parent-subsidiary relationship does not exist Answer: D Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 25) A non-controlling interest arises only when a parent company purchases: A) less than 20% of the stock of a subsidiary company B) between 20% and 50% of the stock of a subsidiary company C) more than 50% but less than 100% of the stock of a subsidiary company D) all of the stock of a subsidiary company Answer: C Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 26) If 100% of a subsidiary's voting stock is acquired in the purchase of the subsidiary, goodwill is defined as the amount by which the purchase price paid by the parent company exceeds the: A) fair value of the net assets of the subsidiary B) carrying amount of the net assets of the subsidiary C) total shareholders' equity of the subsidiary D) balance in the investment in subsidiary account Answer: A Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

20 .

27) Yukon Electrical Company owns all of the stock of Simmons Corporation and 80% of the stock of I-Tek Corporation. In 2020, Yukon earned net income of $450,000, Simmons earned $120,000, and I-Tek earned $180,000. Yukon's consolidated income statement would report consolidated net income of: A) $450,000 B) $570,000 C) $750,000 D) $714,000 Answer: D Diff: 2 Type: MC L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 28) Under the equity method the investor's share of dividends is treated as a return of investment.

Answer: TRUE Diff: 2 Type: TF L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 29) If a company owns 49% of the stock of another business, cash dividends received from the investee company are generally recorded by decreasing the value of the Investment account.

Answer: TRUE Diff: 2 Type: TF L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 30) If a company owns between 20 and 50% of the voting share of an investee it must normally use the equity method to account for its investment.

Answer: TRUE Diff: 2 Type: TF L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

21 .

31) Under the equity method, the investor's share of dividends is treated as an increase in its investment.

Answer: FALSE Explanation: Cash dividends received from the investee company are generally recorded by decreasing the value of the Investment account.

Diff: 2 Type: TF L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 32) Goodwill arises when a parent company must pay more to acquire a subsidiary company than the fair value of the subsidiary's net assets.

Answer: TRUE Diff: 2 Type: TF L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 33) A company that owns less than 20% of another company's stock must use the consolidation method of accounting.

Answer: FALSE Explanation: Non-strategic investments are accounted for at fair value.

Diff: 2 Type: TF L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 34) The amount paid to purchase all the outstanding shares of a subsidiary company is added to the existing assets of that subsidiary.

Answer: FALSE Explanation: Investments accounted for by the equity method are recorded initially at cost to the parent's investment account.

Diff: 2 Type: TF L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

22 .

35) Non-controlling interest occurs when a company owns only 90% of a company they control.

Answer: FALSE Explanation: Non-controlling interest arises when a parent company purchases less than 100% of the shares of a subsidiary company.

Diff: 1 Type: TF L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 36) The parent and subsidiary relationship that is established in consolidation accounting is an example of the entity concept.

Answer: TRUE Diff: 1 Type: TF L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 37) A non controlling interest will appear on the consolidated balance sheet when the parent company owns more than 40% but less than 100% of the subsidiary's stock.

Answer: FALSE Explanation: Non-controlling interest arises when a parent company purchases more than 50%, but less than 100% of the shares of a subsidiary company.

Diff: 2 Type: TF L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

23 .

38) Energy Direct Corp. acquired 32% of Edmonton Limited for $2,000,000 on January 1, 2020.

During 2020, Edmonton Limited earned $480,000 and paid dividends of $225,000. a. Prepare the journal entries required to record the acquisition, and the transactions during 2020. b. Determine the carrying value on Energy Direct Corp. of the investment in Edmonton Limited as at December 31, 2020.

Answer: a. Long Term Investment 2,000,000 Cash 2,000,000 Long-Term Investment 153,600 Investment Revenue 153,600 (32% x $480,000) Cash 72,000 Long-Term Investment 72,000 (32% x 225,000) b. Long-Term Investment: (2,000,000 + 153,600 - 72,000) 2,081,600 Diff: 2 Type: ES L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 39) When the equity method is used to account for a stock investment, dividends received are recorded as a reduction to the Investment account and the investor's share of income reported by the investee is treated as an increase in the Investment account. Explain why the investment is accounted for in this fashion.

Answer: The equity method is normally used to account for stock investments where 20%-50% of the voting common shares of the investee are owned. In these cases, the investor can exert a significant influence over the investee in business matters. The investor/investee relationship is, therefore, very close and influential.

