Sample Review questions: Income statements, financial accounting

Sample Review questions:

____ 1. Which one of the following financial statements reports an entity's financial position at a specific date?

a. Balance sheet
b. Statement of retained earnings
c. Income statement
d. Both the income statement and the balance sheet

____ 2. The Ranier Company reported the following items on its financial statements for the year ending December 31, 2012:

Sales $ 560,000 Cost of goods sold $400,000
Salary expense 40,000 Interest expense 30,000
Dividends 20,000 Income tax expense 25,000

How much will be reported as retained earnings on Ranier's balance sheet at December 31, 2012, if this is the first year of operations?

a. $ 45,000 c. $ 85,000
b. $ 65,000 d. Not enough information is provided.

____ 3. Raymond Corporation reported the following information for the year ended December 31, 2012:

Net income $ 10,000 Dividends 6,000 Retained earnings at December 31, 2012 - 25,000

What was the economic effect of the payment of Raymond's dividends?

a. The dividend reduced net income for 2012.
b. The dividend should be equal to net income if the company's accounting equation is in balance.
c. The dividends reduce total retained earnings for the year.
d. The dividends must be paid whenever Raymond Corp. reports net income.

____ 4. Which of the following organizations is responsible for setting auditing standards followed by public accounting firms in conducting independent audits of financial statements?

a. Financial Accounting Standards Board (FASB)
b. Securities and Exchange Commission (SEC)
c. Public Company Accounting Oversight Board (PCAOB)
d. International Accounting Standards Board (IASB)

____ 5. The natural progression in items from one statement to another and preparation of financial statements is best represented by the following order:

a. Balance sheet and statement of cash flows > statement of retained earnings > income statement
b. Balance sheet and statement of cash flows > income statement > statement of retained earnings.
c. Statement of retained earnings > income statement > balance sheet and statement of cash flows
d. Income statement > statement of retained earnings > balance sheet and statement of cash flows

____ 6. Which of the following statements is true concerning external users of financial information?

a. External users need detailed records of the business to make informed decisions.
b. External users are primarily responsible for the preparation of financial statements.
c. External users rely on the financial statements to help make informed decisions.
d. External users rely on management to tell them whether the company is a good investment

____ 7. The preparation of financial statements requires that the information be understandable

a. Only to CPAs.
b. To those willing to spend the time to understand it.
c. Only to those who take an accounting course.
d. Only to financial analysts and brokers.

____ 8. Which one of the following items is reported as a current asset on a classified balance sheet?

a. Inventory c. Land
b. Accounts payable d. Common stock

____ 9. The following information is given for Jutras Company:

Cash $ 50,000 Inventory $ 45,000
Land 75,000 Accumulated Depreciation 40,000
Plant & Equipment 150,000 Accounts Payable 60,000

What are the company's current assets?

a. $220,000 c. $130,000
b. $155,000 d. $ 95,000

____ 10. Which of the following would not be considered to be an intangible asset?

a. Franchises c. Investments
b. Copyrights d. Goodwill

Nadia & Sisters, Inc.

Nadia & Sisters, Inc. a retailer of women's clothing, earned a net profit of $77,000 for 2012. The balance
sheet for Nadia & Sisters includes the following items:

Cash $29,000 Accounts receivable $39,000
Inventory 79,000 Prepaid insurance $ 3,000
Land 90,000 Accounts payable $21,000
Taxes payable 29,000 Capital stock $50,000
Retained earnings 97,000 Long-term notes payable $43,000

____ 11. Read the information for Nadia & Sisters, Inc. The average current ratio for stores such as Nadia & Sisters is 2.4 to 1. What does this comparison tell you about its liquidity?

a. It is more liquid than its competitors
b. It has more long-term assets than its competitors
c. Since a rule of thumb for current ratios is 2 to 1, neither Nadia & Sisters nor its competitors is liquid.
d. Nadia & Sisters is more profitable than its competitors.

____ 12. What is the correct method for calculating working capital?

a. Total Assets minus Total Liabilities c. Current Assets minus Current Liabilities
b. Current Assets minus Total Liabilities d. Current Assets plus Current Liabilities

____ 13. Which of the following events will cause a company's current ratio to decrease?

a. The sale of inventory for cash.
b. The sale of inventory for credit (accounts receivable).
c. Issuing stock for cash.
d. Paying off long-term debt with cash.

