Question 1

The ending balance for merchandise inventory is reported on the balance sheet as a current asset.

Accepted Answer

This is true. The balance for merchandise inventory at the end of an accounting period represents goods that have not yet been sold and is classified as a current asset on the balance sheet.

Question 2

Undepreciated cost is the same as the book value of an asset.

Accepted Answer

Undepreciated cost refers to the original cost of an asset, not including any depreciation that has been taken. It is equivalent to the book value of an asset, which is the cost minus accumulated depreciation. Therefore, the statement is true.

Question 3

The purpose of a balance sheet is to summarize the results of operations during an accounting period.

Accepted Answer

The purpose of a balance sheet is to provide a snapshot of a company's financial position at a specific point in time, including its assets, liabilities, and equity. It does not summarize the results of operations during an accounting period, which is the purpose of the income statement.

Question 4

Net sales plus cost of goods sold is called gross profit.

Accepted Answer

Gross profit is calculated as net sales minus the cost of goods sold, not the sum of the two.

Question 5

Assets that are used in the operation of a business are called temporary investments.

Accepted Answer

Assets that are used in the operation of a business are called fixed assets or property, plant, and equipment. Temporary investments refer to investments that are held for a short period of time and are intended to be sold or converted into cash quickly.

Question 6

Liquidity refers to the speed with which the assets can be converted to cash.

Accepted Answer

Liquidity is defined as the ease with which an asset can be converted into cash without affecting its market value. The quicker and easier it is to do so, the higher the asset's liquidity.

Question 7

Current assets include cash and all other assets that may be reasonably expected to be converted into cash or consumed within one year or the normal operating cycle of the business, whichever is longer.

Accepted Answer

This statement correctly defines current assets. Current assets are expected to be converted into cash within one year or the normal operating cycle of the business, whichever is longer. Examples of current assets include cash, accounts receivable, inventory, and prepaid expenses.

Question 8

Assets that are expected to be used for more than one year in an operation of a business are called property, plant, and equipment.

Accepted Answer

Property, plant, and equipment are long-term assets that are expected to be used for more than one year in a business operation.

Question 9

The purpose of an income statement is to provide information on the status of a business at a specified date.

Accepted Answer

The purpose of an income statement is to provide information on the financial performance of a business over a period of time, typically a month or a year, not just a specified date.

Question 10

The multiple-step form of income statement shows operating income separate from other revenue and other expenses.

Accepted Answer

The multiple-step income statement breaks down operating income into its separate components, which includes revenue and expenses directly related to the primary operations of the business. This is different from other revenue and expenses, such as gains or losses from investments, which are shown separately on the income statement.

Question 11

Working capital is the difference between current assets and current liabilities.

Accepted Answer

This is the basic definition of working capital, as it represents the amount of funds a company has available for its daily operations. Current assets include cash, inventory, and accounts receivable, while current liabilities include short-term debt and accounts payable.

Question 12

The cost of a building less its accumulated depreciation represents the undepreciated cost.

Accepted Answer

This is a correct definition of the undepreciated cost.

Question 13

Current assets are listed on the balance sheet from the most liquid to least liquid.

Accepted Answer

Current assets are listed on the balance sheet based on their liquidity, with the most liquid assets listed first. This is because these assets are considered to be the most easily converted into cash, which can be important for the short-term financial health of the company. Examples of current assets include cash and cash equivalents, accounts receivable, and inventory.

Question 14

Current liabilities are those obligations that are due within one year or the normal operating cycle of the business, whichever is longer, and which will require no use of current assets.

Accepted Answer

Current liabilities are obligations due within one year or the normal operating cycle, whichever is longer, and typically require the use of current assets to settle them.

Question 15

The single-step form of income statement lists all revenue items and their totals first, followed by all expense items and their totals, to produce a difference that is either net income or net loss.

Accepted Answer

This is a correct explanation of the single-step form of income statement.

Question 16

Gross sales less sales returns and allowances is called net sales.

Accepted Answer

Gross sales minus sales returns and allowances (such as discounts given to customers) equals net sales. Net sales represent the actual amount of revenue earned by a company.

Question 17

A primary purpose of the work sheet is to serve as an aid in the preparation of the financial statements.

Accepted Answer

The work sheet is a tool used to summarize information needed to prepare financial statements, such as the income statement, balance sheet, and statement of cash flows. It is not a required financial statement but is helpful in organizing and presenting financial information in a clear and concise manner.

Question 18

The statement of owner's equity summarizes all changes in the owner's equity during the period.

Accepted Answer

The statement of owner's equity shows the beginning balance of owner's equity, any additional investments made by the owner, any withdrawals made by the owner, and the net income or loss for the period, all of which combine to determine the ending balance of owner's equity. Therefore, it summarizes all changes in the owner's equity during the period.

Question 19

Gross profit less operating expenses produces the income from operations.

Accepted Answer

This is the definition of income from operations, also known as operating income. It represents the amount of profit generated by a company's core business operations before any interest or taxes are taken into account.

Question 20

A formal statement of the changes in owner's equity during an accounting period is called a statement of financial position.

Accepted Answer

A statement of financial position is also known as a balance sheet, and it shows the assets, liabilities, and equity of a company at a specific point in time. A formal statement of the changes in owner's equity during an accounting period is called a statement of changes in owner's equity.

Quiz 15: Financial Statements and Year-End Accounting for a Merchandising Business