Accounting - Kenneth W. Boyd - E-Book

Accounting E-Book

Kenneth W. Boyd

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Get up to speed quickly--review and practice major conceptsin Accounting! Whether you're looking to improve your classroom experience, orsimply become more familiar with Accounting concepts, 1,001Accounting Practice Problems For Dummies is the hands-on toolyou need to get a step ahead. The book's practice questions andreview content go hand-in-hand with the content offered inAccounting For Dummies, ensuring that you have a workingknowledge of the most important concepts and skills inaccounting. This practical resource gives you access to tons of helpfulonline content, including practice problems in multiple-choiceformat, and customizable practice sets for self-directed study, allavailable on the go through your smartphone, laptop, or tablet.Practice problems are categorized as easy, medium, or hard, so youcan build your knowledge at your own pace. A perfect companion foranyone looking to increase their Accounting skills, this book hasthe added benefit of offering review and practice useful forindividuals looking to pass their Accounting courses and lay thegroundwork for an Accounting career. * Filled with practice questions, review content, tips, andexplanations for anyone interested in Accounting principles * Includes tons of online practice content, such as multiplechoice questions and customizable practice sets, all available withpurchase of the book * Ideal for individuals looking to pass an Accounting class orstart a career in Accounting * Serves as an excellent companion resource to Accounting ForDummies Packed with endless practice opportunities, 1,001 AccountingPractice Problems For Dummies has everything you need tojumpstart your journey into Accounting and financialdocumentation.

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1,001 Accounting Practice Problems For Dummies®

Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com

Copyright © 2015 by John Wiley & Sons, Inc., Hoboken, New Jersey

Media and software compilation copyright © 2015 by John Wiley & Sons, Inc. All rights reserved.

Published simultaneously in Canada

No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

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Library of Congress Control Number: 2014954678

ISBN 978-1-118-85328-3 (pbk)

1,001 Accounting Practice Problems For Dummies®

Visit www.dummies.com/cheatsheet/1001accounting to view this book's cheat sheet.

Table of Contents

Cover

Introduction

What You’ll Find

Beyond the Book

Where to Go for Additional Help

Part I: The Questions

Chapter 1: Elements of Accounting

The Problems You’ll Work On

What to Watch Out For

Chapter 2: Financial Effects of Transactions

The Problems You’ll Work On

What to Watch Out For

Chapter 3: The Bookkeeping Cycle

The Problems You’ll Work On

What to Watch Out For

Chapter 4: The Bookkeeping Cycle: Adjusting and Closing Entries

The Problems You’ll Work On

What to Watch Out For

Chapter 5: Understanding and Reporting Profit

The Problems You’ll Work On

What to Watch Out For

Chapter 6: Reporting Financial Conditions on the Balance Sheet

The Problems You’ll Work On

What to Watch Out For

Chapter 7: Coupling the Income Statement and the Balance Sheet

The Problems You’ll Work On

What to Watch Out For

Chapter 8: Reporting Cash Flows

The Problems You’ll Work On

What to Watch Out For

Chapter 9: Reporting Changes in Owners’ Equity

The Problems You’ll Work On

What to Watch Out For

Chapter 10: Choosing Accounting Methods

The Problems You’ll Work On

What to Watch Out For

Chapter 11: Profit Behavior Analysis

The Problems You’ll Work On

What to Watch Out For

Chapter 12: Manufacturing Cost Accounting

The Problems You’ll Work On

What to Watch Out For

Chapter 13: Investment Analysis Fundamentals

The Problems You’ll Work On

What to Watch Out For

Chapter 14: Financial Statement Analysis

The Problems You’ll Work On

What to Watch Out For

Part II: The Answers

Chapter 15: Answers and Explanations

About the Author

Cheat Sheet

Advertisement Page

Connect with Dummies

End User License Agreement

Guide

Cover

Table of Contents

Begin Reading

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Introduction

This book is intended for anyone who needs to brush up on basic accounting concepts. You may use this book as a supplement to material you’re learning in an undergraduate accounting course. If you’re working as an accountant, this book may help you with concepts that you need to review. The book provides a basic level of accounting knowledge. After you understand these concepts, you can move on to more complex accounting issues.

What You’ll Find

The 1,001 accounting questions are grouped into 14 chapters that cover everything from absorption costing to warranty expense. The last chapter of the book contains the answers, with detailed answer explanations. If you miss a question, take a close look at the answer explanation. Understanding where you went wrong will help you learn the concepts.

Beyond the Book

This product comes with a free online Cheat Sheet that helps you increase your accounting knowledge. Check it out at www.dummies.com/cheatsheet/1001accounting.

Where to Go for Additional Help

This book covers a great deal of accounting material. Because there are so many topics, you may struggle in some areas. If you get stuck, consider getting some additional help.