Garage Solutions

Garage Solutions began operations on January 2, 2012, with an investment of $50,000 by each of its two
stockholders. Net income for its first year of business was $240,000. Garage Solutions paid a total of
$100,000 in dividends to its stockholders during the year.

____ 14. Read the information about Garage Solutions. If the company's revenues were $500,000 for the year ended December 31, 2012, how much were total expenses?

a. $160,000 c. $640,000
b. $260,000 d. $740,000

____ 15. Which financial statement reports the sources and uses of an entity's cash resources?

a. Income statement c. Balance sheet
b. Statement of retained earnings d. Statement of cash flows

____ 16. Which of the following best describes a company's operating activities?

a. Operating activities focus on the sale of products and services.
b. Operating activities are necessary to provide the money to start a business.
c. Operating activities are needed to provide the valuable assets required to run a business.
d. Operating activities represent the right to receive a benefit in the future

____ 17. Which one of the following is an operating activity of a business?

a. Paying for purchases of inventory c. Borrowing money from a bank
b. Issuing stock for cash d. Purchasing a manufacturing plant.

____ 18. Which of the following is a current asset?

a. Land
b. Buildings
c. Store fixtures
d. Prepaid insurance

____ 19. Payment is received from customers who were billed earlier for services provided for them. For this transaction, identify the effect on the accounting equation.

a. Assets increase and liabilities increase.
b. Assets increase and stockholders' equity increases.
c. Liabilities increase and stockholders' equity decreases.
d. There is no effect on the accounting equation as one asset account increases while
another asset account decreases.

____ 20. The Carson Company purchased a building for $75,000 in cash. What is the effect on current assets?

a. Increase in current assets c. No effect on current assets
b. Decrease in current assets d. Unable to determine

____ 21. Tanner Enterprises received payment from its customers for previous sales on credit. What was the impact on its working capital?

a. Increase in working capital c. No effect on working capital
b. Decrease in working capital d. Unable to determine

____ 22. The correct term for an entry made to the left side of an account is

a. Double-entry system
b. Debit
c. Credit
d. Journalizing

____ 23. The correct term for the process of recording the economic effects of business transactions in a book of original entry is

a. Double-entry system
b. Debit
c. Credit
d. Journalizing

____ 24. All of the following accounts have normal credit balances except

a. Accounts Payable c. Investments
b. Common Stock (Capital Stock) d. Service Revenue

____ 25. Which of the following will not cause a trial balance to be out of balance?

a. The balance for an account is incorrectly computed.
b. A debit entry is posted as a credit.
c. A credit entry is posted to the wrong account as a credit.
d. An account is accidentally omitted from the trial balance.

Laramee Inc.
Laramee Inc. reports these account balances at January 1, 2012:

Retained Earnings $ 49,000
Accounts Receivable 20,000
Accounts Payable 24,000
Capital Stock 185,000
Land 153,000
Cash 13,000
Equipment 20,000
Notes Payable 28,000
Buildings 80,000

____ 26. See the account balances for Laramee Inc.

On January 31, Laramee collected $12,000 of its accounts receivable and paid $11,000 on its note payable. In Laramee's trial balance prepared on January 1, 2012, the total of the credit column is:

a. $182,000
b. $286,000
c. $196,000
d. $166,000

____ 27. Your bookkeeper is off for the day and you are trying to figure out what her last entry in the journal could be for. Unfortunately, she only recorded the debit side of the transaction as $4,400 to Accounts Payable. It is possible that this debit could correspond to:

a. A purchase of equipment costing $4,400 on credit.
b. A payment of $4,400 to a supplier to settle a balance due.
c. A $4,400 sale to a customer.
d. A $4,400 issuance of the company's capital stock.
____ 28. Transactions are recorded in the general journal in:

a. Alphabetical order.
b. Account number order.
c. Chronological order.
d. Financial statement order.

____ 29. Sampson Auto Mall sells new trucks and pays each salesperson a commission of $1,000 for each truck sold. During the month of August, a salesperson, Peter, sold 3 new trucks. Sampson pays Peter on the 10th day of the month following the sale. Peter operates on the cash basis; the car dealer operates on the accrual basis.

