Question 1

In the Connecting with Small Business box titled,"LIFO or FIFO?" the passage explained that accounting for profits may differ,depending upon ___________________.
A) the accounting method used to calculate overhead expenses
B) the accounting method used to calculate the cost of inventory
C) price and volume
D) the company's tax bracket

Accepted Answer

The passage specifically states that LIFO and FIFO are different methods for accounting for the cost of inventory, which can affect how profits are calculated. None of the other answer choices are mentioned as factors that can affect accounting for profits in the passage.

Question 2

When creating the income statement,which of the following statements is accurate?
A) Revenues,minus general operating expenses = gross profit.
B) Revenues,minus tax expense = gross profit.
C) Revenues,minus depreciation expense = gross profit.
D) Revenues,minus cost of goods sold = gross profit.

Accepted Answer

Gross profit is calculated by subtracting cost of goods sold from revenues. Option A, B and C are incorrect as they do not accurately reflect this calculation.

Question 3

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 inventory items purchased are the first ones sold, which matches the approach of retailers trying to sell older merchandise first. This method results in the cost of goods sold being based on the oldest inventory costs, potentially resulting in a lower cost of goods sold and higher net income in inflationary periods.

Question 4

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 goods purchased are the first ones sold, meaning that the cost of goods sold will reflect higher, more recent prices. This will result in lower reported gross profit figures, which can lead to lower income tax liability. During a period of rising prices, using LIFO will result in higher cost of goods sold and lower reported profits, which can help to reduce the firm's tax liability.

Question 5

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 credit customers under the "90 days same as cash" credit plan qualifies as accounts receivable, which is a current asset that should be listed on Jepson's balance sheet until the customers make their payments.

Question 6

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 __________________________
A) transfer long-term liabilities on the balance sheet to the balance sheet of a secondary firm?
B) inflate the values of assets on the Balance Sheet?
C) account for sales and profits at a time period,before or after the time these sales and profits actually occurred?
D) change one's method of accounting for inventory during the same fiscal year?

Accepted Answer

Accounting for sales and profits at a time period before or after the time these sales and profits actually occurred is considered fraudulent and unethical. This practice is commonly known as "cooking the books," and it misleads stakeholders such as investors, creditors, and government agencies. Such unethical behavior can result in significant legal and financial consequences, including fines, lawsuits, and even imprisonment. Therefore, accounting professionals must adhere to ethical standards and accurately report financial information.

Question 7

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, also known as the profit and loss statement, shows a company's revenues and expenses over a specific period of time. The "bottom line" refers to the net income or loss of the company, which is calculated by subtracting total expenses from total revenue. Therefore, the income statement is the financial statement that reveals a firm's "bottom line." The balance sheet is a snapshot of a company's financial position at a specific point in time, while the statement of cash flows shows the inflows and outflows of cash during a specific period. The trial balance is a list of all accounts and their balances used to ensure that debits and credits are in balance. None of these statements directly reveal the firm's "bottom line."

Question 8

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 FIFO...

Question 9

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, expenses, and net income over a certain period of time. This reveals whether or not the company is earning a profit, which is important information for accountants and stakeholders to evaluate the company's financial health and sustainability. Choices A, B, and D are not directly related to information provided in an income statement.

Question 10

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 considered intangible assets of a firm and therefore should be included in the firm's intangible assets section of the balance sheet. They should not be included with long-term liabilities, cost of goods sold, or fixed assets.

Question 11

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 of Blast-off Airlines will increase its Retained earnings account, as this account represents the accumulated earnings that have not been distributed to shareholders as dividends. In addition, the purchase of an additional commuter plane is a fixed asset purchase, which will increase the Fixed asset account. Therefore, the Balance Sheet accounts that will show the affect are Retained earnings and fixed asset accounts.

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

When Scott Drilling Contractors issued a corporate bond, it created a long-term liability because it has to pay interest for the next twenty years. The bond represents a debt that the company owes, and it will not be fully repaid until the bond matures. As such, it is recorded as a long-term liability on the balance sheet.

Question 13

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

Managing cash flows is crucial for a rapidly growing company that buys merchandise from suppliers on credit and sells goods to customers on credit. The company needs to ensure that it has enough cash to pay back its suppliers even if customers do not pay on time. Good cash flow management involves tracking inflows and outflows of cash, forecasting future cash needs, and making sure that the company has access to financing when needed. While generating revenue, controlling inventory, and balancing assets with liabilities are also important for a growing business, they may not directly address the issue of managing cash flows.

Question 14

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 would increase the gross profit of the firm, as gross profit is calculated as revenue minus cost of goods sold. Therefore, the correct answer is D.

Question 15

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 revenue, which means that only the accounts related to revenue and cost of goods sold are used. Therefore, the correct choice is D which contains revenues and cost of goods sold only.

Question 16

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 (owner's equity)for this business = ___________.
A) $2.2 million
B) $4.8 million
C) $3.5 million
D) $0.2 million

Accepted Answer

To find the net worth or owner's equity, we need to subtract the total liabilities from the total assets. 
Net worth = Assets - Liabilities 
Net worth = $3.5 million - $1.3 million 
Net worth = $2.2 million 
Therefore, the answer is choice A) $2.2 million.

Question 17

Bridget Cartier has privately invested $100,000 in Jacques and Jacqueline's Idaho Ski Resort.The business will use the money to purchase new ski lift chairs.$100,000 will be recorded on the balance sheet as part of the owners' equity account.In order to keep the accounts balanced,the balance sheet will also show:
A) An increase of $100,000 cash.
B) A fixed asset [ski lift chairs] = $100,000.
C) A liability for $100,000.
D) An increase in accounts receivable for $100,000 in her QuickBooks.

Accepted Answer

The $100,000 invested by Bridget will be recorded on the balance sheet as part of the owners' equity account. To balance the accounting equation, this equity will be matched by an equal and opposite asset. Since the money will be used to purchase ski lift chairs, a fixed asset worth $100,000 will be recorded on the balance sheet. There is no increase in cash, liability, or accounts receivable in this transaction.

Question 18

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 the company does not hold inventory or produce goods, its gross profit will be identical to its net revenue. However, it will still have operating expenses such as salaries, rent, and office supplies, so option C is incorrect. The company may have current assets such as cash, accounts receivable, and prepaid expenses, so option D is also incorrect. Option A is not necessarily true since the company could have expenses that reduce its net income.

Question 19

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

Employee salaries are an expense for the company and are recorded as a liability until they are paid at the end of the month. Therefore, the salaries of the installers are part of the company's current liabilities.

Question 20

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

Payments made for insurance are classified as a general expense since it is a necessary cost for the operation of the business. Salaries paid to salespeople (A) could also be classified as a general expense, as it is a recurring cost of doing business. Dividends paid to stockholders (B) would not be classified as an expense on the income statement, but rather as a distribution of profits to owners. Costs associated with an advertising campaign (D) could be classified as a marketing or advertising expense.

Quiz 17: Understanding Accounting and Financial Information

In the Connecting with Small Business box titled,"LIFO or FIFO?" the passage explained that accounting for profits may differ,depending upon ___________________.

When creating the income statement,which of the following statements is accurate?

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.

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.

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 __________________________

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"?

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 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?

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.

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:

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?

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 (owner's equity) for this business = ___________.

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:

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