Which financial statement must be prepared before the others?
A) statement of cash flows
B) income statement
C) balance sheet
D) statement of retained earnings
What is the proper order for the different categories of cash flows reported on the statement of cash
flows?
A) financing activities, investing activities, and operating activities
B) operating activities, investing activities, and financing activities
C) operating activities, financing activities, and investing activities
D) investing activities, financing activities, and operating activities
The accounts of Yardy Company are as follows on November 30, of the current year:
Account Balance
Accounts Payable $26,5000
Accounts Receivable $15,600
Cash $73,000
Common Stock $37,000
Dividends $3,000
Insurance Expense $2,100
Retained Earnings $27,800
Salary Expense $15,000
Sales Revenue $19,900
Supplies $2,500
What is the total of the credit column in the trial balance at November 30, of the current year?
A) $94,300
B) $91,300
C) $111,200
D) $222,400
Wetzel Company has the following accounts and balances at the end of the fiscal year:
Retained Earnings (Beginning Balance) $54,000
Cash $10,000
Receivables $12,000
Dividends Declared $10,000
Accounts Payable $15,000
Common Stock $60,000
Long-term Investments $108,500
Service Revenue $99,000
Supplies Expense $38,000
Utilities Expense $28,500
Income Tax Expense $21,000
Prepare the Income Statement, Statement of Retained Earnings, and Balance Sheet for the fiscal year
ended December 31, 2022. Headings are not required.
income Statement
Statement of Retained Earnings
Balance Sheet
Define the following terms:
Term Definition
Accrual Accounting
Revenue Principle
Expense Recognition Principle
Answer:
Term Definition
Accrual Accounting Accounting that records the impact of a
business event as it occurs, regardless of
whether the transaction affected cash.
Revenue Principle The basis for recording revenues - tells
accountants when to record revenue and the
amount of revenue to record.
Expense Recognition Principle The basis for recording expenses. Directs
accountants to measure the expenses, and to
match them against the revenues earned
during that same period.
Put an "X" in the appropriate box to indicate if the normal balance of an account is a debit or a credit
balance.
NORMAL BALANCE NORMAL BALANCE
IS A DEBIT IS A CREDIT
ACCOUNTS
Cash
Service Revenue
Accounts Receivable
Accounts Payable
Utilities Expense
Common Stock
Notes Payable
Land
Retained Earnings
Dividends
Rent Expense
Journalize the following transactions (omit explanations)
June 1. John invested $40,000 in the business, which in turn issued common stock to him.
June 3. The business purchased equipment on account for $7,000.
June 5. The business provided engineering services on account, $13,000.
June 6. The business paid salary to the receptionist, $5,000.
June 7. The business received cash from a customer as payment on account $8,000.
Date Accounts and Explanation Debit Credit
The following accounts and balances are taken from Moore Company's adjusted trial balance:
Accounts Payable $8,000
Accounts Receivable 3,300
Accumulated Depreciation 1,000
Depreciation Expense 1,300
Dividends 2,400
Insurance Expense 2,500
Interest Revenue 1,240
Prepaid Insurance 2,320
Retained Earnings, Beginning
Balance 10,600
Salary Expense 26,100
Service Revenue 36,800
What is the ending balance in Retained Earnings after the closing entries are completed?
A) $5,740
B) $8,140
C) $16,340
D) $38,040
Answer: C
Complete the chart below by putting an "X" in the appropriate box:
Account
Closed with a debit
to the account
Closed with a
credit to the
account Not closed
Notes Payable
Prepaid Rent
Common Stock
Long-term Investment
Depreciation Expense
Dividends
Advertising Expense
Interest Revenue
Rent Revenue
Cost of Goods Sold
Selling Expense
Gain on Sale of Land
Unearned Revenue
Income Tax Expense
Fiscal year 2022 (April 1, 2022 - March 31, 2023) has been great for Murphy Incorporated. Net
income is higher than expected. Management believes that fiscal year 2023 will not be as profitable.
On December 31, 2022, Murphy signed a one-year contract for monthly advertising for $2,400,000.
The advertising began on January 1, 2023. The CEO has asked the accountant to expense the
$2,400,000 during fiscal year 2022.
You are the accountant. Comment on each of the following:
What is the proper accounting treatment?
State and briefly discuss which accounting
principle(s) is (are) involved?
Why would the CEO make this request?
What is your response to the CEO?
Answer:
What is the proper accounting
treatment?
On 1/1/2023, $2,400,000 should be recorded
as prepaid advertising. $200,000
($2,400,000/12 months) should be recorded
as an expense each month from January
2023 until December 2023.
Fiscal year 4/1/2022-3/31/2023: Advertising
Expense $600,000 ($200,000 × 3).
Fiscal year 4/1/2023-3/31/2024: Advertising
Expense $1,800,000 ($200,000 × 9).
State and briefly discuss which
accounting principle(s) is (are) involved?
The expense recognition principle states that
expenses must be recognized in the same
period in which any related revenues are
earned.
Why would the CEO make this request? The CEO wants to record all of the $2,400,000
as expense in fiscal year 2022. This would
make net income in fiscal year 2023 look
better. This unethical action would keep
$1,800,000 ($200,000 per month for 9
months) off of the 2023 fiscal year income
statement.
What is your response to the CEO? I would explain that our business must follow
GAAP and in this case, the expense
recognition principle. An expense of $200,000
must be recorded each month from January 1
until December 31, 2023. All business
decisions must be evaluated ethically.
A violation of the expense recognition
principle is unethical and would mislead
stockholders, creditors and other users of the
financial statements.
I would also remind the CEO of the AICPA Code
of Professional Conduct and state that I am
unable to comply with his request.
Adjusting entries:
A) are needed for all balance sheet accounts.
B) must be made on a daily basis to record supplies used during that day.
C) are needed because errors have been made in previous journal entries.
D) are made before the financial statements can be prepared.
The Accumulated Depreciation account:
A) is another term for depreciation expense.
B) represents the original cost of a plant asset.
C) is a contra asset account.
D) has a normal balance which is the same as its companion account.
The adjusted trial balance is used to prepare:
A) the balance sheet and the income statement only.
B) balance sheet, income statement, and statement of retained earnings.
C) the balance sheet only.
D) the income statement only.
Which of the following is NOT a correct statement about adjusting entries?
A) Every adjusting entry affects cash.
B) Every adjusting entry affects the balance sheet.
C) Every adjusting entry affects net income.
D) Adjusting entries are posted before the adjusted trial balance is prepared.
Complete the following chart to show the required adjusting entries for the following situations:
Type of Adjusting Entry
Account Debited in the
Adjusting Entry
Account Credited in the
Adjusting Entry
Prepaid Insurance
Depreciation Expense
Accrued Salaries
Accrued Interest Revenue
Unearned Service Revenue
Accrued Interest Expense
Supplies
Prepaid Rent
Answer:
Type of Adjusting Entry
Account Debited in the
Adjusting Entry
Account Credited in the
Adjusting Entry
Prepaid Insurance Insurance Expense Prepaid Insurance
Depreciation Expense Depreciation Expense Accumulated Depreciation
Accrued Salaries Salaries Expense Salaries Payable
Accrued Interest Revenue Interest Receivable Interest Revenue
Unearned Service Revenue Unearned Service Revenue Service Revenue
Accrued Interest Expense Interest Expense Interest Payable
Supplies Supplies Expense Supplies
Prepaid Rent Rent Expense Prepaid Rent
Powered by TCPDF (www.tcpdf.org)
