Question 1

Meg Malloy is running an income statement on her QuickBooks™ computer accounting program. Which of the following accounts will be used to calculate gross profit?
A)Revenues, net sales, depreciation, and operating expenses
B)Revenues, general expenses
C)Revenues, cost of goods sold, tax expenses, net income before taxes
D)Revenues, cost of goods sold

Accepted Answer

Gross profit is calculated by subtracting the cost of goods sold from revenues, so only the accounts of revenues and cost of goods sold are required. Option D includes these two accounts.

Question 2

Many business decisions are made in hopes of improving a firm's "bottom line." Which of the following financial statements will reveal a firm's "bottom line"?
A)income statement
B)balance sheet
C)statement of cash flows
D)trial balance

Accepted Answer

The income statement shows a firm's revenues (income) minus expenses, resulting in the net income or "bottom line." The balance sheet shows a company's assets, liabilities, and shareholder equity at a specific point in time. The statement of cash flows shows the inflows and outflows of cash during a specific period. The trial balance is a tool used in accounting to check the accuracy of financial records.

Question 3

In calculating cost of goods sold, Meg Malloy noticed that her accounting software included the freight charges on purchased goods. Your response to this procedure is:
A)Freight charges are a legitimate part of cost of goods sold.
B)Freight charges should be subtracted as part of general expenses.
C)Freight charges cannot be deducted as an expense on the income statement.
D)Freight charges are part of revenues.

Accepted Answer

Freight charges are a legitimate part of cost of goods sold as they directly relate to the purchase of goods and bringing them to the company's location. Therefore, they should be included in the calculation of cost of goods sold.

Question 4

Use the fundamental accounting equation to solve the following: Assets minus liabilities equals:
A)net income.
B)gross margin.
C)owners' equity.
D)cash reserves.

Accepted Answer

The fundamental accounting equation is Assets = Liabilities + Owners' Equity. Therefore Assets minus Liabilities equals Owners' Equity.

Question 5

Keith will graduate from Southern State University this year. He has accumulated $18,000 in student loans during his four years at college. An accountant would classify the loans as:
A)assets.
B)liabilities.
C)owners' equity.
D)intangibles.

Accepted Answer

Student loans are liabilities because they represent a debt owed by the borrower (Keith) to the lender (the organization that provided the loan). It is an obligation that must be repaid, and therefore it is classified as a liability on a balance sheet.

Question 6

If a firm can reduce its cost of goods sold and continue to sell its product for the same price, we would expect the firm to enjoy an increase in its:
A)revenue.
B)liabilities.
C)employee turnover.
D)gross profit.

Accepted Answer

Reducing the cost of goods sold while maintaining the same selling price means that the firm's gross profit margin (the difference between revenue and cost of goods sold) will increase. Therefore, we would expect the firm to enjoy an increase in its gross profit.

Question 7

The Balance Sheet for Renuvation LLC shows assets totaling $107,000 and liabilities totaling $75,000. Which of the following statements is correct?
A)Owner's Equity equals $182,000.
B)Current Assets are worth $32,000.
C)Net Income for the period is $32,000.
D)Owner's Equity equals $32,000.

Accepted Answer

Owner's Equity = Total Assets - Total Liabilities 
So, Owner's Equity = $107,000 - $75,000 = $32,000 
Therefore, option D is correct. The other options are incorrect as there is no information provided about current assets or net income in the question. Option A is also incorrect as it assumes that Owner's Equity is equal to the sum of assets and liabilities, which is not true.

Question 8

At the time the Jepson Plumbing Supply prepared its financial statements, it had several customers who bought goods over the past three months on its "90 days same as cash" credit plan. These customers had not yet paid their bills, but they have good credit ratings and Jepson is confident that they will make their payments on time. The amount these credit customers owe would show up as part of the:
A)current assets listed on Jepson's balance sheet.
B)current liabilities listed on Jepson's balance sheet.
C)a deferred cash flow on Jepson's statement of cash flows.
D)unrealized revenue reported on Jepson's income statement.

Accepted Answer

The amount owed by customers on the "90 days same as cash" credit plan would be considered accounts receivable, which is a current asset and would be listed on Jepson's balance sheet.

