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12. The following information is available for a company: December 31, 2009: Total Assets $100,000 Net income for the year $4,000 Dividends paid $0 Assets are equally financed with debt and equity 50% of the equity comes from contributed capital December 31, 2010: Total Assets $92,000 Net loss for the year $3,000 No new debt or equity issued or repurchased In 2010, the company most likely: A. paid a dividend of $1,000 B. paid a dividend of $5,000 C. did not pay a dividend because they incurred a loss.

Ans: B. 2009 ($) 2010 ($) Total Assets (given) 100,000 92,000 Total Debt (50% in 2009, no change in 2010) 50,000 50,000 Total Equity (Total assets – total debt) 50,000 42,000 Equity Components Contributed Capital (50% of Equity in 2009, no change in 2010) 25,000 25,000 Retained Earnings (solved for) (Total Equity – Contributed Capital) 25,000 17,000 Retained earnings = opening RE + net income – dividends 2010 Retained Earnings = 17,000 = 25,000 - 3,000 - Dividends Dividends = 5,000

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13. Which of the following is least likely to be classified as a financial statement element?
A. Asset.

B. Revenue.

C. Net income.

  
   
Ans: C.

Net income is not an element of the financial statements, but the net result of revenues less expenses. The elements are: assets, liabilities, owners’ equity, revenue and expenses.

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14. The following information is from a company’s 2008 financial statements ($millions): Balances as of the year ended 31 December 2008 2007 Retained earnings 140 120 Accounts receivable 43 38 Inventory 48 45 Accounts payable 29 36 In 2008 the company declared and paid cash dividends of $5 million and recorded depreciation expense in the amount of $25 million. The company’s 2008 cash flow from operations ($ millions) is closest to: A. 25. B. 30. C. 35.

Ans: C. Operating activities:   NI +depreciation and other noncash expenses -gain on sales of long-term assets & investments +decrease in current asset (- increase in current assets) +increase in current liabilities (+ decrease in current liabilities) +increase in deferred tax liabilities (-decrease in DTL) =CFO The change in retained earnings is $20 and dividends are paid from retained earnings. 2008 net income equals the change in retained earnings plus any dividends paid during 2008. Depreciation expense is added to net income and the changes in balance sheet accounts are also considered to determine cash flow from operations. $20 + 5 (dividends) + 25 (depreciation) – 5 (increase in receivables) – 3 (increase in inventory) – 7 (decrease in payables) = $35 million.

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15. A company receives a payment of $10,000 on 1 December, for rent on a property for December and January. On receipt, they correctly record it as cash and unearned revenue. If at 31 December, their year-end, they failed to make an adjusting entry related to this payment, ignoring taxes, what is the effect on the financial statements for the year?

A. Assets are overstated by $5,000 and Liabilities are overstated by $5,000

B. Assets are overstated by $5,000 and Owner’s equity is overstated by $5,000

C. Liabilities are overstated by $5,000 and Owners’ equity is understated by $5,000

  
   
Ans: C.

The company should have made an adjusting entry to reduce the Unearned revenue account (a liability) by $5,000 and increase Revenue, (and hence net income and retained earnings) by $5,000.

Unearned revenue   5,000

    Revenue                   5,000

As the company failed to make the adjusting entry the liabilities are overstated and owners’ equity is understated.

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16. An analyst gathers the following information from a company’s accounting records (all figures in thousands): Assets, 31 December 2008 $5,250 Liabilities, 31 December 2008 2,200 Contributed capital, 31 December 2008 1,400 Retained earnings, 1 January 2008 800 Dividends declared during 2008 200 The analyst’s estimate of net income ($ thousands) for 2008 is closest to: A. 650. B. 850. C. 1,050.

Ans: C. Total assets = liabilities + owner’s equity. Owner’s equity = $5,250– 2,200= 3,050. Owners equity = contributed capital + ending retained earnings. Ending retained earnings = 3,050– 1,400= 1,650. Ending retained earnings = beginning retained earnings + net income – dividends. 1,650= 800 + net income – 200; Net income = $1,050

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17. The following is available about the company: Contributed capital, beginning of the year $50,000 Retained earnings, beginning of the year 225,000 Sales revenue earned during the year 450,000 Investment income earned during the year 5,000 Expenses paid during the year 402,000 Dividends paid during the year 10,000 Total assets, end of the year 800,000 Total liabilities at the end of the year are closest to: A. $472,000 B. $482,000 C. $487,000

Ans: B. Start of year capital contributed by owners $50,000 Initial retained earnings 225,000   Sales revenue 450,000   Investment income 5,000   Expenses (402,000)   Net income 53,000   Dividends paid (10,000) Increase in retained earnings 43,000 43,000 Ending owners’ equity $318,000 Assets = liabilities + equity $800,000=liabilities + $318,000 Liabilities = $482,000

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18. Under U.S.GAAP, differences between accrued revenue and expenses and cash flows result in the creation of assets and liabilities. Would each of the following revenue events result in the creation of an asset or a liability when the event originally occurs? Revenue is recognized before the cash is received Cash is received before the revenue is recognized A Asset Asset B Asset Liability C Liability Liability

Ans: B. Revenue recognized before the cash is received will result in the creation of an accounts receivables, an asset, whereas when the cash is received before the revenue is recognized a liability, unearned revenue, is created.

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19. An accounting document that records transactions in the order in which they occurs is best described as a:

A. Trial balance.

B. General ledger.

C. General journal.
.
Ans: C.

The general journal records transaction in the order in which they occur (chronological order) and is therefore sorted by date.

  

A is incorrect. A trial balance is prepared at the end of an accounting period prior to the financial statements. A trial balance reports only ending balances (and not transactions) for each account. Adjusting entries are then made, if required, and then an adjusted trial balance can be prepared, for as many cycles as are necessary.

  

B is incorrect. The general ledger contains all the journal entries that are posted to the general journal and other specialized journals, except that the general ledger sorts the data by account where the general journal and the specialized journal records the transactions by date. The general ledger is considered the core of an accounting system.

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20. An entry made to record an accrual, such as bad debt expense, that is not yet reflected in the accounting system is best described as a(n):

A. ledger entry.

B. adjusting entry.

C. trial balance entry.

  
   
Ans: B.

Adjusting entries are a type of journal entries typically made at the end of the accounting period to record items such as accruals that are not yet reflected the accounting system.

  

A is incorrect. Journal entries record every transaction, showing which accounts are changed and by what amount. A listing of all the journal entries in order of their dates is called the general journal.

  

C is incorrect. 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.

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21. What is the effect on the accounting equation when a company’s Board of Directors declares a cash dividend?

A. Assets decrease and owners’ equity decreases.

B. Liabilities increase and owners’ equity decreases.

C. There is no effect on the accounting equation until the dividend is paid.

  
   
Ans: B.

The company would create (increase) a liability for dividends payable and deduct the same amount from its retained earnings, thus decreasing owners’ equity.