Test Bank For Survey of Accounting, 6th Edition

Student name:__________ TRUE/FALSE – Write ‘T’ if the statement is true and ‘F’ if the statement is false. 1) The term “recognition” means to report an economic event in the financial statements. ⊚ ⊚ true false 2) Companies that use accrual accounting recognize revenues and expenses at the time that cash is paid or received. ⊚ ⊚ true false 3) The term “accrual” describes an earnings event that is recognized before cash is paid or received. ⊚ ⊚ true false 4) A company may recognize a revenue or expense without a corresponding cash collection or payment in the same accounting period. ⊚ ⊚ true false 5) A payment to an employee in settlement of salaries payable decreases an asset and decreases stockholders’ equity. ⊚ ⊚ 6) true false An increase in an expense may be accompanied by a decrease in a liability. ⊚ ⊚ Version 1 true false 1 7) Revenues and expenses are temporary accounts. ⊚ ⊚ true false 8) In the closing process, the amounts in temporary accounts are moved to net income, a permanent account. ⊚ ⊚ 9) Accounts that are closed include expenses, dividends, and unearned revenues. ⊚ ⊚ 10) true false true false After closing the accounts, all income statement accounts have non-zero balances. ⊚ ⊚ true false 11) Two of the steps in the accounting cycle are adjusting the accounts and closing the accounts. ⊚ ⊚ 12) Accrual-basis accounting often fails to match expenses with revenues. ⊚ ⊚ 13) true false true false Adjusting entries never affect a business’s cash account. Version 1 2 ⊚ ⊚ 14) Asset use transactions always involve the payment of cash. ⊚ ⊚ 15) true false true false Providing services to customers on account is an asset exchange transaction. ⊚ ⊚ true false 16) An adjusting entry that decreases unearned revenue and increases service revenue is a claims exchange transaction. ⊚ ⊚ 17) Sometimes the recognition of revenue is accompanied by an increase in liabilities. ⊚ ⊚ 18) true false true false The collection of an account receivable is a claims exchange transaction. ⊚ ⊚ true false MULTIPLE CHOICE – Choose the one alternative that best completes the statement or answers the question. 19) The balance of Accounts Receivable is shown on which of the following financial statements? Version 1 3 A) Income statement B) Balance sheet C) Statement of cash flows D) None of these answer choices 20) Which of the following illustrates how the recognition of revenue earned on account affects the financial statements? Balance Sheet Income Statement Statement of Cash Assets = Liabilities + Stockholders’ Revenve − Expense = Net Flows Equity Income A. + + B. + + C. − − D. − + A) B) C) D) + + + + − −OA + +OA Option A Option B Option C Option D 21) Bledsoe Company received $31,000 cash from the issue of stock on January 1, Year 1. During Year 1, Bledsoe earned $10,100 of revenue on account. The company collected $9,200 cash from accounts receivable and paid $7,000 cash for operating expenses. Based on this information alone, during Year 1, which of the following statements is true? A) B) C) D) Version 1 Total assets increased by $43,300. Total assets increased by $2,200. Total assets increased by $34,100. Total assets did not change. 4 22) Bledsoe Company received $17,000 cash from the issue of stock on January 1, Year 1. During Year 1, Bledsoe earned $8,500 of revenue on account. The company collected $6,000 cash from accounts receivable and paid $5,400 cash for operating expenses. Based on this information alone, during Year 1, which of the following statements is true? A) Total assets increased by $20,100. B) Total assets increased by $600. C) Total assets increased by $26,100. D) Total assets did not change. 23) Addison Company experienced an accounting event that affected its financial statements as indicated below: Assets = Liabilities + Stockholders’ Revenue − Expense = Net Equity Income + + + Statement of Cash Flow + Which of the following accounting events could have caused these effects on Addison’s financial statements? A) Issued common stock B) Earned revenue on account C) Earned cash revenue D) Collected cash from accounts receivable 24) Ash Company experienced a business event that affected its financial statements as indicated below. Assets = Liabilities + Stockholders’ Revenue − Expense = Net Equity Income Statement of Cash Flow +OA Which of the following events could have caused these effects on the company’s financial statements? Version 1 5 A) B) C) D) Collecting cash from customers as payment of accounts receivable Earning cash for providing services to customers Paid cash to purchase land Purchased supplies on account 25) Stanley Company earns $8,000 of revenue on account in Year 1. Cash collections of receivables amount to $4,500 in Year 1 with the remainder being collected in Year 2. Which of the following shows how the recognition of revenue in Year 1 will affect the company’s accounting equation? Cash A. Assets = + Accounts = Receivable 4,500 Balance Sheet Liabilities + Stockholders’ Equity Accounts + Common Stock + Retained Payable Earnings 4,500 B. 4,500 4,000 C. 8,000 8,000 D. 8,000 A) B) C) D) 8,000 Option A Option B Option C Option D 26) Leece Company experienced an accounting event that affected its financial statements as indicated below: Balance Sheet Income Statement Statement of Cash Assets = Liabilities + Stockholders’ Revenue − Expense = Net Flows Equity Income +/− n/a n/a n/a n/a n/a +OA Which of the following accounting events could have caused these effects on the company’s financial statements? Version 1 6 A) B) C) D) 27) Provided consulting services on account Provided consulting services for cash Collected cash in partial settlement of its account receivable The information provided does not represent a completed event. What happens when a company collects cash from accounts receivable? A) B) C) D) The asset accounts receivable increases. Stockholders’ equity increases. Liabilities decrease. Total assets are not affected. 28) Stannous Company earns $10,000 of revenue on account in Year 1. Cash collections of receivables amount to $3,500 in Year 1 with the remainder being collected in Year 2. Which of the following shows how the collection of cash will affect the company’s accounting equation in Year 1? Cash A. 3,500 B. 3,500 C. 10,000 Assets + Accounts Receivable −3,500 D. A) B) C) D) Version 1 = = Balance Sheet Liabilities + Accounts + Payable Stockholders’ Equity Common + Retained Stock Earnings 3,500 10,000 −4,000 10,000 10,000 Option A Option B Option C Option D 7 29) Which of the following answer choices accurately reflects how the recording of accrued salary expense at the end of the year affects the financial statements of a business? Balance Sheet Income Statement Assets = Liabilities + Equity Revenue − Expense = Net Income A. + − + − B. − C. D. + − A) B) C) D) − + − − + − − + + Statement of Cash Flows −OA −OA Option A Option B Option C Option D 30) In Year 1, Dale Company incurred $4,000 of utility expense on account. Dale paid cash for these expenses in Year 2. Which of the following shows how paying cash for utility expense will affect Dale’s accounting equation in Year 2? A. Balance Sheet Assets = Liabilities + Cash + Accounts = Accounts + Receivable Payable (4,000) (4,000) B. 4,000 C. D. (4,000) (4,000) (4,000) A) B) C) D) Version 1 Stockholders’ Equity Common + Retained Stock Earnings (4,000) (4,000) Option A Option B Option C Option D 8 31) Which of the following shows how a payment made to settle an accrued expense, such as the salaries payable, will affect a company’s financial statements? Balance Sheet Income Statement Assets = Liabilities + Equity Revenue − Expense = Net Income A. − − Statement of Cash Flows −FA B. − − C. − − −OA D. − − −IA A) B) C) D) Option A Option B Option C Option D 32) During Year 1 China Enterprises experienced the following events:(1)Earned $10,000 of revenue on account(2)Incurred $9,000 of expenses on accountBased on this information, which of the following describes the combined effects of both events on the amounts of total assets, net income, and cash flows from operating activities shown on the Year 1 financial statements? Total Assets Net Income $ 1,000 $10,000 $10,000 $10,000 $ 1,000 $ 1,000 $ 1,000 $10,000 A B C D A) B) C) D) Version 1 Cash Flow from Operating Activities 0 0 $1,000 $1,000 Option A Option B Option C Option D 9 33) How will accounts receivable appear on the following financial statements? A) B) C) D) 34) Asset on the balance sheet Expense on the income statement Liability on the balance sheet Revenue on the income statement How will accounts payable appear on the following financial statements? A) B) C) D) Expense on the income statement Revenue on the income statement Liability on the balance sheet Asset on the balance sheet 35) Greg Company recognized revenue on account. Which of the following financial statements are affected by this accounting event? A) Balance sheet B) Income statement C) Statement of cash flows D) Income statement and the balance sheet 36) Amber Company recognized accrued salary expense. Which of the following financial statements are affected by this accounting event? A) Statement of cash flows B) Income statement C) Balance sheet D) Income statement and the balance sheet 37) Mary Company collected cash from an account receivable. Which of the following financial statements are affected by this accounting event? Version 1 10 A) Income statement and the statement of cash flows B) Statement of changes in stockholders’ equity C) Balance sheet and the statement of cash flows D) Income statement and the balance sheet 38) Paying cash to settle a salaries payable obligation will affect which section of the statement of cash flows? A) Financing activities B) Operating activities C) Noncash activities D) Investing activities 39) Which of the following transactions does not involve an accrual? A) B) C) D) Recording interest earned that will be received in the next period Recording operating expense incurred but not yet paid Recording salary expense incurred but not yet paid Recording the pre-payment of two years’ worth of insurance 40) Jantzen Company recorded employee salaries earned but not yet paid. Which of the following represents the effect of this transaction on the financial statements? Balance Sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Revenue − Expense = Net Income A. + + + + OA B. C. + − D. Version 1 + − + − − + − − + − IA 11 A) B) C) D) Option A Option B Option C Option D 41) Revenue on account amounted to $4,200. Cash collections of accounts receivable amounted to $2,450. Expenses for the period were $2,200. The company paid dividends of $500. What was the amount of net income for the period? A) B) C) D) $250 $1,950 $1,500 $2,000 42) Revenue on account amounted to $5,000. Cash collections of accounts receivable amounted to $2,300. Expenses for the period were $2,100. The company paid dividends of $450. What was the amount of net income for the period? A) B) C) D) 43) The recognition of an expense may be accompanied by which of the following? A) B) C) D) 44) $1,200 $2,900 $2,850 $2,450 An increase in liabilities A decrease in liabilities A decrease in revenue An increase in assets Which of the following statements about accrual accounting is true ? Version 1 12 A) Revenue is recorded only when cash is received. B) Expenses are recorded when they are incurred. C) Revenue is recorded in the period when it is earned. D) Revenue is recorded in the period when it is earned and expenses are recorded when they are incurred. 