Question 1

Which is more important to a public accountant-the duty to the public or the duty to the client?

Accepted Answer

A public accountant holds his or her duty to the public above their duty to the client, themselves, and their profession.
Key Takeaway: The public depends on the ethical behavior of a public accountant. This reliance is of the utmost importance when the public depends on financial data to make significant financial decisions. The Enron case brought to light the importance of the public accountant's duty to the public, rather than to the client.

Question 2

Bart's Brewskies saw sales of $50,000 in December-primarily due to New Year's Eve celebrations. Bart determined that 30% of his sales are paid in cash, while the rest are billed for their brewskies. Of the money owed, 40% is paid December, while the remaining is paid the following month. What is the increase of Accounts Receivable on New Year's Eve?

Accepted Answer

The increase of the accounts receivable account is $21,000. To calculate, $50,000 multiplied by the 70% of A/R customers is $35,000. Of this $35,000, 60% remains at the month's end, which is $21,000.
Key Takeaway: The balance of an Accounts Receivable account at any point is the amount of money owed to the company. Since we do not have a starting point-also known as beginning balance-we can only calculate the change in this account. In this example, $50,000 was made in December. 70% of that, or $35,000, was billed to customers. Of the $35,000, 60% remains unpaid at the end of December, which is $21,000-the balance of A/R account.

Question 3

Which financial statement does not include sales that are recorded as credit?

Accepted Answer

The statement of cash flows does not record sales that are recorded as credit.
Key Takeaway: The income statement and the balance sheet both show net income, which includes cash sales and sales on credit. The statement of cash flows does not include future incoming and outgoing cash that is recorded on credit.

Question 4

Bart owns a brewery that specializes in a beer containing caffeine. He recently purchased a $20,000 coffee maker to help add a kick to his brew. He expects the coffee maker to have a useful life of ten years and have a salvage value of $2,000. If Bart's brewery, Bart's Brewskies, is using the double declining depreciation method, how much would he depreciate in the first year?

Accepted Answer

Using the double declining depreciation method, the first year's depreciation is $4,000. This is shown by plugging the numbers into the formula: Depreciation Base x (2 x 100% / Useful life of asset).
Key Takeaway: The salvage value has no bearing on the depreciation taken. For the double declining deprecation method, you are calculating the percentage of depreciation using the straight line method, which is 100% divided by the number of years of useful life. You'll then have a percentage, which is doubled then multiplied by the depreciation base. In the first year, the base is the cost of the asset. In this example, the base of the second year would be $16,000.

Question 5

The first step in the accounting cycle is to:

Accepted Answer

The first step in the accounting cycle is to identify the transaction. This is done from a source document, such as an invoice or a receipt for sales, a canceled check for expenses, or a time card to produce a paycheck.
Key Takeaway: The accounting cycle is a series of steps taken from the beginning of a transaction through the accounting period as each transaction occurs. It begins with identifying the transaction through the source document to gain the information necessary to properly analyze the transaction. The information from the source document includes the date, the amount, a description, and the identity of any other involved party in the transaction so it can be analyzed and posted to the journal properly.

Question 6

During 2009, Bart's Brewskies saw a jump in accounts receivables. It went from $10,000 at year end in 2008 to $20,000 at year end in 2009. With the introduction of his newest brewskie, chocolate beer, Bart saw his sales skyrocket. In 2009, his sales were $120,000. How much cash did Bart's Brewskies take in for 2009?

Accepted Answer

The cash taken in by the company during 2009 was $110,000. This is calculated by: Sales ? (2009 A/R ? 2008 A/R) or $120,000 ? (20,000 ? 10,000).
Key Takeaway: If accounts receivables increase between accounting periods, the increase is deducted from net sales. Even though the amounts in the A/R accounts are revenue, they are not cash. The fact that there is a difference between revenue and receipts needs to be remembered when addressing accounts receivable questions.

Question 7

At year end, the accounts for Doug's Doohickeys show the following balances prior to adjusting entries:
Accounts Receivable: $10,000 debit balance
Allowance for Uncollectible Accounts: $3,500 credit balance
Sales were $1,000,000 and 40% of the sales were on credit.
If Doug deems that .4% of his accounts won't be collected, what is the balance of the Allowance for Uncollectible Accounts going to be?

