True/False Indicate whether the statement is true or false. ____ 1. In accounting, to value means to record a transaction or event. ____ 2. The recognition issue deals with when a business transaction should be recorded. ____ 3. When stockholders make an investment, the Common Stock account is debited. ____ 4. Another name for the ledger is the book of original entry. ____ 5. All transactions can be easily assigned to specific accounting periods. ____ 6. The convention of consistency pertains to the use of the same accounting principles by all firms. ____ 7. Return on assets measures how efficiently assets are used to produce sales. ____ 8. A debt to equity ratio of 1.0 means that half of the company's assets are financed by creditors. ____ 9. The statement of cash flows explains the difference between net income as shown on the income statement and the net cash flows generated from operations. ____ 10. Issuance of notes, either long-term or short-term, would be reflected in the financing activities section of the statement of cash flows. Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. Those who lend money or deliver goods and services before being paid are called a. investors. b. debtors. c. underwriters. d. creditors. ____ 2. Which of the following is a business event that is not considered a recordable transaction? a. A company receives a product previously ordered. b. A company pays an employee for work performed. c. A customer inquires about the availability of a service. d. A customer purchases a service. Name: ________________________ ID: A 2 ____ 3. Which of the following errors will cause the trial balance to be out of balance? a. An entire transaction was entered in the general journal as $27 instead of $72. b. An entire transaction was omitted from the general journal. c. The balance of an account was incorrectly computed. d. A debit entry was entered in the wrong debit account. ____ 4. The general journal does not have a column titled a. Debit b. Account Balance. c. Date. d. Post. Ref. ____ 5. Which of the following statements is not necessarily true about a journal entry? a. Assets are indented. b. The date of the journal entry is always recorded. c. The Post. Ref. column is left blank until the entry is posted. d. All debits must be recorded before any credits. ____ 6. Which of the following accounts could decrease as a result of adjusting entries? a. Prepaid Insurance b. Accumulated Depreciation-Equipment c. Supplies Expense d. Revenue ____ 7. Use this information pertaining to the Essex Corporation to answer the following question. 1. The corporation's Office Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end. 2. Depreciation on a building is estimated to be $10,000. 3. A one-year insurance policy was purchased for $4,000. Three months have passed since the purchase. 4. Accrued interest on a note receivable amounted to $200. 5. The company received a $7,200 advance payment during the year on services to be performed. By the end of the year, one-fourth of the services had been performed. The adjusting entry to record the accrued interest on the note is a. Interest Expense 200 Interest Receivable 200 b. Interest Payable 200 Interest Expense 200 c. Interest Receivable 200 Interest Income 200 d. Interest Income 200 Interest Receivabe ____ 8. Which of the following accounts is not found in closing entries? a. Dividends b. Income Summary c. Retained Earnings d. Accumulated Depreciation-Equipment ____ 9. The convention of consistency relates most closely to a. verifiability. b. comparability. c. timeliness. d. faithful representation. ____ 10. Which of the following items is not shown on a single-step income statement? a. Cost of goods sold b. Interest expense c. Selling expenses d. Gross margin ____ 11. Use this information to answer the following question. Ramsey Company Income Statement For the Year Ended December 31, 2013 Revenues Net sales $200,000 Dividend income 17,500 Total revenues $217,500 Costs and expenses Costs of goods sold $ 75,500 Selling expenses 20,000 General and administrative expenses 12,000 Interest expense 12,500 Total costs and expenses 120,000 Income before income taxes $ 97,500 Income taxes 39,000 Net income $ 58,500 If the income statement were prepared in a multistep form, operating expenses would be a. $92,000. b. $32,000. c. $44,500. d. $80,000. ____ 12. Use the following information for the first year of operations for Layton Novelties, Inc. to answer the following question. Use ending balances whenever average balances are required for computing ratios. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Liabilities Current assets $ 28,000 Current liabilities $ 16,000 Investments 12,000 Long-term liabilities 4,000 Property, plant, and equipment 48,000 Total liabilities $ 20,000 Intangible assets 32,000 Stockholders' Equity Common stock $ 80,000 Retained earnings 20,000 Total stockholders' equity $100,000 Total liabilities and Total assets $120,000 stockholders' equity $120,000 Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2013 Net sales $ 80,000 Costs of goods sold 32,000 Gross margin $ 48,000 Operating expenses 12,000 Income before income taxes $ 36,000 Income taxes 14,400 Net income $ 21,600 Cash flow from operating expenses for Layton Novelties is $32,400. The cash return on assets for Layton Novelties is a. 45 percent. b. 40 percent. c. 27 percent. d. 9 percent. ____ 13. Royer Corporation engaged in this transaction: Received dividends on securities held. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Schedule of noncash investing and financing transactions b. Operating activities section c. Financing activities section d. Investing activities section ____ 14. If net cash flows from operating activities were $316,000, net income were $200,000, and net sales were $2,000,000, cash flows to sales would equal (Round amounts to one decimal place) a. 10.0%. b. $116,000. c. 15.8%. d. 0.6 times. ____ 15. Analysis of the financing activities section of the statement of cash flows will disclose a. the extent of investments in plant and equipment. b. net income for the period. c. any sales or repurchases of stock. d. the amount of money loaned to others. Short Answer 1. How does the statement of retained earnings relate to the income statement and the balance sheet? 2. By what amount, if any, would each of the following errors cause a trial balance to be out of balance? a. A purchase of supplies of $840 was recorded as a debit to Equipment and a credit to Cash for $840. b. An $890 balance in Prepaid Insurance was copied to the trial balance as a debit of $980. c. A $600 balance in Accounts Payable was copied to the trial balance as a debit of $600. 3. Record the following transactions, using proper form, in the journal provided. Mar. 2 Provided services in the amount of $2,000, receiving $600 in partial payment. 12 Received $800 of the amount owed from March 2. General Journal Page 1 Date Description Post. Ref. Debit Credit 4. Following is a list of descriptions of concepts or conventions of accounting. Write the name of the concept or convention that is described. a. The relative importance of an item or event. b. Once a company has adopted an accounting procedure, it must use it from one period to the next unless a note to the financial statements informs users of a change in procedure. c. The benefits to be gained from providing accounting information should be greater than the costs of providing it. d. When faced with choosing between two equally acceptable procedures or estimates, accountants should choose the one that is least likely to overstate assets and income. e. Financial statements should present all the information relevant to users' understanding of the statements. 