Deck 2: Analyzing Transaction and Their Effect on Financial Statement

Question 1

The purchase of a three-year insurance policy should be reflected on the Statement of Financial Position under current assets.

Answer 1

True

Question 2

Revenue recognition criteria are necessary to determine when to recognize revenue when using both accrual and cash accounting methods.

Answer 2

False

Question 3

The purchase of equipment costing $19,500 for $1,500 down (with the balance on account) will increase both sides of the Statement of Financial Position by $18,000.

Answer 3

True

Question 4

The sales of merchandise on credit will cause the retained earnings and long-term liabilities accounts to increase.

Question 5

Dividends are an expense of doing business.

Question 6

Public companies are prohibited from being cross listed.

Question 7

The Classified Statement of Financial Position distinguishes between current and non-current assets and liabilities.

Question 8

Straight-line depreciation = (cost + residual value) ÷ estimated useful life.

Question 9

Accumulated depreciation is deducted when calculating net income.

Question 10

Information has predictive value if it provides feedback to users on their previous assessments of the company.

Question 11

Carrying Value of an asset is the cost of the asset that has already been expensed.

Question 12

A significant limitation of the template method is the lack of specific retained earnings and dividends declared accounts.

Question 13

Information is considered to be material if it would impact the decisions of a financial statement user.

Question 14

The objective of both IFRS and ASPE is to allow financial reporting that is useful to the financial statement users.

Question 15

A declaration of dividends results in an increase in liabilities and a decrease in shareholders' equity.

Question 16

The issuance of common shares with a value of $9,000 to purchase land will increase the common share account.

Question 17

All public companies must follow IFRS.

Question 18

The return on assets = net income ÷ average total assets.

Question 19

Relevance, faithful representation and cost constraint are examples of the fundamental qualitative characteristics.

Question 20

The template method can only be used by large companies.

Question 21

Cost of goods sold should be matched up with the revenue generated on each year's Statement of Income because of the

A) revenue recognition criteria.
B) cash basis of accounting.
C) actual basis of accounting.
D) accrual basis of accounting.

Question 22

The following costs are initially expressed as assets but are then reclassified as expenses when they are used up, except for the following:

A) inventory.
B) prepaid insurance.
C) prepaid rent.
D) short-term investments.

Question 23

A piece of equipment was recently purchased for $10,600 on April 1. It is estimated that it will last for 10 years and have a residual value of $600. The depreciation expense to be recognized in the year of acquisition, assuming a December year end, would be

A) $1,000.00.
B) $750.00.
C) $662.50.
D) $833.33.

Question 24

On March 31, 2020 Exacto Company paid $5,200 for a 1-year insurance policy. To record this transaction Exacto Company should

A) decrease Cash and increase Insurance Expense.
B) decrease Cash and increase Prepaid Insurance.
C) increase Accounts Payable and increase Insurance Expense.
D) increase Cash and increase Prepaid Insurance.

Question 25

If a vehicle was purchased for $6,500 and has a residual value of $500, the annual depreciation expense will be $1,000 if the estimated useful life is

A) 6 years.
B) 6.5 years.
C) 7 years.
D) 13 years.

Question 26

Which of the following enhancing characteristics is achieved if a third party, with sufficient understanding, would arrive at a similar result to that used by the company?

A) comparability
B) understandability
C) timeliness
D) verifiability

Question 27

The benefits of reporting financial information must exceed the costs of doing so, according to which characteristic of financial information?

A) the concept of materiality
B) faithful representation
C) cost constraint
D) verifiability

Question 28

The enhancing qualitative characteristics that increase the usefulness of financial information include all of the following, except for

A) verifiability.
B) materiality.
C) understandability.
D) comparability.

Question 29

Under the accrual basis of accounting, expenses are

A) always paid in cash.
B) recorded only when paid.
C) recorded when incurred.
D) only relevant for the determination of net income.

Question 30

The receipt of cash is a revenue recognition criteria for

A) IFRS.
B) ASPE.
C) cash basis of accounting.
D) accrual basis of accounting.

Question 31

A company received a $6,500 deposit from a customer for goods to be delivered the following month. Under the accrual and cash basis of accounting respectively, the account credited is a Accrual basis Cash basis

A) liability liability
B) liability revenue
C) revenue liability
D) revenue revenue

Question 32

How is cash invested by shareholders in exchange for shares initially recorded in the accounting records?

A) as an increase in Retained Earnings, and an increase in Cash
B) as an increase in Long-Term Investments, and a decrease in Cash
C) as an increase in Common Shares, and a decrease in Cash
D) as an increase in Common Shares, and an increase in Cash

Question 33

The profit margin ratio = sales ÷ net income.

