Kingpin804

Accruals are best described as requiring an accounting entry:

A) when an expense has been incurred.

B) only when a good or service has been provided.

C) when the earliest event in a transaction occurs.

---

Accruals require an accounting entry when the earliest event occurs (paying or receiving cash, providing a good or service, or incurring an expense) and one or more offsetting entries as the exchange is completed.

Kingpin804

An accounting entry that updates the historical cost of an asset to current market levels is best described as:

A) a contra account.

B) a valuation adjustment.

C) accumulated depreciation.

---

In some cases, accounting standards require balance sheet values of certain assets to reflect their current market values. Accounting entries that update these assets’ values from their historical cost are called valuation adjustments. To keep the accounting equation in balance, changes in asset values are also changes in owners’ equity, through gains or losses on the income statement or in “other comprehensive income.”

Kingpin804

Alpha Company reported the following financial statement information:

December 31, 2006:
	Assets	$70,000
	Liabilities	45,000
December 31, 2007:
	Assets	82,000
	Liabilities	55,000
During 2007:
	Stockholder investments	3,000
	Net income	?
	Dividends	6,000

Calculate Alpha’s net income for the year ended December 31, 2007 and the change in stockholders’ equity for the year ended December 31, 2007.

Net income

Change in stockholders' equity

A) ($3,000) $2,000 increase

B) $5,000 $2,000 decrease

C) $5,000 $2,000 increase

---

Stockholders’ equity, as of December 31, 2006, was $25,000 ($70,000 assets – $45,000 liabilities) and stockholders’ equity, as of December 31, 2007, was $27,000 ($82,000 assets – $55,000 liabilities). Stockholders’ equity increased $2,000 during 2007. Net income for 2007 was $5,000 ($27,000 ending equity + $6,000 dividends – $3,000 stockholder investments – $25,000 beginning equity).

Kingpin804

Wichita Corporation reported the following balances as of December 31, 2007:

Cash	$?
Accounts payable	16,000
Accounts receivable	58,000
Additional paid-in capital	42,000
Common stock	19,600
Inventory	12,000
Plant and equipment	26,800
Notes payable	20,000
Retained earnings	32,000

Calculate Wichita’s cash and total assets as of December 31, 2007 based only on these entries.

Cash

Total assets

A) $16,000 $129,600

B) $32,800 $113,600

C) $32,800 $129,600

---

Liabilities plus equity are equal to $129,600 ($16,000 accounts payable + $20,000 notes payable + $19,600 common stock + $42,000 additional paid-in capital + $32,000 retained earnings). Since assets must equal liabilities plus equity, cash must equal $32,800 ($129,600 total assets – $58,000 accounts receivable – $12,000 inventory – $26,800 plant and equipment).

Kingpin804

Beta Company reported the following financial statement information:

December 31, 2006:
	Assets	$58,000
	Liabilities	28,000
December 31, 2007:
	Assets	?
	Liabilities	38,000
During 2007:
	Stockholder investments	15,500
	Net income	18,000
	Dividends	7,750

Calculate Beta’s total assets and stockholders’ equity as of December 31, 2007.

Total assets

Stockholders' equity

A) $93,750 $55,750

B) $93,750 $30,000

C) $79,250 $55,750

---

Stockholders’ equity, as of December 31, 2006, was $30,000 ($58,000 assets – $28,000 liabilities) and stockholders’ equity, as of December 31, 2007, was $55,750 ($30,000 beginning equity + $15,500 stockholder investments + $18,000 net income – $7,750 dividends). Total assets, as of December 31, 2007, are $93,750 ($38,000 liabilities + $55,570 stockholders’ equity).

Kingpin804

Prema Singh is the bookkeeper for Octabius Industries. Singh has been asked by the CFO of Octabius to review all purchases that occurred between February 1 and February 8 to investigate an error on the receiving dock. Singh will most likely look at the:

A) general journal.

B) initial trial balance.

C) general ledger.

---

Journal entries record every transaction, showing which accounts are changed by what amounts. A listing of all the journal entries in order by date is called the “general journal.”

Kingpin804

Which of the following is the best description of the flow of information in an accounting system?

A) Journal entries, general ledger, trial balance, financial statements.

B) General ledger, trial balance, general journal, financial statements.

C) Trial balance, general ledger, general journal, financial statements.

---

Information flows through an accounting system in four steps:
1. Journal entries record every transaction, showing which accounts are changed by what amounts. A listing of all the journal entries in order by date is called the “general journal.”
2. The general ledger sorts the entries in the general journal by account.
3. At the end of the accounting period, an initial trial balance is prepared that shows the balances in each account. If any adjusting entries are needed, they will be recorded and reflected in an adjusted trial balance.
4. The account balances from the adjusted trial balance are presented in the financial statements.

Kingpin804

A listing of all the firm’s journal entries by date is called the:

A) general ledger.

B) adjusted trial balance.

C) general journal.

---

A listing of all the journal entries in order by date is called the “general journal.” The general ledger sorts the entries in the general journal by account. At the end of the accounting period, an initial trial balance is prepared that shows the balances in each account. If any adjusting entries are needed, they will be recorded and reflected in an adjusted trial balance. The account balances from the adjusted trial balance are presented in the financial statements.

Kingpin804

The best description of the general ledger is that it:

A) sorts the entries in the general journal by account.

B) groups accounts into the categories that are presented in the financial statements.

C) is where journal entries are first recorded.

---

Information flows through an accounting system in four steps:
1. Journal entries record every transaction, showing which accounts are changed by what amounts. A listing of all the journal entries in order by date is called the “general journal.”
2. The general ledger sorts the entries in the general journal by account.
3. At the end of the accounting period, an initial trial balance is prepared that shows the balances in each account. If any adjusting entries are needed, they will be recorded and reflected in an adjusted trial balance.
4. The account balances from the adjusted trial balance are presented in the financial statements.

Kingpin804

Jack Rivers is an investment analyst for the equity fund of a family office. The head of the family, Charlotte Blackmon, is concerned that management may be manipulating the earnings of some of the companies that the fund invests in. Rivers explains to Blackmon, “Even though we don’t have access to the detailed transactions that underlie the financial statements, we can be sure that management is not manipulating earnings because I read the footnotes to the financial statements of every company we invest in. The footnotes would disclose any deviation from appropriate accounting parameters.” Rivers is:

A) correct.

B) incorrect because even within appropriate accounting parameters, management can manipulate earnings through the assumptions that rely on their discretion.

C) incorrect because deviation from appropriate accounting parameters is addressed in the auditor’s report, so a qualified opinion in the auditor’s report ensures that management is not manipulating earnings.

---

Because adjustments and assumptions within the financial statements are to some extent at the discretion of management, the possibility exists that management can try to manipulate or misrepresent the company’s financial performance. A clean auditor’s report does not ensure that management is unable to manipulate earnings, and a qualified opinion expresses reservations about the appropriateness of accounting policies. An analyst doesn’t have access to the detailed information that flows through a company’s accounting system, but only sees its end product, the financial statements.