Question 1

FIFO and LIFO are two common methods used to compute the depreciation of tangible assets.

Accepted Answer

FIFO and LIFO are methods used for inventory valuation, not depreciation of tangible assets. Straight-line, accelerated, and units-of-production are commonly used methods for depreciating tangible assets.

Question 2

The total cost of goods sold reported on an income statement is not affected by the inventory valuation method the firm uses.

Accepted Answer

Different inventory valuation methods, such as LIFO or FIFO, can result in different costs assigned to goods sold, which in turn affects the total cost of goods sold reported on the income statement.

Question 3

The "bottom line" of the Barkley Company's income statement is equal to the net worth of the firm.

Accepted Answer

The bottom line of the income statement shows the company's net income, not its net worth. Net worth is calculated by subtracting the company's total liabilities from its total assets, and it is shown on the company's balance sheet.

Question 4

The LIFO method of inventory valuation assumes the newest items in inventory are sold first.

Accepted Answer

LIFO stands for "last in, first out," meaning that the last items added to the inventory are assumed to be the first items sold. This results in the oldest items being left in inventory, which can lead to an overstatement of the cost of goods sold and an understatement of ending inventory.

Question 5

The Barkley Company wants to know the value of its owners' equity. It will total its assets and subtract its liabilities.

Accepted Answer

This is the correct method to calculate the value of owner's equity in accounting, as it follows the basic accounting equation (Assets = Liabilities + Owner's Equity).

Question 6

One important source of financing for most small businesses is the owners savings. If the owner contributes money to the business from his/her personal savings, it is will be recorded in the Owner's Equity account on the balance sheet.

Accepted Answer

When the owner contributes personal savings to the business, it increases the Owner's Equity account on the balance sheet.

Question 7

When an accountant "writes off" the cost of a tangible asset over its estimated lifetime, it is called depreciation.

Accepted Answer

This statement is true. Depreciation is the process of allocating the cost of a tangible asset over its estimated useful life, as it gradually loses its value over time due to wear and tear or obsolescence.

Question 8

The Barkley Company has several automobiles that are used in the business. Recently, the owners were told that even though the government permits the firm to depreciate the vehicles, it is not a deductible expense on the income statement.

Accepted Answer

Depreciation is a deductible expense on the income statement.

Question 9

The Barkley Company has recorded its unpaid bill for supplies under a current liabilities account on the balance sheet. This payment will be due to the supplier in less than a year.

Accepted Answer

Current liabilities are debts or obligations that must be paid within a year or less, and accordingly, the unpaid bill for supplies is recorded under a current liabilities account on the balance sheet.

Question 10

The cash a firm raised from issuing new debt or equity capital would be reported on a statement of cash flows.

Accepted Answer

The issuance of new debt or equity capital would result in an inflow of cash and would be reported under the "financing activities" section of the statement of cash flows.

Question 11

The Barkley Company will refer to its income statements to determine whether it was profitable, or, whether it lost money over the past year.

Accepted Answer

Income statements show revenue and expenses over a period of time, and can help determine whether a company was profitable or not.

Question 12

FIFO is a method of inventory valuation that assumes the items most recently purchased are also the items that are sold first.

Accepted Answer

The answer of FIFO is a method of inventory valuation...

Question 13

FIFO is a method of computing net cash flows by subtracting financial inflows from financial outflows.

Accepted Answer

FIFO stands for First In, First Out and is a method of inventory management. It has nothing to do with computing net cash flows.

Question 14

Revenue on the income statement represents the dollar amount of what is received for goods sold, services rendered and/or from other revenue sources.

Accepted Answer

Revenue on the income statement is indeed the dollar amount received for goods sold, services rendered, and other sources, such as interest or rent.

Question 15

The Barkley Company bought supplies in early January that it must pay for by the end of the month. These purchases are posted to accounts payable and listed as assets on the firm's balance sheet.

Accepted Answer

When purchases are made on credit (i.e. with the promise to pay later), they are recorded as accounts payable, which is a liability on the balance sheet. Assets are items that the company owns and expects to provide benefits in the future, such as inventory or equipment.

Question 16

The income statement computes net income by subtracting liabilities from assets.

Accepted Answer

The income statement computes net income by subtracting expenses from revenues, not liabilities from assets.

Question 17

Although a firm may use different inventory valuation methods, generally accepted accounting principles (GAAP) states that these methods must produce the same dollar value for the cost of goods sold.

Accepted Answer

GAAP requires that inventory valuation methods should be consistent but does not require them to produce the same dollar value for the cost of goods sold. The different methods can result in different values for cost of goods sold, but the method used must be disclosed in the financial statements.

Question 18

The Barkley Company's balance sheet shows: what the business owns, minus what the business owes, equals the book value (or, net worth) of the business.

Accepted Answer

The statement is correct. A balance sheet shows a business's assets (what it owns) and liabilities (what it owes), and the difference between them is the net worth or book value of the business.

Question 19

Generally accepted accounting principles (GAAP) permits firms to choose among different methods of depreciation and inventory valuation.

Accepted Answer

GAAP does allow for flexibility in choosing depreciation and inventory valuation methods, as long as the chosen method is consistently applied and disclosed properly in financial statements.

Question 20

The Barkley Company balance sheet shows the following items: Accounts payable totaling $50,000; salaries payable totaling $65,000, and notes payable totaling $100,000. These are liabilities, or money that the firm owes others.

Accepted Answer

Liabilities are defined as debts or obligations that the company owes to others, such as accounts payable, salaries payable, and notes payable. These are all listed as liabilities on the balance sheet.

Quiz 17: Understanding Accounting and Financial Information