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Exam 1 Review
Supplemental Instruction
Iowa State University
1. Which of the following best describes the objective of financial accounting?
a. To capture information about the activities of a company so that it can be reported
to decision makers inside the business.
b. To capture information about the activities of a company so that it can be reported
to decision makers outside the business.
c. To capture information about employee activities of a company so that it can be
reported to managers.
d. To capture information about investors, so a company can decide who to sell
stock to.
2. Which of the following statements regarding the income statement is not correct?
a. The equation for the income statement is Revenues + Expenses = Net Income
b. The income statement is usually the first financial statement that is prepared.
c. When listing the accounts on the income statement, revenues are on top, usually
with the largest, most relevant revenue listed first.
d. It is quite common for a business to provide goods and services in one month and
collect cash in a later month.
3. What are the three types of business activities that can be found on the Statement of Cash
a. Buying, selling, and investing
b. Investing, operating, and spending
c. Financing, operating, and investing
d. None of the above
4. At the end of the year, Carnations Inc. reported net income of $15,250 and paid dividends
of $4,300. If they ended the year with Retained Earnings of $20,650, what was their
Beginning Retained Earnings?
a. $10,000
b. $31,600
c. $29,000
d. $9,700
5. How does the balance sheet connect to the Statement of Cash Flows?
a. The Cash on the balance sheet is equal to the ending Cash reported on the
statement of cash flows.
b. The Cash on the balance sheet is equal to beginning Cash reported on the
statement of cash flows.
c. The balance sheet and the statement of cash flows are not connected
d. Both a and b
6. Which of the following is false regarding GAAP?
a. GAAP stands for Generally Accepted Accounting Principles
b. GAAP is a set of rules of accounting created by the Financial Accounting
Standards Board for use in the United States
c. The main goal of GAAP is to ensure companies produce financial information
that is useful in decision making
d. All are true of GAAP
7. Sarbanes-Oxley requires all of the following except:
1060 Hixson-Lied Student Success Center  515-294-6624  [email protected] 
a. Top managers of public companies must sign a report certifying their
responsibilities for the financial statements
b. Companies must maintain an audited system of internal controls to ensure
accuracy in the accounting reports
c. Companies must report financial statements every month
d. Companies must maintain an independent committee to oversee top management
and ensure that they cooperate with auditors
8. Which of the following is a disadvantage of incorporation?
a. Ability to raise capital
b. Double taxation of earnings
c. Ease of ownership transfer
d. Limited liability of stockholder
9. Receiving contributions from stockholders’ is a ___________ activity that can be found
on the statement of cash flow?
a. Investing
b. Operating
c. Financing
d. None of the above
10. All of the following are asset accounts except:
a. Cash
b. Inventory
c. Supplies
d. Accounts Payable
11. Which of the following best describes current liabilities?
a. Liabilities that will become noncurrent liabilities
b. Debts or obligations that will be paid, settled, or fulfilled within 12 months of the
balance sheet date
c. Liquid liabilities
d. Assets that are turned into liabilities in the current period
12. According to the Revenue Recognition Principle, when would revenue be recognized if
cash was received in a period after goods or services are provided?
a. In the current period
b. In the next period
c. At the end of the year
d. They must pay when the goods or services are provided
13. Total current assets, total current liabilities, and total stockholders’ equity can all be
found on:
a. Classified Balance Sheet
b. Balance Sheet
c. Income Statement
d. Classified Income Statement
14. Target Co. sold 25 purses at $32 each, which customers paid in cash. What is one of the
effects of the transaction on the accounting equation?
a. Cash -$800
b. Accounts Receivable +800
c. Sales Revenue +800
d. Sales Expense -800
15. Lulu Lemon recorded a transaction that decreased accounts receivables by $23,100 and
increased cash by $23,100. Which of the following best describes that transaction?
a. Lulu Lemon paid insurance costs of $23,100 for the next six months
b. Lulu Lemon had customers pay $23,100 off on their account balance
c. Lulu Lemon paid employees wages of $23,100
d. Lulu Lemon sold $23,100 of stock to investors
16. What are the effects on the accounting equation if Patchwork received a bill of $578 for
utilities in January that they will pay in February?
a. Prepaid utilities +578; Cash -578
b. Cash +578; Utilities Expense +578
c. Prepaid utilities +578; Accounts Payable +578
d. Utilities Expense +578; Accounts Payable +578
17. Which of the following has a normal debit balance?
a. Notes Payable
b. Expenses
c. Accounts Payable
d. Revenues
18. Thermos Co. had a net profit margin of 12%. What does this tell us about the company’s
a. For every dollar of revenues, Thermos Co earned 12 cents of income.
b. For every dollar of net income, Thermos Co earned 12 cents of revenue.
c. Their net income was 12% higher than last year.
d. Their revenue was 12% higher than last year.
19. Which of the following is not a limitation of the income statement?
a. Does not indicate the amount of cash the company is generating
b. Does not directly measure the change in the value of a company
c. Uses estimates to measure income
d. All of the above are limitations of the income statement
20. paid for advertising for the year on January 1, 2012. Under the accrual method,
when would they record the expense?
a. When cash is paid
b. When the expense is incurred
c. When customers see the advertising
d. When customers that saw the advertising use their website
21. StoreCo receives $40,000 for newspaper subscriptions. They have delivered 25% of the
newspapers to subscribers. What revenue can StoreCo report?
a. 0
b. 30,000
c. 25,000
d. 10,000
22. Which of the following accounts would NOT increase with a debit?
a. Cash
b. Cost of Goods Sold
c. Dividends
d. Sales Revenue
23. Which of the following situations would result in a $200 credit to cash?
a. Purchasing machinery for $200
b. Taking out a loan for $200
c. Selling machinery for $200
d. Having net income equal to $200
24. Which of the following is an advantage of a sole proprietor?
a. Ease of ownership transfer
b. Income is only taxed once
c. Legal protection
d. Double Taxation
25. The balance sheet is the company’s financial position at a ______?
a. Period of time
b. Annual Report
c. Point of Time
d. Financial Year
26. The current ratio would include all of the following accounts except…
a. Inventory
b. Cash
c. Current Liabilities
d. Retained Earnings
27. Which of the following best represents the matching principle?
a. Prepaying rent for a year
b. Target expenses electricity costs for next year
c. Target expenses electricity costs for the current month
d. Recording revenue for receiving cash before performing a service
28. Which event would not constitute a transaction?
a. Dylan orders a T.V.
b. Jeff’s Pizza delivers the pizza that you ordered and you pay cash
c. Best Buy pays off a loan from Wells Fargo
d. Dylan’s T.V. arrives that he orders.