45) Recognition of revenue may be accompanied by which of the following? A) B) C) D) A decrease in a liability An increase in a liability An increase in an asset An increase in an asset or a decrease in a liability 46) Mize Company provided $45,500 of services on account, and collected $38,000 from customers during the year. The company also incurred $37,000 of expenses on account, and paid $32,400 against its payables. Which of the following statements about the result of these events is true? A) B) C) D) 47) Total assets would increase. Total liabilities would increase. Total stockholders’ equity would increase. All of these answer choices are correct. Which of the following events would not require an end-of-year adjusting entry? A) Purchasing supplies for cash B) Paying for one year’s rent on July 1 C) Providing services for cash D) Each of these answer choices would require an end-of-year adjusting entry. Version 1 13 48) The adjusting entry to recognize work completed on unearned revenue involves which of the following? A) An increase in assets and a decrease in liabilities B) An increase in liabilities and a decrease in stockholders’ equity C) A decrease in liabilities and an increase in stockholders’ equity D) A decrease in assets and a decrease in liabilities 49) Jack’s Snow Removal Company received a cash advance of $14,400 on December 1, Year 1 to provide services during the months of December, January, and February. The year-end adjustment on December 31, Year 1, to recognize the partial expiration of the contract will A) B) C) D) increase stockholders’s equity by $4,800 increase assets by $4,800 increase liabilities by $4,800 increase assets by $4,800 and increase stockholders’s equity by $4,800 50) Jack’s Snow Removal Company received a cash advance of $6,000 on December 1, Year 1 to provide services during the months of December, January, and February. The year-end adjustment on December 31, Year 1, to recognize the partial expiration of the contract will A) increase assets by $2,000 B) increase stockholders’ equity by $2,000 C) increase liabilities by $2,000 D) increase assets by $2,000 and increase stockholders’ equity by $2,000 51) The following account balances were drawn from the financial statements of Grayson Company: Cash Accounts receivable Land Version 1 $ 6,000 $ 3,100 $ 9,600 Accounts payable Common stock Retained earnings, January 1 $ 2,050 ? $ 4,300 14 Revenue $ 11,100 Expenses $ 8,050 Based on the above information, what is the balance of Common Stock for Grayson Company? A) B) C) D) $12,350 $9,300 $1,250 $12,000 52) The following account balances were drawn from the financial statements of Grayson Company: Cash Accounts receivable Land $ 8,800 $ 3,000 $ 16,000 Accounts payable Common stock Retained earnings, January 1 Revenue $ 2,500 ? $ 5,400 $ 19,000 Expenses $ 14,500 Based on the above information, what is the balance of Common Stock for Grayson Company? A) B) C) D) $15,400 $19,900 $900 $20,800 53) Prior to closing the accounts, Syracuse Company’s accounting records showed the following balances: Retained earnings Service revenue Interest revenue Salaries expense Operating expense Version 1 $ 7,400 8,450 1,200 5,300 1,750 15 Interest expense Dividends 900 1,500 After closing the accounts, Syracuse’s retained earnings balance would be A) B) C) D) $7,400. $7,600. $9,100. $10,600. 54) Prior to closing the accounts, Syracuse Company’s accounting records showed the following balances: Retained earnings Service revenue Interest revenue Salaries expense Operating expense Interest expense Dividends $16,800 21,750 1,800 12,300 3,450 900 2,700 After closing the accounts, Syracuse’s retained earnings balance would be A) B) C) D) $16,800. $23,700. $21,000. $26,400. 55) Sheldon Company began Year 1 with $1,900 in its supplies account. During the year, the company purchased $5,600 of supplies on account. The company paid $2,800 on accounts payable by year end. At the end of Year 1, Sheldon counted $3,300 of supplies on hand. Sheldon’s financial statements for Year 1 would show: Version 1 16 A) B) C) D) $4,700 of supplies; $5,600 of supplies expense $3,300 of supplies; $4,200 of supplies expense $3,300 of supplies; $2,300 of supplies expense $4,700 of supplies; $1,400 of supplies expense 56) Sheldon Company began Year 1 with $1,200 in its supplies account. During the year, the company purchased $3,400 of supplies on account. The company paid $3,000 on accounts payable by year end. At the end of Year 1, Sheldon counted $1,400 of supplies on hand. Sheldon’s financial statements for Year 1 would show: A) B) C) D) $1,600 of supplies; $200 of supplies expense $1,400 of supplies; $2,000 of supplies expense $1,400 of supplies; $3,200 of supplies expense $1,600 of supplies; $3,400 of supplies expense 57) Which of the following show how purchasing supplies for cash will affect a company’s financial statements? Balance Sheet Income Statement Assets = Liabilities + Equity Revenue − Expense = Net Income A. + − B. + C. + D. + − A) B) C) D) Version 1 + − + − + − Statement of Cash Flows −IA −OA −OA Option A Option B Option C Option D 17 58) Which of the following shows how the year-end adjustment to recognize supplies expense will affect a company’s financial statements? Balance Sheet Income Statement Assets = Liabilities + Equity Revenue − Expense = Net Income A. + − B. − C. + − D. − A) B) C) D) − + Statement of Cash Flows − −OA − + − −OA Option A Option B Option C Option D 59) Jason Company paid $5,400 for one year’s rent in advance beginning on October 1, Year 1. Jason’s Year 1 income statement would report rent expense, and its statement of cash flows would report cash outflow for rent, respectively, of A) B) C) D) $5,400; $5,400 $900; $5,400 $1,350; $5,400 $1,350; $1,350 60) Jason Company paid $7,200 for one year’s rent in advance beginning on October 1, Year 1. Jason’s Year 1 income statement would report rent expense, and its statement of cash flows would report cash outflow for rent, respectively, of A) B) C) D) Version 1 $7,200; $7,200 $1,800; $1,800 $1,800; $7,200 $1,200; $7,200 18 61) Which of the following shows how paying cash to lease office space for one year affects the company’s financial statements? Balance Sheet Income Statement Assets = Liabilities + Equity Revenue − Expense = Net Income A. + − + − B. − − C. + − D. − + A) B) C) D) Option A Option B Option C Option D + Statement of Cash Flows −OA − −OA −OA 62) On October 1, Year 1 Allen Company paid $24,000 cash to lease office space for one year beginning immediately. How would the adjustment on December 31, Year 1 to recognize rent expense affect the company’s financial statements? Balance Sheet Income Statement Statement of Cash Flows Assets = Liabilities + Equity Revenue − Expense = Net Income A. (6,000) (6,000) 6,000 (6,000) B. (6,000) 6,000 C. (2,000) D. (4,000) A) B) C) D) Version 1 + 6,000 (6,000) (2,000) 2,000 (2,000) (4,000) 4,000 (4,000) −OA −OA Option A Option B Option C Option D 19 63) How would purchasing prepaid rent be classified? A) B) C) D) Asset source transaction Asset use transaction Asset exchange transaction Claims exchange transaction 64) Revenue on account amounted to $6,200. Cash collections of accounts receivable amounted to $5,900. Cash paid for expenses was $4,100. The amount of employee salaries accrued at the end of the year was $1,900. What is the net cash flow from operating activities for the year? A) B) C) D) $1,800 $1,900 $2,100 $7,700 65) Revenue on account amounted to $9,000. Cash collections of accounts receivable amounted to $8,100. Cash paid for expenses was $7,500. The amount of employee salaries accrued at the end of the year was $900. What is the net cash flow from operating activities for the year? A) B) C) D) 66) $900 $600 $1,500 $8,700 Which of the following accounts would not appear on a balance sheet? Version 1 20 A) B) C) D) Service Revenue. Salaries Payable. Unearned Revenue. Neither Service Revenue nor Unearned Revenue would appear on a balance sheet. 67) Warren Enterprises had the following events during Year 1: The business issued $23,000 of common stock to its stockholders.The business purchased land for $15,000 cash.Services were provided to customers for $19,000 cash.Services were provided to customers for $8,000 on account.The company borrowed $19,000 from the bank.Operating expenses of $15,000 were incurred and paid in cash.Salary expense of $1,100 was accrued.A dividend of $7,000 was paid to the stockholders of Warren Enterprises. Assuming the company began operations during Year 1, What is the amount of retained earnings as of December 31, Year 1? A) B) C) D) $3,900 $3,700 $13,900 $27,000 68) Warren Enterprises had the following events during Year 1:The business issued $40,000 of common stock to its stockholders.The business purchased land for $24,000 cash.Services were provided to customers for $32,000 cash.Services were provided to customers for $10,000 on account.The company borrowed $32,000 from the bank.Operating expenses of $24,000 were incurred and paid in cash.Salary expense of $1,600 was accrued.A dividend of $8,000 was paid to the stockholders of Warren Enterprises. Assuming the company began operations during Year 1, what is the amount of retained earnings as of December 31, Year 1? A) B) C) D) Version 1 $10,000 $8,400 $16,400 $42,000 21 69) Which of the following would cause net income on the accrual basis to be different from (either higher or lower than) the amount of net cash flow for operating activities on the statement of cash flows? A) B) C) D) Purchased land for cash Purchased supplies for cash Paid advertising expense Paid dividends to stockholders 70) Rushmore Company provided services for $16,500 cash during Year 1. Rushmore incurred $13,000 expenses on account during Year 1, and by the end of the year, $3,500 of that amount had been paid with cash. Assuming that these are the only accounting events that affected Rushmore during Year 1, which of the following statements is true? A) The amount of net income shown on the income statement is $9,500. B) The amount of net cash flow from operating activities shown on the statement of cash flows is $7,000. C) The amount of net income shown on the income statement is $3,500. D) The amount of net loss shown on the income statement is $3,500. 71) Rushmore Company provided services for $45,000 cash during Year 1. Rushmore incurred $36,000 expenses on account during Year 1, and by the end of the year, $9,000 of that amount had been paid with cash. Assuming that these are the only accounting events that affected Rushmore during Year 1, which of the following statements is true? A) The amount of net loss shown on the income statement is $9,000. B) The amount of net income shown on the income statement is $27,000. C) The amount of net income shown on the income statement is $9,000. D) The amount of net cash flow from operating activities shown on the statement of cash flows is $18,000. 