5. Why is it important for a company to maintain the same accounting methods and practices from period to period? Name: ________________________ ID: A 7 6. For each of the definitions below, write the name of the ratio that is described. a. A measure that shows the proportion of a company's assets that is financed by creditors and the proportion financed by stockholders b. A measure that shows the productivity of a company's assets by comparing cash flows from operating activities to average total assets. c. A measure that relates the amount earned by a business to the stockholders' investment in the business d. A measure that shows the percentage of each sales dollar that results in net income e. A measure that shows how much cash a company's operations generate in relation to its net income. f. A measure that shows how efficiently a company uses its assets to produce income g. A measure of how efficiently assets are used to produce sales 7. Indicate on the blanks below the type of activity (operating activity, financing activity, investing activity, noncash transaction) each of the following transactions represents. _____ a. Company sold shares of its own stock for cash. _____ b. Acquired land and buildings by issuance of long-term mortgage payable. _____ c. Declared and paid cash dividends. _____ d. Received interest income. _____ e. Exchanged shares of stock for 15-year bonds. _____ f. Paid the U.S. Treasury for income taxes. _____ g. Collected proceeds from the sale of a long-term investment at cost. _____ h. Declared stock dividends. _____ i. Paid off long-term debt with cash. _____ j. Purchased equipment with cash. 8. The activity from the Long-Term Investments account for Rice Corporation appears below. In addition, the income statement shows a loss on the sale of investments of $16,000. Long-Term Investments Beginning balance, 2013 $ 92,000 Purchases 139,000 Sales (101,000) Ending balance, 2013 $130,000 Based on the information given, compute the amounts to be shown and indicate how they would appear on the statement of cash flows. Assume that the indirect method is being used and that the investments were purchased for cash. Problem 1. Explain why each of the following persons or groups would be interested in seeing the financial statements of a company. Also state whether each has a direct or indirect financial interest. a. Potential investor b. Internal Revenue Service c. A labor union d. Securities and Exchange Commission e. Potential creditor f. Management g. Economic planners 2. Use the following accounts and balances to prepare a balance sheet for Paulding Company at December 31, 2013. Accounts Payable $20,000 Common Stock 24,000 Cash 9,600 Retained Earnings, Dec. 31, 2013 4,800 Equipment 26,400 Accounts Receivable 12,800 3. In the journal provided, prepare journal entries without explanations for the following transactions. Write "no entry" if none is needed. a. Received a $3,000 invoice for this month's rent. Payment will not be made right away. b. Paid $3,200 for insurance premiums to cover the next six months. c. A $700 dividend is declared and paid. d. The rent invoice (in a) is paid. e. Purchased land for $120,000. The company paid half in cash and issued a promissory note for the other half. General Journal Page 1 Date Description Post. Ref. Debit Credit 4. Lindsay Company had the following transactions for the month of August. 5 Performed services on credit, $8,000 10 Performed services for cash, $7,000 12 Paid expenses in cash, $2,000 14 Collected on account, $4,000 19 Incurred expenses on credit, $5,000 24 Performed services on credit, $2,400 29 Paid on account, $4,000 Enter the above transactions in the following T accounts. Determine the cash balance after transactions, the amount still to be received, and the amount still to be paid. Cash Accounts Payable Accounts Receivable Revenue Expenses Name: ________________________ ID: A 11 5. Given the adjusted trial balance below, prepare (in good form) an income statement, statement of retained earnings, and balance sheet. The name of the business is Hampden Cleaning Service and the accounting period coincides with the calendar year. Hampden Cleaning Service Adjusted Trial Balance December 31, 2013 Cash $ 530 Accounts Receivable 1,200 Supplies 20 Prepaid Insurance 20 Office Equipment 2,000 Accumulated Depreciation-Office Equipment $ 300 Accounts Payable 1,200 Salaries Payable 70 Common Stock 1,000 Retained Earnings, Dec. 31, 2012 400 Service Revenue Earned 2,200 Salaries Expense 1,120 Supplies Expense 80 Insurance Expense 100 Depreciation Expense-Office Equipment 100 ______ $5,170 $5,170 Name: ________________________ Class: ___________________ Date: __________ ID: A MBA500 A, Mid-Term 070212 True/False Indicate whether the statement is true or false. ____ 1. In accounting, to value means to record a transaction or event. ____ 2. The recognition issue deals with when a business transaction should be recorded. ____ 3. When stockholders make an investment, the Common Stock account is debited. ____ 4. Another name for the ledger is the book of original entry. ____ 5. All transactions can be easily assigned to specific accounting periods. ____ 6. The convention of consistency pertains to the use of the same accounting principles by all firms. ____ 7. Return on assets measures how efficiently assets are used to produce sales. ____ 8. A debt to equity ratio of 1.0 means that half of the company's assets are financed by creditors. ____ 9. The statement of cash flows explains the difference between net income as shown on the income statement and the net cash flows generated from operations. ____ 10. Issuance of notes, either long-term or short-term, would be reflected in the financing activities section of the statement of cash flows. Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. Those who lend money or deliver goods and services before being paid are called a. investors. b. debtors. c. underwriters. d. creditors. ____ 2. Which of the following is a business event that is not considered a recordable transaction? a. A company receives a product previously ordered. b. A company pays an employee for work performed. c. A customer inquires about the availability of a service. d. A customer purchases a service. 1 Name: ________________________ ID: A ____ 3. Which of the following errors will cause the trial balance to be out of balance? a. An entire transaction was entered in the general journal as $27 instead of $72. b. An entire transaction was omitted from the general journal. c. The balance of an account was incorrectly computed. d. A debit entry was entered in the wrong debit account. ____ 4. The general journal does not have a column titled a. Debit b. Account Balance. c. Date. d. Post. Ref. ____ 5. Which of the following statements is not necessarily true about a journal entry? a. Assets are indented. b. The date of the journal entry is always recorded. c. The Post. Ref. column is left blank until the entry is posted. d. All debits must be recorded before any credits. ____ 6. Which of the following accounts could decrease as a result of adjusting entries? a. Prepaid Insurance b. Accumulated Depreciation-Equipment c. Supplies Expense d. Revenue ____ 7. Use this information pertaining to the Essex Corporation to answer the following question. 1. The corporation's Office Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end. 2. Depreciation on a building is estimated to be $10,000. 3. A one-year insurance policy was purchased for $4,000. Three months have passed since the purchase. 4. Accrued interest on a note receivable amounted to $200. 