75 test bank for financial ACCT2 2nd edition by godwin

75 Test Bank for Financial ACCT2 2nd Edition by Godwin
Multiple Choice Questions - Part 1
Ponzi Corporation reported the following information for the year ended
December 31, 2012. Net income $100,000; Dividends 6,000; Retained earnings
at December 31, 2012 $120,000. Refer to the information provided above for
Ponzi Corporation. What was the balance of retained earnings at January 1,
2012?
1.

$ 21,000

2.

$ 26,000

3.

$106,000

4.

$214,000

Who among the following invest funds into a business and are considered
owners?
1.

Stockholders

2.

Creditors

3.

Bankers

4.

Lenders

Which of the following is an assumption made in the preparation of the
financial statements?
1.

Financial statements are prepared for a specific entity that is distinct from the entity's
owners.

2.

The current market value is assumed to be less relevant than the original cost paid.


3.

The preparation of financial statements for a specific time period assumes that the
balance sheet covers a designated period of time.

4.

Financial statements are prepared assuming that inflation has a distinct effect on the

monetary unit.

Who among the following generally lends funds to a business entity and
expects repayment of the funds?
1.

A partner

2.

A stockholder

3.

An owner

4.

A creditor

Ponzi Corporation reported the following information for the year ended
December 31, 2012. Net income $100,000; Dividends 6,000; Retained earnings
at December 31, 2012 $120,000. Refer to the information provided above for
Ponzi Corporation. What was the economic effect of the payment of Ponzi's
dividends?
1.

The dividend reduced net income for 2012.

2.

The dividend should be added to net income if the company's accounting equation is in
balance.

3.

The dividend reduced total retained earnings.

4.

The dividends must be paid whenever Ponzi Corporation reports net income.


You are a potential creditor and are concerned that a particular company you
are ready to give a loan to might have too much debt. Which financial
statement would provide you information needed in order to evaluate your
concern?
1.

Balance sheet

2.

Income statement

3.

Statement of retained earnings

4.

Statement of cash flows

Which one of the following items appears on a balance sheet?
1.

Retained earnings

2.

Sales revenue

3.

Utilities expense

4.

Dividends

Which statement demonstrates the financial success or failure of the
company over that specific period of time?
1.

Statement of changes in stockholders’ equity

2.

Statement of retained earnings

3.

Balance sheet

4.

Income statement


Which of the following underlying assumptions for the conceptual framework
is the reason the dollar is used in the preparation of financial statements?
1.

Economic entity

2.

Continuity

3.

Time period

4.

Monetary unit

Which financial statement would you refer to in order to determine how many
resources (assets) the company owns?
1.

Balance sheet

2.

Statement of retained earnings

3.

Income statement

4.

Statement of cash flows

Which of the following is a correct fundamental accounting equation?
1.

Assets + Liabilities = Equity

2.

Assets + Retained Earnings = Equity

3.

Assets + Equity = Liabilities

4.

Assets = Liabilities + Equity

"Economic resources" are known as:
1.

assets.

2.

liabilities.


3.

owners' equity.

4.

retained earnings.

The income statement shows:
1.

how much profit the company has earned since it began operations.

2.

net income equal to the amount of cash on the balance sheet.

3.

a summary of the results of operations for a period of time.

4.

the liquidity of the company on an annual basis

Doughtry's Pet Shop reported a net loss of $1,500,000 and total expenses of
$2,900,000. How much were the total sales?
1.

$4,400,000

2.

$1,400,000

3.

$2,900,000

4.

$1,500,000

What does the phrase, "Revenue is recognized when earned" mean?
1.

Revenue is recorded in the accounting records when the goods are received from a
supplier, and reported on the income statement when sold to the customer.

2.

Revenue is recorded in the accounting records and reported on the income statement
when the cash is received from the customer.

3.

Revenue is recorded in the accounting records when the goods are sold to a customer,
and reported on the income statement when the cash payment is received from the
customer.


4.

Revenue is recorded in the accounting records and reported on the income statement
when goods are sold and delivered to a customer.