Accepted Answer

The balance of the Allowance for Uncollectible Accounts is going to be $5,100:
$1,000,000 x 40% is $400,000 of accounts receivable for the year. 4% (.004) of this amount is $1,600. $1,600 + $3,500 = $5,100.
Key Takeaway: The Allowance for Uncollectible Accounts carries a credit balance-the current year's allowance would be calculated using the A/R for the year, along with the uncollectible percentage. That will be added to the current balance. Also note that the numbers are tricky. Be sure to read them carefully, as in .4% vs. 4%.

Question 8

Bart's Brewskies is considering firing their new accountant. Bart misclassified one of his expenses and even though Bart was the one who made the error, he says the accountant should have caught it when he prepared the trial balance. Is he correct?

Accepted Answer

Bart is incorrect. The trial balance will not show a misclassified expense. It only shows that debits and credits are equal or balanced.
Key Takeaway: The trial balance is prepared to detect math errors that have occurred when using a double-entry accounting system. As long as the total debits are equal to the total credits, it is balanced. It does not detect any issues with misclassifying transactions, as the balance would not be affected.

Question 9

Between the balance sheet and the income statement, which financial statement(s) is/are impacted by depreciation?

Accepted Answer

Both the balance sheet and the income statement are impacted by depreciation.
Key Takeaway: Depreciation increases accumulated depreciation, which is shown on the balance sheet. The depreciation expense is shown on the income statement, which reduces net income.

Question 10

Larry's Lobsters keeps its operating cash in an interest-bearing checking account and they earn $150 in interest during the year. Where is that interest shown?

Accepted Answer

Interest earned from the checking account will appear in the non-operating income section of the income statement.
Key Takeaway: If the interest earned is outside the scope of the company's main operations, which in this case is the lobster business, then the interest earned is noted in the non-operating income section of the income statement.

Question 11

Bart's Brewskies is reconciling the company's bank account. Assuming that all transactions flow through one account, which of the following transactions will Bart's subtract from their bank statement's ending balance to reconcile the accounts?

Accepted Answer

The checks that Bart wrote that have not yet been cashed should be subtracted from the bank statement's ending balance when reconciling the account.
Key Takeaway: Transactions that are added or subtracted from the bank statement's ending balance during account reconciliation should be transactions that have not yet been recognized by the bank. A and D answers have already been recognized by the bank and thus, will be shown in the bank statement. Answers C and E have yet to be recognized on the bank statement, but it will be an addition to the ending balance. The uncashed checks should be deducted from the bank statement's balance, as it has already been deducted from Bart's checkbook balance.

Question 12

Wages Payable represents a/an ____________ for the company.

Accepted Answer

Wages Payable represents a liability for the company.
Key Takeaway: Accrued expenses are liabilities. They represent expenses that are recognized in the books before payment is made. Accrued expenses are generally periodic expenses that should be recognized during the accounting period in which they were incurred, such as wages and utilities.

Question 13

Jim's Jeans makes stylish denim products for senior citizens. Jim's Jeans begins the year with $20,000 in inventory. Jim purchases his inventory from a supplier in Europe and during the year he purchased $85,000 in goods. With the success of his Granny Glam line, Jim was quite happy with $150,000 in sales for the year, and he sees a 50% gross profit on the selling price. What was the balance of his inventory account at year end?

Accepted Answer

The balance of the inventory account at year end is $30,000. The answer is found by plugging numbers into the Cost of Goods Sold formula:
opening inventory
+ additions during the year
goods available for sale
? year-end inventory
cost of goods sold
The unknown in the problem is the year-end inventory. The other numbers can be plugged in. First, the COGS needs to be determined. This is found in the statement of $150,000 in sales with a 50% gross profit. Thus, $150,000 x .5 = $75,000 in gross profit. Subtract gross profit from sales to get the COGS: 150,000 ? 75,000 = 75,000 COGS
Using the formula:
20,000 (opening inventory)
+ 85,000 (additions during the year) =
105,000 (goods available for sale)
? Year End Inventory =
75,000
Therefore, year-end inventory is $30,000.
Key Takeaway: The cost of goods sold formula often has figures that will require further calculations to obtain. The COGS formula is:
Opening inventory
+ Additions during the year
Goods available for sale
? Year-end inventory
Cost of goods sold.