5. The company received a $7,200 advance payment during the year on services to be performed. By the end of the year, one-fourth of the services had been performed. The adjusting entry to record the accrued interest on the note is a. Interest Expense 200 Interest Receivable 200 b. c. d. Interest Payable Interest Expense 200 Interest Receivable Interest Income 200 Interest Income 200 Interest Receivable 200 200 200 2 Name: ________________________ ID: A ____ 8. Which of the following accounts is not found in closing entries? a. Dividends b. Income Summary c. Retained Earnings d. Accumulated Depreciation-Equipment ____ 9. The convention of consistency relates most closely to a. verifiability. b. comparability. c. timeliness. d. faithful representation. ____ 10. Which of the following items is not shown on a single-step income statement? a. Cost of goods sold b. Interest expense c. Selling expenses d. Gross margin ____ 11. Use this information to answer the following question. Ramsey Company Income Statement For the Year Ended December 31, 2013 Revenues Net sales Dividend income Total revenues Costs and expenses Costs of goods sold Selling expenses General and administrative expenses Interest expense Total costs and expenses Income before income taxes Income taxes Net income $200,000 17,500 $217,500 $ 75,500 20,000 12,000 12,500 120,000 $ 97,500 39,000 $ 58,500 If the income statement were prepared in a multistep form, operating expenses would be a. $92,000. b. $32,000. c. $44,500. d. $80,000. 3 Name: ________________________ ID: A ____ 12. Use the following information for the first year of operations for Layton Novelties, Inc. to answer the following question. Use ending balances whenever average balances are required for computing ratios. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets $ 28,000 12,000 48,000 Liabilities Current liabilities Long-term liabilities Total liabilities $ 16,000 4,000 $ 20,000 32,000 Total assets $120,000 Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income $ 80,000 32,000 $ 48,000 12,000 $ 36,000 14,400 $ 21,600 Cash flow from operating expenses for Layton Novelties is $32,400. The cash return on assets for Layton Novelties is a. 45 percent. b. 40 percent. c. 27 percent. d. 9 percent. 4 $ 80,000 20,000 $100,000 $120,000 Name: ________________________ ID: A ____ 13. Royer Corporation engaged in this transaction: Received dividends on securities held. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Schedule of noncash investing and financing transactions b. Operating activities section c. Financing activities section d. Investing activities section ____ 14. If net cash flows from operating activities were $316,000, net income were $200,000, and net sales were $2,000,000, cash flows to sales would equal (Round amounts to one decimal place) a. 10.0%. b. $116,000. c. 15.8%. d. 0.6 times. ____ 15. Analysis of the financing activities section of the statement of cash flows will disclose a. the extent of investments in plant and equipment. b. net income for the period. c. any sales or repurchases of stock. d. the amount of money loaned to others. Short Answer 1. How does the statement of retained earnings relate to the income statement and the balance sheet? 2. By what amount, if any, would each of the following errors cause a trial balance to be out of balance? a. A purchase of supplies of $840 was recorded as a debit to Equipment and a credit to Cash for $840. b. An $890 balance in Prepaid Insurance was copied to the trial balance as a debit of $980. c. A $600 balance in Accounts Payable was copied to the trial balance as a debit of $600. 5 Name: ________________________ ID: A 3. Record the following transactions, using proper form, in the journal provided. Mar. 2 Provided services in the amount of $2,000, receiving $600 in partial payment. 12 Received $800 of the amount owed from March 2. Date Description General Journal Post. Ref. Debit Page 1 Credit 4. Following is a list of descriptions of concepts or conventions of accounting. Write the name of the concept or convention that is described. a. The relative importance of an item or event. b. Once a company has adopted an accounting procedure, it must use it from one period to the next unless a note to the financial statements informs users of a change in procedure. c. The benefits to be gained from providing accounting information should be greater than the costs of providing it. d. When faced with choosing between two equally acceptable procedures or estimates, accountants should choose the one that is least likely to overstate assets and income. e. Financial statements should present all the information relevant to users' understanding of the statements. 5. Why is it important for a company to maintain the same accounting methods and practices from period to period? 6 Name: ________________________ ID: A 6. For each of the definitions below, write the name of the ratio that is described. a. A measure that shows the proportion of a company's assets that is financed by creditors and the proportion financed by stockholders b. A measure that shows the productivity of a company's assets by comparing cash flows from operating activities to average total assets. c. A measure that relates the amount earned by a business to the stockholders' investment in the business d. A measure that shows the percentage of each sales dollar that results in net income e. A measure that shows how much cash a company's operations generate in relation to its net income. f. A measure that shows how efficiently a company uses its assets to produce income g. A measure of how efficiently assets are used to produce sales 7. Indicate on the blanks below the type of activity (operating activity, financing activity, investing activity, noncash transaction) each of the following transactions represents. _____ a. Company sold shares of its own stock for cash. _____ b. Acquired land and buildings by issuance of long-term mortgage payable. _____ c. Declared and paid cash dividends. _____ d. Received interest income. _____ e. Exchanged shares of stock for 15-year bonds. _____ f. Paid the U.S. Treasury for income taxes. _____ g. Collected proceeds from the sale of a long-term investment at cost. _____ h. Declared stock dividends. _____ i. Paid off long-term debt with cash. _____ j. Purchased equipment with cash. 8. The activity from the Long-Term Investments account for Rice Corporation appears below. In addition, the income statement shows a loss on the sale of investments of $16,000. Long-Term Investments Beginning balance, 2013 Purchases Sales Ending balance, 2013 $ 92,000 139,000 (101,000) $130,000 Based on the information given, compute the amounts to be shown and indicate how they would appear on the statement of cash flows. Assume that the indirect method is being used and that the investments were purchased for cash. 7 Name: ________________________ ID: A Problem 1. Explain why each of the following persons or groups would be interested in seeing the financial statements of a company. Also state whether each has a direct or indirect financial interest. a. Potential investor b. Internal Revenue Service c. A labor union d. Securities and Exchange Commission e. Potential creditor f. Management g. Economic planners 2. Use the following accounts and balances to prepare a balance sheet for Paulding Company at December 31, 2013. Accounts Payable Common Stock Cash Retained Earnings, Dec. 31, 2013 Equipment Accounts Receivable $20,000 24,000 9,600 4,800 26,400 12,800 8 Name: ________________________ ID: A 3. In the journal provided, prepare journal entries without explanations for the following transactions. Write "no entry" if none is needed. a. Received a $3,000 invoice for this month's rent. Payment will not be made right away. b. Paid $3,200 for insurance premiums to cover the next six months. c. A $700 dividend is declared and paid. d. The rent invoice (in a) is paid. e. Purchased land for $120,000. The company paid half in cash and issued a promissory note for the other half. Date Description General Journal Post. Ref. Debit 9 Page 1 Credit Name: ________________________ ID: A 4. Lindsay Company had the following transactions for the month of August. 