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Questions and Answers of Accounting

Statement of Financial Accounting Concepts No. 5 identifies four characteristics that an item must have before it is recognized in the financial statements. What are these four characteristics?
Briefly describe the types of information concerning financial position, income, and cash flows that might be provided:(a) Within the main body of the financial statements,(b) In the notes to the
In January 2005, Alan Jackson Inc. doubled the amount of its outstanding stock by selling on the market an additional 10,000 shares to finance an expansion of the business. You propose that this
Describe the two major constraints inherent in the presentation of accounting information.
What are some of the costs of providing accounting information? What are some of the benefits of accounting information? Describe the cost-benefit factors that should be considered when new
How are materialities (and immateriality) related to the proper presentation of financial statements? What factors and measures should be considered in assessing the materiality of a misstatement in
The treasurer of Joan Osborne Co. has heard that conservatism is a doctrine that is followed in accounting and, therefore, proposes that several policies be followed that is conservative in nature.
Discuss whether the changes described in each of the cases below require recognition in the CPA’s report as to consistency. (Assume that the amounts are material.)(a) After 3 years of computing
Identify which qualitative characteristic of accounting information is best described in each item below. (Do not use relevance and reliability.)(a) The annual reports of Best Buy Co. are audited by
For each item below, indicate to which category of elements of financial statements it belongs.(a) Retained earnings(b) Sales(c) Additional paid-in capital(d) Inventory(e) Depreciation(f) Loss on
Identify which basic assumption of accounting is best described in each item below.(a) The economic activities of FedEx Corporation are divided into 12-month periods for the purpose of issuing annual
Identify which basic principle of accounting is best described in each item below.(a) Norfolk Southern Corporation reports revenue in its income statement when it is earned instead of when the cash
Which constraints on accounting information are illustrated by the items below?(a) Zip’s Farms, Inc. reports agricultural crops on its balance sheet at market value.(b) Crimson Tide Corporation
Presented below are three different transactions related to materiality. Explain whether you would classify these transactions as material.(a) Marcus Co. has reported a positive trend in earnings
If the going concern assumption is not made in accounting, what difference does it make in the amounts shown in the financial statements for the following items?(a) Land.(b) Unamortized bond
What accounting assumption, principle, or modifying convention does Target Corporation use in each of the situations below?(a) Target uses the lower of cost or market basis to value inventories.(b)
Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material.(a) Legal fees paid in connection with the purchase of land
(Qualitative Characteristics) SFAC No. 2 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative
(Qualitative Characteristics) The qualitative characteristics that make accounting information useful for decision-making purposes are as follows.Identify the appropriate qualitative
Ten interrelated elements that are most directly related to measuring the performance and financial status of an enterprise are provided below.Identify the element or elements associated with the 12
(Assumptions, Principles, and Constraints) Presented below are the assumptions, principles, and constraints used in this chapter.1. Economic entity assumption 5. Historical cost principle 9.
(Assumptions, Principles, and Constraints) Presented below are a number of operational guidelines and practices that have developed over time.Select the assumption, principle, or constraint that most
(Accounting Principles—Comprehensive) Presented below are a number of business transactions that occurred during the current year for Fresh Horses, Inc. In each of the situations, discuss the
(Accounting Principles—Comprehensive) Presented below is information related to Garth Brooks, Inc. Comment on the appropriateness of the accounting procedures followed by Garth Brooks, Inc.(a)
(Conceptual Framework—General) Roger Morgan has some questions regarding the theoretical framework in which standards are set. He knows that the FASB and other predecessor organizations have
(Conceptual Framework—General) The Financial Accounting Standards Board (FASB) has developed a conceptual framework for financial accounting and reporting. The FASB has issued seven Statements of
(Objectives of Financial Reporting) Regis Gordon and Kathy Medford are discussing various aspects of the FASB’s pronouncement Statement of Financial Accounting Concepts No. 1, “Objectives of
(Qualitative Characteristics) Accounting information provides useful information about business transactions and events. Those who provide and use financial reports must often select and evaluate
(Revenue Recognition and Matching Principle) After the presentation of your report on the examination of the financial statements to the board of directors of Bones Publishing Company, one of the
(Revenue Recognition and Matching Principle) On June 5, 2003, McCoy Corporation signed a contract with Sulu Associates under which Sulu agreed (1) to construct an office building on land owned by
(Matching Principle) An accountant must be familiar with the concepts involved in determining earnings of a business entity. The amount of earnings reported for a business entity is dependent on the
(Matching Principle) Accountants try to prepare income statements that are as accurate as possible. A basic requirement in preparing accurate income statements is to match costs against revenues
(Matching Principle) Carlos Rodriguez sells and erects shell houses, that is, frame structures that are completely finished on the outside but are unfinished on the inside except for flooring,
(Qualitative Characteristics) Recently, your Uncle Waldo Ralph, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some
(Matching) Hinckley Nuclear Power Plant will be “mothballed” at the end of its useful life (approximately 20 years) at great expense. The matching principle requires that expenses be matched to
Give an example of a transaction that results in:(a) A decrease in an asset and a decrease in a liability.(b) A decrease in one asset and an increase in another asset.(c) A decrease in one liability
Do the following events represent business transactions? Explain your answer in each case.(a) A computer is purchased on account.(b) A customer returns merchandise and is given credit on account.(c)
Name the accounts debited and credited for each of the following transactions.(a) Billing a customer for work done.(b) Receipt of cash from customer on account.(c) Purchase of office supplies on
Why are revenue and expense accounts called temporary or nominal accounts?
