Question 1

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

Accepted Answer

When expenses exceed revenues for an accounting period, a business would report a net loss.

Question 2

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 cash flows from operating activities (cash inflows and outflows related to day-to-day business operations), cash flows from investing activities (cash inflows and outflows related to investments in long-term assets), and cash flows from financing activities (cash inflows and outflows related to borrowing and issuing stock). Option D includes all three of these categories, making it the correct answer.

Question 3

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

Accepted Answer

The amount of insurance expense reported on the income statement is the amount of insurance used up (incurred) in the current period to help generate revenue. This is also known as the matching principle, where expenses are recognized in the same period as the corresponding revenues. It is important to note that the amount of cash paid for insurance may not necessarily match the amount of insurance expense recognized on the income statement due to timing differences or accruals.

Question 4

During 2014, Canton Company's assets increased $95,500 and the liabilities decreased $17,300. Canton Company's stockholders' equity at December 31, 2014 was $211,500. What amount was stockholders' equity at January 1, 2014?

Accepted Answer

The increase in assets and the decrease in liabilities both increase stockholders' equity. The total increase in stockholders' equity is $95,500 + $17,300 = $112,800. Subtracting this amount from the stockholders' equity at December 31, 2014 gives the stockholders' equity at January 1, 2014: $211,500 - $112,800 = $98,700.

Question 5

Which of the following equations best describes the income statement?

Accepted Answer

The income statement is designed to show the company's revenues, gains, expenses, losses, and net income (or net loss) over a period of time. Therefore, the best equation to describe the income statement would be Net income = Revenues - Expenses.

Question 6

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 about a company's ability to generate cash flows from its typical business operations, including paying for goods and services, collecting revenue from customers, and paying expenses such as salaries and rent. It shows whether the company is generating enough cash from its operations to cover its day-to-day expenses. Choices A and B are incorrect because they describe financing activities and investing activities, respectively. Choice D is incorrect because it is a general definition of a cash flow statement, but does not specifically describe the operating activities section.

Question 7

Lena Company has provided the following data (ignore income taxes): 2014 revenues were $99,000.
2014 expenses were $47,800.
Dividends declared and paid during 2014 totaled $9,500.
Total assets at December 31, 2014 were $177,000.
Total liabilities at December 31, 2014 were $89,000.
Common stock at December 31, 2014 was $28,000.
Which of the following is not 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): 2014 revenues were $77,500.
2014 net income was $33,900.
Dividends declared and paid during 2014 totaled $5,700.
Total assets at December 31, 2014 were $217,000.
Total stockholders' equity at December 31, 2014 was $123,000.
Retained earnings at December 31, 2014 were $83,000.
Which of the following is correct?

Accepted Answer

Net income minus dividends declared and paid equals the increase in retained earnings. Therefore, $33,900 - $5,700 = $28,200 increase in retained earnings.

Question 9

A company's retained earnings increased $375,000 last year and its assets increased $973,000. The company declared a $79,000 cash dividend during the year. What was last year's net income?

Accepted Answer

Retained earnings = Net income - Dividends

We are given that the retained earnings increased by $375,000 and dividends paid were $79,000. Therefore, the net increase in retained earnings was $375,000 + $79,000 = $454,000.

We are also given that assets increased by $973,000. Since assets must equal liabilities plus stockholders' equity, and we are given that there were no changes in liabilities, the increase in assets must equal the increase in stockholders' equity. Therefore, the increase in stockholders' equity was also $973,000.

We can now set up the following equation to solve for net income:

Net income = Retained earnings + Dividends
Net income = ($973,000 - $454,000) + $79,000
Net income = $598,000 - $454,000
Net income = $144,000

Therefore, last year's net income was $144,000.

Question 10

Which of the following would most likely increase retained earnings?

Accepted Answer

Retained earnings are increased when there is a net income (revenues exceeding expenses) and the company chooses to keep the profits within the company rather than distribute them to shareholders through dividends. Therefore, an increase in revenues would most likely result in an increase in retained earnings.

Question 11

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. The reason for this is that revenue is recognized when the goods are sold, regardless of whether the customer paid in cash or on credit. Therefore, both types of sales are included in the revenue figure on the income statement.

Question 12

Lena Company has provided the following data (ignore income taxes): 2014 revenues were $99,000.
2014 expenses were $47,800.
Dividends declared and paid during 2014 totaled $9,500.
Total assets at December 31, 2014 were $177,000.
Total liabilities at December 31, 2014 were $89,000.
Common stock at December 31, 2014 was $28,000.
Which of the following is correct?

Accepted Answer

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

Question 13

Madrid Company has provided the following data (ignore income taxes): 2014 revenues were $77,500.
2014 net income was $33,900.
Dividends declared and paid during 2014 totaled $5,700.
Total assets at December 31, 2014 were $217,000.
Total stockholders' equity at December 31, 2014 was $123,000.
Retained earnings at December 31, 2014 were $83,000.
Which of the following is not correct?

Accepted Answer

Retained earnings increased by $28,200 during 2014, calculated as net income ($33,900) minus dividends paid ($5,700), not $33,900.

Question 14

At the beginning of 2014, a corporation had assets of $270,000 and liabilities of $160,000. During 2014, assets increased $25,000 and liabilities increased $5,000. What was stockholders' equity on December 31, 2014?

Accepted Answer

The answer of At the beginning of 2014, a corporation...

Question 15

On January 1, 2014, Miller Corporation had retained earnings of $8,000,000. During 2014, 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, 2014?

Accepted Answer

Retained earnings at the end of the year can be calculated by adding net income to beginning retained earnings, and then subtracting dividends. 
Beginning retained earnings = $8,000,000
Net income = $1,500,000
Dividends = $500,000
Therefore, Retained Earnings on December 31, 2014 is:
= $8,000,000 + $1,500,000 - $500,000
= $9,000,000

Question 16

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

Accepted Answer

Net income or net loss directly affects retained earnings as it represents the profit or loss of the corporation. Declaration of dividends also affects retained earnings as it is a distribution of profits to shareholders. Issuance of common stock and purchase of machinery affect the corporation's equity and assets, respectively, but do not directly impact retained earnings.

Question 17

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 18

In what order would the items on the balance sheet appear?

Accepted Answer

The standard format for a balance sheet is assets first, followed by liabilities, then equity, with retained earnings being a component of equity. Therefore, the correct order is assets, liabilities, common stock (or other equity accounts), and finally retained earnings.

Question 19

Which of the following items is reported as an expense on the income statement?

Accepted Answer

Cost of goods sold is an expense that represents the cost of the products or services sold by a company during a specific period. Dividends declared and paid are distributions of profits to shareholders and are reported separately in the statement of changes in equity. Accounts payable is a liability account that represents the amount owed by a company to its suppliers and is not reported as an expense.

Question 20

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

Accepted Answer

The claims of creditors are reported as liabilities on the balance sheet because they are debts owed to outside parties. The claims of investors, on the other hand, are recorded as stockholders' equity because they represent ownership in the company. This includes common stock, preferred stock, and retained earnings.

Quiz 1: Financial Statements and Business Decisions