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Classifications of Accounting Concepts and Accounts

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The lettered items below represent a classification scheme for the concepts of financial accounting. Match each number term with the letter of the category in which it belongs.

a. Decision makers (users of accounting information)
b. Business activities or entities relevant to accounting measurement
c. Objectives of accounting information
d. Accounting measurement considerations
e. Accounting processing considerations
f. Qualitative characteristics
g. Accounting conventions
h. Financial statements

1. conservatism
2. verifiability
3. statement of cash flows
4. materiality
5. reliability
6. recognition
7. cost-benefit
8. understandability
9. business transactions
10. consistency
11. full disclosure
12. finishing information that is useful to investors and creditors
13. Specific business entities
14. classification
15. management
16. neutrality
17. internal accounting
18. valuation
19. investors
20. timeliness
21. relevance
22. furnishing information that is useful in assessing cash flow prospects


Each of the statements below violates a convention in accounting. State which of the following accounting conventions is violated: comparability and consistency, materiality, conservatism, full disclosure, or cost-benefit.

1. A series of reports that are time-consuming and expensive to prepare is presented to the board of directors each month even though the reports are never used.
2. A company changes its method of accounting for depreciation.
3. The company in #2 does not indicate in the financial statements that the method of depreciation was changed, nor does it specify the effect of the change on net income.
4. A new office building next to the factory is debited to the Factory account because it represents a fairly small dollar amount in relation to the factory.
5. The asset account for a pickup truck still used in the business is written down to what the truck could be sold for even though the carrying value under conventional depreciation methods is higher.


The lettered items below represent a classification scheme for a balance sheet, and the numbered items are account titles, Match each account with the letter of the category in which it belongs.

a. current assets
b. investments
c. property, plant, and equipment
d. intangible assets
e. current liabilities
f. long-term liabilities
g. owner's equity
h. not on balance sheet

1. patent
2. building held for sale
3. prepaid rent
4. wages payable
5. note payable in five years
6. building used in operations
7. fund held to pay off long-term debt
8. inventory
9. prepaid insurance
10. depreciation expense
11. accounts receivable
12. interest expense
13. unearned revenue
14. short-term investments
15. accumulated depreciation
16. M. Capelli, Capital


The following data pertain to a corporation: Prepare a classified balance sheet; omit the heading.

Cash, $31,200
Investments in Six-Month Government Securities, $16,400
Accounts Receivable, $38,000
Inventory, $40,000
Prepaid Rent, $1,200
Investment in Corporate Securities (long-term), $20,000
Land, $8,000
Building, $70,000
Accumulated Depreciation, Building, $14,000
Equipment, $152,000; Accumulated Depreciation, Equipment, $17,000
Copyright, $6,200
Accounts Payable, $51,000
Revenue in Advance, $2,800
Bonds Payable, $60,000
Common Stock, $10 par, 10,000 shares authorized, issued, and outstanding, $100,000
Paid-in Capital in Excess of Par Value, $50,000
Retained Earnings, $88,200



Owner's Equity


Using the classification scheme below for a multistep income statement, match each account with the letter of the category in which it belongs.

a. net sales
b. cost of goods sold
c. selling expenses
d. general and administrative expenses
e. other revenues and expenses
f. not on income statement

1. Purchases
2. Sales Discounts
3. Merchandise Inventory (beginning)
4. Interest income
5. Advertising Expense
6. Office Salaries Expense
7. Freight Out Expense
8. Prepaid Insurance
9. Utilities Expense
10. Sales Salaries Expense
11. Rent Expense
12. Purchases Returns and Allowances
13. Freight In
14. Depreciation Expense, Delivery Equipment
15. Wages Payable
16. Interest Expense

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Accounting Questions

Part One: Balance Sheet and Income Statement Classifications.
Specify on the answer sheet the letter of the financial statement classification the account would appear in. Use only the classifications shown.

Balance Sheet Income and Retained Earnings Statement
a. Current Assets j. Sales Revenue
b. Investments k. Cost of Goods Sold
c. Property, Plant, and Equipment l. Operating Expenses
d. Intangible Assets m. Other Revenues and Gains
e. Other Assets n. Other Expenses and Losses
f. Current Liabilities o. Extraordinary Item
g. Long-term Debt p. Retained Earnings Section
h. Capital Stock q. Not on the Statements
i. Retained Earnings

Account balances taken from the ledger of Morin Company on December 31, 2005 follow:

1. Capital Stock, $10 par

2. Loss on Sale of Equipment

3. Land

4. Notes Payable?Short Term

5. Accum. Depreciation?Buildings

6. Mortgage Payable due 2007

7. Sales

8. Dividends Declared and Paid

9. Merchandise Inventory

10. Salaries and Wages Expense

11. Merchandise on order with supplier

12 Interest Revenue

13. Accounts Payable

14. Long-Term Investments

15. Accounts Receivable

16. Error made in computing 2003 depreciation expense

Part Two ? Key Conceptual Terms.
Various accounting assumptions, principles, constraints, and characteristics are listed below. Select those which best justify the following accounting procedures and indicate the corresponding letter(s) in the answer sheet provided. A letter may be used more than once or not at all.
a. Historical cost f. Economic entity k. Revenue recognition
b. Relevance g. Materiality l. Full disclosure
c. Monetary unit h. Conservatism m. Substance over form
d. Going concern i. Periodicity n. Industry practices
e. Consistency j. Matching o. Reliability

1. Using the lower of cost or market approach in valuing inventories.
2. Describing the depreciation methods used in the financial statements.
3. Applying the same accounting treatment to similar accounting events.
4. The quality which helps users make predictions about present, past, and future events.
5. Recording a transaction when goods or services are exchanged for cash or claims to cash.
6. Expensing, when acquired, metal office wastebaskets having a life of ten years.
7. Provides the figure at which to record a liability.
8. The preparation of timely reports on continuing operations.
9. Not reporting assets at liquidation prices (do not use "historical cost").
10. Reporting information which is faithfully representative of economic events.

Part Three ? Multiple Choice Questions. Specify on the answer sheet the best choice.

1. Which of the following transactions would be considered a financing activity in preparing a statement of cash flows?
a. Amortizing a discount on bonds payable
b. Recording net income from operations
c. Selling common stock
d. Purchasing inventory

2. The net income for the year ended December 31, 2004, for Ryan Company was $720,000. Additional information is as follows:

Capital expenditures $1,200,000
Depreciation on plant assets 450,000
Cash dividends paid on common stock 180,000
Increase in noncurrent deferred tax liability 45,000
Amortization of patents 21,000

Based on the information given above, what should be the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 2004?
a. $1,056,000.
b. $1,146,000.
c. $1,191,000.
d. $1,236,000.

3. Information concerning the debt of Dickey Company is as follows:
Short-term borrowings:
Balance at December 31, 2004 $525,000
Proceeds from borrowings in 2005 325,000
Payments made in 2005 (450,000)
Balance at December 31, 2005 $400,000
Current portion of long-term debt:
Balance at December 31, 2004 $1,625,000
Transfers from caption "Long-Term Debt" 500,000
Payments made in 2005 (1,225,000)
Balance at December 31, 2005 $ 900,000
Long-term debt:
Balance at December 31, 2004 $9,000,000
Proceeds from borrowings in 2005 2,250,000
Transfers to caption "Current Portion of Long-Term Debt" (500,000)
Payments made in 2005 (1,500,000)
Balance at December 31, 2005 $9,250,000

In preparing a statement of cash flows for the year ended December 31, 2005, for Dickey Company, cash flows from financing activities would reflect
Inflow Outflow
a. $2,000,000 $2,000,000
b. $2,250,000 $2,250,000
c. $2,650,000 $2,575,000
d. $2,575,000 $3,175,000

4. How does failure to record accrued revenue distort the financial reports?
a. It understates revenue, net income, and current assets.
b. It understates net income, stockholders' equity, and current liabilities.
c. It overstates revenue, stockholders' equity, and current liabilities.
d. It understates current assets and overstates stockholders' equity.

5. On June 15, 2004 Greer Corporation accepted delivery of merchandise which it purchased on account. As of June 30 Greer had not recorded the transaction or included the merchandise in its inventory. The effect of this error on its balance sheet for June 30, 2004 would be
a. assets and stockholders' equity were overstated but liabilities were not affected.
b. stockholders' equity was the only item affected by the omission.
c. assets and liabilities were understated but stockholders' equity was not affected.
d. assets and stockholders' equity were understated but liabilities were not affected.

6. Notes to financial statements should not be used to
a. describe the nature and effect of a change in accounting principles.
b. identify substantial differences between book and tax income.
c. correct an improper financial statement presentation.
d. indicate basis for asset valuation.

7. The occurrence which most likely would have no effect on 2004 net income (assuming that all amounts involved are material) is the
a. sale in 2004 of an office building contributed by a stockholder in 1980.
b. collection in 2004 of a receivable from a customer whose account was written off in 2003 by a charge to the allowance account.
c. settlement based on litigation in 2004 of previously unrecognized damages from a serious accident which occurred in 2002.
d. worthlessness determined in 2004 of stock purchased on a speculative basis in 2000.

8. Under which of the following conditions would material flood damage be considered an extraordinary item for financial reporting purposes?
a. Only if floods in the geographical area are unusual in nature and occur infrequently.
b. Only if the flood damage is material in amount and could have been reduced by prudent management.
c. Under any circumstances as an extraordinary item.
d. Flood damage should never be classified as an extraordinary item.

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