The equity method of accounting reflects this close relationship by increasing/decreasing the Investment account to reflect comparable increases/decreases in the investee's shareholders' equity. Dividends reduce the investee's shareholders' equity, so they also reduce the investor's Investment account. On the other hand, reported net income of the investee increases both the investee's shareholders' equity and the Investment account.

Diff: 2 Type: ES L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

24 .

40) The DEML Corporation reported the following transactions for the year 2020: Jan.1 Purchased 35% of the common shares of Utilities Board Corporation for $700,000.

This is a long-term investment giving DEML significant influence over the operations of Utilities Board.

Sept. 30 Received a $42,000 dividend on the Utilities Board Corporation stock.

Dec. 31 Utilities Board Corporation reported net income of $176,200 for the year ended December 31, 2020.

Dec. 31 DEML sold 50% of the Utilities Board shares for $400,000.

Prepare journal entries to record all the above events for the DEML Corporation.

Answer: Jan. 1 Long-Term Investment 700,000 Cash 700,000 Sept.30 Cash 42,000 Long-Term Investment 42,000 Dec.31 Long-Term Investment 61,670 Investment Income 61,670 ($176,200 × 35%) Dec.31 Cash 400,000 Long-Term Investment 359,835 ($700,000 - $42,000 + 61,670) × 50% Gain on Sale of Investment 40,165 Diff: 2 Type: ES L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

25 .

41) On January 1, 2019, Red Deer Corporation paid $360,000 to purchase 32% of the outstanding voting stock of English Court Corporation. The equity method is used to account for the investment. The following data relate to this investment.

2019 ∙ Dividends received from English Court Corporation amounted to $20,000. ∙ Net income reported by English Court Corporation was $290,000. ∙ Current market value of English Court Corporation investment on December 31, 2019, was $365,000.

2020 ∙ Dividends received from English Court Corporation amounted to $30,000. ∙ Net income reported by English Court Corporation was $320,000. ∙ Current market value of English Court Corporation investment on December 31, 2020, was $430,000. ∙ The investment was sold on December 31, 2020, for $430,000.

Prepare all journal entries for 2019 and 2020 relating to Red Deer Corporation's investment in English Court Corporation.

Answer: 2019 Long-Term Investment 360,000 Cash 360,000 Cash 20,000 Long-Term Investment 20,000 Long-Term Investment 92,800 Investment Income 92,800 ($290,000 × 32%) 2020 Cash 30,000 Long-Term Investment 30,000 Long-Term Investment 102,400 Investment Income 102,400 ($320,000 × 32%) Cash 430,000 Loss on Sale of Investment 75,200 Long-Term Investment 505,200 ($360,000 - $20,000 + $92,800 - $30,000 + $102,400) Diff: 2 Type: ES L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

26 .

42) PET Corporation purchased 225,000 shares of SOX Corporation on January 1, 2020, for $540,000. SOX Corporation has 600,000 shares outstanding. SOX Corporation earned net income of $360,000 and paid dividends of $106,000 during 2020.

Required: a. What method should be used to account for the SOX Corporation investment? b. How much revenue will be recorded by PET Corporation in 2020 from its investment in SOX Corporation? c. What is the balance in PET's investment account at the end of 2020? d. Assume all of the above facts except that on January 1, 2020, PET Corporation purchased 90,000 shares of SOX Corporation. How much revenue will be recorded by PET Corporation in 2020 from its investment in SOX Corporation?

Answer: a. equity method (due to purchase of 37.5% of SOX Corporation's outstanding shares) b. $360,000 × 0.375 = $135,000 c. $540,000 + $135,000 - ($106,000 × .375) = $675,000 - $39,750 = $635,250 d. $106,000 × 0.15* = $15,900 (dividend revenue; equity method not used) * 90,000 shares purchased / 600,000 shares outstanding = 15% ownership Diff: 2 Type: ES L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 43) An investor owns 40% of the voting common shares in an investee and has the ability to exercise significant influence over the investee. How should the investor account for the investment?

Answer: The investor should use the equity method to account for the investment. Using the equity method of accounting for the investment, the investor company will record its proportionate share of net income of the investee corporation, relative to its ownership interest.

Likewise, dividends paid to the investor by the investee will decrease the Investment account.

The net result is that the ownership interest of the investee company is accurately reflected in the books of the investor company.

Diff: 2 Type: ES L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

27 .

44) How does a company such as ONEX Ltd. report the results of its diverse worldwide lines of business?