72) The following pre-closing accounts and balances were drawn from the records of Carolina Company on December 31, Year 1: Version 1 22 Cash Dividends Land Accounts payable $ 3,400 1,700 2,000 1,050 Accounts receivable Common stock Revenue Expense $ 1,450 2,175 2,000 1,150 What is the amount of total assets on Carolina’s December 31, Year 1 balance sheet? A) B) C) D) $6,850 $5,400 $8,550 $8,850 73) The following pre-closing accounts and balances were drawn from the records of Carolina Company on December 31, Year 1: Cash Dividends Land Accounts payable $ 4,000 2,000 3,200 1,800 Accounts receivable Common stock Revenue Expense $ 3,400 3,900 3,200 2,200 What is the amount of total assets on Carolina’s December 31, Year 1 balance sheet? A) B) C) D) $12,600 $13,800 $7,200 $10,600 74) The following pre-closing accounts and balances were drawn from the records of Carolina Company on December 31, Year 1: Cash Dividends Land Accounts payable $ 2,200 1,100 1,400 750 Accounts receivable Common stock Revenue Expense $ 1,150 1,575 1,400 850 What is net income that will be shown on Carolina’s Year 1 income statement? Version 1 23 A) B) C) D) $1,400 $850 $350 $550 75) The following pre-closing accounts and balances were drawn from the records of Carolina Company on December 31, Year 1: Cash Dividends Land Accounts payable $ 4,000 2,000 3,200 1,800 Accounts receivable Common stock Revenue Expense $ 3,400 3,900 3,200 2,200 What is net income that will be shown on Carolina’s Year 1 income statement? A) B) C) D) $2,200 $3,200 $1,000 $200 76) The following pre-closing accounts and balances were drawn from the records of Carolina Company on December 31, Year 2: Cash Dividends Land Accounts payable $ 3,800 1,900 2,200 1,150 Accounts receivable Common stock Revenue Expense $ 1,550 2,375 2,200 1,250 What is the amount of retained earnings that will be shown on the balance sheet at December 31, Year 2? A) B) C) D) Version 1 $3,075 $4,975 $6,000 $4,025 24 77) The following pre-closing accounts and balances were drawn from the records of Carolina Company on December 31, Year 2: Cash Dividends Land Accounts payable $ 4,000 2,000 3,200 1,800 Accounts receivable Common stock Revenue Expense $ 3,400 3,900 3,200 2,200 What is the amount of retained earnings that will be shown on the balance sheet at December 31, Year 2? A) B) C) D) $5,900 $7,200 $3,900 $4,900 78) Nelson Company experienced the following transactions during Year 1, its first year in operation.Issued $7,000 of common stock to stockholdersProvided $3,300 of services on accountPaid $1,850 cash for operating expensesCollected $2,400 of cash from accounts receivablePaid a $150 cash dividend to stockholdersWhat is the net income that will be reported for Year 1? A) B) C) D) $1,050 $1,450 $900 $1,300 79) Nelson Company experienced the following transactions during Year 1, its first year in operation.Issued $12,000 of common stock to stockholdersProvided $4,600 of services on accountPaid $3,200 cash for operating expensesCollected $3,800 of cash from accounts receivablePaid a $200 cash dividend to stockholders What is the net income that will be reported for Year 1? Version 1 25 A) B) C) D) $1,400 $800 $1,000 $1,200 80) Nelson Company experienced the following transactions during Year 1, its first year in operation.Issued $8,000 of common stock to stockholdersProvided $4,300 of services on accountPaid $2,100 cash for operating expensesCollected $2,900 of cash from accounts receivablePaid a $200 cash dividend to stockholdersWhat is the of net cash flow from operating activities shown on the Year 1 statement of cash flows? A) B) C) D) $600 $800 $2,000 $2,200 81) Nelson Company experienced the following transactions during Year 1, its first year in operation.Issued $12,000 of common stock to stockholdersProvided $4,600 of services on accountPaid $3,200 cash for operating expensesCollected $3,800 of cash from accounts receivablePaid a $200 cash dividend to stockholders What is the of net cash flow from operating activities shown on the Year 1 statement of cash flows? A) B) C) D) $400 $600 $1,400 $1,200 82) Nelson Company experienced the following transactions during Year 1, its first year in operation.Issued $8,400 of common stock to stockholdersProvided $4,700 of services on accountPaid $2,200 cash for operating expensesCollected $3,100 of cash from accounts receivablePaid a $220 cash dividend to stockholdersWhat is the total amount of assets shown on the balance sheet prepared as of December 31, Year 1? Version 1 26 A) B) C) D) $9,080 $10,680 $10,900 $9,520 83) Nelson Company experienced the following transactions during Year 1, its first year in operation.Issued $12,000 of common stock to stockholdersProvided $4,600 of services on accountPaid $3,200 cash for operating expensesCollected $3,800 of cash from accounts receivablePaid a $200 cash dividend to stockholdersWhat is the total amount of assets shown on the balance sheet prepared as of December 31, Year 1? A) B) C) D) $12,400 $12,600 $13,400 $13,200 84) Nelson Company experienced the following transactions during Year 1, its first year in operation.Issued $9,600 of common stock to stockholdersProvided $5,900 of services on accountPaid $2,500 cash for operating expensesCollected $3,700 of cash from accounts receivablePaid a $280 cash dividend to stockholdersWhat is the amount of retained earnings that will be shown on the company’s balance sheet prepared as of December 31, Year 1? A) B) C) D) $2,480 $3,400 $3,120 $12,720 85) Nelson Company experienced the following transactions during Year 1, its first year in operation.Issued $12,000 of common stock to stockholders.Provided $4,600 of services on account.Paid $3,200 cash for operating expenses.Collected $3,800 of cash from accounts receivable.Paid a $200 cash dividend to stockholders. What is the amount of retained earnings that will be shown on the company’s balance sheet prepared as of December 31, Year 1? Version 1 27 A) B) C) D) $1,200 $1,000 $1,400 $13,200 86) On December 31, Year 1, Gaskins Company owed $4,500 in salaries to employees who had worked during December but would be paid in January. If the year-end adjustment is properly recorded on December 31, Year 1, what will be the effect of this accrual on the following items for Gaskins? Net Income a. b. c. d. Not Affected Decrease Increase No effect A) B) C) D) Cash Flow from Operating Activities Not Affected Not Affected Decrease Decrease Option A Option B Option C Option D 87) ABC Company ended Year 1 with the following account balances:Cash $600, Common Stock $400, and Retained Earnings $200.The following transactions occurred during Year 2:Issued common stock for $19,000 cash.ABC borrowed an additional $11,000 from Chris Bank.ABC earned $9,000 of revenue on account.ABC incurred $4,000 of operating expenses on account.Cash collections of accounts receivables were $6,000.ABC provided additional services to customers for $1,000 cash.ABC purchased land for $14,000.ABC used $3,000 in cash to make a partial payment on its accounts payable.ABC declared and paid a $200 dividend to the stockholdersOn December 31 ABC had accrued salaries of $4,000.What is the amount of net income (loss) reported on the December 31, Year 2 income statement? Version 1 28 A) B) C) D) E) $6,200 $5,800 $6,000 $2,000 None of these answer choices is correct 88) ABC Company ended Year 1 with the following account balances:Cash $600, Common Stock $400, and Retained Earnings $200.The following transactions occurred during Year 2:Issued common stock for $19,000 cash.ABC borrowed an additional $11,000 from Chris Bank.ABC earned $9,000 of revenue on account.ABC incurred $4,000 of operating expenses on account.Cash collections of accounts receivables were $6,000.ABC provided additional services to customers for $1,000 cash.ABC purchased land for $14,000.ABC used $3,000 in cash to make a partial payment on its accounts payable.ABC declared and paid a $200 dividend to the stockholdersOn December 31 ABC had accrued salaries of $4,000.What is the net cash flow from operating activities shown on the statement of cash flows for the year ending December 31, Year 2? A) B) C) D) $4,000 $3,800 $6,000 None of these answer choices is correct 89) ABC Company ended Year 1 with the following account balances:Cash $600, Common Stock $400, and Retained Earnings $200.The following transactions occurred during Year 2:Issued common stock for $19,000 cash.ABC borrowed an additional $11,000 from Chris Bank.ABC earned $9,000 of revenue on account.ABC incurred $4,000 of operating expenses on account.Cash collections of accounts receivables were $6,000.ABC provided additional services to customers for $1,000 cash.ABC purchased land for $14,000.ABC used $3,000 in cash to make a partial payment on its accounts payable.ABC declared and paid a $200 dividend to the stockholdersOn December 31 ABC had accrued salaries of $4,000.What is the amount of retained earnings that will be shown on the balance sheet prepared at the end of Year 2? Version 1 29 A) B) C) D) $2,000 $5,800 $6,000 $6,200 90) Duluth Company collected a $6,000 cash advance from a customer on November 1, Year 1 for work to be performed over a six-month period beginning on that date. If the year-end adjustment is properly recorded, what will be the effect of the adjusting entry on Duluth’s Year 1 financial statements? A) Increase assets and decrease liabilities B) Increase assets and increase revenues C) Decrease liabilities and increase revenues D) No effect 91) Gomez Company collected $21,300 on September 1, Year 1 from a customer for services to be provided over a one-year period beginning on that date. How much revenue would Gomez Company report related to this contract on its income statement for the year ended December 31, Year 1? How much would it report as cash flows from operating activities for Year 1? A) B) C) D) Revenue of $7,100; Cash flow from operating activities of $7,100 Revenue of $0; Cash flow from operating activities of $21,300 Revenue of $7,100; Cash flow from operating activities of $21,300 Revenue of $21,300; Cash flow from operating activities of $21,300 92) Gomez Company collected $9,000 on September 1, Year 1 from a customer for services to be provided over a one-year period beginning on that date. How much revenue would Gomez Company report related to this contract on its income statement for the year ended December 31, Year 1? How much would it report as cash flows from operating activities for Year 1? Version 1 30 A) B) C) D) Revenue of $3,000; Cash flow from operating activities of $3,000 Revenue of $9,000; Cash flow from operating activities of $9,000 Revenue of $3,000; Cash flow from operating activities of $9,000 Revenue of $0; Cash flow from operating activities of $9,000 93) What types of accounts are “matched” when the matching concept is used in a discussion of accrual accounting? A) B) C) D) 94) Expenses and revenues Expenses and liabilities Assets and stockholders’ equity Assets and liabilities The matching concept most significantly influences which financial statement? A) B) C) D) Balance sheet Income statement Statement of changes in stockholders’ equity Statement of cash flows 95) What is the term commonly used to describe expenses that are matched with the period in which they are incurred? A) B) C) D) Market expenses Matching expenses Period costs Working costs 96) If retained earnings decreased during the year, and no dividends were paid, which of the following must be true? Version 1 31 A) B) C) D) 97) Which of the following correctly states the proper order of the accounting cycle? A) B) C) D) 98) Expenses for the year exceeded revenues. The company did not have enough cash to pay its expenses. Total stockholders’ equity increased. Liabilities increased during the year. Record transactions, adjust accounts, close temporary accounts, prepare statements. Adjust accounts, record transactions, close temporary accounts, prepare statements. Record transactions, adjust accounts, prepare statements, close temporary accounts. Adjust accounts, prepare statements, record transactions, close temporary accounts. What is the primary goal of the accrual basis of accounting? A) B) C) D) Report revenue when received. Match assets and liabilities in the proper period. Report expenses when cash disbursements are made. Match revenues and expenses in the proper period. 