Which of the following is the correct date format for the financial statement
heading?
1.

Balance Sheet for the Year Ended June 30, 2012

2.

Statement of Retained Earnings as of December 31, 2012

3.

Income Statement for the Year Ending December 31, 2012

4.

Statement of Retained Earnings at December 31, 2012

Which of the following terms best describes a distribution of the net income
of a corporation to its owners?
1.

Retained earnings

2.

Dividends

3.

Liquidation of assets

4.

Revenue

Monaco Lawn Service Company used $250 of fuel to mow customer lawns in
June. The fuel was purchased on account and due in July. Fuel Expense
should be recorded in:
1.

July.

2.

June.

3.

August.

4.

April.


Which financial statement would you analyze to determine its operating
performance for the past year?
1.

Balance sheet

2.

Statement of retained earnings

3.

Income statement

4.

Statement of cash flows

Which one of the following events creates a liability for a business?
1.

An obligation to pay for goods purchased on credit from a supplier

2.

Inventories purchased for cash

3.

Amounts invested by the owners

4.

Stock sold to the general public

The going concern assumption is concerned with:
1.

the company's ability to continue operations long enough to carry out its existing
obligations.

2.

any information that is capable of influencing the decisions of anyone using the
financial statements.

3.

measuring ongoing business activities at their exchange price at the time of the initial
external transaction.

4.

offsetting management's natural optimism by providing a prudent approach to
uncertainty in financial statement items.


On January 1, 2012, Blackstone Company reported assets of $1,000,000 and
liabilities of $600,000. During 2012 assets decreased by $200,000 and Equity
decreased $250,000. What is the amount of Equity on December 31, 2012.
1.

$650,000

2.

$150,000

3.

$400,000

4.

$800,000

The resources used to generate revenues during a period are called:
1.

net income.

2.

expenses.

3.

revenues.

4.

dividends.

Ranger Company has assets of $5,000,000, liabilities of $3,000,000, and
retained earnings of $1,200,000. How much is total equity?
1.

$8,000,000

2.

$2,000,000

3.

$3,800,000

4.

$1,800,000

Expenses can be matched against revenues:
1.

if the earnings process is not complete.

2.

when cash is collected from the sale of products.


3.

in the same period as the revenue that it helped to generate.

4.

when payment is made for costs related to revenue.

Monaco Lawn Service Company creates revenue each time:
1.

it is scheduled for service.

2.

amount is paid in full.

3.

a lawn is mowed.

4.

money is received in advance.

Which of the following best describes the term "expenses"?
1.

The cost of assets used in the investing activities of a business.

2.

The amount of interest or claim that the owners have in the business.

3.

The future economic resources of a business entity.

4.

A decrease in resources resulting from the sale of goods or provision of services.

The assets and liabilities of the company are $175,000 and $40,000,
respectively. Equity should equal:
1.

$215,000.

2.

$135,000.

3.

$175,000.

4.

$40,000.


"Revenues" are best described as:
1.

decreases in resources resulting from the purchase of goods for the provision of
services.

2.

increases in resources resulting from the sale of goods or the provision of services.

3.

assets used or consumed in the sale of products or services.

4.

an increase in the financing activities section of the statement of cash flows.

Which of the following concepts relates to separating the reporting of
business and personal economic transactions?
1.

Cost principle

2.

Monetary unit assumption

3.

Economic entity assumption

4.

Objectivity assumption

"Matching principle" is best described as:
1.

the principle that a revenue should be recorded when a resource has been earned.

2.

an increase in resources resulting from the sale of goods or the provision of services.

3.

the principle that expenses should be recorded in the period resources are used to
generate revenues.

4.

an increase in the financing activities.

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

Balance sheet


2.

Statement of retained earnings

3.

Income statement

4.

Statement of cash flows

The time period assumption is necessary because:

1.

inflation exists and causes confusing swings in financial statement amounts over time.

2.

external users of financial statements want accurately-reported net income for a
specific period of time.

3.

financial statements users expect full disclosure of all events throughout the entire time
period translated in dollars.