In addition to getting help from your friends, teachers, or coworkers, you can find a variety of great materials online. If you have Internet access, a simple search often turns up a treasure trove of information. You can also head to www.dummies.com to see the many articles and books that can help you in your studies.

1,001 Accounting Practice Problems For Dummies gives you just that — 1,001 practice questions and answers that increase your understanding and give you an opportunity to apply accounting concepts. If you need more in-depth study and direction for your accounting courses, you may want to try out the following For Dummies products (or their companion workbooks), all published by Wiley. There are For Dummies books that cover each of the major areas of study in accounting:

Accounting For Dummies,

by John A. Tracy:

This book provides an introduction to the most important accounting concepts. You’ll learn about cash versus accrual accounting and how accounting transactions are processed.

Cost Accounting For Dummies,

by Ken Boyd:

This book explains how costs are identified and assigned to products and services. The text also explains how companies price their products and how firms calculate profit.

Financial Accounting For Dummies,

by Maire Loughran:

Use this book to understand how accountants generate financial statements. This book explains how accounting information is presented to investors, lenders, and regulators.

Managerial Accounting For Dummies,

by Mark P. Holtzman:

Try this book if you need to understand how management uses accounting to make decisions. For example, managers need accounting data to decide whether they should manufacture a component part themselves or buy the part from an outside firm. This book explains how accounting is used inside an organization.

Part I

The Questions

Visit www.dummies.com for free access to great For Dummies content online.

In this part . . .

The only way to become proficient in accounting is through a lot of practice. Fortunately, you now have 1,001 practice opportunities right in front of you. These questions cover a variety of accounting concepts and range in difficulty from easy to hard. Master these problems and you’ll be well on your way to a solid foundation in accounting concepts.

Here are the types of problems that you can expect to see:

Elements of accounting (

Chapter 1

)

Financial effect of transactions (

Chapter 2

)

Bookkeeping cycle and adjusting and closing entries (

Chapters 3

and

4

)

Understanding and reporting profit (

Chapter 5

)

Reporting financial conditions on the balance sheet (

Chapter 6

)

Coupling the income statement and balance sheet (

Chapter 7

)

Reporting cash flows (

Chapter 8

)

Reporting changes in stockholders’ equity (

Chapter 9

)

Choosing accounting methods (

Chapter 10

)

Profit behavior analysis (

Chapter 11

)

Manufacturing cost accounting (

Chapter 12

)

Investment analysis and financial statement analysis (

Chapters 13

and

14

)

Chapter 1

Elements of Accounting

Accounting is a subject that requires you to learn concepts in a specific order. That’s because concept B builds upon what you learned about concept A. In fact, an accounting student can get very frustrated trying to learn a concept by jumping ahead and not understanding earlier concepts. This chapter provides some of the critical elements of accounting. You need these concepts before moving on to any other accounting topics.

The Problems You’ll Work On

In this chapter, you see a variety of algebra problems:

Working with transactions that change the accounting equation

Defining assets, liabilities, equity, revenue, and expenses

Understanding the differences between cash-basis and accrual-basis accounting

Compiling the income statement using revenue and expense transactions

Using the balance sheet and the income statement

Types of Business Entities

1–5

1. Business entities can legally be organized in a variety of ways. What is a common characteristic among all business entity types?

2. What business type is a single-owner business?

3. Entering into a business with another person is an example of what type of business entity?

4. Why is a sole partnership not one of the ways of legally organizing a business?

5. Which business type is most difficult to create initially but, once created, makes it easier to raise funds and provides liability protection for the owners?

The Accounting Equation and Why It Balances

6–30

6. What is the proper format of the basic accounting equation?

7. What are assets?

8. What makes a vehicle purchased with a loan an example of an asset?

9. What are liabilities?

10. Why is money owed to a bank on a loan considered a liability?

11. What does it mean when a company purchases something on account?

12. Why is a loan from a bank not an asset?

13. Why is office equipment an example of an asset?

14. What is the name for resources owned by a company?

15. A business has assets of $135,000 and liabilities of $45,000. Calculate the amount of owners’ equity.

16. A business has liabilities of $345,700 and owners’ equity of $154,300. Calculate the amount of assets the company has.

17. At the end of an accounting period, a company’s total assets equaled $1,450,000, and owners’ equity was $654,000. How much were the company’s liabilities?

18. At the end of an accounting period, a company’s total assets equaled $576,000, and liabilities equaled $245,000. How much was the company’s owners’ equity?

19. At the end of an accounting period, a company’s owners’ equity equaled $2,376,000, and its liabilities equaled $142,000. How much were the company’s assets?

20. What does it mean when a business has negative retained earnings?

21. What is the effect on the accounting equation if a company buys a truck with a cash down payment of $5,000 and borrows the remaining $25,000?

22. What is the effect on the accounting equation when a company pays cash for purchases of inventory?

23. What is the effect on the accounting equation when a company obtains a loan to purchase a delivery truck?

24. A company owes a supplier $37,000 for inventory purchased a week ago. What is the effect on the accounting equation if the company makes a $20,000 payment?