99) Which of the following financial statement elements is closed at the end of an accounting cycle? A) B) C) D) 100) Dividends Common stock Assets Liabilities Which of the following accounts is not closed at the end of an accounting cycle? Version 1 32 A) B) C) D) Revenues Retained earnings Dividends Expenses 101) Which of the following statements about the balance in a revenue account at the beginning of an accounting period is true? A) The beginning balance of a revenue account will always be zero. B) The beginning balance of a revenue account equals last period’s ending balance. C) The beginning balance of a revenue account will always be higher than the previous periods ending balance. D) The beginning balance of a revenue account will equal to the amount of retained earnings for the previous period. 102) Which of the following shows how receiving cash for services that will be performed in the future affects the company’s financial statements? Balance Sheet Income Statement Assets = Liabilities + Equity Revenue − Expense = Net Income A. + − + + B. + C. + − D. + + A) B) C) D) Option A Option B Option C Option D Version 1 + + + Statement of Cash Flows +OA +OA +OA 33 103) Allen Company received $12,000 cash from Gerry Corporation for cleaning services that Allen agrees to perform over a one-year period beginning on June 1, Year 1. How would the adjustment on December 31, Year 1 to recognize the portion of the revenue that Allen earned during Year 1 affect Allen Company’s financial statements? Balance Sheet Income Statement Statement Assets = Liabilities + Equity Revenue − Expense = Net Income of Cash Flows A. (7,000) 7,000 7,000 7,000 B. (7,000) C. 12,000 12,000 D. (6,000) A) B) C) D) 7,000 6,000 12,000 12,000 6,000 6,000 12,000 OA Option A Option B Option C Option D 104) Which of the following describes the effects of a claims exchange transaction on a company’s financial statements? Balance Sheet Income Statement Assets = Liabilities + Equity Revenue − Expense = Net Income A. B. Statement of Cash Flows +OA + C. D. Version 1 + + +OA − + − +OA 34 A) B) C) D) 105) Option A Option B Option C Option D Which of the following is an asset source transaction? A) Issued common stock. B) Paid a cash dividend to stockholders. C) Received a payment on accounts receivable. D) Accrued salary expense. 106) Which of the following is an asset use transaction? A) B) C) D) 107) Purchased machine for cash. Recorded insurance expense at the end of the period. Invested cash in an interest earning account. Accrued salary expense at the end of the period. Which of the following is a claims exchange transaction? A) Recognized revenue earned on a contract where the cash had been collected at an earlier date. B) Issued common stock. C) Invested cash in an interest earning account. D) Purchased machine for cash. 108) Which of the following is an asset exchange transaction? Version 1 35 A) Issued common stock. B) Accrued salary expense at the end of the accounting period. C) Collected cash on accounts receivable. D) Recognized revenue earned on a contract where the cash had been collected at an earlier date. 109) Earning revenue on account would be classified as a/an? A) B) C) D) claims exchange transaction. asset use transaction. asset source transaction. asset exchange transaction. SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 110) Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NA Banks Company performed $5,000 of services for customers on account. Balance Sheet Income Statement Assets = Liabilities + Stockholders’ Revenue − Expense = Net Equity Income Version 1 Statement of Cash Flows 36 111) Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NATodd Company collected $2,000 cash from accounts receivable. Balance Sheet Income Statement Assets = Liabilities + Stockholders’ Revenue − Expense = Net Equity Income Statement of Cash Flows 112) Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NAIngstrom Company provided $2,600 of services for a customer who paid $1,000 cash immediately and promised to pay an additional $1,600 one month later. Balance Sheet Income Statement Assets = Liabilities + Stockholders’ Revenue − Expense = Net Equity Income Statement of Cash Flows 113) Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NAAmity Company signed contracts for $25,000 of services to be performed in the future. Balance Sheet Version 1 Income Statement Statement 37 Assets = Liabilities + Stockholders’ Revenue − Expense = Net Equity Income of Cash Flows 114) Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NAAt the end of the accounting period, Signet Company recognized accrued salaries. Balance Sheet Income Statement Assets = Liabilities + Stockholders’ Revenue − Expense = Net Equity Income Statement of Cash Flows 115) Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NACalloway Company received $750 from a customer for services to be performed at a future date. Balance Sheet Income Statement Assets = Liabilities + Stockholders’ Revenue − Expense = Net Equity Income Version 1 Statement of Cash Flows 38 116) When is revenue recognized under accrual accounting? 117) What does the balance in accounts receivable represent? 118) When are expenses recognized under accrual accounting in relation to the payment of cash? 119) What is the effect on the accounting equation of a cash payment to creditors? 120) Why are adjusting entries necessary in an accrual accounting system? What are some common examples? 121) What effect does the recording of revenue normally have on total assets? Version 1 39 122) What effect does providing services on account have on the statement of cash flows? What effect does providing services on account have on the balance sheet? 123) Describe the purpose of the closing process. 124) Describe the difference between temporary and permanent accounts, and state which ones are closed. 125) Define the accounting cycle and list the stages of the cycle. 126) Explain the meaning of the term, “matching concept.” Version 1 40 127) The temporary accounts are closed prior to the start of the next accounting cycle. In this closing process, the amounts in each of these accounts are transferred to what other account(s)? ESSAY. Write your answer in the space provided or on a separate sheet of paper. 128) Vanguard Company uses accrual accounting. Indicate whether each of the following statements regarding Vanguard’s accounting system is true or false.The recognition of accounting events and the realization of cash consequences must occur in different accounting periods.The cash consequence of a transaction sometimes precedes its accounting recognition.Expenses may either be matched to revenues they produce or to periods in which they are incurred.Vanguard may record accrual transactions, but may not record deferral transactions.Vanguard is not permitted to make cash sales. 129) Wheaton Company performed services for a customer on account. Indicate whether each of the following statements about this transaction is true or false.Assets and stockholders’ equity both increase when the revenue is recognized.This transaction did not affect cash flows.The company recorded an increase in revenue and a decrease in accounts receivable.Recognition of revenue would be delayed until cash was received.This transaction is an example of an asset exchange transaction. 130) XYZ Company used $5,000 cash to pay off its accounts payable. With respect to this event, indicate whether each of the following statements is true or false.Total assets would decrease.Expenses would increase.Total liabilities would remain the same. Version 1 41 131) Dixon Company collected cash during December of Year 1 from a customer for services to be performed during January of Year 2. Indicate whether each of the following statements about this transaction is true or false.Dixon’s Year 2 income statement would not be affected by this transaction.Dixon’s Year 1 statement of cash flows would be affected by this transaction.This transaction is an asset exchange transaction.The revenue for the services provided will be recorded in Year 2.The transaction increases Dixon’s liabilities. 132) Regarding the relationships of revenues and expenses to assets and liabilities, state whether each of the following statements is true or false.Recording an increase in a revenue account may be associated with a decrease in assets.Recording an increase in a revenue account may be associated with a decrease in liabilities.An increase in Salaries Expense may be accompanied by a decrease in Salaries Payable.Recording a decrease in assets may be associated with an increase in an expense account.A decrease in Supplies will be accompanied by an increase in Supplies Expense. Version 1 42 133) Wyatt Company paid $57,000 in January of Year 2 for salaries that had been earned by employees in December of Year 1. Indicate whether each of the following statements about financial statement effects of the January of Year 2 event is true or false.The income statement for Year 2 is not affected because the salaries expense had been recognized at the end of December in Year 1.Cash flows from operating activities decreased on the Year 2 statement of cash flows.Payment of the salaries in Year 2 increased a liability.The Year 2 statement of changes in stockholders’ equity would not be affected because the salaries expense had been recognized at the end of December in Year 1.Both assets and stockholders’ equity decreased in Year 2 as a result of this transaction. 134) Indicate whether each of the following statements about the closing process and the accounting cycle is true or false.The closing process transfers certain account balances to retained earnings at the end of the accounting cycle.Only accounts that appear on the income statement are closed at the end of each accounting cycle.The permanent accounts contain information that is cumulative in nature.The retained earnings balance at the end of any given year is equal to that year’s net income. 135) Regarding the effects of end-of-period adjustments, state whether each of the following statements is true or false.Recording the usage of supplies involves an increase in liabilities and a decrease in stockholders’ equity.The accrual of salaries is considered a claims exchange transaction.Recording services performed on a prepaid contract involves a decrease in liabilities and an increase in assets.End-of-period adjustments often affect cash flows.Failure to record accrued salaries at the end of the year will cause reported net income to be higher than it should have been. Version 1 43 136) Indicate whether each of the following statements regarding the four types of accounting events is true or false.Asset exchange transactions involve an increase in one asset and a decrease in another asset.An asset source transaction involves an increase in assets and an increase in a corresponding claims account.An asset use transaction cannot result in an increase in stockholders’ equity.Asset exchange transactions cannot affect cash flows.Some claims exchange transactions involve an increase in a liability account and a decrease in an stockholders’ equity account. 