Question 1

The opening balance of retained earnings for Musicala Inc.was $325,000.During the year, it earned net income of $52,400 and paid dividends of $16,000.What is the closing balance of retained earnings?

Accepted Answer

The closing balance of retained earnings is calculated by adding net income to the opening balance and then subtracting dividends. So, $325,000 + $52,400 - $16,000 = $361,400.

Question 2

Lennox Limited reported sales of $5,000,000, cost of goods sold of $3,200,000, operating expenses of $1,400,000, and income tax expense of $160,000 for the year.What was their net income for the year?

Accepted Answer

Net income is calculated by subtracting cost of goods sold, operating expenses, and income tax expense from sales. So, $5,000,000 - $3,200,000 - $1,400,000 - $160,000 = $240,000.

Question 3

Today, a company sold $1,000 of goods on credit.The customer took the goods with him, but will only pay in 30 days.When would the sale be reflected under the cash basis of accounting and the accrual basis of accounting? $\begin{array}{ll}&\text { Cash Basis }&\text { Accrual Basis }\
A.&\text { today } & \text { today } \
B.&\text { today } & \text { at collection } \
C.&\text { at collection } & \text { today } \
D.&\text { at collection } & \text { at collection }
\end{array}$

Accepted Answer

Under the cash basis of accounting, revenue is recognized when cash is received, so the sale would be reflected when the payment is collected. Under the accrual basis of accounting, revenue is recognized when earned, regardless of when payment is received, so the sale would be reflected today when the goods were delivered.

Question 4

The opening balance of shareholders' equity for Sedona Transport was $530,000.During the year, Sedona issued 50,000 common shares at market price of $3.50 per share.The company earned net income of $152,400, recorded other comprehensive income of ($2,300), and paid dividends of $10,000.What is the closing balance of shareholders' equity?

Accepted Answer

Opening balance of shareholders' equity = $530,000
Net income during the year = $152,400
Other comprehensive income = ($2,300)
Dividends paid = ($10,000)
Total increase in shareholder's equity = $140,100

Sedona issued 50,000 common shares at a market price of $3.50 per share, which amounts to $175,000. This amount is added to the total increase in shareholder's equity to get the closing balance of shareholder's equity.

Closing balance of shareholders' equity = Opening balance + Total increase + Issuance of common shares
= $530,000 + $140,100 + $175,000
= $845,100

Therefore, the correct choice is C.

Question 5

During the past year Ascot Company made credit sales of $450,000, cash sales of $275,000, and collected $50,000 of deposits on future orders.What amount should they report as revenue on their income statement?

Accepted Answer

Revenue on the income statement should include both credit sales ($450,000) and cash sales ($275,000), totaling $725,000. Deposits on future orders are not recognized as revenue until the service is performed or goods are delivered.

Question 6

A company has current assets of $200,000 and current liabilities of $150,000.If they used cash to pay off some accounts payable, what would the effect be on their current ratio?

Accepted Answer

Paying off accounts payable with cash would decrease current liabilities, which would increase the current ratio (current assets divided by current liabilities).

Question 7

When a sale on credit is made under the cash basis of accounting, at the time of the sale, how is the transaction recorded?

Accepted Answer

Under the cash basis of accounting, revenues are only recognized when cash is received, not at the time of sale. Therefore, a sale on credit (where cash is not received at the time of the sale) is not recorded at the time of the sale.

Question 8

The opening balances of capital stock and retained earnings for a company were $2,200,000 and $1,325,000, respectively.During the year, they earned net income of $425,000, the shareholders invested an additional $500,000 for shares and the company paid dividends of $42,000.What was the closing amount of shareholders' equity?

Accepted Answer

The closing amount of shareholders' equity can be calculated by adding the opening balances of capital stock and retained earnings, the net income for the year, and the additional investment by shareholders, then subtracting the dividends paid. This equals $2,200,000 (opening capital stock) + $1,325,000 (opening retained earnings) + $425,000 (net income) + $500,000 (additional investment) - $42,000 (dividends) = $4,408,000.

Question 9

Lennox Limited reported sales of $5,000,000, cost of goods sold of $3,200,000, operating expenses of $1,400,000, and income tax expense of $160,000 for the year.What is the gross profit for the year?

