Question 1

Which of the following describes the operating activities section of a cash flow statement?

Accepted Answer

The operating activities section of a cash flow statement provides information with respect to a company's ability to generate cash flows that are directly related to earning income. This includes cash received from customers, payments made to suppliers, and operating expenses paid. It does not provide information about how operations have been financed or dividend payments to stockholders, and while it does show the net increase or decrease in cash during the period, this is not the primary focus of the section.

Question 2

Which of the following is the amount of revenue reported on the income statement of a retail company?

Accepted Answer

The amount of revenue reported on the income statement of a retail company includes both cash and credit sales for the period. This is because revenue is recognized when goods are sold, regardless of whether payment is received immediately in cash or at a later date through credit. Option A only includes the cash collected, while Option C only includes cash sales and collections, both of which do not fully capture the company's revenue for the period. Option D is irrelevant as stockholders' investments are not included in revenue.

Question 3

On January 1,2019,Miller Corporation had retained earnings of $8,000,000.During 2019,Miller reported net income of $1,500,000,declared dividends of $500,000,and issued common stock for $1,000,000.What were Miller's retained earnings on December 31,2019?

Accepted Answer

Retained earnings on December 31, 2019 would be calculated as:
Retained Earnings = Beginning Retained Earnings + Net Income - Dividends Declared
Retained Earnings = $8,000,000 + $1,500,000 - $500,000
Retained Earnings = $9,000,000. Therefore, the correct answer is option C.

Question 4

Which of the following would immediately cause a change in a corporation's retained earnings?

Accepted Answer

Net income or net loss directly affects the amount of retained earnings as it represents the portion of a corporation's profits that are not distributed as dividends. Declaration of dividends also directly affects the amount of retained earnings as it decreases the amount that a corporation retains. The issuance of common stock to new stockholders and purchase of new machinery do not immediately affect retained earnings as they are not directly related to profits or dividends.

Question 5

Within which of the following would you find the inventory method(s)being used by a business entity?

Accepted Answer

The inventory method(s) used by a business entity are typically disclosed in the notes to the financial statements. These notes provide detailed information about the accounting policies, including inventory valuation methods (e.g., FIFO, LIFO, weighted average), which are crucial for understanding how inventory is managed and valued in the financial statements.

Question 6

When would a company report a net loss on the income statement?

Accepted Answer

A company would report a net loss on the income statement when its expenses are greater than its revenues during an accounting period. This means that the company did not generate enough revenue to cover its expenses and incurred a loss.

Question 7

Lena Company has provided the following data for its 2019 operations (ignore income taxes): 2019 revenues were $99,000.
2019 expenses were $47,800.
Dividends declared and paid during 2019 totaled $9,500.
Total assets at December 31,2019 were $177,000.
Total liabilities at December 31,2019 were $89,000.
Common stock at December 31,2019 was $28,000.
Which of the following is correct?

Accepted Answer

The answer of Lena Company has provided the following data...

Question 8

Madrid Company has provided the following data (ignore income taxes): 2019 revenues were $77,500.
2019 net income was $33,900.
Dividends declared and paid during 2019 totaled $5,700.
Total assets at December 31,2019 were $217,000.
Total stockholders' equity at December 31,2019 was $123,000.
Retained earnings at December 31,2019 were $83,000.
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Which of the following is correct?

Accepted Answer

We can use the accounting equation to calculate the total expenses:
Total Assets = Total Liabilities + Stockholders' Equity
Stockholders' Equity = Common Stock + Retained Earnings
Total Liabilities = Total Assets - Stockholders' Equity
Total Liabilities = $217,000 - $123,000 = $94,000

Therefore, choice B is incorrect.

We can also use the following formula to calculate Retained Earnings:
Retained Earnings = Net Income - Dividends Declared + Beginning Retained Earnings
$83,000 = $33,900 - $5,700 + Beginning Retained Earnings
Beginning Retained Earnings = $83,000 - $28,200 = $54,800

Therefore, choice C is correct.

We cannot determine the value of Common Stock with the given information, so choice D is incorrect.

To calculate Total Expenses, we can use the following formula:
Total Expenses = Revenues - Net Income
Total Expenses = $77,500 - $33,900 = $43,600

Therefore, choice A is incorrect.

Question 9

Which financial statement would you use to determine a company's earnings performance during an accounting period?

Accepted Answer

The income statement is the financial statement that shows a company's revenues, expenses, gains, and losses during an accounting period. It is used to determine the company's earnings performance during a specific period, such as a quarter or a year. The other financial statements (balance sheet, statement of stockholders' equity, and statement of cash flows) provide important information about a company's financial position and liquidity, but they do not show the company's earnings performance.

