Question 1

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

Accepted Answer

The balance sheet equation is Assets = Liabilities + Owners' Equity. Therefore, Owners' Equity = Assets - Liabilities, which in this case is $107,000 - $75,000 = $32,000. Option D is correct. Option A is incorrect, as it implies that the company has additional equity of $182,000, which is not reflected in the balance sheet. Option B is incorrect, as it implies that the current assets are worth $32,000 which is wrong. Option C is incorrect, as net income cannot be determined from the balance sheet alone.

Question 2

As Hector was packing to return to State University after his summer vacation, he realized that he owned many valuable things such as a laptop computer, a stereo system, and a DVD player. An accountant would list all of these as Hector's:

Accepted Answer

These items are all assets because they have value and are owned by Hector. Liabilities refer to debts or obligations owed by Hector, owners' equity refers to Hector's share of the value of any property or business that he owns, and intangibles refer to things like patents or copyrights that do not have a physical presence.

Question 3

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:

Accepted Answer

The credit customers who have not yet paid their bills fall under accounts receivable, which is a current asset that is expected to be collected within the next 12 months. Therefore, the amount owed by these credit customers would be included as part of the current assets listed on Jepson's balance sheet.

Question 4

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:

Accepted Answer

Since McCartney Consulting Group does not hold an inventory of goods or produce any goods itself, its revenue will be equal to its net revenue. As a result, its gross profit could be identical to its net revenue. However, the company will have operating expenses related to consulting services, such as salaries for employees and office rent. Therefore, it will have some operating expenses. The company may have current assets such as cash, accounts receivable, and prepaid expenses, which will be recorded on its balance sheet.

Question 5

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:

Accepted Answer

Rapidly growing companies often struggle with cash flow management, especially when dealing with credit sales to customers and credit purchases from suppliers. Improving their ability to manage cash flows can help them better handle their financial obligations, including paying suppliers on time. While generating revenue, controlling inventory, and balancing assets with liabilities are all important aspects of business operations, they may not directly address the issue of repaying suppliers when customers don't pay on time.

Question 6

Monica noted that she disbursed $6,347 in payments for operations in her travel agency and received $6,189 in cash receipts for services rendered. She had no cash receipts or disbursements from investments or financing activities. Thus, Monica had a:

Accepted Answer

Monica's cash inflow ($6,189) is less than her cash outflow ($6,347), resulting in a negative cash flow. This means that she has a net loss in cash for the period.

Question 7

Carole Grand and Bonnie Lamore run a shuttle service from Western Illinois to the busy Chicago O'Hare airport. Last month, they recorded the following:  Carole and Bonnie's gross profit for the past month was:

Accepted Answer

To calculate the gross profit, we need to subtract the total expenses (gas, maintenance, etc.) from the total revenue earned. Adding up the revenue from all the trips ($3,350) and subtracting the total expenses ($2,100) gives us a gross profit of $1,250.

Question 8

The financial ratios that measure a firm's ability to pay its short-term debts are called:

Accepted Answer

Liquidity ratios measure a company's ability to pay its short-term debts, such as current ratio and quick ratio. Leverage ratios measure a company's debt levels and ability to meet long-term debt obligations. Equity ratios measure a company's equity position and how much of the company is being financed by equity. Profitability ratios measure a company's ability to generate profits relative to its revenue, assets, or equity.

Question 9

When reviewing the balance sheet for Preferred Pet Care, Inc., a mobile small animal care business, Julian noted the following information: Company assets totaling $3.5 million, and liabilities totaling $1.3 million. On paper, the net worth (owners' equity) for this business = ____________.

Accepted Answer

Net worth or owners' equity is calculated by subtracting total liabilities from total assets. Therefore, the net worth for Preferred Pet Care, Inc. would be $3.5 million - $1.3 million = $2.2 million.