Omar Morena, a fellow student, contends that the double entry system means that each transaction must be recorded twice. Is Omar correct? Explain.
Is it necessary that a trial balance be taken periodically? What purpose does it serve?
Indicate whether each of the items below is a real or nominal account and whether it appears in the balance sheet or the income statement.(a) Prepaid Rent.(b) Salaries and Wages Payable.(c)
Employees are paid every Saturday for the preceding work week. If a balance sheet is prepared on Wednesday, December 31, what does the amount of wages earned during the first three days of the week
(a) How do the components of revenues and expenses differ between a merchandising company and a service enterprise?(b) Explain the income measurement process of a merchandising company.
What is the purpose of the Cost of Goods Sold account? (Assume a periodic inventory system.)
Under a perpetual system, what is the purpose of the Cost of Goods Sold account?
If the $3,900 cost of a new microcomputer and printer purchased for office use were recorded as a debit to Purchases, what would be the effect of the error on the balance sheet and income statement
What differences are there between the trial balance before closing and the trial balance after closing with respect to the following accounts?(a) Accounts Payable.(b) Expense accounts.(c) Revenue
What are adjusting entries and why are they necessary?
What are closing entries and why are they necessary?
What are closing entries and why are they necessary? Discuss.
Selanne Enterprises made the following entry on December 31, 2005.Dec. 31, 2005 Interest Expense ...................................... 10,000Interest Payable
“A work sheet is a permanent accounting record, and its use is required in the accounting cycle.” Do you agree? Explain.
Distinguish between cash-basis accounting and accrual basis accounting. Why is accrual-basis accounting acceptable for most business enterprises and the cash basis unacceptable in the preparation of
When wages expense for the year is computed, why are beginning accrued wages subtracted from and ending accrued wages added to, wages paid during the year?
List two types of transactions that would receive different accounting treatment using(a) Strict cash-basis accounting, and(b) A modified cash basis.
What are reversing entries, and why are they used?
Transactions for Argot Company for the month of May are presented below. Prepare journal entries for each of these transactions. (You may omit explanations.)May 1 B.D. Argot invests $3,000 cash in
Brett Favre Repair Shop had the following transactions during the first month of business. Journalize the transactions.Aug. 2 Invested $12,000 cash and $2,500 of equipment in the business.7 Purchased
On July 1, 2005, Blair Co. pays $18,000 to Hindi Insurance Co. for a 3-year insurance contract. Both companies have fiscal years ending December 31. For Blair Co. journalize the entry on July 1 and
Using the data in BE3-3, journalize the entry on July 1 and the adjusting entry on December 31 for Hindi Insurance Co. Hindi uses the accounts Unearned Insurance Revenue and Insurance Revenue.
Mogilny Corporation owns a warehouse. On November 1, it rented storage space to a lessee (tenant) for 3 months for a total cash payment of $2,700 received in advance. Prepare Mogilny’s November 1
Catherine Janeway Company’s weekly payroll, paid on Fridays, totals $6,000. Employees work a 5-day week. Prepare Janeway’s adjusting entry on Wednesday, December 31, and the journal entry to
Included in Martinez Company’s December 31 trial balance is a note receivable of $10,000. The note is a 4-month, 12% note dated October 1. Prepare Martinez’s December 31 adjusting entry to record
Prepare the following adjusting entries at December 31 for DeGads Co.(a) Interest on notes payable of $400 is accrued.(b) Fees earned but unbilled total $1,400.(c) Salaries earned by employees of
At the end of its first year of operations, the trial balance of Rafael Company shows Equipment $30,000 and zero balances in Accumulated Depreciation—Equipment and Depreciation Expense.