Answer: ONEX Ltd. will report the results of its diverse operations using consolidated financial statements, which combine the reports of the many subsidiary companies that make up ONEX (the parent company).

Diff: 1 Type: ES L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 45) Barking Power Corporation acquired 80% of the voting common shares of Brighton Beach Corporation on December 31, 2019. During the year ended December 31, 2020, Barking Power Corporation and Brighton Beach Corporation reported net income of $110,000 and $75,000 from their own operations, respectively. a. How much income attributable to the equity holders of the parent corporation will be reported on the consolidated income statement for the year ended December 31, 2020? b. Discuss the way in which non-controlling interests in the subsidiary might be presented on consolidated financial statements. What exactly does non-controlling interest represent?

Answer: a. $110,000 + ($75,000 × 0.80) = $170,000 b. Non-controlling interest will appear on the balance sheet representing the 20% interest not owned by Barking Power Corporation. It is shown as part of shareholders' equity.

Non controlling interest represents the subsidiary's equity that is held by shareholders other than the parent company.

Diff: 2 Type: ES L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

28 .

46) What are consolidated financial statements? What are some of the benefits and limitations of them for ONEX Ltd.?

Answer: When the financial statements are consolidated, the financial statements of ONEX Ltd. and all its subsidiaries are aggregated into a single set of financial statements that present the financial position and results of operations for the entire economic entity. The consolidated statements represent the aggregation of more than one legal entity into statements for a single economic entity. For example, the assets on the consolidated balance sheets are the sum of the assets of the parent and those of the subsidiaries, with some adjustments. Consolidated financial statements communicate to investors in ONEX Ltd. the assets that are at its disposal and the revenues and expenses that the consolidated entity has generated. This aggregation reduces the time and effort required to learn about the entity. Without consolidated statements, users would have to examine financial statements for each of the firms in the consolidated group (i.e.

Canadian Utilities Limited). This could be very time consuming. (This approach would, however, be desirable for some users, such as financial analysts.) The consolidated statements also eliminate the effects of inter-company transactions, which can be used to manipulate the statements. The disadvantage is that they aggregate information so that details are lost and the opportunity to compare the performance of parts of the whole to other companies in their industry is gone. Particularly when a company operates a variety of dissimilar businesses, there are no comparable companies as a basis for assessing results.

Diff: 1 Type: ES L.O.: Appendix B-2 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 11.3

Analyze and report long-term investments in bonds

1) The amortization of a discount on a long-term bond investment: A) decreases the investor's Long-Term Investment account B) decreases the investor's interest revenue C) increases the investor's interest revenue D) increases the investor's interest expense Answer: C Diff: 2 Type: MC L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

29 .

2) Amortization of a discount or premium on the bond affects all of the following except: A) the carrying value of the bonds on the investor's books B) retained earnings of the investor C) the amount of cash received when interest payments are made D) interest revenue of the investor Answer: C Diff: 3 Type: MC L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 3) Long-term bond investments are reported on the balance sheet at their: A) historical cost B) amortized cost C) current market value D) lower of cost or market Answer: B Diff: 2 Type: MC L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 4) When a premium on a bond investment is amortized by the company holding the investment: A) the amount of cash received as an interest payment will be increased B) the amount of cash received as an interest payment will be reduced C) Interest Revenue will be debited D) companies normally credit a separate account called Premium on Investments Answer: C Diff: 3 Type: MC L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

30 .

5) Amortizing a discount on a long-term bond investment will cause: A) the interest revenue reported on the income statement to exceed the cash received by the investor B) the interest revenue reported on the income statement to equal the cash received by the investor C) the cash received by the investor to exceed the interest revenue reported on the income statement D) the interest revenue reported is not related to the cash received by the investor Answer: A Diff: 3 Type: MC L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 6) Amortizing a discount on a bond investment will cause the Investment account and interest revenue to respectively: A) decrease and increase B) increase and decrease C) increase and increase D) decrease and decrease Answer: C Diff: 3 Type: MC L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 7) Amortizing a premium on a bond investment will cause the Investment account and interest revenue to respectively: A) increase and increase B) decrease and decrease C) decrease and increase D) increase and decrease Answer: B Diff: 3 Type: MC L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

31 .

8) Suppose an investor purchases $100,000 of 5% Government of Canada bonds at a price of $95,735 on June 1, 2020. The bonds pay interest on June 1 and December 1. The investor intends to hold the bonds until their maturity on June 2, 2025. The bonds will be outstanding for five years (10 interest periods). The investor paid a discounted price for the bonds of $95,735 (an effective interest rate of 6%). How much total interest revenue will be recorded on December 1, 2020?