137) Hernandez Company began business operations and experienced the following transactions during the year beginning January 1, Year 1:Issued common stock for $50,000 cash.Provided services to customers for $125,000 on account.Purchased $2,500 of supplies on account.Paid $30,000 cash to rent office space for a 12-month period beginning July 1, Year 1.Collected $115,000 cash from customers.Paid cash for $90,000 of operating expenses.Adjusted the accounting records to reflect that there was $750 of supplies remaining on hand at yearend.Recorded an end-of-year adjustment to recognize rent expense.Required:Record the above transactions on a horizontal statements model, reflecting their effect on the different financial statements.Prepare Hernandez Company’s income statement, balance sheet and statement of cash flows for the year ended December 31, Year 1. Version 1 44 138) The following transactions apply to Einstein Corporation.Issued common stock for $50,000 cash.Provided services to customers for $28,000 on account.Purchased land for $16,000 cash.Purchased $1,500 of supplies on account.Paid $12,000 for operating expenses.Paid $550 on accounts payable.Collected $25,000 cash from customers.Accrued $600 of salary expense at year end.Paid $2,000 dividends to stockholders.Required:Identify the effect on the statement of cash flows for each of the above transactions.Classify the above accounting events into one of four types of transactions (asset source, asset use, asset exchange, claims exchange). 139) Record each of the following events in the horizontal statements model. After each event, record the corresponding December 31 end-of-year adjustment that would be necessary.Paid $36,000 for a 1-year lease beginning April 1.Paid $3,000 to purchase supplies. At year end, $1,080 of supplies remained.Received a $48,000 cash advance for a 6-month contract beginning on September 1. 140) The following data were taken from the accounting records of Li Company at December 31, Year 1 after adjusting entries have been entered. The December 31, Year 1 closing entries have not been made. Service revenue Retained earnings Accounts receivable Salaries expense Operating expense Accounts payable Supplies expense Prepaid rent Common stock Version 1 $ 166,000 95,000 26,500 88,000 15,400 22,800 760 4,000 90,000 45 Supplies Dividends Insurance expense Rent expense Unearned revenue 400 2,400 1,600 20,000 1,530 Required:List the accounts that should be closed at the end of Year 1.Prepare an income statement for Li Company for Year 1.What is the balance in retained earnings after closing? 141) For each of the following transactions, indicate the type by entering AS for asset source transactions, AU for asset use transactions, AE for asset exchange transactions, and CE for claims exchange transactions.Paid $2,000 in dividends to its stockholders.Recorded the accrual of $1,000 in salaries to be paid later.Issued common stock for $20,000 in cash.Earned revenue to be collected next year.Paid the salaries accrued in number 2 above.Received cash from customers in number 4 above.Purchased supplies on account.Received $500 from a customer for services to be provided later. 142) Classify each of the following transactions for the purpose of the statement of cash flow as operating activities (OA), investing activities (IA), financing activities (FA), or not reported on the statement of cash flows (NA).Sold land.Made adjusting entry to recognize interest revenue on investments.Borrowed funds from the bank.Paid rent in advance for the next six months.Paid cash to settle accrued salary expense.Purchased supplies on account.Collected accounts receivable. Version 1 46 143) Maggie Stern started a consulting business, Stern Consulting, on January 1, Year 1 by issuing $9,000 of common stock. In addition, the following events occurred in Year 1:Provided services on account, $27,500Paid cash for $13,500 in operating expensesCollected $11,000 of the revenue that was previously recorded on accountPaid a cash dividend of $5,000 to the stockholdersRequired:Show the effects of the above transactions on the accounting equation. Assets = Liabilities + Equity 1) 2) 3) 4) 5) Total 144) Turner Company started its business by issuing $10,000 of common stock on January 1, Year 1. The company performed $38,000 of service for customers on account in Year 1. It collected $32,500 of this amount in Year 1, recorded expenses on account of $29,500, paid $21,000 of the payables owed, and paid a $500 dividend to the stockholders.Required:What is the amount of total assets at the end of Year 1?What is the amount of cash on hand at the end of Year 1?What is the net income for Year 1?Prepare a balance sheet for Year 1. 145) The Maryland Corporation was started on January 1, Year 1, with the issuance of $50,000 of stock. During Year 1, the company provided $75,000 of services on account and collected $68,000 of that amount. Maryland incurred $63,000 of expenses, and paid $50,000 of that amount during Year 1. On December 31, Year 1, Maryland paid investors a $2,000 cash dividend and accrued $4,000 of salary expense.Required:What is the net income for year ended December 31, Year 1?Prepare the company’s statement of cash flows for the year ended December 31, Year 1.What is the balance in Maryland’s retained earnings account after closing? Version 1 47 146) Consider the following independent scenarios:At January 1, Year 2, accounts receivable was $24,000. Cash collected on accounts receivable during Year 2 was $55,000. At December 31, Year 2, accounts receivable was $30,000. What were the revenues earned on account during Year 2?At January 1, Year 2, accounts payable was $19,000. During Year 2, expenses on account were $68,000. At December 31, Year 2, accounts payable was $15,000. What was the amount of cash paid on accounts payable during Year 2?At January 1, Year 2, the balance in the prepaid insurance account was $480; that amount expires in Year 2. On March 1, Year 2, the company paid $3,000 for insurance coverage for the next 12 months. What was the amount of insurance expense for Year 2?At January 1, Year 2, the balance in the supplies account was $550. At December 31, Year 2, the company counted $400 of supplies on hand. The company reported supplies expense in Year 2 of $3,300. What was the total of supplies purchases during Year 2? 147) Oregon Company began operations on January 1, Year 1, by issuing $10,000 in common stock to the stockholders. On March 1, Year 1, Oregon accepted an advance of $36,000 to provide services for a one-year period beginning April 1. During Year 1, services in the amount of $32,000 were provided to customers on account, and 80% of this amount was collected by year-end. During Year 1, operating expenses incurred on account were $24,000, and 60% of this amount was paid by year-end. During the year, Oregon paid $1,200 to purchase supplies. By year-end, $1,080 of the supplies had been used. Dividends to stockholders were $2,000 during the year. During Year 1, Oregon paid salaries of $28,000, and on December 31, Year 1, the company accrued salaries of $2,800.Oregon recorded all appropriate adjusting entries at year end.What would Oregon report for service revenue for Year 1?What would Oregon report for salaries expense for Year 1?What would Oregon report for supplies expense for Year 1?What would the amount be for net cash flows from operating activities for Year 1?What is the net income for Year 1?What would the balance in the retained earnings account be at December 31, Year 1? Version 1 48 148) In a company’s annual report, the reader will find a company’s income statement, statement of changes in stockholder’s equity, balance sheet, and statement of cash flows. These financial statements can help the reader to answer specific questions. Identify which financial statement would be most useful in answering the following questions. If more than one financial statement can answer the question, please identify all applicable statements.How much cash was collected from accounts receivable during the current year?What was the total amount of land owned by the company?What was the total revenue earned by the company during the most recent year?What were the types of claims that the company has against its assets?What was the total amount of cash received by the issuance of common stock?Was the company profitable during the most recent year?What was the amount of cash dividends paid to the stockholders during the most recent year?What was the total amount of cash borrowed by the company during the most recent year?What was the ending balance of retained earnings?What was the amount of change in the cash balance during the current year? 149) The following events apply to Bowman’s Cleaning Service for Year 1.Issued stock for $44,000 cashOn May 1, paid $27,000 for one year’s rent in advancePurchased on account $4,500 of supplies to be used in the businessPerformed services of $68,400 and received cashAt December 31, adjusted the records for the expired rentAt December 31, an inventory of supplies showed that $660 of supplies were still unusedRequired:Record the events in general ledger accounts under an accounting equation. (Note: There is no need to provide appropriate account titles for the Retained Earnings amounts in the last column of the table.) Version 1 49 150) Using the form below, record each of the following transactions for Mayer Corporation during the year ending December 31, Year 1. (Note: There is no need to provide appropriate account titles for the Retained Earnings amounts in the last column of the table.)November 1: Received cash from clients for services to be performed over the next six months, $12,000November 1: Paid $1,200 for a 12-month insurance policyDecember 31: Recorded expiration of two months of the insuranceDecember 31: Earned $4,000 of the amount received from clients in November Assets Cash Supplies = Prepaid Insurance Liabilities AP Unearned Revenue + Stockholders’ Equity CS + RE a. b. c. d. 151) In a company’s annual report, the reader will find a company’s income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows. These financial statements can help the reader to answer specific questions. Identify which financial statement would be most useful in answering the following questions. If more than one financial statement can answer the question, please identify all applicable statements.What was the ending balance of retained earnings?What was the amount of cash dividends paid to the stockholders during the most recent year?What was the total amount of land owned by the company?What was the total amount of cash borrowed by the company during the most recent year?What were the types of claims that the company had against its assets?What was the total amount of cash received by the issuance of common stock in the current year?Was the company profitable during the most recent year?How much cash was collected from accounts receivable during the current year?What was the total revenue earned by the company during the most recent year?What was the amount of change in the cash balance during the current year? Version 1 50 152) The following transactions apply to Kellogg Company.Issued common stock for $20,000 cashProvided services to customers for $38,000 on accountPurchased land for $15,000 cashIncurred $29,000 of operating expenses on accountCollected $35,000 cash from customers for services provided in event number 2Paid $27,000 on accounts payablePaid $2,000 dividends to stockholdersRequired:Identify the dollar amount effect on the statement of cash flows, if any, for each of the above transactions. Enter NA for items not affected.Indicate whether each transaction involves operating, investing, or financing activities. Leave the related cell blank for items that do not result in operating, investing, or financing cash flows. Event a. Effect on Statement of Cash Flows b. Transaction Type 1. 