5 10 12 14 19 24 29 Performed services on credit, $8,000 Performed services for cash, $7,000 Paid expenses in cash, $2,000 Collected on account, $4,000 Incurred expenses on credit, $5,000 Performed services on credit, $2,400 Paid on account, $4,000 Enter the above transactions in the following T accounts. Determine the cash balance after transactions, the amount still to be received, and the amount still to be paid. Cash Accounts Payable Accounts Receivable Revenue Expenses 10 Name: ________________________ ID: A 5. Given the adjusted trial balance below, prepare (in good form) an income statement, statement of retained earnings, and balance sheet. The name of the business is Hampden Cleaning Service and the accounting period coincides with the calendar year. Hampden Cleaning Service Adjusted Trial Balance December 31, 2013 Cash Accounts Receivable Supplies Prepaid Insurance Office Equipment Accumulated Depreciation-Office Equipment Accounts Payable Salaries Payable Common Stock Retained Earnings, Dec. 31, 2012 Service Revenue Earned Salaries Expense Supplies Expense Insurance Expense Depreciation Expense-Office Equipment $ 530 1,200 20 20 2,000 $ 300 1,200 70 1,000 400 2,200 1,120 80 100 100 $5,170 11 ______ $5,170 Name: ________________________ Class: ___________________ Date: __________ ID: A MBA500 A, Mid-Term 070212 True/False Indicate whether the statement is true or false. ____ 1. In accounting, to value means to record a transaction or event. ____ 2. The recognition issue deals with when a business transaction should be recorded. ____ 3. When stockholders make an investment, the Common Stock account is debited. ____ 4. Another name for the ledger is the book of original entry. ____ 5. All transactions can be easily assigned to specific accounting periods. ____ 6. The convention of consistency pertains to the use of the same accounting principles by all firms. ____ 7. Return on assets measures how efficiently assets are used to produce sales. ____ 8. A debt to equity ratio of 1.0 means that half of the company's assets are financed by creditors. ____ 9. The statement of cash flows explains the difference between net income as shown on the income statement and the net cash flows generated from operations. ____ 10. Issuance of notes, either long-term or short-term, would be reflected in the financing activities section of the statement of cash flows. Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. Those who lend money or deliver goods and services before being paid are called a. investors. b. debtors. c. underwriters. d. creditors. ____ 2. Which of the following is a business event that is not considered a recordable transaction? a. A company receives a product previously ordered. b. A company pays an employee for work performed. c. A customer inquires about the availability of a service. d. A customer purchases a service. 1 Name: ________________________ ID: A ____ 3. Which of the following errors will cause the trial balance to be out of balance? a. An entire transaction was entered in the general journal as $27 instead of $72. b. An entire transaction was omitted from the general journal. c. The balance of an account was incorrectly computed. d. A debit entry was entered in the wrong debit account. ____ 4. The general journal does not have a column titled a. Debit b. Account Balance. c. Date. d. Post. Ref. ____ 5. Which of the following statements is not necessarily true about a journal entry? a. Assets are indented. b. The date of the journal entry is always recorded. c. The Post. Ref. column is left blank until the entry is posted. d. All debits must be recorded before any credits. ____ 6. Which of the following accounts could decrease as a result of adjusting entries? a. Prepaid Insurance b. Accumulated Depreciation-Equipment c. Supplies Expense d. Revenue ____ 7. Use this information pertaining to the Essex Corporation to answer the following question. 1. The corporation's Office Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end. 2. Depreciation on a building is estimated to be $10,000. 3. A one-year insurance policy was purchased for $4,000. Three months have passed since the purchase. 4. Accrued interest on a note receivable amounted to $200. 5. The company received a $7,200 advance payment during the year on services to be performed. By the end of the year, one-fourth of the services had been performed. The adjusting entry to record the accrued interest on the note is a. Interest Expense 200 Interest Receivable 200 b. c. d. Interest Payable Interest Expense 200 Interest Receivable Interest Income 200 Interest Income 200 Interest Receivable 200 200 200 2 Name: ________________________ ID: A ____ 8. Which of the following accounts is not found in closing entries? a. Dividends b. Income Summary c. Retained Earnings d. Accumulated Depreciation-Equipment ____ 9. The convention of consistency relates most closely to a. verifiability. b. comparability. c. timeliness. d. faithful representation. ____ 10. Which of the following items is not shown on a single-step income statement? a. Cost of goods sold b. Interest expense c. Selling expenses d. Gross margin ____ 11. Use this information to answer the following question. Ramsey Company Income Statement For the Year Ended December 31, 2013 Revenues Net sales Dividend income Total revenues Costs and expenses Costs of goods sold Selling expenses General and administrative expenses Interest expense Total costs and expenses Income before income taxes Income taxes Net income $200,000 17,500 $217,500 $ 75,500 20,000 12,000 12,500 120,000 $ 97,500 39,000 $ 58,500 If the income statement were prepared in a multistep form, operating expenses would be a. $92,000. b. $32,000. c. $44,500. d. $80,000. 3 Name: ________________________ ID: A ____ 12. Use the following information for the first year of operations for Layton Novelties, Inc. to answer the following question. Use ending balances whenever average balances are required for computing ratios. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets $ 28,000 12,000 48,000 Liabilities Current liabilities Long-term liabilities Total liabilities $ 16,000 4,000 $ 20,000 32,000 Total assets $120,000 Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income $ 80,000 32,000 $ 48,000 12,000 $ 36,000 14,400 $ 21,600 Cash flow from operating expenses for Layton Novelties is $32,400. The cash return on assets for Layton Novelties is a. 45 percent. b. 40 percent. c. 27 percent. d. 9 percent. 4 $ 80,000 20,000 $100,000 $120,000 Name: ________________________ ID: A ____ 13. Royer Corporation engaged in this transaction: Received dividends on securities held. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Schedule of noncash investing and financing transactions b. Operating activities section c. Financing activities section d. Investing activities section ____ 14. If net cash flows from operating activities were $316,000, net income were $200,000, and net sales were $2,000,000, cash flows to sales would equal (Round amounts to one decimal place) a. 10.0%. b. $116,000. c. 15.8%. d. 0.6 times. ____ 15. Analysis of the financing activities section of the statement of cash flows will disclose a. the extent of investments in plant and equipment. b. net income for the period. c. any sales or repurchases of stock. d. the amount of money loaned to others. Short Answer 1. How does the statement of retained earnings relate to the income statement and the balance sheet? 