25. What is the effect on the accounting equation when owners contribute a delivery truck to a company?

26. What is the effect on the accounting equation when a company earns revenue by selling a product and collects the amount of the sale in cash?

27. What is the impact on the accounting equation when a company uses its cash to pay for office expenses such as rent and utilities?

28. What does it mean when a business is highly leveraged?

29. The owners of a start-up invest $1,000,000 into the business. After one year of operations, the business has assets of $850,000 and losses of $300,000. What are the total liabilities at the end of the first year?

30. The owners of a start-up invest $50,000 into the business. After one year of operations, the business has assets of $350,000 and liabilities of $200,000. How much profit or loss did the business generate during the first year?

Cash-basis Accounting versus Accrual-basis Accounting

31–52

31. What is the main characteristic of cash-basis accounting?

32. What is the main characteristic of accrual-basis accounting?

33. What is the primary difference between cash-basis and accrual-basis accounting?

34. Cash-basis accounting is most frequently used by which group?

35. Accrual-basis accounting is most frequently used by which group?

36. Why is cash-basis accounting not used by large businesses?

37. When are transactions recorded under accrual-basis accounting?

38. Al LaMode Ice Cream Company produces high-quality ice cream that is distributed to shops in resort areas. On July 1, the company purchased the raw materials to make the ice cream. On July 15, the process was complete, and the product was stored in the freezer ready to ship to customers. On July 31, Ken and Mary’s Ice Cream Shop ordered 200 pounds of ice cream. On August 1, Al LaMode delivered the ice cream to Ken and Mary’s Ice Cream Shop. Ken and Mary paid Al LaMode on August 10. Ken and Mary sold all the ice cream between August 5 and August 12. If it uses accrual-basis accounting, when will Al LaMode record the revenue from the sale to Ken and Mary?

39. Al LaMode Ice Cream Company produces high quality ice cream that is distributed to shops in resort areas. On July 1, the company purchased the raw materials to make the ice cream. On July 15, the process was complete, and the product was stored in the freezer ready to ship to customers. On July 31, Ken and Mary’s Ice Cream Shop ordered 200 pounds of ice cream. On August 1, Al LaMode delivered the ice cream to Ken and Mary’s Ice Cream Shop. Ken and Mary paid Al LaMode on August 10. Ken and Mary sold all the ice cream between August 5 and August 12. If it uses cash-basis accounting, when will Al LaMode record the revenue from the sale to Ken and Mary?

40. Little Falls Bandages sells medical supplies to college football teams. The teams pay a flat fee of $10,000 on August 1 for as many bandages as they need during the football season, September through November. If they use cash-basis accounting, how much revenue does Little Falls record in September?

41. Furd Buggy Company uses electricity in its retail shop during the month of May. On June 15, the company receives the bill for the May electricity usage for $759. Furd pays the bill on July 1. If Furd Buggy Company uses accrual-basis accounting, on which month’s income statement will the expense appear, and how much will it be?

42. Credit Cab Corporation buys fuel from a fuel bank, paying $1,000,000 on January 1 for 250,000 gallons of fuel. The company uses the last of the 250,000 gallons on July 1. The January income statement shows a fuel expense of $1,000,000. What basis of accounting does Credit Cab use?

43–49 Use the following information to answer the questions. The following is selected information regarding Ace, Inc. for the fiscal year 2015:

Cash receipts from sales made in 2015: $750,000Cash payments for purchases of inventory in 2015: $325,000The company did not have a beginning inventory balance in 2015.Cash payments for other expenses: $375,000Year-end receivables balance from customers for sales made during the year 2015: $155,000Cost of products in ending inventory that have not been sold: $120,000Liability for unpaid expenses that were incurred in 2015: $450,000

43. Calculate the amount of cash-basis revenues for Ace, Inc. for 2015.

44. Calculate the amount of cash-basis expenses for Ace, Inc. for 2015.

45. Calculate the amount of cash-basis profit or loss for Ace, Inc. for 2015.

46. Calculate the amount of accrual-basis revenues for Ace, Inc. for 2015.

47. Calculate the accrual-basis cost of goods sold for Ace, Inc. for 2015.

48. Calculate, using the accrual basis, other expenses for Ace, Inc. for 2015.

49. Calculate the accrual-basis profit or loss for Ace, Inc. for 2015.

50–52 Use the following information to answer the questions. XYZ, Inc. had the following transactions during 2015:

Sales on account: $5,000Cash sales: $6,000Amount collected as customer deposits in 2016: $3,000Amount paid for utilities expenses incurred in 2015: $2,000Amount paid in advance for services to be used in 2016: $1,000

50. Calculate the amount of cash-basis revenues for XYZ, Inc. for 2015.

51. Calculate the amount of cash-basis expenses for XYZ, Inc. for 2015.

52. Calculate the amount of difference between accrual-basis revenues and cash-basis revenues for XYZ, Inc. for 2015.

Profit Activities and the Income Statement

53–72

53. What is the name of the financial statement that summarizes a company’s revenues, other income, expenses, and losses?