A) $2,500 B) $3,354 C) $2,872 D) $2,917 Answer: C Diff: 3 Type: MC L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 9) Suppose an investor purchases $100,000 of 5% Government of Canada bonds at a price of $95,735 on June 1, 2020. The bonds pay interest on June 1 and December 1. The investor intends to hold the bonds until their maturity on June 2, 2025. The bonds will be outstanding for five years (10 interest periods). The investor paid a discounted price for the bonds of $95,735 (an effective interest rate of 6%). What amount will be reported for the long-term investment in bonds on the balance sheet on December 31, 2020?

A) $95,735 B) $96,108 C) $100,000 D) $96,172 Answer: D Explanation: $95,735 + $373 + $64 = $96,172 Diff: 3 Type: MC L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 10) Amortization of a discount on a long-term bond investment will decrease the amount of interest revenue recorded by the investor.

Answer: FALSE Explanation: If bonds are purchased at a discount, the adjusting entry to amortize the discount will increase the investment account and increase interest revenue each payment period.

Diff: 2 Type: TF L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 32 .

11) For a company that prepares its financial results in accordance with IFRS, a held to maturity bond investment must use the effective rate interest method.

Answer: TRUE Diff: 2 Type: TF L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 12) Under ASPE a reporting an organization can use either the effective interest rate method or straight line to account for the amortization of their bond investment.

Answer: TRUE Diff: 2 Type: TF L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 13) Investments in long-term bonds are shown on the balance sheet at their current market value.

Answer: FALSE Explanation: Long-term bond investments are reported on the balance sheet at their amortized cost.

Diff: 2 Type: TF L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 14) From the buyer's perspective, a discount on a long-term investment in bonds means additional interest revenue while a premium means less interest revenue.

Answer: TRUE Diff: 3 Type: TF L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

33 .

15) On May 1, 2020, Gigajoule Company paid $180,000 to purchase $200,000 of bonds that carry a 5% contract rate of interest and will mature in 5 years from the date of purchase. Interest on the bonds is paid May 1 and November 1 of each year. Gigajoule Company is a private company that prepares its financial statements in accordance with ASPE. It plans to hold the bonds until maturity and amortizes the premium or discount on bonds using the straight-line method each interest payment date. As of December 31, 2020, the bonds had a market value of $185,000. a. Prepare all necessary journal entries for 2020 dealing with the investment in bonds. b. Show how the bonds would be presented on the balance sheet dated December 31, 2020.

Answer: a.

May 1 Long-Term Investment in Bonds 180,000 Cash 180,000 Nov.1 Cash 5,000 Interest Revenue ($200,000 × 0.05 × 6/12) 5,000 Nov.1 Long-Term Investment in Bonds 2,000 Interest Revenue ($200,000 - $180,000) × (6/60) 2,000 Dec.31 Interest Receivable 1,667 Interest Revenue ($200,000 × 0.05 × 2/12) 1,667 Dec.31 Long-Term Investment in Bonds 667 Interest Revenue ($200,000 - $180,000) × (2/60) 667 b. The investment would be classified as a long-term investment on the balance sheet. Interest receivable would be classified as a current asset on the balance sheet.

Current assets Interest receivable

2,000

Long-term investments Long-term investment in bonds 182,667 ($180,000 + $2,000 + $667) Diff: 3 Type: ES L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

34 .

16) How does an investor account for a long-term investment in bonds?

Answer: The investor records the investment at cost and will amortize the difference between cost and the face value of the bonds over their duration. If the bonds were purchased at a discount, the adjusting entry to amortize the discount will increase the Investment account and increase interest revenue each payment period. If the bonds were purchased at a premium, the adjusting entry to amortize the premium will decrease the Investment account and decrease interest revenue each payment period.

Diff: 1 Type: ES L.O.: Appendix B-3 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 11.4

Report investing activities on the statement of cash flows

1) The purchase of long-term investments would appear on a cash flow statement in the: A) operating activities section B) investing activities section C) financing activities section D) would not appear on a cash flow statement Answer: B Diff: 1 Type: MC L.O.: Appendix B-4 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 2) The sale of a long-term investment would appear on a cash flow statement as a: A) cash inflow in the operating activities section B) cash inflow in the investing activities section C) cash inflow in the financing activities section D) cash outflow in the investing activities section Answer: B Diff: 1 Type: MC L.O.: Appendix B-4 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

35 .