2. By what amount, if any, would each of the following errors cause a trial balance to be out of balance? a. A purchase of supplies of $840 was recorded as a debit to Equipment and a credit to Cash for $840. b. An $890 balance in Prepaid Insurance was copied to the trial balance as a debit of $980. c. A $600 balance in Accounts Payable was copied to the trial balance as a debit of $600. 5 Name: ________________________ ID: A 3. Record the following transactions, using proper form, in the journal provided. Mar. 2 Provided services in the amount of $2,000, receiving $600 in partial payment. 12 Received $800 of the amount owed from March 2. Date Description General Journal Post. Ref. Debit Page 1 Credit 4. Following is a list of descriptions of concepts or conventions of accounting. Write the name of the concept or convention that is described. a. The relative importance of an item or event. b. Once a company has adopted an accounting procedure, it must use it from one period to the next unless a note to the financial statements informs users of a change in procedure. c. The benefits to be gained from providing accounting information should be greater than the costs of providing it. d. When faced with choosing between two equally acceptable procedures or estimates, accountants should choose the one that is least likely to overstate assets and income. e. Financial statements should present all the information relevant to users' understanding of the statements. 5. Why is it important for a company to maintain the same accounting methods and practices from period to period? 6 Name: ________________________ ID: A 6. For each of the definitions below, write the name of the ratio that is described. a. A measure that shows the proportion of a company's assets that is financed by creditors and the proportion financed by stockholders b. A measure that shows the productivity of a company's assets by comparing cash flows from operating activities to average total assets. c. A measure that relates the amount earned by a business to the stockholders' investment in the business d. A measure that shows the percentage of each sales dollar that results in net income e. A measure that shows how much cash a company's operations generate in relation to its net income. f. A measure that shows how efficiently a company uses its assets to produce income g. A measure of how efficiently assets are used to produce sales 7. Indicate on the blanks below the type of activity (operating activity, financing activity, investing activity, noncash transaction) each of the following transactions represents. _____ a. Company sold shares of its own stock for cash. _____ b. Acquired land and buildings by issuance of long-term mortgage payable. _____ c. Declared and paid cash dividends. _____ d. Received interest income. _____ e. Exchanged shares of stock for 15-year bonds. _____ f. Paid the U.S. Treasury for income taxes. _____ g. Collected proceeds from the sale of a long-term investment at cost. _____ h. Declared stock dividends. _____ i. Paid off long-term debt with cash. _____ j. Purchased equipment with cash. 8. The activity from the Long-Term Investments account for Rice Corporation appears below. In addition, the income statement shows a loss on the sale of investments of $16,000. Long-Term Investments Beginning balance, 2013 Purchases Sales Ending balance, 2013 $ 92,000 139,000 (101,000) $130,000 Based on the information given, compute the amounts to be shown and indicate how they would appear on the statement of cash flows. Assume that the indirect method is being used and that the investments were purchased for cash. 7 Name: ________________________ ID: A Problem 1. Explain why each of the following persons or groups would be interested in seeing the financial statements of a company. Also state whether each has a direct or indirect financial interest. a. Potential investor b. Internal Revenue Service c. A labor union d. Securities and Exchange Commission e. Potential creditor f. Management g. Economic planners 2. Use the following accounts and balances to prepare a balance sheet for Paulding Company at December 31, 2013. Accounts Payable Common Stock Cash Retained Earnings, Dec. 31, 2013 Equipment Accounts Receivable $20,000 24,000 9,600 4,800 26,400 12,800 8 Name: ________________________ ID: A 3. In the journal provided, prepare journal entries without explanations for the following transactions. Write "no entry" if none is needed. a. Received a $3,000 invoice for this month's rent. Payment will not be made right away. b. Paid $3,200 for insurance premiums to cover the next six months. c. A $700 dividend is declared and paid. d. The rent invoice (in a) is paid. e. Purchased land for $120,000. The company paid half in cash and issued a promissory note for the other half. Date Description General Journal Post. Ref. Debit 9 Page 1 Credit Name: ________________________ ID: A 4. Lindsay Company had the following transactions for the month of August. 5 10 12 14 19 24 29 Performed services on credit, $8,000 Performed services for cash, $7,000 Paid expenses in cash, $2,000 Collected on account, $4,000 Incurred expenses on credit, $5,000 Performed services on credit, $2,400 Paid on account, $4,000 Enter the above transactions in the following T accounts. Determine the cash balance after transactions, the amount still to be received, and the amount still to be paid. Cash Accounts Payable Accounts Receivable Revenue Expenses 10 Name: ________________________ ID: A 5. Given the adjusted trial balance below, prepare (in good form) an income statement, statement of retained earnings, and balance sheet. The name of the business is Hampden Cleaning Service and the accounting period coincides with the calendar year. Hampden Cleaning Service Adjusted Trial Balance December 31, 2013 Cash Accounts Receivable Supplies Prepaid Insurance Office Equipment Accumulated Depreciation-Office Equipment Accounts Payable Salaries Payable Common Stock Retained Earnings, Dec. 31, 2012 Service Revenue Earned Salaries Expense Supplies Expense Insurance Expense Depreciation Expense-Office Equipment $ 530 1,200 20 20 2,000 $ 300 1,200 70 1,000 400 2,200 1,120 80 100 100 $5,170 11 ______ $5,170 Name: ________________________ Class: ___________________ Date: __________ ID: A MBA500 A, Mid-Term 070212 True/False Indicate whether the statement is true or false. ____ 1. In accounting, to value means to record a transaction or event. ____ 2. The recognition issue deals with when a business transaction should be recorded. ____ 3. When stockholders make an investment, the Common Stock account is debited. ____ 4. Another name for the ledger is the book of original entry. ____ 5. All transactions can be easily assigned to specific accounting periods. ____ 6. The convention of consistency pertains to the use of the same accounting principles by all firms. ____ 7. Return on assets measures how efficiently assets are used to produce sales. ____ 8. A debt to equity ratio of 1.0 means that half of the company's assets are financed by creditors. ____ 9. The statement of cash flows explains the difference between net income as shown on the income statement and the net cash flows generated from operations. ____ 10. Issuance of notes, either long-term or short-term, would be reflected in the financing activities section of the statement of cash flows. Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. Those who lend money or deliver goods and services before being paid are called a. investors. b. debtors. c. underwriters. d. creditors. ____ 2. Which of the following is a business event that is not considered a recordable transaction? a. A company receives a product previously ordered. b. A company pays an employee for work performed. c. A customer inquires about the availability of a service. d. A customer purchases a service. 