54. What is another name for an income statement?

55. What is the financial statement that shows the business profit or loss during a period?

56. The financial statement you are looking at lists revenues and gains, along with some other items. What financial statement are you viewing?

57. Other than revenues and expenses, what other items may be found on an income statement?

58. A banker asks a borrower for information on the company’s revenue growth over the last few years. What financial statement will the borrower provide the banker?

59. What information is presented on an income statement?

60. Which of the following items appear on an income statement?

deferred revenue

current liabilities

loss on the sale of equipment

cash received from customers

dividends paid to stockholders

61. Identify the expenses that must be listed separately on the income statement to comply with accounting rules.

62–64Use the following information to answer the questions. Hummus Records has the following current-year information in its accounting records:

Sales revenue: $47,000Interest revenue: $1,200Selling expenses: $14,000General expenses: $3,000Cost of goods sold: $20,000Tax expense: $2,200

62. Calculate the gross profit for Hummus Records.

63. Calculate the operating income for Hummus Records.

64. Calculate the income before taxes for Hummus Records.

65–68 Use the following information to answer the questions. The following data is available for Koala Kuddles for 2015:

Sales revenue: $15,000,000Cost of goods sold: $12,400,000Interest expense: $125,000Selling, general, and administrative expense: $1,450,000Loss on the sale of equipment: $275,000Income tax expense: $200,000Cost of new equipment: $800,000

65. What is the amount of gross profit on Koala Kuddles’ 2015 income statement?

66. What is the amount of operating earnings on Koala Kuddles’ 2015 income statement?

67. What is the amount of earnings or loss before income taxes on Koala Kuddles’ 2015 income statement?

68. What is the amount of net income or loss on Koala Kuddles’ 2015 income statement?

69–72 Use the following information to answer the questions. The following data is available for Petal Bikes for 2015:

Sales revenue: $8,000,000Gross margin: $2,000,000Operating earnings: $650,000Earnings before income tax: $420,000Net income: $180,000Petal Bikes had no gains or losses and no interest revenue in 2015.

69. What is the amount of income tax expense on Petal Bikes’ 2015 income statement?

70. What is the amount of the cost of goods sold on Petal Bikes’ 2015 income statement?

71. What is the amount of selling, general, and administrative expenses on Petal Bikes’ income statement?

72. What is the amount of interest expense on Petal Bikes’ 2015 income statement?

Financial Condition and the Balance Sheet

73–78

73. What are the three primary financial statements?

74. What is the balance sheet sometimes called?

75. GameTime Caterers has presented its banker with a financial statement that displays the cash balance on hand, the amount owed to its suppliers, common stock, and retained earnings as of December 31, 2015. What statement did the company give to the banker?

76–78 Use the following information to answer the questions. The following data is available for Car Bop, Inc. for 2015:

Amounts owed by customers: $75,000Cost of unsold product: $90,000Cash balance: $110,000Amounts owed for unpaid purchases and expenses: $72,000Notes payable to bank: $73,000Unearned revenues: $10,000Cash sales for 2015: $227,000Credit sales for 2015: $133,000Cost of goods sold for 2015: $175,000

76. What are the total assets on Car Bop’s balance sheet?

77. What are the total liabilities on Car Bop’s balance sheet?

78. What is the total equity on Car Bop’s balance sheet?

Cash Flows and the Statement of Cash Flows

79–90

79. A banker is considering a loan to finance a vehicle for a small company but wants to make sure that the company will have enough cash to make the payments over the next three years. What statement should she look at?

80. The statement of cash flows includes a section called which of the following?

cash outflows

cash inflows

summary of cash

operating activities

spending activities

81. During the year, Organic Bricks Co. paid cash for a new delivery truck. Where on the statement of cash flows would that event appear?

82. During the year, Organic Bricks made the last payment on the mortgage on its building. How should the company classify this on the statement of cash flows?

83. Organic Bricks sold an old truck that originally cost $76,000. The book value of the truck was $26,000, and the company received $30,000 in cash from the buyer as full payment. How should the company reflect this transaction in the cash flows from investing activities?

84. Determine the amount of change in cash during the year based on the following:

Cash flow from operating activities: ($50,000)

Cash flow from investing activities: $20,000

Cash flow from financing activities: $50,000

Significant non-cash transactions include purchase of a building with a $250,000 note.