4.

it is required by the federal government.

65 Free Test Bank for Financial ACCT2 2nd Edition by
Godwin Multiple Choice Questions - Part 2
The principle of conservatism is concerned with:
1.

the avoidance of overstating assets or income in the preparation of financial
statements.

2.

the minimization of costs associated with providing financial information.

3.

the company's ability to carry out its existing commitments.

4.

the company's procedures for recording activities at their initial exchange price.

Cash received from customers for mowing their lawns is reported on the
statement of cash flows in the:
1.

financing activities section.


2.

investing activities section.

3.

operating activities section.

4.

supplemental section.

In order for accounting information to be useful in making informed decisions,
it must be:
1.

internal.

2.

relevant.

3.

reliable.

4.

both relevant and reliable.

Which one of the following is not one of the three business activities as
shown in statement of cash flows?
1.

Financing

2.

Operating

3.

Investing

4.

Measuring

On January 1, 2012, Money Company's balance in retained earnings was
$10,000,000. At the end of the year, December 31, 2012, the balance in retained
earnings was $9,400,000. During 2012, the company earned net income of
$440,000. How much were dividends?
1.

$1,040,000

2.

$1,000,000


3.

$ 600,000

4.

$ 440,000

If stockholders want to know how money flowed into and out of the company,
what financial statement would they use?
1.

Income statement

2.

Statement of cash flows

3.

Balance sheet

4.

Statement of retained earnings

An accountant is uncertain about the best estimate of an amount for a
business transaction. If there are two possible amounts that could be
recorded, the amount least likely to overstate assets and earnings is selected.
Which of the following qualities is characterized by this action?
1.

Comparability

2.

Conservatism

3.

Materiality

4.

Neutrality

Which one of the following equations represents the statement of retained
earnings activity?
1.

Beginning retained earnings + net income + dividends = ending retained earnings

2.

Beginning retained earnings + cash inflows 0 cash outflows = ending retained earnings

3.

Beginning retained earnings + dividends 0 net income = ending retained earnings


4.

Beginning retained earnings + net income 0 dividends = ending retained earnings

Information that is material means that an error in recording the dollar amount
of a transaction would:
1.

likely affect the judgment of someone relying on the financial statements.

2.

not affect the decisions of financial statement users.

3.

not impact a business decision of a creditor.

4.

result in the overstatement of assets or income.

Which one of the following financial statements shows the end of the year
cash balance for a business entity?
1.

Income statement and statement of retained earnings

2.

Balance sheet and statement of cash flows

3.

Statement of retained earnings and statement of cash flows

4.

Balance sheet and statement of retained earnings

Davis Construction began operation on January 1, 2012, with an initial
investment of $100,000 from each of its three stockholders. During the year
ending 2012 Davis Construction had net income of $125,000 and paid

dividends of $50,000. Refer to the information provided for Davis
Construction, Inc. The dividends for the year:
1.

increases the amount of capital stock reported by the company.

2.

are part of Davis Construction's operating expense.

3.

are reported on the statement of retained earnings.

4.

are reported on the income statement.


One of the qualitative characteristics of accounting information include:
1.

reliability.

2.

cash flow information.

3.

all accounting information.

4.

assets reported on the balance sheet.

The statement of cash flows has which of the following economic activity
categories?
1.

Financing, investing, and operating

2.

Cash, credit, and noncash

3.

Financing, credit, and operating

4.

Financing, management, and operating

Beginning retained earnings $550,000; Ending retained earnings 700,000;
Dividends paid 100,000; Revenue 525,000. Refer to the selected information
provided for Tarp Corporation. The company's expenses are:
1.

$100,000.

2.

$150,000.

3.

$450,000.

4.

$275,000.

Which one of the following is not one of the activities on the statement of
cash flows?
1.

Operating activities


2.

Investing activities

3.

Business activities

4.

Financing activities

Davis Construction began operation on January 1, 2012, with an initial
investment of $100,000 from each of its three stockholders. During the year
ending 2012 Davis Construction had net income of $125,000 and paid
dividends of $50,000. Refer to the information provided for Davis
Construction, Inc. and calculate its retained earnings balance at December 31,
2012.
1.