Question 34

The accounting standards that publicly traded companies in Canada must adhere to are

A) International Financial Reporting Standards.
B) Accounting Standards for Private Enterprise.
C) Canada Revenue Agency Standards.
D) all of the above

Question 35

A company sold merchandise for cash. What is the effect of this sale?

A) increase in revenue, increase in COGS, decrease in inventory
B) increase in revenue, decrease in COGS, increase in inventory
C) increase in revenue, increase in COGS, increase in inventory
D) increase in revenue, decrease in COGS, decrease in inventory

Question 36

The main objective of IFRS and ASPE is

A) To ensure compliance with the income tax act
B) To protect shareholder investment
C) To produce financial reporting that is useful for financial statement users
D) To provide specific guidelines for publicly traded companies

Question 37

Information that has been determined based on the best information available using the correct process and with an adequate explanation provided is an example of which fundamental characteristic?

A) neutral
B) faithful representation
C) timeliness
D) verifiability

Question 38

Oleander Company paid $22,000 for goods it had purchased last month on account. What is the effect of the payment?

A) a decrease in inventory
B) a decrease in accounts payable
C) an increase in cost of goods sold
D) an increase in inventory

Question 39

All of the following are examples of enhancing qualitative characteristics except

A) verifiability.
B) understandability.
C) neutrality.
D) timeliness.

Question 40

Marlin Enterprises signed a lease for office space during their first month of business. At that time they paid a total of $12,000 for first and last months' rent. At the end of the first month, the effect on the financial statements would be

A) $12,000 rent expense.
B) $6,000 rent expense and $6,000 prepaid rent on the Statement of Financial Position.
C) $12,000 prepaid rent on the Statement of Financial Position.
D) Nothing recorded because the company has not made any sales yet.

Question 41

Shareholders of a publicly traded company want to assess the return on their investment. The shareholders should use the following ratio to help specifically assess this:

A) Gross profit margin.
B) ROE.
C) ROA.
D) Profit margin.

Question 42

When the board of directors declares a $500 dividend, which of the following would be included in recording the transaction?

A) increase in Retained Earnings, increase in Dividends Declared
B) decrease in Cash, decrease in Dividends Payable
C) increase in Dividends Declared, increase in Dividends Payable
D) decrease in Dividends Payable, increase in Cash

Question 43

How are goods that are purchased for resale at a later date recorded in the financial statements?

A) as inventory
B) as prepaid expenses
C) as cost of goods sold
D) as operating expenses

Question 44

The accounting basis that attempts to measure performance in the period in which it occurred is the

A) approval basis.
B) cash basis.
C) matching basis.
D) accrual basis.

Question 45

When $10,000 of inventory is purchased with a three-month note payable bearing 2% interest, the inventory has a total cost of

A) $10,200.
B) $10,000.
C) $10,100.
D) $9,900.

Question 46

If dividends are declared and paid in the same accounting period, what is the net effect on the accounting equation?

A) a decrease in Retained Earnings and an increase in Expenses
B) a decrease in Cash and an increase Expenses
C) a decrease in Cash and an increase in Retained Earnings
D) a decrease in Cash and a decrease in Retained Earnings

Question 47

Which of the following assets is never expensed on the Statement of Income?

A) land
B) building
C) inventory
D) equipment

Question 48

Which of the following transactions would decrease the cash from operating activities?

A) the payment of dividends
B) the sale of goods on account
C) the purchase of goods on account
D) the payment of wages

Question 49

The asset that results from the payment of expenses in advance is

A) Accounts receivable.
B) Short-term investments.
C) Inventory.
D) Prepaid expense.

Question 50

On Oct. 1, 2020, Othello, Inc. signed a 1-year $75,000 note payable from First National Bank. The loan plus 6% interest is to be paid on Sept. 30, 2021. Othello's year -end is December 31. In its 2020 financial statements Othello will record interest expense of

A) $375.
B) $1,125.
C) $4,500.
D) $75,000.

Question 51

The accounting template approach has several limitations. These limitations include all of the following, except for

A) printing out reports can be challenging.
B) mainly only suitable for very small businesses.
C) inability to properly quantify revenues and expenses.
D) theoretically incorrect treatment of accounting information.
E) all of the above

Question 52

The purchase of land for a combination of cash and issuance of shares would require which of the following?

A) increase in Land, increase in Common shares, increase in Cash
B) increase in Cash, decrease in Common shares, decrease in Land
C) increase in Land, increase in Common shares
D) increase in Land, increase in Common shares, decrease in Cash

Question 53

The sale of merchandise to a customer partly for cash and partly on account would require which of the following?