85. Determine the cash flow from investing activities during the year based on the following:

Cash flow from operating activities: $50,000

Cash flow from financing activities: $25,000

Net increase/(decrease) in cash during the year: ($40,000)

86. Determine the cash flow from financing activities during the year based on the following:

Cash flow from operating activities: $6,000

Cash flow from investing activities: ($5,000)

Net increase/(decrease) in cash during the year: $13,000

87. Determine the cash flow from operating activities during the year based on the following:

Cash flow from investing activities: $45,000

Cash flow from financing activities: ($55,000)

Cash at the beginning of the year: $270,000

Cash at the end of the year: $370,000

88–90 Use the following information to answer the questions. The following data is available for Lawn Paint Yard Service:

Proceeds received from issuance of stock: $20,000New equipment purchases: $130,000Amount of a new note payable: $65,000Proceeds from sale of old equipment with a book value of $40,000: $45,000Dividends paid: $40,000Dividends declared but unpaid: $10,000Cash flow from operating activities: $45,000

88. Calculate the cash flow from investing activities for Lawn Paint Yard Service.

89. Calculate the cash flow from financing activities for Lawn Paint Yard Service.

90. If Lawn Paint Yard Service started the year with a cash balance of $6,300, what was the balance of cash on hand at the end of the year?

Chapter 2

Financial Effects of Transactions

This chapter explains the three basic financial statements. You’ll go over the information found in each type of statement. The chapter also points out the financial impact of many accounting transactions. As an accountant, you need to understand how accounting activity affects each financial statement.

The Problems You’ll Work On

In this chapter, you see questions on these topics:

Going over the three basic financial statements

Finding out about prepaid assets and unearned revenue

Understanding cash versus credit sales and customer deposits

Reviewing how inventory costs are moved to cost of sales

Working with depreciation expense

What to Watch Out For

Don’t let common mistakes trip you up. Some of the following suggestions may be helpful:

Be careful when posting customer payments. Some customer payments are deposits. A customer deposit means that you haven’t delivered a product or service yet. You post customer deposits to a liability account.

Some expenses are paid in advance. Insurance premiums, for example, are paid before the period of insurance coverage. You post these premium payments to prepaid assets. The payments are considered an asset because you don’t have to pay cash later to cover the expense.

Inventory is an asset account. When you sell inventory, you move those costs from an asset account to cost of sales expense.

Depreciation expense is a non-cash item. Rather than crediting cash, you credit accumulated depreciation.

Classifying Business Transactions

91–99

91. What are the primary financial statements?

92. What is the name of the financial statement that summarizes a business’s assets, liabilities, and owners’ equity at the end of an accounting period?

93. What is the name of the financial statement that summarizes the profit-making transactions during a period of time?

94. What is the name of the financial statement that summarizes a business’s cash transactions during a period of time?

95. The primary activity of a business is focused on which of the following?

generating assets

generating a profit

creating jobs

communities

executive compensation

96. Which of the following transactions relates to generating cost of goods sold?

obtaining a loan from a bank

selling services to customers

purchasing a new machine for the factory

hiring a new employee

purchasing inventory

97. Which of the following is an example of a profit-making transaction?

obtaining a loan from a bank

selling services to customers

purchasing a new machine for the factory

hiring a new employee

purchasing inventory

98. Which of the following is an example of an investing activity?

obtaining a loan from a bank

selling services to customers

purchasing a new machine for the factory

hiring a new employee

purchasing inventory

99. Which of the following is an example of a financing activity?

obtaining a loan from a bank

selling services to customers

purchasing a new machine for the factory

hiring a new employee

purchasing inventory

Looking at Both Sides of Business Transactions

100–109

100. Which of the following is a responsibility of an accountant?

executing all business transactions

determining the business justification of every transaction

auditing the financial statements for accuracy

the operations of the business

recording of the transactions in the accounting records

101. The most important assets that are found on the balance sheets of most businesses that sell products are which of the following?

cash, accounts receivable, goodwill, and inventory

accounts receivable, other assets, inventory, and fixed assets

cash, accounts receivable, inventory, and fixed assets

cash, sales, inventory, and fixed assets

cash, accounts receivable, inventory, sales, and fixed assets

102. What types of liabilities do not usually require the payment of interest?

103–109 Use the following information to answer the questions. The following is a condensed balance sheet for Green Power, Inc. for the fiscal year 2015:

Cash: $125,000Accounts receivable: $150,000Inventory: $200,000Property, plant, and equipment: $330,000Total assets: $805,000Operating liabilities: $150,000Interest-bearing liabilities: $160,000Owners’ invested capital: $120,000Owners’ retained earnings: $375,000

103. Green Power, Inc. received $50,000 cash as a capital contribution from one of its owners. What impact did this transaction have on the balance sheet?

104. Green Power, Inc. took out a bank loan for $100,000 on January 1. The terms of the loan require Green Power to repay the loan in full in three years, plus make annual interest payments of $8,000 on December 31. What impact did this transaction have on the balance sheet on the day the company took out the loan?

105. Green Power, Inc. received a $25,000 payment from a customer as payment on the customer’s account. What impact did this transaction have on the balance sheet?