$175,000

2.

$ 75,000

3.

$150,000

4.

$275,000

Which of the following qualitative characteristic of useful accounting
information implies that only items that meet or exceed certain thresholds will
affect decisions?
1.

Conservatism

2.

Materiality

3.

Relevance

4.

Comparability

Cash used to purchase a truck to transport lawn mowers and other tools to
customer locations is reported on the statement of cash flows in the:
1.

financing activities section.


2.

investing activities section.

3.

operating activities section.

4.

supplemental section.

Bailout Corporation reported the following information for the year ended
December 31, 2012. Revenues $2,500,000; Expenses 2,000,000; Retained
earnings at December 31, 2011 100,000; Retained earnings at December 31,
2012 450,000. Refer to the selected information provided for Bailout
Corporation. How much was paid out in dividends in 2012?
1.

$500,000

2.

$150,000

3.

$350,000

4.

$250,000

How is the balance sheet linked to the other financial statements?
1.

The amount of retained earnings is reported on the balance sheet as a liability.

2.

Retained earnings is added to total assets and reported on the balance sheet.

3.

Retained earnings from the statement of retained earnings is reported on the balance
sheet.

4.

There is no link between the balance sheet and other statements, as each contains
different accounts and provides different information.


Which one of the following is a correct basic structure of the cash flow
statement?
1.

Cash flows provided (used) by operating activities + / - cash flows provided (used) by
business activities + / - cash flows provided (used) by financing activities = net increase
(decrease) in cash

2.

Cash flows provided (used) by operating activities + / - cash flows provided (used) by
investing activities + / - cash flows provided (used) by business activities = net increase
(decrease) in cash

3.

Cash flows provided (used) by operating activities + / - cash flows provided (used) by

financing activities + / - net change in working capital = net increase (decrease) in cash

4.

Cash flows provided (used) by operating activities + / - cash flows provided (used) by
investing activities + / - cash flows provided (used) by financing activities = net increase
(decrease) in cash

Cash investments made by stockholders in exchange for capital stock in a
business are reported on the statement of cash flows in the:
1.

financing activities section.

2.

investing activities section.

3.

operating activities section.

4.

supplemental section.

Beginning retained earnings $550,000; Ending retained earnings 700,000;
Dividends paid 100,000; Revenue 525,000. Refer to the selected information
provided for Tarp Corporation. What is the net income for Tarp Corporation?
1.

$150,000

2.

$250,000


3.

$525,000

4.

$350,000

Four financial statements are usually prepared for a business. The statement
of cash flows is usually prepared last. The retained earnings statement (RE),
the balance sheet (B), and the income statement (I) are prepared in a certain
order to obtain information needed for the next statement. In what order are
these three statements prepared?
1.

I, RE, and B

2.

B, I, and RE

3.

RE, I, and B

4.

RE, B, and I

Which of the following is not an asset?
1.

Investments

2.

Cash

3.

Inventory

4.

Equity

Which of the following best describes a company's operating activities?
1.

Operating activities are cash flows directly related to earning income.

2.

Operating activities are necessary to provide the money to start a business.

3.

Operating activities are needed to provide the valuable assets required to run a
business.


4.

Operating activities represent the right to receive a benefit in the future.

Jetson Corporation reported the following information for the year ended
December 31, 2012. Revenue $14,000,000; Expenses 11,500,000; Dividends
1,000,000; Retained earnings at December 31, 2012 1,750,000. Refer to the
selected information provided for Jetson Corporation. What was the retained
earnings balance on December 31, 2011?
1.

$ 250,000

2.

$2,500,000

3.

$1,500,000

4.

$ 350,000

Which of the following best describes the term "retained earnings" of a
company?
1.

The amount of total profits earned by a company since it began operations.

2.

The amount of claim that the owners have on the assets of the company.

3.

The future economic resources of a company.

4.

The accumulated net income of a company that has not been distributed to owners in
the form of dividends.

