Financial Reporting and Analysis 【Reading 23】Sample company, accounts, 2012

Kingpin804

A company’s chart of accounts is:

A) used for entries that offset other accounts.

B) the set of journal entries that makes up the components of owners’ equity.

C) a detailed list of the accounts that make up the five financial statement elements.

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A company’s chart of accounts is a detailed list of the accounts that make up the five financial statement elements and the line items presented in the financial statements. Contra accounts are used for entries that offset other accounts. The categories that make up owners’ equity are capital, additional paid-in capital, retained earnings and other comprehensive income.

Kingpin804

Accumulated depreciation and treasury stock are most likely to be shown as what types of accounts?

Accumulated depreciation

Treasury stock

A) Contra-asset Equity

B) Contra-asset Contra-equity

C) Liability Equity

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Accumulated depreciation is a contra-asset account to the asset account property, plant & equipment. Treasury stock is a contra-equity account to common stock or additional paid-in capital.

Kingpin804

Allowance for bad debts and investment in affiliates are most likely to be shown as what types of accounts?

Allowance for bad debts

Investment in affiliates

A) Contra-asset Asset

B) Contra-asset Liabilities

C) Liabilities Asset

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Allowance for bad debts is a contra-asset account to accounts receivable. Investments in affiliates are considered assets.

Kingpin804

The following amounts were drawn from the records of JME Company: total assets = $1,200; total liabilities = $750; contributed capital = $600. Based on this information alone, retained earnings must be equal to:

A) $150.

B) $450.

C) −$150.

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(1,200 − 750 − 600) = −150

Kingpin804

What is the fundamental balance sheet equation?

A) Assets = Liabilities + Stockholders' Equity (A = L + E).

B) Assets = Stockholders' Equity - Liabilities (A = E - L).

C) Liabilities = Assets + Stockholders' Equity (L = A + E).

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The fundamental balance sheet equation is Assets = Liabilities + Stockholders’ Equity (A = L + E). This is the fundamental accounting relationship that sets the basis for recording all financial transactions.

Kingpin804

Which of the following least accurately describes a correct use of double-entry accounting?

A) A decrease in a liability account may be balanced by a decrease in another liability account.

B) A transaction may be recorded in more than two accounts.

C) An increase in an asset account may be balanced by an increase in an owner’s equity account.

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Keeping the accounting equation in balance requires double-entry accounting, in which a transaction has to be recorded in at least two accounts. An increase in an asset account, for example, must be balanced by a decrease in another asset account or by an increase in a liability or owners’ equity account. A decrease in a liability account may be balanced by an increase in another liability account, not a decrease. If two liabilities decrease without a balancing entry, the balance sheet will be out of balance.

Kingpin804

The purchase of equipment for $25,000 cash is most likely to be recorded as:

A) an increase in one asset account and a decrease in another asset account.

B) an increase in an asset account and an increase in a liability account.

C) an increase in two asset accounts.

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The purchase of equipment for cash is an increase in property, plant and equipment (an asset) and a decrease in cash (another asset).

Kingpin804

Washburn Motors signs a contract to sell a $100,000 luxury sedan to be delivered next month, and receives a $20,000 cash down payment from the buyer. How will the transaction most likely affect Washburn’s assets and liabilities?

Assets

Liabilities

A) Unchanged Unchanged

B) Increase Increase

C) Increase Unchanged

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The down payment will increase cash (an asset) and unearned revenue (a liability). Revenues (and thus retained earnings and owner’s equity) will not increase because the car has not been delivered.

Kingpin804

A furniture store acquires a set of chairs for $750 cash and sells them for $1000 cash. These transactions are most likely to affect which accounts?

Purchase

Sale

A) Assets only Assets, revenue, expenses, owners' equity

B) Assets only Assets and revenues only

C) Assets and expenses Assets, revenue, expenses, owners' equity

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The purchase will be a decrease in cash and an increase in inventory, both asset accounts. The expense is not recorded until the chairs are sold. The sale will be a decrease in inventory and an increase in cash (assets), an increase in sales (revenues), an increase in cost of goods sold (expenses), and an increase in retained earnings (owners’ equity) for the $250 profit.

Kingpin804

Which of the following is the least likely to be considered an accrual for accounting purposes?

A) Accumulated depreciation.

B) Wages payable.

C) Unearned revenue.

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Accruals fall into four categories:
1. Unearned revenue.
2. Accrued revenue.
3. Prepaid expenses.
4. Accrued expenses. Wages payable are a common example of an accrued expense.
Accumulated depreciation is considered a contra-asset account to property, plant and equipment, not an accrual.