Question 9

Retailers attempt to sell older merchandise before more recently acquired merchandise is sold. The assumptions made by the method of inventory valuation are most consistent with this approach.
A)FIFO (first in, first out)
B)LIFO (last in, first out)
C)average costing
D)accelerated costing

Accepted Answer

FIFO assumes that the first items purchased are the first items sold. This method results in older merchandise being sold before more recently acquired merchandise, which aligns with the approach retailers try to take in selling their inventory.

Question 10

McCartney Consulting Group is a management-consulting firm that provides its expertise to businesses that employ its services. Since it does not hold an inventory of goods or produce any goods itself:
A)its revenue will equal its net income.
B)its gross profit could be identical to its net revenue.
C)it is unlikely to have any operating expenses.
D)its balance sheet will not record any current assets.

Accepted Answer

Since McCartney Consulting Group does not hold inventory or produce any goods, it is unlikely to have any cost of goods sold, thus its gross profit could be identical to its net revenue. However, they will have operating expenses such as salaries, rent, utilities, and other overhead costs. Therefore, option A and C are incorrect. Option D is also incorrect because even though they may not have current assets related to inventory, they may have other current assets such as accounts receivable or cash on hand.

Question 11

Green Living Construction Company installs solar panels in large newly constructed buildings. The company employs several expert installers who work on a full-time basis. Although the installers work everyday, the company pays them at the end of the month, for the previous month's work. Employee salaries are recorded as on Green Living's Balance Sheet.
A)capital cash flows
B)current liabilities
C)retained earnings
D)long-term liabilities

Accepted Answer

The employee salaries that are paid at the end of the month for the previous month's work are considered a current liability for Green Living Construction Company. This is because the company owes the money to its employees and is expected to pay it off within the current accounting period.

Question 12

Scott Drilling Contractors recently issued a corporate bond on which it expects to pay interest for the next twenty years. Scott would record this as a on its balance sheet.
A)declining balance asset
B)retained earning
C)long-term liability
D)long-term expense

Accepted Answer

Scott Drilling Contractors issued a corporate bond, which means it borrowed money from investors. The company will be paying interest on this bond for the next twenty years. Therefore, the correct choice is long-term liability, as the bond represents a long-term debt obligation for the company.

Question 13

On December 31, 2001, Virginia Laboratories had assets of $235,000 and owners equity of $84,000. We can conclude that on December 31, 2001, Virginia Laboratories balance sheet showed:
A)Total liabilities of $151,000.
B)Suffered a net loss of $151,000.
C)Experienced a cash inflow of $319,000.
D)Paid a dividend of $3.00 per share.

Accepted Answer

The equation for a balance sheet is Assets = Liabilities + Owners Equity. Therefore, Liabilities = Assets - Owners Equity. Plugging in the given numbers, we get Liabilities = $235,000 - $84,000 = $151,000. Therefore, Virginia Laboratories had total liabilities of $151,000 on December 31, 2001.

Question 14

Which of the following would be classified as a general expense on an income statement?
A)Salaries paid to salespeople
B)Dividends paid to stockholders
C)Payments made for insurance
D)Costs associated with an advertising campaign

Accepted Answer

General expenses typically refer to regular recurring expenses that cannot be directly attributed to the production of goods or services. Payments made for insurance would be considered a general expense. Salaries paid to salespeople and costs associated with an advertising campaign would likely be classified as selling expenses, while dividends paid to stockholders would not appear on the income statement.

Question 15

A company's income statement is important to accountants and other stakeholders. It reveals:
A)A company's sources of funding.
B)A company's ability to distribute goods or services in a timely manner.
C)A company's ability to earn a profit over time.
D)A company's capitalized value.

Accepted Answer

The income statement shows a company's revenue and expenses, which ultimately determines its profit or loss. It provides insight into a company's ability to earn a profit over time, which is important for investors and other stakeholders. Options A, B, and D are not related to the income statement.

Question 16

Blast-off Airlines is a recent start-up commuter airline that flies between eight regional cities on the east coast. Although it has attracted numerous investors who see value in the company's service, it does not pay dividends. Last year, the firm claimed profits of $4,800,000, which will be used to purchase an additional commuter plane. The Balance Sheet accounts that will show this affect are:
A)Retained earnings and fixed asset accounts
B)Long-term liabilities and fixed asset accounts
C)Retained earnings and accounts receivable accounts
D)Accounts payable and accounts receivable accounts

Accepted Answer

The profits that Blast-off Airlines earned will be added to the Retained Earnings account, while the purchase of a new commuter plane will affect the Fixed Asset accounts. Therefore, the best choice is A.