Which of the following statements is true?

a. Peter will recognize commission revenue earned in the amount of $3,000 in August.
b. Sampson will recognize commission expense in the amount of $3,000 in August.
c. Peter will recognize commission expense in the amount of $3,000 in September.
d. Peter will recognize revenue in the same month that the car dealer recognizes expense.

____ 30. When are revenues and expenses recognized in the same accounting period that cash receipts and payments occur?

a. Under the cash basis of accounting
b. Under the accrual basis of accounting
c. Under the adjusting method of accounting
d. Under both the cash and accrual bases of accounting

____ 31. Which of the following concepts is important to accrual accounting?

a. Time period, because accrual accounting divides earnings into time periods
b. Monetary unit, because inflation is a big factor in the environment
c. Cash basis, because if cash is not received, revenue is not accrued
d. Entity concept, because personal transactions must be separated from business transactions

____ 32. Vargus Corp. purchased equipment at a cost of $260,000 in January, 2008. As of January 1, 2012, depreciation of $88,000 had been recorded on this asset. Depreciation expense for 2012 is $22,000. After the adjustments are recorded and posted at December 31, 2012, what are the balances for the Depreciation Expense and Accumulated Depreciation?

a. $ 22,000 $ 110,000
b. $ 22,000 $ 88,000
c. $ 110,000 $ 110,000
d. $ 110,000 $ 88,000

____ 33. Failure to record the earned portion of unearned revenue would result in which of the following?

a. Net income being understated c. Stockholders' equity being overstated
b. No effect on total liabilities d. Total assets being understated

____ 34. Which one of the following is the last step in the accounting cycle?

a. Journalizing business transactions c. Closing the accounts
b. Recording and posting adjustments d. Preparing financial statements

____ 35. Which one of the following steps in the accounting cycle is optional rather than required?

a. Business transactions are recorded c. The accounts are closed
b. Adjustments are recorded d. Work sheets are prepared

____ 36. Freeman Company prepares monthly financial statements and will record.a prepaid account for each of the following except:

a. Freeman paid for three months of window washing services in advance.
b. Freeman purchases a four-year casualty insurance policy.
c. A tenant that pays Freeman for six months of rent in advance.
d. Freeman purchase office supplies to last for several months.

____ 37. Which of the following transactions involves an accrued asset?

a. Wages earned by employees but not yet paid
b. Rent collected in advance from a tenant
c. Rent owed by a tenant but not yet collected
d. One year's premium on life insurance policy paid in advance

Problem

Canyon Corporation

The accountant for the Canyon Corporation prepared the following list from the company's accounting
records for the year ended December 31, 2012:

Retained earnings ? Prepaid expenses $ 3,000
Cash $ 7,000 Common stock 40,000
Accounts payable 15,000 Accounts receivable 17,000
Sales revenue 125,000 Interest income 500
Cost of sales 70,000 Salary expense 4,000
Land 75,000 Income tax expense 200
Notes payable 15,000 Selling expense 45,000
Inventory 20,000 Salaries payable 5,000

38. Read the information for Canyon Corporation. Using good form, prepare a Balance Sheet for the Canyon Corporation.

39. The following information is available from the records of Focus Seascapes, Inc. at the end of the 2012 calendar year:

Accounts payable $ 4,700
Service revenues 28,000
Accounts receivable 3,600
Office equipment 9,200
Capital stock ?
Rent expense 2,500
Cash 13,200
Retained earnings, beginning of year 10,500
Dividends paid during the year 3,800
Salary and wage expense 14,000

Required:
(1) What is Focus' net income for the year ended December 31, 2012?
(2) What is Focus' retained earnings balance for the year ended December 31, 2012?

Singer Company

The following income statement items are taken from the records of Singer Company for the year ended
December 31, 2010:
Advertising expense $2,600
Commission expense 3,515
Cost of goods sold 29,200
Depreciation expense - Office Building 4,000
Income tax expense 190
Insurance expense - sales person's auto 3,350
Interest expense 1,400
Interest revenue 2,340
Rent revenue 7,700
Salaries and wages expense - Office 13,660
Sales Revenue 50,300
Supplies expense - Office 1,990
40. Read the information about Singer Company

Required:

Prepare a single-step income statement for the year ended December 31, 2010.

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