Accounting Principles Quiz

Questions and Answers

What happens to a company's acid-test ratio when it purchases 7-month US T-bills for cash?

It becomes negative.

It remains unchanged.

It decreases.

It increases. (correct)

Which of the following documents is equivalent to a balance sheet?

Income statement

Adjusted trial balance

Cash flow statement

None of the above (correct)

Most accounts in the income statement are classified as which type of accounts at the end of an accounting cycle?

Permanent accounts

Equity accounts

Current accounts

Temporary accounts (correct)

Which characteristic is part of the conceptual framework's qualitative aspect of faithful representation?

Neutrality Signup and view all the answers

Which of the following is included under the concept of relevance in the conceptual framework?

Confirmatory value Signup and view all the answers

Identify an asset that is not expected to be turned into cash within one year.

Copyright Signup and view all the answers

Which of the following would typically not require an adjusting entry?

Cash and Unearned revenue Signup and view all the answers

What type of account is rent collected in advance categorized as?

A liability account Signup and view all the answers

What is the total amount recorded as insurance expense for the options provided?

$5,500 Signup and view all the answers

Which of the following changes in the accounting profession did NOT occur in the last 20 years?

Movement toward cash-based accounting. Signup and view all the answers

What type of transaction do gains stem from?

Increases in equity from peripheral transactions of an entity. Signup and view all the answers

How much will New Shoes report in its ending balance sheet as current liabilities?

$11,500 Signup and view all the answers

Which of the following represents a typical liability classification for warranty claims?

Current liabilities Signup and view all the answers

What is the liability amount New Shoes will report as its long-term liabilities after considering the note payable?

$19,500 Signup and view all the answers

What is the total value of prepaid insurance recorded in the options provided?

$12,000 Signup and view all the answers

Which of the following is NOT a type of expense recorded by New Shoes in the year-end financial overview?

Accounts payable Signup and view all the answers

Which of the following is NOT an example of an internal transaction?

Paying the CEO salary. Signup and view all the answers

In a perpetual inventory system, what will the COGS and inventory amounts be after a sale of inventory costing $500 for $880?

COGS increases by 500; Inventory decreases by 500. Signup and view all the answers

Which of the following would NOT be considered a permanent account?

Cost of goods sold. Signup and view all the answers

What action should Green Energy Inc. take in response to potential changes in Federal subsidies?

Hire an independent valuation firm to estimate the expected life of the firm. Signup and view all the answers

What is the primary purpose of the Management Discussion and Analysis (MD&A) section in the annual report?

To address information asymmetry. Signup and view all the answers

If a company purchases inventory with cash, which financial ratio is most likely to change?

The current ratio will increase. Signup and view all the answers

What is the most important objective of financial reporting?

Making decisions. Signup and view all the answers

Which of the following options correctly reflects the impact of paying the CEO salary on financial accounts?

It is recorded as a reduction in cash and an expense. Signup and view all the answers

What is the role of disclosure notes in a company's financial statements?

They are an integral part of a company's financial statements. Signup and view all the answers

What does comprehensive income represent?

It is the change in equity from non-owner transactions. Signup and view all the answers

How should a company record a purchase order that it has received but not yet fulfilled?

A credit to deferred revenue. Signup and view all the answers

What is the prepaid insurance balance for Trek NV at the end of their first year?

$36,000 Signup and view all the answers

What account should be debited when Dakota Inc. purchases furniture on account for $4,000?

Property, Plant & Equipment (PP&E) Signup and view all the answers

What happens to the debt to equity ratio when a company issues common stock?

It decreases. Signup and view all the answers

What is the wage expense for Pizza City during the year?

$162,000 Signup and view all the answers

Why are adjusting entries necessary in accounting?

To update all account balances before preparing financial statements. Signup and view all the answers

What amount is Mark expecting to lose in litigation?

$20,000 Signup and view all the answers

Which adjusting entry reflects the recognition of revenue that was previously deferred?

Deferred Revenue to Service Revenue Signup and view all the answers

Which account represents an expense related to legal proceedings?

Litigation expense Signup and view all the answers

In the context of adjusting entries, what is the significance of the entry debiting Supplies and crediting Supplies expense?

It records an expense incurred for supplies used. Signup and view all the answers

What type of account is 'Wages payable' categorized as?

Liability Signup and view all the answers

Study Notes

Internal Transactions and Accounting

Internal transactions do not include paying a CEO's salary; these are external transactions.
Writing off uncollectible accounts, recording prepaid insurance expiration, and adjusting supplies accounts are considered internal transactions.
Permanent accounts do not include cost of goods sold, as they are temporary accounts closed at year-end.

Inventory and Cost of Goods Sold

Under a perpetual inventory system, COGS is increased by the cost of inventory sold ($500) and inventory is decreased by the same amount.
ABC Inc. sold inventory for $880, but the cost of goods sold is not impacted by sales price.

Financial Reporting Considerations

Green Energy Inc. should have an independent valuation firm assess firm value if reliant on federal subsidies amidst political uncertainty.
The Management Discussion and Analysis (MD&A) section mitigates information asymmetry, allowing management to communicate insights beyond standard accounting.

Ratios and Financial Metrics

A company purchasing inventory with cash results in a decrease in quick ratio, as quick assets are reduced.
Current ratio remains unaffected by this transaction since both current assets and current liabilities remain unchanged.

Relevance of Financial Reporting

The primary goal of financial reporting is to provide useful decision-making information.
Confirmatory value, completeness, and neutrality are components of relevance in the conceptual framework alongside predictive value.

Asset Classification and Adjustments

An asset expected to be held longer than a year is a copyright, while inventory and supplies are typically short-term assets.
Adjusting entries include prepaid expenses and unearned revenue, impacting income statement and balance sheet accounts.

Disclosure and Comprehensive Income

Disclosure notes are integral to financial statements, providing essential, relevant information required by accounting standards.
Comprehensive income encompasses net change in equity from all non-owner transactions, expanding beyond just net income.

Transaction Recording

Deferred revenue is credited when a purchase order is received without immediate fulfillment, reflecting liability.
Prepaid insurance at year-end involves calculating expense based on policy duration and recognizing the appropriate amount as a prepaid asset.

Organizational Changes in Accounting

Significant changes in the accounting profession include movements toward principle-based GAAP, audit reforms from Sarbanes-Oxley, and the codification of US GAAP.
Notably, the SEC has retained its authority over GAAP rather than handing it off to the private sector.

Wage Expense Determination

Wage expense for the year reflects changes in payable accounts and cash wages paid, calculated from starting and ending balances of wages payable.

Importance of Adjusting Entries

Adjusting entries are crucial for up-to-date account balances prior to financial statements preparation, encompassing prepaid expenses, deferred revenues, and liabilities.

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Description

Test your knowledge of internal transactions and inventory accounting principles with this quiz. Questions cover topics such as adjusting entries and cost of goods sold in a perpetual inventory system. Challenge yourself to see how well you understand these key accounting concepts.