Question 17

Rapidly growing companies often buy increasing amounts of merchandise from suppliers on credit, and then sell the goods to their customers on credit. These companies sometimes have difficulty repaying their suppliers when customers who buy on credit don't pay on time. Firms that experience this difficulty need to do a better job of:
A)Generating revenue.
B)Controlling inventory.
C)Managing cash flows.
D)Balancing assets with liabilities.

Accepted Answer

Rapidly growing companies often face cash flow problems, especially when they have to pay their suppliers before receiving payments from their customers. Therefore, managing cash flows effectively is crucial to ensure that the company can meet its obligations timely and avoid defaulting on its debt. While generating revenue, controlling inventory, and balancing assets with liabilities are also important, they may not directly address the cash flow issue that arises when a firm's customers don't pay on time.

Question 18

Miko is preparing her homework for her accounting class. She is uncertain as to the proper handling of patents and copyrights on a firm's financial statements. Which of the following is correct?
A)Patents and copyrights are included with the firm's intangible assets on the balance sheet.
B)Patents and copyrights are included with the firm's long-term liabilities on the balance sheet.
C)Patents and copyrights are included with the firm's cost of goods sold on the income statement.
D)Patents and copyrights are included with the firm's fixed assets on the balance sheet.

Accepted Answer

Patents and copyrights are intangible assets and should be included under the intangible assets section on the balance sheet.

Question 19

During a period of rising prices, using FIFO (first in, first out) inventory valuation method will result in net income figures than would LIFO (last in, first out).
A)higher
B)lower
C)the same
D)less accurate

Accepted Answer

The answer of During a period of rising prices, using...

Question 20

During a period of rising prices, if a firm desires to report a low gross profit figure in hopes of reducing their income tax liability, the firm will use the inventory valuation method.
A)FIFO (first in, first out)
B)LIFO (last in, first out)
C)sliding scale
D)average cost

Accepted Answer

LIFO assumes that the last items in inventory are the first to be sold, which means the cost of goods sold will reflect the higher prices of more recently acquired inventory. This results in a lower gross profit figure because the cost of goods sold is higher. Therefore, if a firm desires to report a low gross profit figure in hopes of reducing their income tax liability during a period of rising prices, using the LIFO inventory valuation method would be the best choice.

Quiz 17: Understanding Accounting and Financial Information

Meg Malloy is running an income statement on her QuickBooks™ computer accounting program. Which of the following accounts will be used to calculate gross profit?

Many business decisions are made in hopes of improving a firm's "bottom line." Which of the following financial statements will reveal a firm's "bottom line"?

In calculating cost of goods sold, Meg Malloy noticed that her accounting software included the freight charges on purchased goods. Your response to this procedure is:

Use the fundamental accounting equation to solve the following: Assets minus liabilities equals:

Keith will graduate from Southern State University this year. He has accumulated $18,000 in student loans during his four years at college. An accountant would classify the loans as:

If a firm can reduce its cost of goods sold and continue to sell its product for the same price, we would expect the firm to enjoy an increase in its:

The Balance Sheet for Renuvation LLC shows assets totaling $107,000 and liabilities totaling $75,000. Which of the following statements is correct?

Retailers attempt to sell older merchandise before more recently acquired merchandise is sold. The assumptions made by the method of inventory valuation are most consistent with this approach.

McCartney Consulting Group is a management-consulting firm that provides its expertise to businesses that employ its services. Since it does not hold an inventory of goods or produce any goods itself:

Scott Drilling Contractors recently issued a corporate bond on which it expects to pay interest for the next twenty years. Scott would record this as a on its balance sheet.

On December 31, 2001, Virginia Laboratories had assets of $235,000 and owners equity of $84,000. We can conclude that on December 31, 2001, Virginia Laboratories balance sheet showed:

Which of the following would be classified as a general expense on an income statement?

A company's income statement is important to accountants and other stakeholders. It reveals:

Miko is preparing her homework for her accounting class. She is uncertain as to the proper handling of patents and copyrights on a firm's financial statements. Which of the following is correct?

During a period of rising prices, using FIFO (first in, first out) inventory valuation method will result in net income figures than would LIFO (last in, first out) .

During a period of rising prices, if a firm desires to report a low gross profit figure in hopes of reducing their income tax liability, the firm will use the inventory valuation method.