1 Name: ________________________ ID: A ____ 3. Which of the following errors will cause the trial balance to be out of balance? a. An entire transaction was entered in the general journal as $27 instead of $72. b. An entire transaction was omitted from the general journal. c. The balance of an account was incorrectly computed. d. A debit entry was entered in the wrong debit account. ____ 4. The general journal does not have a column titled a. Debit b. Account Balance. c. Date. d. Post. Ref. ____ 5. Which of the following statements is not necessarily true about a journal entry? a. Assets are indented. b. The date of the journal entry is always recorded. c. The Post. Ref. column is left blank until the entry is posted. d. All debits must be recorded before any credits. ____ 6. Which of the following accounts could decrease as a result of adjusting entries? a. Prepaid Insurance b. Accumulated Depreciation-Equipment c. Supplies Expense d. Revenue ____ 7. Use this information pertaining to the Essex Corporation to answer the following question. 1. The corporation's Office Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end. 2. Depreciation on a building is estimated to be $10,000. 3. A one-year insurance policy was purchased for $4,000. Three months have passed since the purchase. 4. Accrued interest on a note receivable amounted to $200. 5. The company received a $7,200 advance payment during the year on services to be performed. By the end of the year, one-fourth of the services had been performed. The adjusting entry to record the accrued interest on the note is a. Interest Expense 200 Interest Receivable 200 b. c. d. Interest Payable Interest Expense 200 Interest Receivable Interest Income 200 Interest Income 200 Interest Receivable 200 200 200 2 Name: ________________________ ID: A ____ 8. Which of the following accounts is not found in closing entries? a. Dividends b. Income Summary c. Retained Earnings d. Accumulated Depreciation-Equipment ____ 9. The convention of consistency relates most closely to a. verifiability. b. comparability. c. timeliness. d. faithful representation. ____ 10. Which of the following items is not shown on a single-step income statement? a. Cost of goods sold b. Interest expense c. Selling expenses d. Gross margin ____ 11. Use this information to answer the following question. Ramsey Company Income Statement For the Year Ended December 31, 2013 Revenues Net sales Dividend income Total revenues Costs and expenses Costs of goods sold Selling expenses General and administrative expenses Interest expense Total costs and expenses Income before income taxes Income taxes Net income $200,000 17,500 $217,500 $ 75,500 20,000 12,000 12,500 120,000 $ 97,500 39,000 $ 58,500 If the income statement were prepared in a multistep form, operating expenses would be a. $92,000. b. $32,000. c. $44,500. d. $80,000. 3 Name: ________________________ ID: A ____ 12. Use the following information for the first year of operations for Layton Novelties, Inc. to answer the following question. Use ending balances whenever average balances are required for computing ratios. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets $ 28,000 12,000 48,000 Liabilities Current liabilities Long-term liabilities Total liabilities $ 16,000 4,000 $ 20,000 32,000 Total assets $120,000 Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income $ 80,000 32,000 $ 48,000 12,000 $ 36,000 14,400 $ 21,600 Cash flow from operating expenses for Layton Novelties is $32,400. The cash return on assets for Layton Novelties is a. 45 percent. b. 40 percent. c. 27 percent. d. 9 percent. 4 $ 80,000 20,000 $100,000 $120,000 Name: ________________________ ID: A ____ 13. Royer Corporation engaged in this transaction: Received dividends on securities held. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Schedule of noncash investing and financing transactions b. Operating activities section c. Financing activities section d. Investing activities section ____ 14. If net cash flows from operating activities were $316,000, net income were $200,000, and net sales were $2,000,000, cash flows to sales would equal (Round amounts to one decimal place) a. 10.0%. b. $116,000. c. 15.8%. d. 0.6 times. ____ 15. Analysis of the financing activities section of the statement of cash flows will disclose a. the extent of investments in plant and equipment. b. net income for the period. c. any sales or repurchases of stock. d. the amount of money loaned to others. Short Answer 1. How does the statement of retained earnings relate to the income statement and the balance sheet? 2. By what amount, if any, would each of the following errors cause a trial balance to be out of balance? a. A purchase of supplies of $840 was recorded as a debit to Equipment and a credit to Cash for $840. b. An $890 balance in Prepaid Insurance was copied to the trial balance as a debit of $980. c. A $600 balance in Accounts Payable was copied to the trial balance as a debit of $600. 5 Name: ________________________ ID: A 3. Record the following transactions, using proper form, in the journal provided. Mar. 2 Provided services in the amount of $2,000, receiving $600 in partial payment. 12 Received $800 of the amount owed from March 2. Date Description General Journal Post. Ref. Debit Page 1 Credit 4. Following is a list of descriptions of concepts or conventions of accounting. Write the name of the concept or convention that is described. a. The relative importance of an item or event. b. Once a company has adopted an accounting procedure, it must use it from one period to the next unless a note to the financial statements informs users of a change in procedure. c. The benefits to be gained from providing accounting information should be greater than the costs of providing it. d. When faced with choosing between two equally acceptable procedures or estimates, accountants should choose the one that is least likely to overstate assets and income. e. Financial statements should present all the information relevant to users' understanding of the statements. 5. Why is it important for a company to maintain the same accounting methods and practices from period to period? 6 Name: ________________________ ID: A 6. For each of the definitions below, write the name of the ratio that is described. a. A measure that shows the proportion of a company's assets that is financed by creditors and the proportion financed by stockholders b. A measure that shows the productivity of a company's assets by comparing cash flows from operating activities to average total assets. c. A measure that relates the amount earned by a business to the stockholders' investment in the business d. A measure that shows the percentage of each sales dollar that results in net income e. A measure that shows how much cash a company's operations generate in relation to its net income. f. A measure that shows how efficiently a company uses its assets to produce income g. A measure of how efficiently assets are used to produce sales 7. Indicate on the blanks below the type of activity (operating activity, financing activity, investing activity, noncash transaction) each of the following transactions represents. _____ a. Company sold shares of its own stock for cash. _____ b. Acquired land and buildings by issuance of long-term mortgage payable. _____ c. Declared and paid cash dividends. _____ d. Received interest income. _____ e. Exchanged shares of stock for 15-year bonds. _____ f. Paid the U.S. Treasury for income taxes. _____ g. Collected proceeds from the sale of a long-term investment at cost. _____ h. Declared stock dividends. _____ i. Paid off long-term debt with cash. _____ j. Purchased equipment with cash. 8. The