Question 10

Costas Calendar Company's Statement of Cash Flows showed the following activities for the year ended December 31, 2016:  The year-end cash balance for this firm is:

Accepted Answer

The answer of Costas Calendar Company's Statement of Cash Flows...

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 every day, 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.

Accepted Answer

Employee salaries that have been earned but not yet paid are recorded as a current liability on the balance sheet.

Question 12

In the Making Ethical Decisions box titled "Would You Cook the Books?" the situation provides the student with an ethical dilemma that might present itself to an accounting professional. The story focuses on: Is it ethical to __________________________

Accepted Answer

It is unethical to account for sales and profits at a time period, before or after the time these sales and profits actually occurred. This is a form of financial statement fraud and can mislead investors and stakeholders. Transferring long-term liabilities, inflating the values of assets, or changing the method of accounting for inventory may also be unethical if done with the intent to deceive or mislead stakeholders.

Question 13

Carole Grand and Bonnie Lamore run a shuttle service from Western Illinois to the busy Chicago O'Hare airport. Last month, they recorded the following:  If 25% of their net income is paid to the government in taxes, what is their net income after taxes?

Accepted Answer

The answer of Carole Grand and Bonnie Lamore run a...

Question 14

Lisa 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?

Accepted Answer

Patents and copyrights are considered intangible assets and should be included with other intangible assets on the balance sheet. They are not considered liabilities or cost of goods sold, nor are they fixed assets.

Question 15

Nebraska Communications is considering the purchase of a new satellite. The firm believes the satellite will help generate future earnings. In addition, the firm recognizes the tax benefits of a lower net income provided by the annual ________ of the asset.

Accepted Answer

The option that provides tax benefits through a lower net income is depreciation. Choice A (inventory valuation) and choice C (appreciation) do not directly relate to the tax benefits of a lower net income through depreciation. Choice B (declining balance) is a method of depreciation, but alone it does not provide tax benefits.

Question 16

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.

Accepted Answer

Since it is a bond that Scott Drilling Contractors expects to pay interest on for the next twenty years, it would be recorded as a long-term liability on its balance sheet.

Question 17

Similar to the example of FIFO and LIFO inventory accounting methods, a college store purchased sweatshirts for the upcoming fall semester. Using the following data, where a total of 100 sweatshirts were purchased by the store and placed in inventory, select the correct statement from the following choices.

Accepted Answer

Under FIFO (First-In, First-Out) method, the oldest inventory is sold first. In the case of sweatshirts, this would mean that the ones purchased first would be sold first, and the newer ones would remain in inventory. As prices of inventory items tend to rise over time, using FIFO would result in higher profits as the newer, higher-priced sweatshirts would not be sold until the older, lower-priced ones are sold first. Therefore, the correct statement is that FIFO would provide the most profit.

Question 18

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:

Accepted Answer

Student loans represent a debt that Keith owes to the lender or the government. Therefore, they are classified as liabilities.

Question 19

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?

Accepted Answer

Gross profit is calculated using the formula:
Gross profit = Revenues - Cost of goods sold 
Therefore, only the accounts Revenues and Cost of goods sold are needed to calculate gross profit. Choice (A) includes depreciation and operating expenses which are not used to calculate gross profit. Choice (B) only includes general expenses which are also not used to calculate gross profit. Choice (C) includes tax expenses and net income before taxes which are not relevant to calculating gross profit.

Question 20

Cindy is concerned because during the past four months her company has experienced difficulty in paying its bills on time. She knows if this continues, the firm will have difficulties in accomplishing its goals. Cindy is concerned with:

Accepted Answer

Cindy's concern about the company's ability to pay its bills on time indicates a problem with cash flow, which refers to the inflow and outflow of cash in a business. This is different from asset disbursement (how assets are distributed) and inventory valuation (how inventory is valued), which may impact cash flow but are not the specific issue Cindy is worried about. Profit and loss may also be affected by cash flow issues, but again, it is not the specific concern mentioned by Cindy.

Quiz 17: Understanding Accounting and Financial Information