If an investor can use accounting information for two different companies to
evaluate the types and amounts of expenses, the information is said to have
the quality of:
1.

comparability.

2.

consistency.

3.

neutrality.


4.

materiality.

Liabilities are reported on the:
1.

income statement.

2.

statement of retained earnings.

3.

statement of cash flows.

4.

balance sheet.

If a company has $10,500,000 of revenues, declares and pays $550,000 in
dividends, and has net income of $1,600,000, how much were expenses for
the year?
1.

$8,350,000

2.

$1,050,000

3.

$2,150,000

4.

$8,900,000

Scott Brothers, Inc. follows the qualitative characteristic of consistency. This
means that:
1.

for expenses, Scott uses the same account titles as used by its competitors.

2.

Scott has elected certain accounting principles that can never be changed.

3.

Scott applies the same accounting methods each period.

4.

Scott applies the same accounting principles as its competitors.


Free Text Questions
The statement of cash flows classifies cash flow into ____________________,
____________________ and ____________________ activities.
Answer Given

operating, investing, financing

The three financial statements in which net income can be found are the
____________________, the ____________________ and the
____________________.
Answer Given

income statement, statement of retained earnings, statement of cash flows using the
indirect method

What is the purpose of an income statement?
Answer Given

An income statement reports the company's revenues and expenses for a period of
time and shows the company's profitability (or lack of). The income statement’s
purpose is to demonstrate the financial success or failure of the company over a
specific period of time.

Net income from the income statement increases ____________________.
Answer Given

retained earnings

What is the difference between comparability and consistency?
Answer Given


Comparability allows comparisons to be made between or among companies. Even
though a certain amount of freedom exists in selecting accounting techniques, when
this information is disclosed in the financial statements, users can still compare the
information when they know what technique is used. Consistency refers to the
application of the same accounting techniques over time. It involves the relationships
between a set of numbers over several periods, but within one company only, unlike
comparability that can be between or among companies.

The names of the four basic financial statements are the
____________________, the ____________________, the
____________________, and the ____________________
Answer Given

income statement, balance sheet, statement of retained earnings, statement of cash
flows

The type of business activity that relates to obtaining funds from either
issuing stock or borrowing money is called ____________________.
Answer Given

financing

The financial statement in which you list revenues, starting with sales revenue
(service revenue), is called the ____________________.
Answer Given

income statement

List the four financial statements. Explain the connection between these four
statements.
Answer Given

1. Balance Sheet; 2. Income Statement; 3. Statement of Retained Earnings; 4.
Statement of Cash Flows. Net income on the income statement increases retained


earnings on the statement of retained earnings. The balance in the statement of
retained earnings goes to the balance sheet. The ending balance for cash on the
statement of cash flows is also shown on the balance sheet.

The fundamental accounting equation is ____________________ =
____________________ + ____________________.
Answer Given

Assets, Liabilities, Equity

The beginning balance of retained earnings was $2,400,000, and the ending
balance was $1,500,000. The company paid dividends of $150,000. A)
Determine the amount of net income (loss)for the year. B) What information
would one find on the income statement in addition to net income?

Answer Given

A) $1,500,000 (Ending retained earnings) o 2,400,000 (Beginning retained earnings) =
($900,000); ($900,000) (Decrease in retained earnings) + 150,000 (Dividends paid) =
$750,000 (Loss). B) The Income statement will show the sources of amounts earned
(revenues) as well as the amount and type of costs incurred by the company
(expenses) during the period.

Paige Company claims that its financial information is useful. Mention any
four qualities that must be present in order to have "useful" accounting
information? Explain these four qualities.
Answer Given

Four qualitative characteristics of useful accounting information are relevance,
reliability, comparability, and consistency. Relevant information has the capacity to
make a difference in a decision. It helps users predict future events or provides
feedback. Reliable information is dependable, verifiable, and free from bias.
Comparability allows comparisons to be made between or among companies.
Consistency refers to the application of the same accounting methods over time.


Both net income and dividends can be found on the financial statement called
the ____________________.
Answer Given

statement of retained earnings