3) On the cash flow statement, the purchase and sale of bonds of other companies to be held for an extended time are reported as: A) operating activities B) financing activities C) investing activities D) would not appear on a cash flow statement Answer: C Diff: 2 Type: MC L.O.: Appendix B-4 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 4) Purchases of bonds of other companies are reported as financing activities on the cash-flow statement.

Answer: FALSE Explanation: The purchase and sale of bonds of other companies to be held for an extended time are reported as investing activities.

Diff: 2 Type: TF L.O.: Appendix B-4 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 11.5

Explain the impact of the time value of money on certain types of investments

1) All of the following are necessary to compute the future value of a single amount except the: A) interest rate B) length of time between investment and future payment or receipt C) maturity value D) amount of initial payment or receipt Answer: C Diff: 2 Type: MC L.O.: Appendix B-5 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

36 .

2) In present value calculations, the process of determining the present value of a single sum of money is called: A) allocating B) pricing C) negotiating D) discounting Answer: D Diff: 2 Type: MC L.O.: Appendix B-5 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 3) The future value of 1 will always be: A) equal to 1 B) greater than 1 C) less than 1 D) equal to the interest rate Answer: B Diff: 2 Type: MC L.O.: Appendix B-5 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 4) A single amount of $4,700 is to be received in 3 years. If the single amount is discounted at 6% for 3 periods, the present value is ________. The present value of $1 for 3 periods at 6% is 0.840. The present value of an ordinary annuity of $1 for 3 periods at 6% is 2.673. (Round your final answer to the nearest dollar.)

A) $3,948 B) $4,418 C) $4,700 D) $12,563 Answer: A Explanation: $4,700 × 0.84 = $3,948 Diff: 2 Type: MC L.O.: Appendix B-5 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

37 .

5) Cooper Company has purchased equipment that requires annual payments of $18,000 to be paid at the end of each of the next 6 years. The discount rate is 8%. The present value of $1 for six periods at 8% is 0.630. The present value of an ordinary annuity of $1 for six periods at 8% is 4.623. What amount will be assigned to the equipment? (Round your final answer to the nearest dollar.)

A) $3,894 B) $83,214 C) $94,554 D) $108,000 Answer: B Explanation: 4.623 × $18,000 = $83,214 Diff: 2 Type: MC L.O.: Appendix B-5 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 6) On January 1, 2020, bonds with a face value of $72,000 were sold. The bonds mature on January 1, 2030. The face interest rate is 6%. The bonds pay interest semiannually on July 1 and January 1. The market rate of interest is 10%. What is the market price of the bonds? The present value of $1 for 20 periods at 5% is 0.377. The present value of an ordinary annuity of $1 for 20 periods at 5% is 12.462. The present value of $1 for 20 periods at 3% is 0.554. The present value of an ordinary annuity of $1 for 20 periods at 3% is 14.878. (Round your final answer to the nearest dollar.)

A) $54,062 B) $74,160 C) $72,024 D) $72,000 Answer: A Explanation: ($72,000 × 0.377) + ($72,000 × 3% × 12.462) = $54,062 Diff: 2 Type: MC L.O.: Appendix B-5 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

38 .

7) On January 1, 2020, bonds with a face value of $94,000 were sold. The bonds mature on January 1, 2030. The face interest rate is 8% annually. The bonds pay interest semiannually on July 1 and January 1. The market rate of interest is 10% annually. What is the market price of the bonds? The present value of $1 for 20 periods at 5% is 0.377. The present value of an ordinary annuity of $1 for 20 periods at 5% is 12.462. The present value of $1 for 10 periods at 10% is 0.463. The present value of an ordinary annuity of $1 for 10 periods at 10% is 6.145.

(Round your final answer to the nearest dollar.)

A) $82,295 B) $66,627 C) $94,000 D) $97,760 Answer: A Explanation: ($94,000 × 0.377) + ($94,000 × 4% × 12.462) = $82,295 Diff: 2 Type: MC L.O.: Appendix B-5 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state 8) Briefly explain the meaning of the term "present value."

Answer: A present value is the value on a given date of a future payment or series of payments, discounted to reflect the time value of money.

Diff: 2 Type: ES L.O.: Appendix B-5 CPA COMPETENCIES: Appendix B 1.2.2 Evaluates treatment for routine transactions 5.1.1 Evaluates the entity's financial state

39 .