2. 3. 4. 5. 6. 7. Version 1 51 153) Grant Helton started a consulting business, Grant Consulting, on January 1, Year 1, and the business engaged in the following transactions during the year:Issued $40,000 of common stock for cashProvided services on account, $46,500Incurred $37,500 of operating expense, but only paid $32,000 of this amountCollected $39,000 of the revenue that was previously recorded on accountPaid a cash dividend of $4,000 to the stockholdersRequired:Show the effects of the above transactions on the accounting equation. Event 1) Assets = Liabilities + SH Equity 2) 3) 4) 5) Totals 154) Pierce Company was founded in Year 1 and engaged in the following transactions:Issued common stock for cashPaid rent in advance for 3 months at a timePurchased supplies on accountCollected cash from a customer for services to be provided over a period of 1 yearPaid a cash dividend to stockholdersPurchased a 2-year fire insurance policyProvided services to customers on accountCollected cash from accounts receivablePaid cash for various operating expensesRequired:Which of the above transactions would require adjusting entries at year end?Why are adjusting entries required before financial statements can be prepared? 155) Jenna Fisk started her business by issuing $8,000 of common stock on January 1, Year 1. Jenna performed $18,500 of service on account in Year 1, and she collected $16,200 of this amount by year end. She paid operating expenses of $14,900 and paid a $600 dividend to the stockholders.Required:What is the amount of total assets at the end of Year 1?What is the amount of cash on hand at the end of Year 1?What is net income for Year 1?Prepare a balance sheet for December 31, Year 1. Version 1 52 156) The effects of transactions occurring during Year 1 and their related end-of-year adjustments have been recorded below using the accounting equation. Assets Cash 1) 8,000 2) (20,00 0) 3) AR = Prepai d Rent Land AP + Stockholders’ Equity Unearne CS RE d Revenue 80,00 0 20,000 48,000 4) 32,000 5) 32,000 6) (4,800 ) 48,000 32,000 (32,00 0) 4,800 7) 8) Liabilities 24,00 0 20,000 (20,00 0) 9) (4,000 ) 10) Total 139,20 s 0 (24,00 0) 16,000 800 0 24,00 0 (20,00 0) 12,000 (4,000 ) 20,000 80,00 0 40,000 Required:Prepare an income statement for Year 1.Prepare a statement of cash flows for Year 1. Version 1 53 157) Cascade Corporation began business operations and experienced the following transactions during Year 1:Issued common stock for $20,000 cashProvided services to customers for $80,000 on accountIncurred $36,000 of operating expenses on accountCollected $46,000 cash from customersPaid $30,000 on accounts payableRequired:Record the above transactions on a horizontal statements model to reflect their effect on Cascade’s financial statements. Classify each of the following transactions for the purpose of the statement of cash flow as operating activities (OA), investing activities (IA), or financing activities (FA). If a transaction is not reported on the statement of cash flows, leave that cell blank. Assets Cash Accounts Receivable = Liabilities + Stockholders’ Equity Accounts Payable Common Stock Retained Earnings Cash Flows 1. 2. 3. 4. 5. Totals Version 1 54 158) Indicate for each of the following items if the item would be reported on the income statement (IS), statement of changes in stockholders’ equity (SE), balance sheet (BS), or statement of cash flows (CF). Some items may appear on more than one statement; if so, identify all applicable statements.Salaries payablePrepaid insuranceDividends paid to stockholdersInterest revenueAccounts payableSalaries expenseRetained earningsUnearned subscription revenueCash flows from operating activitiesBeginning common stockIssued stock to investors for cashAccounts receivable 159) Classify each of the following transactions for the purpose of the statement of cash flows as operating activities (OA), investing activities (IA), financing activities (FA), or not reported on the statement of cash flows (NA).Collected accounts receivableMade adjusting entry to accrue salary expense at the end of the yearBorrowed funds from the bankPaid rent for the monthPaid cash to settle accounts payableIssued common stock for $30,000 cashPaid cash to acquire land 160) Tucker Company shows the following transactions for the accounting period ending December 31, Year 1: Sold books to customers for $68,000 on accountCollected $56,000 from customersIssued common stock for $16,000 cashPrepaid four months’ rent for $8,800 on October 1, Year 1Purchased supplies for $21,000 cashPhysical count shows $6,500 of supplies remained on December 31, Year 1Recorded adjustment for prepaid rent used Show how the above transactions and year-end adjustments affect the accounting equation.(Note: There is no need to provide appropriate account titles for the Retained Earnings amounts in the last column of the table.) Assets Version 1 = Liabilities + Stockholders’ Equity 55 Cash Accounts Prepaid Supplies Receivable Rent Common Retained Stock Earnings 1. 2. 3. 4. 5. 6. 7. Totals 161) For each of the following transactions, indicate the type by entering “AS” for asset source transaction, “AU” for asset use transaction, “AE” for asset exchange transaction, and “CE” for claims exchange transaction.Paid $10,000 for a plot of landRecorded the accrual of $1,000 in salaries to be paid the following weekIssued common stock for $20,000 in cashIncurred operating expense on accountPaid off its accounts payableEarned revenue to be collected at a future datePaid $2,000 in dividends to its stockholdersReceived cash from customers in number 6 abovePaid the salaries accrued in number 2 aboveBorrowed money from a local bank Version 1 56 162) Determine whether each of the following events are asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE) transactions.Borrowed $6,000 from creditorsIssued common stock to investors for $8,000 cashPaid one year’s rent in advanceProvided services to customers and received $35,000 cashPaid creditors $10,000Received $3,000 of revenue in advanceProvided services to customers on account, $12,000Collected $2,000 from accounts receivableRecognized accrued salary expense of $2,000Adjusted the records for supplies used of $800 Version 1 57 Answer Key Test name: chapter 2 1) TRUE 2) FALSE 3) TRUE 4) TRUE 5) FALSE 6) FALSE 7) TRUE 8) FALSE 9) FALSE 10) FALSE 11) TRUE 12) FALSE 13) TRUE 14) FALSE 15) FALSE 16) TRUE 17) FALSE 18) FALSE 19) B 20) B 21) C 22) A 23) B 24) A 25) C 26) C Version 1 58 27) D 28) A 29) C 30) A 31) C 32) B 33) A 34) C 35) D 36) D 37) C 38) B 39) D 40) D 41) D 42) B 43) A 44) D 45) D 46) D 47) C 48) C 49) A 50) B 51) B 52) A 53) B 54) C 55) B 56) C Version 1 59 57) D 58) B 59) C 60) C 61) C 62) A 63) C 64) A 65) B 66) A 67) A 68) B 69) B 70) C 71) C 72) A 73) D 74) D 75) C 76) D 77) D 78) B 79) A 80) B 81) B 82) B 83) D 84) C 85) A 86) B Version 1 60 87) D 88) A 89) A 90) C 91) C 92) C 93) A 94) B 95) C 96) A 97) C 98) D 99) A 100) B 101) A 102) D 103) A 104) C 105) A 106) B 107) A 108) C 109) C 110) Balance Sheet Income Statement Statement of Cash Assets = Liabilities + Stockholders’ Revenue − Expense = Net Flows Equity Income I NA I I NA I NA Version 1 61 Performing services on account increases assets (accounts receivable) and increases revenue, which increases net income and equity (retained earnings). It does not affect the statement of cash flows, as it does not affect cash. 111) Balance Sheet Assets = Liabilities + Stockholders’ Equity I/D NA NA Income Statement Statement of Cash Revenue − Expense = Net Flows Income NA NA NA I Collecting on accounts receivable increases one asset (cash) and decreases another asset (accounts receivable). It does not affect the income statement, but is reported as a cash inflow for operating activities on the statement of cash flows. 112) Balance Sheet Income Statement Statement of Cash Assets = Liabilities + Stockholders’ Revenue − Expense = Net Flows Equity Income I NA I I NA I I This event increases revenue, net income and equity (retained earnings) by $2,600. Cash increases by $1,000 and accounts receivable increases by $1,600, which result in an increase in assets of $2,600. It is reported as a $1,000 cash inflow for operating activities on the statement of cash flows. 113) Balance Sheet Income Statement Statement of Cash Assets = Liabilities + Stockholders’ Revenue − Expense = Net Flows Equity Income NA NA NA NA NA NA NA This event does not affect the financial statements at all. Revenue is recorded when services are performed, not when the contract is signed. 114) Balance Sheet Version 1 Income Statement Statement 62 Assets = Liabilities + Stockholders’ Revenue − Expense = Net Equity Income NA I NA I D of Cash Flows NA Accruing salaries expense increases liabilities (salaries payable) and it increases expenses, which decreases net income and stockholders’ equity (retained earnings). It does not affect the statement of cash flows. 115) Balance Sheet Income Statement Statement of Cash Assets = Liabilities + Stockholders’ Revenue − Expense = Net Flows Equity Income I I NA NA NA NA I Collecting a payment in advance from a customer increases assets (cash) and increases liabilities (unearned revenue). It does not affect the income statement. Revenue will not be recognized until the services are provided. It will be reported as a cash inflow from operating activities on the statement of cash flows. 116) Revenue is recognized when it is earned; i.e. when the services are performed.Accrual accounting requires that companies recognize revenue when work is done regardless of when cash is collected. 117) The balance in accounts receivable represents the amount of future cash receipts that are due from customers. In other words, it is the amount to be collected from customers who previously received goods or services on account.Accounts receivable is an asset account because it represents something that is owed to the company. 118) Expenses are recognized when they are incurred, regardless of when cash is paid. In accrual transactions, that means that expenses are recorded before cash payments, and in deferral transactions they are recorded after cash payments.Expenses are recognized when incurred, regardless of when payment is made. Version 1 63 119) Assets decrease; liabilities decreaseMaking a cash payment to creditors decreases assets (cash) and decreases liabilities (accounts payable). 120) Adjusting entries are necessary to update ledger account balances before preparing financial statements in order to recognize revenues and expenses that should be recognized in the current year, but have not yet been recorded. Some common adjusting entries include recognizing accrued expenses (such as salaries expense), deferred expenses (such as supplies and prepaid rent), and unearned revenue.Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, is commonly called accrual accounting. 121) The recording of revenue normally has the effect of increasing total assets (usually cash or accounts receivable).If revenue is earned at the same time cash is collected, cash is increased. If revenue is earned on account, and a customer is billed, accounts receivable is increased. A less common situation involves earning revenue after cash was received in advance, in which case assets are unaffected (liabilities decrease and equity increases). 