Question 10

Which of the following equations best describes the income statement?

Accepted Answer

The income statement shows the revenues earned and expenses incurred during a specific period of time. The equation that best describes this relationship is Net income = Revenues − Expenses. This equation shows that the net income (or profit) is calculated by subtracting the expenses from the revenues.

Question 11

During 2019,Canton Company's assets increased $95,500 and the liabilities decreased $17,300.Canton Company's stockholders' equity at December 31,2019 was $211,500.What amount was stockholders' equity at January 1,2019?

Accepted Answer

Stockholders' equity increases by the increase in assets and decreases by the decrease in liabilities. The increase in assets ($95,500) and the decrease in liabilities ($17,300) together increase stockholders' equity by $112,800 ($95,500 + $17,300). To find the stockholders' equity at the beginning of the year, subtract this increase from the ending stockholders' equity: $211,500 - $112,800 = $98,700.

Question 12

What are the categories of cash flows that appear on a statement of cash flows?

Accepted Answer

The categories of cash flows that appear on a statement of cash flows are operating activities, investing activities, and financing activities. Therefore, the best choice is D, which includes these three categories. Option A includes service activities, which is not a standard category, and options B and C include categories that are not typically seen on a statement of cash flows.

Question 13

At the beginning of 2019,a corporation had assets of $270,000 and liabilities of $160,000.During 2019,assets increased $25,000 and liabilities increased $5,000.What was stockholders' equity at December 31,2019?

Accepted Answer

The answer of At the beginning of 2019,a corporation had...

Question 14

How are creditor and investor claims reported on a balance sheet?

Accepted Answer

The claims of creditors are reported as liabilities because they are obligations that the company must pay back, while the claims of investors are recorded as stockholders' equity because they represent the ownership interest in the company. This is why the balance sheet equation is Assets = Liabilities + Stockholders' Equity.

Question 15

Which of the following are the components of stockholders' equity on the balance sheet?

Accepted Answer

Stockholders' equity includes the amount of money that the owners have invested in the company (common stock) and the earnings that the company has retained over time (retained earnings). Dividends are a distribution of those retained earnings to the owners, and they are not a component of stockholders' equity on the balance sheet. Therefore, the best choice is D, which includes both common stock and retained earnings as components of stockholders' equity.

Question 16

Madrid Company has provided the following data (ignore income taxes): 2019 revenues were $77,500.
2019 net income was $33,900.
Dividends declared and paid during 2019 totaled $5,700.
Total assets at December 31,2019 were $217,000.
Total stockholders' equity at December 31,2019 was $123,000.
Retained earnings at December 31,2019 were $83,000.
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Which of the following is not correct?

Accepted Answer

Retained earnings increase by the net income minus dividends paid. For 2019, the increase in retained earnings would be $33,900 (net income) - $5,700 (dividends) = $28,200, not $33,900.

Question 17

Which of the following is represented by elements of the statement of stockholders' equity?

Accepted Answer

Earnings not distributed to owners are represented by retained earnings, which is a component of the statement of stockholders' equity.

Question 18

Lorenta Company has provided the following data (ignore income taxes): 2019 revenues were $117,300.
2019 expenses were $47,800.
Dividends declared and paid during 2019 totaled $9,500.
Total assets at December 31,2019 were $177,000.
Total liabilities at December 31,2019 were $89,000.
Common stock at December 31,2019 was $28,000.
Which of the following is not correct?

Accepted Answer

The answer of Lorenta Company has provided the following data...

Question 19

Willie Company's retained earnings increased $20,000 during the current year.What was Willie's current year net income or loss given that Willie declared $25,000 of dividends during this year?

Accepted Answer

Retained earnings increase is calculated by adding net income to the beginning balance of the retained earnings and subtracting any dividends paid. Therefore: retained earnings increase = net income - dividends paid. Rearranging the equation, we get net income = retained earnings increase + dividends paid. Substituting the values given: net income = $20,000 + $25,000 = $45,000.

Question 20

Which of the following describes the amount of insurance expense reported on the income statement?

Accepted Answer

The insurance expense reported on the income statement represents the amount of insurance used up (incurred) in the current period to help generate revenue. This is an expense recognition principle in accounting, which requires that expenses be recognized when they are incurred, not when they are paid. The amount of cash paid for insurance may differ from the insurance expense reported on the income statement due to changes in prepaid insurance or insurance payable accounts.

Quiz 1: Financial Statements and Business Decisions