A) increase in Accounts Receivable, increase in Cash, increase in Sales Revenue
B) increase in Cash, decrease in Accounts Payable, increase in Sales Revenue
C) increase in Cash, increase in Sales Revenue
D) decrease in Accounts Payable, increase in Accounts Receivable, increase in Sales Revenue

Question 54

Which of the following expenses has no effect on the cash flow of a firm?

A) salaries expense
B) interest expense
C) depreciation expense
D) cost of goods sold

Question 55

Which of the following are examples of financing activities?

A) the distribution of profit to shareholders
B) debt repayment
C) share issues
D) borrowing money to buy a building
E) all of the above

Question 56

Which of the following would be the most useful in determining if a company has sufficient resources to continue operations in the short-term?

A) the profit margin ratio
B) the return on assets ratio
C) the cash from operating activities
D) the cash from financing activities

Question 57

Which of the following would be the effect of a transaction to record the portion of prepaid rent that has expired in a period?

A) increase Prepaid Rent, decrease Rent Expense
B) increase Rent Expense, decrease Cash
C) increase Prepaid Rent, decrease Cash
D) increase Rent Expense, decrease Prepaid Rent

Question 58

The asset that results when a customer buys goods or services on credit is

A) Accounts receivable.
B) Accounts payable.
C) Notes receivable.
D) Cash.

Question 59

If the company had a loan outstanding, which of the following would be used to record accrued interest at the end of the accounting period?

A) increase Interest Expense, decrease Cash
B) increase Interest Expense, increase Interest Payable
C) decrease Interest Payable, increase Interest Income
D) decrease Interest Payable, decrease Cash

Question 60

Which of the following will not appear on the Statement of Income?

A) depreciation
B) interest
C) cost of goods sold
D) dividends declared

Question 61

Behnke Pharmaceuticals accounting system provided the following data for the last two years: Instructions
Calculate the profit margin, return on assets, and return on equity for 2020. Explain what each ratio measures in general, and what each specifically indicates for Behnke Pharmaceuticals.

Question 62

Identify and briefly describe all of the characteristics and constraints of accounting information according to the IFRS conceptual framework.

Question 63

What are three profitability ratios? How are these ratios calculated and interpreted and when would be these ratios be used?

Question 64

Explain both the accrual basis and the cash basis of accounting and indicate why most companies use the accrual basis.

Question 65

Bellamy Inc. began operations in April of the current year with the following transactions occurring during the month:
Apr 1 Sold 15,000 common shares for $13 per share.
2 Paid $6,300 for three months' rent in advance.
5 Purchased $25,000 of equipment paying 25% down and agreeing to pay the balance in two years.
6 Purchased inventory for $19,000 on credit.
10 Sold on account $16,000 of inventory for $23,000.
15 Paid wages of $1,200.
20 Collected $8,000 from customers on account.
25 Paid suppliers $3,000 on account.
31 Paid wages of $1,100.
31 Recognized one month's rent expense.
31 Recognized one month's equipment depreciation expense. The estimated salvage value is $4,000 and the estimated useful life is 5 years.
Instructions
Indicate the effects of these transactions on the balance sheet equation.

Question 66

What are the limitations of the template method for recording financial information? Provide examples of these limitations. When might it be appropriate for a company to use this method?

Question 67

Larry's Landscaping accounting system provided the following data for the last two years: Instructions
Calculate the profit margin, return on assets, and return on equity for 2020. Explain what each ratio measures in general, and what each specifically indicates for Larry's Landscaping.

Question 68

Harmon Enterprises ROA has increased year over year. Factors contributing to this increase may include

A) increase in the average cost of total assets.
B) increase in revenues.
C) increase in expenses.
D) all of the above

Question 69

For each of the following transactions, indicate the effect on shareholders' equity. Use I to indicate an increase, D to indicate a decrease, or NE for no effect.

Question 70

Identify and describe the accounting standards used in Canada. What is the general objective of these standards?

Question 71

Due to the sudden resignation of the accountant at Dupont Electric Inc., the sales manager has prepared the annual financial statements, shown below: Instructions
a) Identify the errors in the financial statements.
b) Prepare corrected financial statements for Mason's Mechanics Inc.

Question 72

Identify which statements dividends declared and paid affect and explain why.

Question 73

Shown below are the account balances for Heron Corp. for their year-end September 30, 2020: Instructions
Given the above information, prepare the
a) Statement of Income,
b) Statement of Changes in Equity, and
c) Classified Statement of Financial Position.

Question 74

For each of the following transactions, indicate if total assets would I increase, D decrease, or NE for no effect.