106. Green Power, Inc. made a principal payment of $80,000 on its bank loan. What impact did this transaction have on the balance sheet?

107. Green Power, Inc. made a $10,000 distribution of profit to its owners. What impact did this transaction have on the balance sheet?

108. Green Power, Inc. purchased equipment that cost $20,000 by making a down payment of $5,000 and financing the remainder with a new loan. What impact did this transaction have on the balance sheet?

109. Green Power, Inc. returned $15,000 of inventory previously purchased on account. The balance has not been paid yet. What impact did this transaction have on the balance sheet?

Concentrating on Sales

110–119

110. How does a company increase profits?

111. Subtracting expenses from revenues gives what?

112. Which of the following types of sales increase assets and revenue at the time cash is received?

cash sales and advanced payment sales

advance payment sales

cash sales

credit sales and advance payment sales

cash sales and credit sales

113. What type of sale transaction creates a liability and no increase in profit for the company?

subsequent cash sale

cash sale

credit sale

advance credit sale

customer deposit

114. What type of sale transaction increases cash and profit?

advance cash sale

cash sale

credit sale

advance credit sale

customer deposit

115. What type of sale transaction does not increase cash but does increase profit?

advance cash sale

cash sale

credit sale

advance credit sale

customer deposit

116. What type of sale transaction increases cash but does not increase profit?

subsequent cash sale

cash sale

credit sale

advance credit sale

customer deposit

117. Cash purchase of an airline ticket for a flight next month is an example of what kind of transaction to the airline?

118. Bebebanana Co. sells its product either as a cash sale or as a customer deposit. During the year the company received $17,100,000 in cash from customers. The company fulfilled 90% of the orders. What is the effect of these exchanges on the business’s financial condition?

119. A company receives $120 on January 1 as payment for a 12-month magazine subscription. Starting in January, the company will deliver the magazines at the end of each month for the next 12 months. How much is the unearned revenue balance on the company’s balance sheet as of June 30?

Concentrating on Expenses

120–129

120. Which financial statement includes expenses?

121. Gold Leaves Corporation purchased $47,000 worth of its product during the year. The company had $3,000 of product on hand at the beginning of the year and sold products that it paid $43,000 for during the year. How much expense related to the products sold will Gold Leaves record for the year?

122. A company buys a building for $2,000,000 — $1,000,000 cash immediately and another $1,000,000 in two weeks. When does the company record the expense of that building?

123. Kelly’s Cleaning Crew recorded expenses of $287,000 for the year. The expenses included increases to operating liabilities of $2,000 and depreciation on the van and cleaning equipment of $7,500. How did the expenses change the financial condition of the business?

124. A company pays $24,000 cash for a one-year insurance policy on October 1. As of December 31, the company has benefited from three months of insurance coverage. Calculate the amount of insurance expenses recorded as of December 31.

125. At the end of the year, the accountant for Bonnie Cameron Cosmetics notices a balance in the prepaid insurance account of $3,600 that was recorded when the three-year premium was paid on July 1. No other entries have been posted to the prepaid insurance account. How much expense should the accountant record at the end of the year?

126. Dragon Zombie Costumes had $95,000 in expenses on the income statement for the year. Of that amount, depreciation expense was $5,000. The company had no change in inventory or operating liabilities. How much cash was paid for expenses?

127. Dragon Zombie Costumes had $141,000 in expenses for the year. These expenses included depreciation expense of $8,500 and an increase in accounts payable of $2,400. How much cash did the company pay for expenses?

128. Kelly’s Clean Crew recorded expenses of $500,000 for the year. The expenses included an increase to wages payable of $3,500 and depreciation on the van and cleaning equipment of $7,500. How much cash did the company pay for expenses?

129. Gray House had $139,000 in expenses for the year. Inventory increased by $2,000, prepaid rent increased by $900, depreciation expense was $9,000, wages payable increased by $12,000, and sales tax payable increased by $4,600. What was the amount of cash used to pay expenses?

Before and after Transactions of Sales and Expenses

130–134 Use the following information to answer the questions. Assume that during the year a business had the following transactions related to sales:

Credit sales: $1,200,000Cash sales: $200,000Customer deposits: $500,000Amount of credit sales collected: $480,000Percentage of customer deposits delivered later in the year as completed sales to clients: 50% (of the $500,000)

130. How much did cash increase as a result of those transactions?

131. What is the total impact on receivables as a result of those transactions?

132. What is the total impact on operating liabilities as a result of those transactions?

133. Calculate the total impact on retained earnings as a result of those transactions.

134. Calculate the total impact on total assets as a result of those transactions.

135–139 Use the following information to answer the questions. Assume that during the year a business had the following transactions related to expenses:

Total expenses: $300,000As a result of those expenses, inventory increased by $45,000; property, plant, and equipment increased by $5,000 as a result of purchases; operating liabilities increased by $25,000; and depreciation expenses of $15,000 were recorded during the year.