Willis Corporation has beginning inventory $81,000; Purchases $540,000; Freight-in $16,200; Purchase Returns $5,800; Purchase Discounts $5,000; and ending inventory $70,200. Compute cost of goods
Karen Sepaniak has year-end account balances of Sales $828,900; Interest Revenue $13,500; Cost of Goods Sold $556,200; Operating Expenses $189,000; Income Tax Expense $35,100; and Dividends $18,900.
Smith Company had cash receipts from customers in 2005 of $152,000. Cash payments for operating expenses were $97,000. Smith has determined that at January 1, accounts receivable was $13,000, and
Pelican Company made a December 31 adjusting entry to debit Salaries Expense and credit Salaries Payable for $3,600. On January 2, Pelican paid the weekly payroll of $6,000. Prepare Pelican’s(a)
(Transaction Analysis—Service Company) Beverly Crusher is a licensed CPA. During the first month of operations of her business (a sole proprietorship), the following events and transactions
(Corrected Trial Balance) The trial balance of Wanda Landowska Company shown below does not balance. Your review of the ledger reveals the following:? (a) Each account had a normal balance. (b) The
(Corrected Trial Balance) The trial balance of Blues Traveler Corporation does not balance. An examination of the ledger shows these errors. 1. Cash received from a customer on account was recorded
(Corrected Trial Balance) The trial balance of Antoine Watteau Co. shown below does not balance. Each of the listed accounts has a normal balance per the general ledger. An examination of the ledger
Adjusting Entries) The ledger of Duggan Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared. An analysis of the
(Adjusting Entries) Karen Weller, D.D.S., opened a dental practice on January 1, 2005. During the first month of operations the following transactions occurred.1. Performed services for patients who
(Analyze Adjusted Data) A partial adjusted trial balance of Piper Company at January 31, 2005, shows the following. Answer the following questions, assuming the year begins January 1. (a) If the
(Adjusting Entries) Bjorn Borg is the new owner of Ace Computer Services. At the end of August 2005, his first month of ownership, Bjorn is trying to prepare monthly financial statements. Below is
(Adjusting Entries) Selected accounts of Urdu Company are shown below. From an analysis of the T-accounts, reconstruct (a) The October transaction entries, and (b) The adjusting journal entries that
(Adjusting Entries) Greco Resort opened for business on June 1 with eight air-conditioned units. Its trial balance on August 31 is as follows. Other data: 1. The balance in prepaid insurance is a
(Transactions, Financial Statements—Service Company) Listed below are the transactions of Isao Aoki, D.D.S., for the month of September.Sept. 1 Isao Aoki begins practice as a dentist and invests
(Adjusting Entries and Financial Statements) Yount Advertising Agency was founded by Thomas Grant in January 2001. Presented below are both the adjusted and unadjusted trial balances as of December
(Adjusting Entries) A review of the ledger of Oklahoma Company at December 31, 2005, produces the following data pertaining to the preparation of annual adjusting entries.1. Salaries Payable $0.
The Enterprise Standard Industrial Classification (SIC) coding scheme, a published classification of firms into separate industries, is commonly used in practice. SIC codes permit identification of
What kinds of questions about future cash flows do investors and creditors attempt to answer with information in the income statement?
How can information based on past transactions be used to predict future cash flows?
Identify at least two situations in which important changes in value are not reported in the income statement.
Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.
Explain the transaction approach to measuring income. Why is the transaction approach to income measurement preferable to other ways of measuring income?
What is earnings management?
How can earnings management affect the quality of earnings?
Why should caution be exercised in the use of the income figure derived in an income statement? What are the objectives of generally accepted accounting principles in their application to the income
A Wall Street Journal article noted that Micro Strategy reported higher income than its competitors by using a more aggressive policy for recognizing revenue on future upgrades to its products. Some
What is the major distinction?(a) Between revenues and gains and(b) Between expenses and losses?
What are the advantages and disadvantages of the single-step income statement?
What is the basis for distinguishing between operating and non-operating items?
Distinguish between the all-inclusive income statement and the current operating performance income statement. According to present generally accepted accounting principles, which is recommended?
How should prior period adjustments be reported in the financial statements? Give an example of a prior period adjustment.
Discuss the appropriate treatment in the financial statements of each of the following.(a) An amount of $113,000 realized in excess of the cash surrender value of an insurance policy on the life of
Indicate where the following items would ordinarily appear on the financial statements of Aleppo, Inc. for the year 2004.(a) The service life of certain equipment was changed from 8 to 5 years. If a

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