Accepted Answer

Gross profit is calculated as sales minus cost of goods sold, which is $5,000,000 - $3,200,000 = $1,800,000.

Question 10

An employee worked for a small business during the current month but he will not be paid until the next month.If the business uses accrual accounting, what would be the effect on the accounting equation in the current month?

Accepted Answer

Under accrual accounting, expenses are recognized when they are incurred, not when they are paid. Therefore, recognizing the employee's salary as an expense in the current month increases liabilities (salary payable) and decreases owners' equity (due to the expense reducing net income).

Question 11

An employee worked for a small business during the current month but will not be paid until the next month.If the business uses cash accounting, what would be the effect on the accounting equation in the current month?

Accepted Answer

With cash accounting, the transaction is only recorded when cash is received or paid, so there is no effect on the accounting equation in the current month.

Question 12

When a sale on credit is made under the accrual basis of accounting, at the time of the sale, how is the transaction recorded?

Accepted Answer

Under the accrual basis of accounting, when a sale is made on credit, it is recorded as an increase in accounts receivable (asset) and an increase in revenue. Therefore, the best choice is B - an increase in assets and an increase in revenues.

Question 13

If an entity suffered a $2,000 loss for the month, which of the following statements is most likely true?

Accepted Answer

A loss indicates that the costs (expenses) exceeded the revenues (benefits) during the month, not necessarily that cash decreased by that amount, shareholders need to invest more, or that revenues weren't collected.

Question 14

When a company makes a sale under accrual accounting, what is the impact on the balance sheet?

Accepted Answer

Under accrual accounting, when a company makes a sale, it recognizes the revenue immediately, which increases owners' equity due to the increase in net income. Additionally, if the sale is made on credit, accounts receivable (an asset) increases, leading to an increase in both assets and owners' equity.

Question 15

Creditors who are expecting to be paid are most interested in which of the following for an entity?

Accepted Answer

Creditors are most interested in an entity's liquidity because it refers to the ability of the entity to meet its short-term obligations. This is important to creditors because they want to ensure that the entity can repay its debt on time. Operating cycle, gross margin, and profitability are important factors for analyzing an entity's financial performance, but they may not be as relevant for creditors who are primarily concerned with the entity's ability to repay its debt.

Question 16

Because of the links among financial statements, they must be prepared in order.Which of the following correctly describes the order of preparation?

Accepted Answer

The correct order starts with the Income Statement, which calculates net income. Net income is then used in the Statement of Comprehensive Income (if prepared separately). The Statement of Changes in Equity needs the net income figure to show changes in equity. Finally, the Balance Sheet is prepared, utilizing information from all the previous statements.

Question 17

Which of the following correctly identifies one of the links among the four financial statements?

Accepted Answer

Net income from the income statement is carried forward to the statement of changes in equity as it affects the total equity of the company. Other comprehensive income from the income statement is also carried forward to the statement of changes in equity. Retained earnings from the statement of changes in equity are reported on the balance sheet. Therefore, option B is the correct link between two financial statements.

Question 18

Which of the following statements about depreciation is true?

Accepted Answer

Depreciation is the process of allocating the cost of a long-term asset (such as equipment) over its useful life. This allocation is recognized as an expense on the income statement. Depreciation is not related to changes in the market value of the asset, and it is not a cash payment. Depreciation can be calculated differently under cash-based and accrual-based accounting, with accrual-based accounting typically providing more accurate and consistent calculations.

Question 19

What would a creditor calculate to assess liquidity?

Accepted Answer

A creditor would calculate the current ratio to assess a company's liquidity. The current ratio is a measure of a company's ability to meet its short-term obligations with its current assets, and a higher current ratio indicates a better ability to do so. Therefore, it is an important metric for creditors evaluating a company's ability to pay back debt in the short term. The operating cycle and gross margin are measures of profitability, while the debt-to-equity ratio is a measure of a company's financial leverage. While these metrics may also be important to creditors, they do not directly assess a company's liquidity.

Question 20

Sherbrooke Inc.reported sales of $10,000,000, net income of $800,000, and dividends of $200,000.What is the increase in their retained earnings for the year?

Accepted Answer

Retained earnings is calculated as net income minus dividends. Therefore, the increase in retained earnings is $800,000 - $200,000 = $600,000.

Quiz 2: Financial Statements: a Window on an Entity