135. How did those expenses change the net balance of property, plant, and equipment?

136. How did those transactions change the balance of retained earnings?

137. Using the balance sheet equation, how did those transactions change the balance of total assets?

138. How did those transactions change the balance of total liabilities and owners’ equity?

139. How did those expenses change the balance of cash?

Determining the Financial Effects of Profit or Loss

140–148

140. How do you calculate profit?

141. Which balance sheet accounts are not affected by sales and expense transactions?

142. Badabing only makes cash sales to its customers and pays all expenses in cash as incurred. During the year, sales were $53,000, and expenses were $42,000. What is the total impact on the financial position for the company as a result of operations during the past year?

143. Profit accumulated by a business since its inception is called what?

144. Badabing only makes credit sales to its customers and pays all expenses in cash as incurred. During the year, sales were $35,000, and expenses were $23,000. Collections from customers were $33,000. What is the total impact on the financial position for the company as a result of operations during the past year?

145–148 Use the following information to answer the questions. The following information is available from the accounting records of Gold Leaves Corporation:

Total sales revenue for the year: $3,200,000As a result of the sales, the receivable balance increased by $1,200,000, and unearned revenues increased by $2,000,000. In addition, the business recorded $4,000,000 in total expenses for the year. As a result of those expenses, inventory balance increased by $2,500,000, depreciation expense was $100,000, and accounts payable increased by $500,000.

145. What is the composite change in the year-end operating liabilities balance of the business caused by its profit-making activities during the year?

146. What is the composite change in total assets caused by the business’s profit-making activities during the year?

147. What is the net income or loss for the year?

148. What is the composite change in the year-end cash balance of the business caused by its profit-making activities during the year?

Chapter 3

The Bookkeeping Cycle

Bookkeeping is the nuts and bolts of accounting. It includes the most basic accounting activities. This chapter covers the chart of accounts and how accounts are created. You’ll see questions on debits and credits and review nominal versus permanent accounts. The chapter provides questions on posting journal entries for a variety of transactions.

The Problems You’ll Work On

In this chapter, you see problems on these accounting topics:

Creating a chart of accounts

Separating nominal and permanent accounts

Understanding how each type of account is debited or credited for changes in the account balance

Finding out about credit card fees and interest income transactions

Working with sales returns and allowances

What to Watch Out For

Don’t let common mistakes trip you up. Some of the following suggestions may be helpful:

You adjust income statements accounts to a zero balance at the end of each accounting period. They are

nominal

(temporary) accounts.

Debiting increases some accounts, while others are increased with a credit entry.

An increase in credit card sales also increases credit card fee expenses.

Gross sales less sales returns and allowances equals net sales.

Constructing Accounts

149–158

149. What is the purpose of accounts used in accounting?

150. What is the purpose of contra accounts?

151. A provided list of accounts includes depreciation expense, accounts receivable, accumulated depreciation, accounts payable, and sales revenue. Which of these accounts is an example of a commonly used contra asset?

152. What is the primary consideration when first setting up a chart of accounts?

153. What is a chart of accounts?

154. What type of account usually begins a chart of accounts?

155. What are the components of a chart of accounts?

156. What account does a business need in its chart of accounts to record expenses for renting its warehouse space?

157. What accounts does a business need in its chart of accounts to record sales to customers on account?

158. What accounts does a business need in its chart of accounts to record the receipt of cash for products to be delivered in the future?

Identifying Nominal versus Real Accounts

159–168

159. Which of the following accounts are real accounts (also known as permanent accounts)?

asset accounts, liability accounts, and expense accounts

asset accounts, liability accounts, and revenue accounts

revenue and expense accounts

asset accounts, liability accounts, and equity accounts

asset accounts and revenue accounts

160. Which of the following accounts are nominal accounts (also known as temporary accounts)?

asset accounts, liability accounts, and expense accounts

asset accounts, liability accounts, and revenue accounts

revenue and expense accounts

asset accounts, liability accounts, and equity accounts

asset accounts and revenue accounts

161. Which of the following accounts are real accounts?

balance sheet accounts

temporary accounts

profit or loss accounts

income statement accounts

revenue accounts

162. Which of the following describes nominal accounts?

They show balances at a point in time.

They’re reported on the income statement.

They’re used to determine the total assets of a business.

They’re reported on the balance sheet.

They’re permanent accounts.

