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    Accrual Basis Net Income; Materiality, Cash Flow Statement

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    1. Molly's Auto Detailers maintains its records on the cash basis. During 2011, Molly's collected $72,000 from customers and paid $21,000 in expenses. Depreciation expense of $5,000 would have been recorded on the accrual basis. Over the course of the year, accounts receivable increased $4,000, prepaid expenses decreased $2,000, and accrued liabilities decreased $1,000. Molly's accrual basis net income would be:

    2. Pat's Custom Tuxedo Shop maintains its records on the cash basis. During this past year Pat's collected $42,000 in tailoring fees, and paid $14,000 in expenses. Depreciation expense totaled $2,000. Accounts receivable increased $1,500, supplies increased $4,000, and accrued liabilities increased $2,500. Pat's accrual basis net income would be:

    3. Materiality can be affected by the dollar amount of man item, the nature of the item, or both.
    a. true
    b. false

    4. The statement of cash flows summarizes transactions that caused cash and cash equivalents to change during a reporting period?
    a. true
    b. false

    5. Permanent accounts would not include:
    a. interest expense
    b. wages payable
    c. prepaid rent
    d. unearned revenues

    6. When Castle Corporation pays premiums, the transaction is recorded as a debit to prepaid insurance. Additional information for the year ended December 31 is as follows: Prepaid insurance at January 1 $52,500, insurance expense recognized during the year 218,750, and prepaid insurance at December 31 61,250. What was the total amount cash paid by Castle for insurance premiums during the year?

    a. 218,750
    b. 166,250
    c. 210,000
    d. 227,500.

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    Solution Preview

    Solution is provided in the attached Excel file.

    All necessary workings are given by preparing ledger accounts affected and missing figures traced. Answers to other multiple choice questions are also given in the same file in the sequence as per the posted problem.

    Question No 1
    Account Receivable
    Details Amount Amount
    Beg Bal $8,000 Cash received $72,000
    Sales Revenue $76,000 Ending Bal $12,000
    $84,000 $84,000

    Details Amount Amount
    Cash paid $21,000 Transferred to Prepaid-Current $4,000
    Transferred from Prepaid Exp-Last year $6,000 ...

    Solution Summary

    The solution discusses accural basis net income, materiality, cash flow statement and permanent accounts.