activity from the Long-Term Investments account for Rice Corporation appears below. In addition, the income statement shows a loss on the sale of investments of $16,000. Long-Term Investments Beginning balance, 2013 Purchases Sales Ending balance, 2013 $ 92,000 139,000 (101,000) $130,000 Based on the information given, compute the amounts to be shown and indicate how they would appear on the statement of cash flows. Assume that the indirect method is being used and that the investments were purchased for cash. 7 Name: ________________________ ID: A Problem 1. Explain why each of the following persons or groups would be interested in seeing the financial statements of a company. Also state whether each has a direct or indirect financial interest. a. Potential investor b. Internal Revenue Service c. A labor union d. Securities and Exchange Commission e. Potential creditor f. Management g. Economic planners 2. Use the following accounts and balances to prepare a balance sheet for Paulding Company at December 31, 2013. Accounts Payable Common Stock Cash Retained Earnings, Dec. 31, 2013 Equipment Accounts Receivable $20,000 24,000 9,600 4,800 26,400 12,800 8 Name: ________________________ ID: A 3. In the journal provided, prepare journal entries without explanations for the following transactions. Write "no entry" if none is needed. a. Received a $3,000 invoice for this month's rent. Payment will not be made right away. b. Paid $3,200 for insurance premiums to cover the next six months. c. A $700 dividend is declared and paid. d. The rent invoice (in a) is paid. e. Purchased land for $120,000. The company paid half in cash and issued a promissory note for the other half. Date Description General Journal Post. Ref. Debit 9 Page 1 Credit Name: ________________________ ID: A 4. Lindsay Company had the following transactions for the month of August. 5 10 12 14 19 24 29 Performed services on credit, $8,000 Performed services for cash, $7,000 Paid expenses in cash, $2,000 Collected on account, $4,000 Incurred expenses on credit, $5,000 Performed services on credit, $2,400 Paid on account, $4,000 Enter the above transactions in the following T accounts. Determine the cash balance after transactions, the amount still to be received, and the amount still to be paid. Cash Accounts Payable Accounts Receivable Revenue Expenses 10 Name: ________________________ ID: A 5. Given the adjusted trial balance below, prepare (in good form) an income statement, statement of retained earnings, and balance sheet. The name of the business is Hampden Cleaning Service and the accounting period coincides with the calendar year. Hampden Cleaning Service Adjusted Trial Balance December 31, 2013 Cash Accounts Receivable Supplies Prepaid Insurance Office Equipment Accumulated Depreciation-Office Equipment Accounts Payable Salaries Payable Common Stock Retained Earnings, Dec. 31, 2012 Service Revenue Earned Salaries Expense Supplies Expense Insurance Expense Depreciation Expense-Office Equipment $ 530 1,200 20 20 2,000 $ 300 1,200 70 1,000 400 2,200 1,120 80 100 100 $5,170 11 ______ $5,170 Name: ________________________ Class: ___________________ Date: __________ ID: A MBA500 A, Mid-Term 070212 True/False Indicate whether the statement is true or false. ____ 1. In accounting, to value means to record a transaction or event. ____ 2. The recognition issue deals with when a business transaction should be recorded. ____ 3. When stockholders make an investment, the Common Stock account is debited. ____ 4. Another name for the ledger is the book of original entry. ____ 5. All transactions can be easily assigned to specific accounting periods. ____ 6. The convention of consistency pertains to the use of the same accounting principles by all firms. ____ 7. Return on assets measures how efficiently assets are used to produce sales. ____ 8. A debt to equity ratio of 1.0 means that half of the company's assets are financed by creditors. ____ 9. The statement of cash flows explains the difference between net income as shown on the income statement and the net cash flows generated from operations. ____ 10. Issuance of notes, either long-term or short-term, would be reflected in the financing activities section of the statement of cash flows. Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. Those who lend money or deliver goods and services before being paid are called a. investors. b. debtors. c. underwriters. d. creditors. ____ 2. Which of the following is a business event that is not considered a recordable transaction? a. A company receives a product previously ordered. b. A company pays an employee for work performed. c. A customer inquires about the availability of a service. d. A customer purchases a service. 1 Name: ________________________ ID: A ____ 3. Which of the following errors will cause the trial balance to be out of balance? a. An entire transaction was entered in the general journal as $27 instead of $72. b. An entire transaction was omitted from the general journal. c. The balance of an account was incorrectly computed. d. A debit entry was entered in the wrong debit account. ____ 4. The general journal does not have a column titled a. Debit b. Account Balance. c. Date. d. Post. Ref. ____ 5. Which of the following statements is not necessarily true about a journal entry? a. Assets are indented. b. The date of the journal entry is always recorded. c. The Post. Ref. column is left blank until the entry is posted. d. All debits must be recorded before any credits. ____ 6. Which of the following accounts could decrease as a result of adjusting entries? a. Prepaid Insurance b. Accumulated Depreciation-Equipment c. Supplies Expense d. Revenue ____ 7. Use this information pertaining to the Essex Corporation to answer the following question. 1. The corporation's Office Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end. 2. Depreciation on a building is estimated to be $10,000. 3. A one-year insurance policy was purchased for $4,000. Three months have passed since the purchase. 4. Accrued interest on a note receivable amounted to $200. 5. The company received a $7,200 advance payment during the year on services to be performed. By the end of the year, one-fourth of the services had been performed. The adjusting entry to record the accrued interest on the note is a. Interest Expense 200 Interest Receivable 200 b. c. d. Interest Payable Interest Expense 200 Interest Receivable Interest Income 200 Interest Income 200 Interest Receivable 200 200 200 2 Name: ________________________ ID: A ____ 8. Which of the following accounts is not found in closing entries? a. Dividends b. Income Summary c. Retained Earnings d. Accumulated Depreciation-Equipment ____ 9. The convention of consistency relates most closely to a. verifiability. b. comparability. c. timeliness. d. faithful representation. ____ 10. Which of the following items is not shown on a single-step income statement? a. Cost of goods sold b. Interest expense c. Selling expenses d. Gross margin ____ 11. Use this information to answer the following question. Ramsey Company Income Statement For the Year Ended December 31, 2013 Revenues Net sales Dividend income Total revenues Costs and expenses Costs of goods sold Selling expenses General and administrative expenses Interest expense Total costs and expenses Income before income taxes Income taxes Net income $200,000 17,500 $217,500 $ 75,500 20,000 12,000 12,500 120,000 $ 97,500 39,000 $ 58,500 If the income statement were prepared in a multistep form, operating expenses would be a. $92,000. b. $32,000. c. $44,500. d. $80,000. 3 Name: ________________________ ID: A ____ 12. Use the following information for the first year of operations for Layton Novelties, Inc. to answer the following question. Use ending balances whenever average balances are required for computing ratios. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets $ 28,000 12,000 48,000 Liabilities Current liabilities Long-term liabilities Total liabilities $ 16,000 4,000 $ 20,000 32,000 Total assets $120,000 Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income $ 80,000 32,000 $ 48,000 12,000 $ 36,000 14,400 $ 21,600 Cash flow from operating expenses for Layton Novelties is $32,400. The cash return on assets for Layton Novelties is a. 45 percent. b. 40 percent. c. 27 percent. d. 9 percent. 4 $ 80,000 20,000 $100,000 $120,000 Name: ________________________ ID: A ____ 13. Royer Corporation engaged in this transaction: Received dividends on securities held. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Schedule of noncash investing and financing transactions b. Operating activities section c. Financing activities section d. Investing activities section ____ 14. If net cash flows from operating activities were $316,000, net income were $200,000, and net sales were $2,000,000, cash flows to sales would equal (Round amounts to one decimal place) a. 10.0%. b. $116,000. c. 15.8%. d. 0.6 times. ____ 15. Analysis of the financing activities section of the statement of cash flows will disclose a. the extent of investments in plant and equipment. b. net income for the period. c. any sales or repurchases of stock. d. the amount of money loaned to others. Short Answer 1. How does the statement of retained earnings relate to the income statement and the balance sheet? 2. By what amount, if any, would each of the following errors cause a trial balance to be out of balance? a. A purchase of supplies of $840 was recorded as a debit to Equipment and a credit to Cash for $840. b. An $890 balance in Prepaid Insurance was copied to the trial balance as a debit of $980. c. A $600 balance in Accounts Payable was copied to the trial balance as a debit of $600. 5 Name: ________________________ ID: A 3. Record the following transactions, using proper form, in the journal provided. Mar. 2 Provided services in the amount of $2,000, receiving $600 in partial payment. 12 Received $800 of the amount owed from March 2. Date Description General Journal Post. Ref. Debit Page 1 Credit 4. Following is a list of descriptions of concepts or conventions of accounting. Write the name of the concept or convention that is described. a. The relative importance of an item or event. b. Once a company has adopted an accounting procedure, it must use it from one period to the next unless a note to the financial statements informs users of a change in procedure. c. The benefits to be gained from providing accounting information should be greater than the costs of providing it. d. When faced with choosing between two equally acceptable procedures or estimates, accountants should choose the one that is least likely to overstate assets and income. e. Financial statements should present all the information relevant to users' understanding of the statements. 5. Why is it important for a company to maintain the same accounting methods and practices from period to period? 6 Name: ________________________ ID: A 6. For each of the definitions below, write the name of the ratio that is described. a. A measure that shows the proportion of a company's assets that is financed by creditors and the proportion financed by stockholders b. A measure that shows the productivity of a company's assets by comparing cash flows from operating activities to average total assets. c. A measure that relates the amount earned by a business to the stockholders' investment in the business d. A measure that shows the percentage of each sales dollar that results in net income e. A measure that shows how much cash a company's operations generate in relation to its net income. f. A measure that shows how efficiently a company uses its assets to produce income g. A measure of how efficiently assets are used to produce sales 7. Indicate on the blanks below the type of activity (operating activity, financing activity, investing activity, noncash transaction) each of the following transactions represents. _____ a. Company sold shares of its own stock for cash. _____ b. Acquired land and buildings by issuance of long-term mortgage payable. _____ c. Declared and paid cash dividends. _____ d. Received interest income. _____ e. Exchanged shares of stock for 15-year bonds. _____ f. Paid the U.S. Treasury for income taxes. _____ g. Collected proceeds from the sale of a long-term investment at cost. _____ h. Declared stock dividends. _____ i. Paid off long-term debt with cash. _____ j. Purchased equipment with cash. 8. The activity from the Long-Term Investments account for Rice Corporation appears below. In addition, the income statement shows a loss on the sale of investments of $16,000. Long-Term Investments Beginning balance, 2013 Purchases Sales Ending balance, 2013 $ 92,000 139,000 (101,000) $130,000 Based on the information given, compute the amounts to be shown and indicate how they would appear on the statement of cash flows. Assume that the indirect method is being used and that the investments were purchased for cash. 7 Name: ________________________ ID: A Problem 1. Explain why each of the following persons or groups would be interested in seeing the financial statements of a company. Also state whether each has a direct or indirect financial interest. a. Potential investor b. Internal Revenue Service c. A labor union d. Securities and Exchange Commission e. Potential creditor f. Management g. Economic planners 2. Use the following accounts and balances to prepare a balance sheet for Paulding Company at December 31, 2013. Accounts Payable Common Stock Cash Retained Earnings, Dec. 31, 2013 Equipment Accounts Receivable $20,000 24,000 9,600 4,800 26,400 12,800 8 Name: ________________________ ID: A 3. In the journal provided, prepare journal entries without explanations for the following transactions. Write "no entry" if none is needed. a. Received a $3,000 invoice for this month's rent. Payment will not be made right away. b. Paid $3,200 for insurance premiums to cover the next six months. c. A $700 dividend is declared and paid. d. The rent invoice (in a) is paid. e. Purchased land for $120,000. The company paid half in cash and issued a promissory note for the other half. Date Description General Journal Post. Ref. Debit 9 Page 1 Credit Name: ________________________ ID: A 4. Lindsay Company had the following transactions for the month of August. 5 10 12 14 19 24 29 Performed services on credit, $8,000 Performed services for cash, $7,000 Paid expenses in cash, $2,000 Collected on account, $4,000 Incurred expenses on credit, $5,000 Performed services on credit, $2,400 Paid on account, $4,000 Enter the above transactions in the following T accounts. Determine the cash balance after transactions, the amount still to be received, and the amount still to be paid. Cash Accounts Payable Accounts Receivable Revenue Expenses 10 Name: ________________________ ID: A 5. Given the adjusted trial balance below, prepare (in good form) an income statement, statement of retained earnings, and balance sheet. The name of the business is Hampden Cleaning Service and the accounting period coincides with the calendar year. Hampden Cleaning Service Adjusted Trial Balance December 31, 2013 Cash Accounts Receivable Supplies Prepaid Insurance Office Equipment Accumulated Depreciation-Office Equipment Accounts Payable Salaries Payable Common Stock Retained Earnings, Dec. 31, 2012 Service Revenue Earned Salaries Expense Supplies Expense Insurance Expense Depreciation Expense-Office Equipment $ 530 1,200 20 20 2,000 $ 300 1,200 70 1,000 400 2,200 1,120 80 100 100 $5,170 11 ______ $5,170