Question 1

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

Accepted Answer

General expenses refer to the regular, ongoing costs of running a business, such as rent, utilities, and insurance. Payments made for insurance fall under this category. Salaries paid to salespeople and costs associated with an advertising campaign would be classified as selling expenses, while dividends paid to stockholders would not appear on the income statement, as they are not an expense.

Question 2

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 by subtracting the cost of goods sold from revenues. Therefore, only the accounts of revenues and cost of goods sold will be used to calculate gross profit. Choice A includes depreciation and operating expenses which are not relevant for calculating gross profit. Choice B only includes general expenses which are also not relevant. Choice C includes tax expenses and net income before taxes which are not necessary for calculating gross profit. Therefore, the best choice is D which only includes the necessary accounts for calculating gross profit.

Question 3

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:

Accepted Answer

If a firm can reduce its cost of goods sold while maintaining the same price for its product, it means that the firm's gross profit margin has increased. Gross profit is calculated as sales revenue minus cost of goods sold. Therefore, a reduction in cost of goods sold leads to an increase in gross profit, which ultimately leads to higher profitability for the firm.

Question 4

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

A corporate bond is a form of borrowing for the company, thus it represents a long-term liability on the balance sheet. The interest payments on the bond would also be recorded as an expense on the income statement.

Question 5

On December 31,2010,Virginia Laboratories had assets of $235,000 and owners' equity of $84,000.We can conclude that on December 31,2010,Virginia Laboratories balance sheet showed:

Accepted Answer

The balance sheet equation is Assets = Liabilities + Owners' equity. Therefore, we can calculate that Virginia Laboratories had liabilities of $151,000 ($235,000 - $84,000 = $151,000) on December 31, 2010.

Question 6

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"?

Accepted Answer

The income statement reveals a firm's "bottom line" by showing its net income or loss for a specific period of time, which represents the profit or loss for the company. The balance sheet shows the financial position of a company at a specific point in time, while the statement of cash flows shows the inflows and outflows of cash during a specific period of time. The trial balance is a list of all accounts with their balances at a specific point in time and is used to ensure the accounting system is in balance.

Question 7

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).

Accepted Answer

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

Question 8

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.

Accepted Answer

FIFO assumes that the oldest merchandise is sold first, which is consistent with the approach of retailers to sell older merchandise before newer ones. This method results in the cost of goods sold reflecting the oldest items first, and the ending inventory reflecting the current, newer items.

Question 9

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.

Accepted Answer

LIFO assumes that the last items purchased are the first ones sold, which maximizes cost of goods sold (COGS) during a period of rising prices. This results in a lower gross profit and, consequently, a lower income tax liability. Therefore, using LIFO inventory valuation method would help the firm achieve their goal of reporting a low gross profit figure.

Question 10

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

Managing cash flows is crucial in this scenario as the company needs to ensure that they have enough cash to repay their suppliers on time even if their customers don't pay on time. Generating revenue and controlling inventory are important aspects of a growing company, but they may not necessarily solve the problem of repaying suppliers on time. Balancing assets with liabilities is also important, but in this scenario, managing cash flows would be the most effective solution.

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:

Accepted Answer

The profits of $4,800,000 will be added to the Retained Earnings account, which is a part of the equity section of the Balance Sheet. The purchase of an additional commuter plane will affect the Fixed Asset accounts on the Balance Sheet. Therefore, the correct choice is A) Retained earnings and fixed asset accounts.

Question 12

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.

Accepted Answer

Employee salaries are recorded as current liabilities on the balance sheet because they are wages owed by the company to its employees for work done in the previous month. Current liabilities are liabilities that are expected to be paid within the next 12 months.

Question 13

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

Accepted Answer

The income statement shows a company's revenue, expenses and resulting profit or loss, which is essential in assessing the company's ability to earn a profit over time. It does not provide information on a company's sources of funding (which is shown in the balance sheet) or its ability to distribute goods/services in a timely manner. Capitalized value is not a term typically associated with the income statement.

Question 14

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

Accepted Answer

Gross profit is calculated by subtracting cost of goods sold from revenues.

Question 15

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:

Accepted Answer

Freight charges incurred in the process of acquiring inventory should be included in the cost of goods sold. This is because such costs are directly related to obtaining the inventory that is being sold and therefore represent an essential part of the total cost of the product. Thus, including these freight charges in the calculation of cost of goods sold ensures that the product's total cost is accurately accounted for, and therefore the resulting profits or losses reported on the income statement are more precise.

Question 16

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 would be reflected in Jepson's accounts receivable, which is a current asset listed on the balance sheet.

Question 17

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?

Accepted Answer

Patents and copyrights are intangible assets of a company and are therefore included in the firm's intangible assets on the balance sheet. This category of assets includes things like patents, copyrights, trademarks, goodwill, and other non-physical assets. These assets are recorded at their initial cost (or fair market value) and are either amortized over their useful life or subjected to impairment tests.

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:

Accepted Answer

Since the firm does not hold inventory or produce goods, its revenue would be equivalent to its net revenue. Its operating expenses would include items such as salaries, rent, and utilities. Therefore, gross profit could be identical to net revenue.

Question 19

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:

Accepted Answer

Since the $100,000 is being used to purchase a fixed asset (ski lift chairs), it will be recorded as an increase in the fixed asset account on the balance sheet. There is no increase in cash, liability or accounts receivable, so options A, C, and D are incorrect.

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. Cash flow refers to the money that flows in and out of a company over a certain period of time. If a company is experiencing difficulty in paying its bills on time, it may be an indicator of a cash flow problem. This can have serious implications for the company's ability to achieve its goals and objectives. Therefore, B is the best choice.

Quiz 17: Understanding Accounting and Financial Information