Question 14

In the statement of owner's equity, owner's equity or capital is calculated using:

Accepted Answer

Owner's equity is calculated using net income when preparing the statement of owner's equity.
Key Takeaway: The statement of owner's equity includes beginning capital, investments made into the business, net income, and owner's withdrawals to determine the ending owner's equity.

Question 15

Larry the Lawyer is going to represent Bart's Brewskies in an upcoming litigation. Bart is being sued for representing his brewskies as being non-alcoholic, when in fact, they were 80-proof. Larry has asked Bart for a retainer of $1,000 before he'll even meet with Bart. Assuming the accrual basis of accounting is in play, that $1,000 is considered (for Larry):

Accepted Answer

The payment from Bart to Larry is a receipt. It would not be considered a revenue until it is earned and services provided. It would not be an accounts receivable, as it was a cash payment.
Key Takeaway: In the accrual basis of accounting, revenue is not recognized until it is earned. Therefore, a retainer is only a cash receipt, not a revenue. It is important to remember that revenues are money earned; receipts are money that is received. The income statement reflects revenues, not cash receipts.

Question 16

Kimmey's Cookies sells gourmet dog biscuits. She uses the cash method of accounting. She purchased $5,000 in inventory on account on October 10th. That same day, she sold $2,500 in biscuits on account to the local pet shop. She will be billed for the inventory on October 12th and she expects payment for the sale on October 15th. Her revenue for October 10th is:

Accepted Answer

Kimmey will not recognize any revenue on October 10th, as she uses the cash-basis method of accounting. Thus, revenue is recognized when payment is received.
Key Takeaway: Cash-basis accounting recognizes revenue when the money is actually received. Sales made on account will not be recognized until the invoice is paid. This method of accounting is usually used by smaller businesses, normally sole proprietorships.

Question 17

Another name for an income statement is a:

Accepted Answer

A profit and loss statement is another name for an Income Statement. A common abbreviation for a profit and loss statement is P & L.
Key Takeaway: The income statement shows a summary of the company's profit or loss during a given timeframe. It records all revenues, as well as operating expenses.

Question 18

If it's assumed that over a time period prices are rising, which inventory identification method would result in a lower tax bill for a company, assuming all other inputs are equal?

Accepted Answer

LIFO-or last-in-first-out-is the inventory identification method that would result in a lower tax bill.
Key Takeaway: Assuming that the first product in inventory will cost less than the last in-for example, a widget in January 2001 would cost $10, while in January 2002 it would cost $12-gross profit would be matched against the more expensive items in the inventory for LIFO, meaning the widget that was purchased later for $12. That would reduce the net profit of the business, resulting in a lower tax bill. For businesses and inventory that are expected to grow over time, LIFO is generally preferable for this reason. Note: It is for this reason that the IRS tends not to like the LIFO method. A special tax form needs to be filed if it is used. A tax consultant can provide more information.

Question 19

Jim's Jeans is being sued by a former employee for $100,000. The employee is claiming age discrimination. She is twenty-four and was terminated when Jim decided that he wanted all employees to be over the age of sixty-five. Jim's attorney has told him that the employee has a strong case and will probably win. How does this impact Jim's accounting records?

Accepted Answer

The lawsuit is a contingent liability of $100,000 and appears on the income statement as an expense.
Key Takeaway: A contingent liability is a loss that is both probable and has an amount that can be estimated. A nuisance suit for $1,000,000 would not meet the criteria. The contingent liability is recorded as an expense, thus it would appear on the income statement. It would also appear as a liability on the balance sheet.

Question 20

Which of the following appear on an income statement in the revenue section?
I. Revenue or income from the primary activity of the business
II. Revenue or income from any secondary activities of the business
III. Gains recognized by the business

Accepted Answer

The revenue section of the income statement shows revenue from primary activities, revenue from secondary activities, and gains recognized by the business.
Key Takeaway: Income statements contain all elements of income within the revenue section, including those from a business' primary activity. For example all elements of an income could include: sales (revenue or income from the primary activity); renting out unused space (revenue or income from a secondary activity); and the sale of a long term asset, such as land (a gain recognized by the business).

Quiz 1: Accounting