122) There is no effect on the statement of cash flows when services are performed on account. Assets (accounts receivable) and equity (retained earnings) will increase on the balance sheet.Providing services on account does not affect the cash account; therefore, the statement of cash flows is unaffected. Revenue will be recognized on the income statement which increases net income. Version 1 64 123) The purpose of the closing process is to bring the balance of the temporary accounts to zero at the end of an accounting period and to update the retained earnings account. By closing temporary accounts, they will be ready to capture revenue, expense, and dividend information for the next period.Closing entries are made after the income statement is prepared. Note that retained earnings is only affected by revenues, expenses, and dividends as the result of the closing process. 124) Temporary accounts (revenues, expenses and dividends) collect information about a single period only; they are closed at the end of that period. Permanent accounts include the balance sheet accounts (assets, liabilities, common stock and retained earnings), and their balances roll forward each year rather than being closed out.Revenue and expense accounts appear on the income statement. Dividends is also a temporary account, but is not reported on the income statement. It is reported only on the statement of changes in equity. All permanent accounts appear on the balance sheet. 125) The accounting cycle is a series of steps or procedures that occur repeatedly throughout the life of a business. The stages described to this point in the course include (1) recording transactions, (2) adjusting the accounts, (3) preparing financial statements, and (4) closing the temporary accounts.The accounting cycle repeats every accounting period. This is usually annually. Version 1 65 126) The “matching concept” refers to the process of “matching” the expenses with the revenues that they produce in the appropriate time period. This matching is largely done through the adjusting process. For example, the accrual of salary expense has the effect of matching the correct portion of salary expense to the accounting period in which the employees contributed to producing revenue. Matching means that expenses should be recognized in the same accounting period as the revenues that they helped a business to earn.The matching concept is the foundation of accrual accounting the recognition of revenues as they are earned and expenses as they are incurred, regardless of when cash is exchanged. 127) Retained EarningsClosing revenues increases retained earnings. Closing expenses and dividends decreases retained earnings. Note that closing entries are the only transactions that directly involve the retained earnings account. 128) This is false. Recognizing accounting events (reporting them on the financial statements) and realizing cash consequences may, but not must, occur in different accounting periods.This is true. Sometimes the cash consequence of a transaction occurs after its accounting recognition. An example is prepaid rent.This is true. The matching concept allows companies that use accrual accounting to match expenses with either revenues or accounting periods.This is false. A company that uses accrual accounting records both accrual and deferral transactions.This is false. Accrual basis companies may make cash sales and may pay cash expenses. Version 1 66 129) This is true. Assets (accounts receivable) and stockholders’ equity (revenue) both increase.This is true. Because cash is not affected, cash flows are not affected.This is false. The event resulted in an increase in revenue and an increase in accounts receivable.This is false. Kenyon would recognize revenue when the services are performed, not when cash is received.This is false. Because assets (accounts receivable) increase, it is an asset source transaction. 130) This is true. This event reduces assets (Cash) and liabilities (Accounts Payable).This is false. This event does not affect the income statement because the expense associated with the accounts payable was previously recognized.This is false. This event reduces assets (Cash) and liabilities (Accounts Payable). 131) This is false. Because work will not begin until Year 2, the revenue is recognized in Year 2This is true. Only the Year 1 statement of cash flows is affected because no cash is received in Year 2.This is false. Collecting a cash advance is an asset source transaction that increases assets (cash) and increases liabilities (unearned revenue).This is true. Revenue will be recognized only when services are performed during January of Year 2.This is true. The transaction increases unearned revenue, a liability. 132) This is false. An increase in a revenue account is usually associated with an increase in assets, such as cash or accounts receivable.This is true. Recording an increase in revenue may be associated with a decrease in liabilities, as in the case of earning revenue from a prepaid contract (unearned revenue).This is false. An increase in salaries expense could be accompanied by an increase in salaries payable, as in the case of accruing salaries expense, but not a decrease.This is true. Recording a decrease in assets (such as prepaid rent or insurance, or supplies) may be associated with an increase in expenses.This is true. Supplies expense is increased when supplies are used, or decreased. Version 1 67 133) This is true. The expense is recognized in the period in which the salaries were earned, in Year 1.This is true. The January, Year 2 payment decreases cash flows from operating activities in Year 2.This is false. When the payment is made, salaries payable, a liability, is decreased, not increased.This is true. Because the expense was recognized in Year 1, the Year 2 statement of changes in stockholders’ equity is unaffected.This is false. The January, Year 2 payment decreases assets (cash) and liabilities (salaries payable), but not stockholders’ equity. 134) This is true. The closing process transfers the balances in revenue, expense, and dividend accounts to retained earnings at the end of the period.This is false. Dividends are closed, but do not appear on the income statement.This is true. All balance sheet, or permanent, accounts contain cumulative information.This is false. Because the retained earnings account accumulates earnings from year to year, its balance is not equal to net income in any particular year. 135) This is false. Recording usage of supplies decreases assets (supplies) and increases expense, which decreases stockholders’ equity.This is true. Accruing salaries increases a liability (salaries payable) and decreases stockholders’ equity (salaries expense decreases retained earnings).This is false. Recording service performed on a prepaid contract involves a decrease in liabilities (unearned revenue) and an increase in revenue, which increases stockholders’ equity. Assets are not affected.This is false. End of period adjustments never affect the cash account and, as a result, never affect cash flows.This is true. Failure to record accrued salaries would understate salaries expense, causing reported income to be higher than it should have been. Version 1 68 136) This is true. An asset exchange transaction involves an increase in one asset and a decrease in another.This is true. An asset source transaction involves an increase in assets and an increase in liabilities or stockholders’ equity.This is true. An asset use transaction involves a decrease in assets and either a decrease in liabilities or stockholders’ equity. Therefore, it cannot result in an increase in stockholders’ equity.This is false. Because an asset exchange transaction involves an increase in one asset and a decrease in another, it often affects cash.This is true. Some claims exchange transactions, including accruing salaries, involve an increase in a liability and a decrease in stockholders’ equity. 137) a. Assets Cash 1. 50, 000 2. AR 125, 5000 3. 4. (30, 000) 5. 115 ,00 0 6. (9,0 00) 7. (115 ,000 ) = Liabil + Stockhol Reve − Expe = NI CF ities ders’ nue nse Equity Supp Prepa AP CS + RE lies id Rent 50, 50,0 F 000 00 A 125 125 125, ,00 ,00 000 0 0 2,5 2,50 00 0 30, (30, O 000 000) A 115, O 000 A (1,7 50) 8. Tot als 45, 000 Version 1 10,0 00 750 (15, 000) 15, 000 2,50 0 (90, 000) (1,7 50) (15, 000) 50, 18, 125 000 250 ,00 0 90,0 00 1,75 0 15,0 00 106, 750 (90, (90, O 000) 000) A (1,7 50) (15, 000) 18,2 45,0 50 00 69 b. Hernandez Company Income Statement For the Year Ended December 31, Year 1 Service revenue $ 125,000 Operating expenses (90,000) Rent expense (15,000) Salaries expense (1,750) Net income $ 18,250 Hernandez Company Balance Sheet As of December 31, Year 1 Assets Cash Accounts receivable $ 45,000 10,000 Supplies Prepaid rent 750 15,000 $ 70,750 Liabilities Accounts payable $ 2,500 Stockholders’ equity Common stock Retained earnings Total liabilities and stockholders’ equity $ 50,000 18,250 68,250 $ 70,750 Hernandez Company Statement of Cash Flows For the Year Ended December 31, Year 1 Cash flows from operating activities Version 1 70 Cash receipts from revenue $ 115,000 Cash payments for rent (30,000) Cash payments for operating expenses (90,000) Net cash flow from operating activities $ (5,000) Cash flows for investing activities 0 Cash flows from financing activities Cash receipts from issuing common stock 50,000 Net increase in cash 45,000 Plus: Beginning cash balance 0 Ending cash balance $ 45,000 138) a. Event a) b) b. Cash Flow 50,000 FA NA Transaction Asset source Asset source c) d) (16,000) IA NA Asset exchange Asset source e) f) g) h) (12,000) OA (550) OA 25,000 OA NA Asset use Asset use Asset source Claims exchange i) (2,000) FA Asset use 139) Assets = Liabili + Stockhol Reve − Expe = ties ders’ nue nse Equity Cash Suppl Prepa Unearne C + RE ies id d S Rent Revenue Version 1 NI Statement of Cash Flows 71 a (36,0 . 00) 36,0 00 (36,0 00) OA (27,0 00) b (3,00 3,00 . 0) 0 (1,9 20) c 48,0 . 00 (27,0 00) 27,0 00 (27,0 00) (3,00 0) OA (1,92 0) 1,92 0 (1,92 0) 48,000 (24,00 0) 48,0 00 OA 24,00 24,0 0 00 24,0 00 Nine months (April through December) of the prepaid rent has been used; Rent expense = $36,000 × 9/12 = $27,000Supplies expense = Purchase of supplies of $3,000 − Supplies on hand of $1,080 = $1,920Four months (September through December) of the cash advance has been earned; Revenue earned = $48,000 × 4/6 = $32,000 140) a. The accounts that should be closed are:Service revenueSalaries expenseOperating expenseSupplies expenseInsurance expenseRent expenseDividendsb. Li Company Income Statement For the Year Ended December 31, Year 1 Service revenue Salaries expense $ 88,000 Operating expense 15,400 Insurance expense 1,600 Rent expense 20,000 Supplies expense Net Income 760 $ 166,000 125,760 $ 40,240 c. Version 1 72 Beginning retained earnings Add: Net income Less: Dividends Ending retained earnings $ 95,000 40,240 (2,400) $ 132,840 141) 1. AU, 2. CE 3. AS, 4. AS, 5. AU, 6. AE, 7. AS, 8. ASAssets (cash) decreased, Stockholders’ Equity (retained earnings from dividends) decreasedLiabilities (salaries payable) increased, Equity (retained earnings from salaries expense) decreasedAssets (cash) increased, Stockholders’ Equity (common stock) increasedAssets (accounts receivable), Stockholders’ Equity (retained earnings from revenue) increasedAssets (cash) decreased, Liabilities (salaries payable) decreasedAssets (cash) increased, Assets (accounts receivable) decreasedAssets (supplies) increased, Liabilities (accounts payable) increasedAssets (cash) increased, Liabilities (unearned revenue) increased 142) 1. IA, 2. NA, 3. FA, 4. OA, 5. OA, 6. NA, 7. OAPurchasing and selling long-lived assets is an investing activityAdjusting entries never affect cash flowsBorrowing cash is a financing activityPaying rent, including paying in advance, is an operating activityPaying salaries is an operating activityMaking purchase on account does not affect cash flowsCollecting cash from customers is an operating activity 143) a. Assets = Liabilities + Equity 1) 9,000 9,000 2) 27,500 27,500 3) (13,500) (13,500) 4) 11,000 (11,000) 5) Version 1 (5,000) (5,000) 73 Total b. Stern Consulting Income Statement For the Year Ended December 31, Year 1 Service revenue Operating expense $ 27,500 (13,500) Net income $ 14,000 Stern Consulting Statement of Cash Flows For the Year Ended December 31, Year 1 Cash flows from operating activities Cash receipts from revenue $ 11,000 Cash payments for operating expenses (13,500) Net cash flow for operating activities $ (2,500) Cash flows for investing activities 0 Cash flows from financing activities Cash receipt stock issuance 9,000 Cash payment for dividends (5,000) Net cash flow from financing activities 4,000 Net increase in cash 1,500 Plus: Beginning cash balance Ending cash balance 0 $ 1,500 144) $26,500$21,000$8,500 Turner Company Balance Sheet As of December 31, Year 1 Version 1 74 Assets: Cash $ 21,000 Accounts receivable 5,500 $ 26,500 Liabilities: Accounts payable $ 8,500 Stockholders’ equity: Common stock 10,000 Retained earnings Total liabilities and stockholders’ equity 8,000 18,000 $ 26,500 See part dSee part dNet income = Revenues of $38,000 − Expenses of $29,500 = $8,500Cash = $10,000 + $32,500 − $21,000 = $21,000 Accounts receivable = $38,000 − $32,500 = $5,500 Accounts payable = $29,500 − $21,000 = $8,500 Retained earnings = Revenues of $38,000 − Expenses of $29,500 − Dividends of $500 = $8,000 145) $8,000 Maryland Corporation Statement of Cash Flows For the Year Ended December 31, Year 1 Cash flows from operating activities Cash receipts from revenue $ 68,000 Cash payments for operating expenses (50,000) Net cash flow from operating activities $ 18,000 Cash flows from investing activities 0 Cash flows from financing activities Cash receipt stock issuance 50,000 Cash payment for dividends (2,000) Version 1 75 Net cash flow from financing activities 48,000 Net increase in cash 66,000 Plus: Beginning cash balance Ending cash balance 0 $ 66,000 Net income = $75,000 services earned − ($63,000 expenses paid + $4,000 accrued expenses) = $,8000Retained earnings = $0 beginning + $8,000 net income − $2,000 dividends = $6,000 146) $61,000$72,000$2,980$3,150Ending A/R of $30,000 = Beginning A/R of $24,000 + Revenue earned on account − Cash collections on A/R of $55,000; Revenue on account = $30,000 − $24,000 + $55,000 = $61,000Ending A/P of $15,000 = Beginning A/P of $19,000 + Expenses on account of $68,000 − Payments on account; Payments on account = $19,000 + $68,000 − $15,000 = $72,000Insurance expense = $480 + ($3,000 × 10/12) = $2,980Ending supplies of $400 = Beginning supplies of $550 + Supplies purchased − Supplies expense of $3,300; Supplies purchased = $400 − $550 + $3,300 = $3,150 Version 1 76 147) $59,000$30,800$1,080$18,000$3,120$1,120Service revenue = Revenue on account of $32,000 + Revenue earned on contract of $27,000 (or $36,000 × 9/12) = $59,000Salaries expense = Salaries paid during year of $28,000 + Salaries accrued at year-end of $2,800 = $30,800Supplies expense = $1,080 (the amount used)Net cash flows from operating activities = Advance to provide services of $36,000 + Collections on account of $25,600 (or $32,000 × 0.80) − Cash paid for operating expenses of $14,400 (or $24,000 × 0.60) − Cash paid to purchase supplies of $1,200 − Cash paid for salaries of $28,000 = $18,000Net income = Service revenue of $59,000 (from part 1) − Operating expenses of $24,000 − Salaries expense of $30,800 (from part 1) − Supplies expense of $1,080 (from part 3) = $3,120Ending retained earnings = Beginning retained earnings of $0 + Net income of $3,120 (from part 5) − Dividends of $2,000 = $1,120 148) Statement of cash flowsBalance sheetIncome statementBalance sheetStatement of cash flows and statement of changes in stockholder’s equityIncome statement and statement of changes in stockholder’s equityStatement of cash flows and statement of changes in stockholder’s equityStatement of cash flowsBalance sheet & statement of changes in stockholder’s equityStatement of cash flows 149) Cash 1. Assets Supplies 44,000 44,000 2. (27,000) 3. 4. Prepaid Rent = Liabilities + Stockholders’ Equity AP CS + RE 27,000 4,500 4,500 68,400 5. Version 1 68,400 (18,000) (18,000) 77 6. (3,840) (3,840) Eight months (May through December) have passed; Rent expense = $27,000 × 8/12 = $18,000Supplies expense = Beginning balance of supplies of $0 + Supplies purchased of $4,500 − Supplies on hand of $660 = $3,840 150) Assets Cash a. 12,000 b. (1,200) c. Supplies = Prepaid Insurance Liabilities AP + Stockholders’ Equity CS + RE Unearned Revenue 12,000 1,200 (200) d. (200) (4,000) 4,000 Two months (November and December) have passed; Insurance expense = $1,200 × 2/12 = $200 151) Balance sheet & statement of changes in stockholders’ equityStatement of cash flows and statement of changes in stockholders’ equityBalance sheetStatement of cash flowsBalance sheetStatement of cash flows and statement of changes in stockholders’ equityIncome statement and statement of changes in stockholders’ equityStatement of cash flowsIncome statementStatement of cash flows 152) 5. Event 1. 2. a. Effect on Statement of Cash Flows 20,000 NA b. Transaction Type FA 3. 4. (15,000) NA IA 5. 6. 35,000 (27,000) OA OA Version 1 78 7. (2,000) FA 153) a. Event 1) 2) Assets 40,000 = Liabilities SH Equity 40,000 46,500 46,500 3) 37,500 (32,000) 4) + (37,500) (32,000) 39,000 (39,000) 5) (4,000) Totals 50,500 (4,000) 5,500 45,000 b. Hylton Consulting Income Statement For the Year Ended December 31, Year 1 Service revenue Operating expense Net income $ 46,500 (37,500) $ 9,000 Hylton Consulting Statement of Cash Flows For the Year Ended December 31, Year 1 Cash flows from operating activities Cash receipts from customers $ 39,000 Cash payments for operating expenses (32,000) Net cash flow from operating activities $ 7,000 Cash flows from investing activities 0 Cash flows from financing activities Cash receipt stock issuance Version 1 40,000 79 Cash payment for dividends (4,000) Net cash flow from financing activities 36,000 Net increase in cash 43,000 Plus: Beginning cash balance 0 Ending cash balance $ 43,000 154) Adjusting entries are required for transactions 2, 3, 4, and 6.Adjusting entries are required at the end of an accounting period to properly match expenses with revenues. Transactions that involve deferrals and accruals often require adjusting entries to bring account balances up to date. 155) $11,000$8,700$3,600 Balance Sheet As of December 31, Year 1 Assets Cash Accounts receivable Liabilities $ 8,700 2,300 $ 11,000 $ 0 Stockholders’ equity Common stock Retained earnings Total liabilities and stockholders’ equity $ 8,000 3,000 11,000 $ 11,000 See part dSee part dNet income = Service revenue of $18,500 − Operating expenses of $14,900 = $3,600Cash = $8,000 + $16,200 − $14,900 = $8,700 Accounts receivable = $18,500 − $16,200 = $2,30 Retained earnings = Net income of $3,600 (from part c) − Dividends of $600 = $3,000 156) a. Version 1 80 Income Statement For the Year Ended December 31, Year 1 Service revenue $ 68,000 Operating expense (24,000) Insurance expense (4,000) Net income $ 40,000 b. Statement of Cash Flows For the Year Ended December 31, Year 1 Cash flows from operating activities Cash receipts from revenue $ 64,000 Cash payment for insurance (4,800) Net cash flow from operating activities $ 59,200 Cash flows from investing activities Cash receipt from sale of land Cash payment for land 20,000 (20,000) Net cash flow from investing activities 0 Cash flows from financing activities Cash receipt stock issuance Net cash flow from financing activities Net increase in cash 80,000 80,000 1,39,200 Plus: Beginning cash balance Ending cash balance 0 $ 1,39,200 Service revenue = $48,000 (event 3) + $20,000 (event number 10) = $68,000 157) Assets = Liabilities + Stockholders’ Equity Cash Cash Accounts Accounts Common Retained Flows Version 1 81 Receivable 1. Payable 20,000 2. Stock 20,000 80,000 36,000 46,000 5. (30,000) Totals 36,000 20,000 FA 80,000 3. 4. Earnings (36,000) (46,000) 46,000 OA (30,000) 34,000 6,000 (30,000) OA 20,000 44,000 36,000 158) 1. BS, 2. BS, 3. SE and CF, 4. IS, 5. BS, 6. IS, 7. BS and SE, 8. BS, 9. CF, 10. SE, 11. SE and CF, 12. BS 159) 1. OA, 2. NA, 3. FA, 4. OA, 5. OA, 6. FA, 7. IA 160) Assets Cash 1. 2. Accounts Prepaid Supplies Receivable Rent 68,000 3. 56,000 (56,000 ) 16,000 4. (8,800) 5. (21,000 ) 8,800 21,000 (14,500 ) 7. Version 1 Stockholders’ Equity Common Retained Stock Earnings 16,00 0 6. Total 42,200 s = Liabilitie + s 12,000 (6,600 ) 2,200 6,500 (14,500 ) (6,600) – 16,00 0 46,900 82 161) 1. AE, 2. CE, 3. AS, 4. CE, 5. AU, 6. AS, 7. AU, 8. AE, 9. AU, 10. ASPurchasing land for cash is an asset exchange transaction that increases land and decreases cash.Accruing salary expense is a claims exchange transaction that increases accounts payable and decreases retained earnings.Issuing common stock is an asset source transaction that increases cash and common stock.Incurring operating expense on account is a claims exchange transaction that increases accounts payable and decreases retained earnings.Paying creditors on account is an asset use transaction that decreases cash and accounts payable.Providing services on account is an asset source transaction that increases accounts receivable and retained earnings.Paying dividends is an asset use transaction that decreases cash and retained earnings.Collecting on accounts receivable is an asset exchange transaction that increases cash and decreases accounts receivable.Paying salaries that have been accrued is an asset use transaction that decreases cash and accrued salaries.Borrowing cash is an asset source transaction that increases cash and notes payable. Version 1 83 162) 1. AS, 2. AS, 3. AE, 4. AS, 5. AU, 6. AS, 7. AS, 8. AE, 9. CE, 10. AUBorrowing cash is an asset source transaction that increases cash and notes payable.Issuing common stock is an asset source transaction that increases cash and common stock.Paying rent in advance is an asset exchange transaction that increases prepaid rent and decreases cash.Providing services for cash is an asset source transaction that increases cash and retained earnings.Paying creditors is an asset use transaction that decreases cash and accounts payable.Receiving an advance payment is an asset source transaction that increases cash and unearned revenue.Providing services on account is an asset source transaction that increases accounts receivable and retained earnings.Collecting on accounts receivable is an asset exchange transaction that increases cash and decreases accounts receivable.Accruing salary expense is a claims exchange transaction that increases accounts payable and decreases retained earnings.Recognizing supplies expense is an asset use transaction that decreases supplies and retained earnings. 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