163. Why are certain accounts closed at the end of the year?

164. Which of the following accounts is a nominal account?

accounts receivable

inventory

allowance for bad debt

prepaid insurance

rent expense

165. Which of the following is an example of a nominal account?

interest income

interest payable

accumulated depreciation

warranty accrual

unearned revenue

166. Which of the following is an example of a real account?

service revenue

inventory

cost of goods sold

interest expense

advertising expense

167. Which of the following is an example of a real account?

utilities expense

sales revenue

bad debt expense

unearned revenue

rent expense

168. Which of the following is an example of a real account?

interest income

salaries expense

dividend income

marketing expense

owners’ capital

Knowing Your Debits from Your Credits

169–183

169. The left side of an account is

the name of the account

the running balance of the account

the debit side

the credit side

the type of account

170. The right side of an account is

the name of the account

the running balance of the account

the debit side

the credit side

the type of account

171. A T account is

the accounting record maintained by a business

another name for a chart of accounts

another name for the accounts listed in the chart of accounts

a special account

a visual way of showing the basic form of an account

172. What type of accounts increase on the debit side?

173. What type of accounts increase on the credit side?

174. How are decreases to liabilities recorded in journal entries?

175. How are increases to revenues recorded in journal entries?

176. What is the normal balance of an account?

177. What three types of accounts normally have debit balances?

178. What three types of accounts normally have credit balances?

179. What is the journal entry to record a collection of $2,000 of outstanding accounts receivables?

180. What main type of accounts has a normal debit balance?

181.Credit to an account means

an increase to an account balance

a decrease to an account balance

recording an amount on the right side of an account

recording an amount on the left side of an account

the balance of an account

182. A company recorded a debit to an asset account for $1,000 and a credit to a liability account for $200. What else should be recorded to complete the journal entry?

183. An account will have a debit balance if

the total debits exceed the total credits

the credits exceed the debits

the account has a normal debit balance

the majority of the transactions recorded in the account are debits

it has a normal debit balance

Making Original Journal Entries

184–198

184.Posting refers to

preparing journal entries

preparing financial statements

analyzing transactions

recording journal entries

reviewing financial statements

185. What are the components of a journal entry?

186. Which of the following isn’t an example of a specialized journal?

sales journal

payroll journal

cash receipts journal

expense journal

disbursement journal

187. The general journal is most commonly used to record

recurring transactions

accounts receivable transactions

non-routine accounting entries

payables transactions

fixed asset details

188. A company records the following journal entry: cash: $5,000; sales revenue: $5,000. Provide a narrative description for the transaction.

189. A company records the following journal entry: cost of goods sold: $5,000; inventory: $5,000. Provide a narrative description for the transaction.

190. What is the proper journal entry to record a payment received from a customer on an outstanding balance?

191. What is the proper journal entry to record a $12,000 purchase of inventory on account?

192. What is the proper journal entry to record a payment on an outstanding balance owed to a supplier?

193. What is the proper entry to record a new three-year, 5% annual interest, $100,000 bank loan?

194. What is the proper entry to record a $25,000 investment in a business made by the owner?

195. What is the proper entry to record $8,000 of salaries paid to employees?

196. What is the proper entry to record a payment on a loan (principal portion only)?

197. What is the proper entry to record $1,500 of rent paid on June 30 to a landlord for the next six months’ rent?

198. What is the proper entry to record a purchase of a truck for $20,000 with a 50% cash down payment and the balance financed with a loan?

Recording Revenue and Income

199–218

199. If a company has $5,000 of credit card sales but has to pay $100 of credit card fees, how much should be recorded as cash?

200. When customers pay with credit cards, the seller

is responsible for any amounts unpaid

is involved in the collection process

receives cash equal to the amount of sale

receives cash equal to the amount of sale less any credit card fees

is responsible for paying the credit card fees after the customer pays his or her credit card company

201. One of the primary reasons sellers are willing to pay the credit card fee is to

increase sales, because customers enjoy the convenience of credit cards

have the security of credit card transactions

receive cash faster

encourage customers to pay the fee

encourage customers to use credit cards

202. A retailer is charged a credit card fee of 2.5% of credit card sales. If credit card sales total $25,000, what is the total credit card fee?

203. A company has cash sales of $40,000 and no other sales. What is the correct journal entry to record this sale?

204. A company has credit card sales of $3,000, and the bank charges a credit card fee of 2%. How much cash will the seller receive after the credit card fee is paid?

205. A company has credit card sales of $50,000, and the bank charges a 2% credit card fee. What is the correct journal entry to record this sale?

206. A company has credit sales of $20,000 and no other sales. What is the correct journal entry to record this sale?

207. A company processes $120,000 of credit card sales during a day. The bank fee for the credit cards is 3.5%. The entry to record the sales will include a credit to sales revenues of $120,000 and debits to

accounts receivable $120,000

cash $115,800 and interest expense $4,200

accounts receivable $115,800 and credit card fees $4,200

accounts receivable $115,800 and interest expense $4,200

cash $115,800 and credit card fees $4,200

208. If a company has $10,000 of credit card sales but has to pay $250 in credit card fees, how much should be recorded as sales revenues?

209. Which of the following is not a source of income for a company?

sales revenue

service revenue

liability income

interest income

investment income

210. How is investment income reported?

211. What makes the sales returns and allowances account a contra account?

212. A company receives returns from customers totaling $3,000 and refunds the cash to the customers. What is the proper journal entry for this transaction?

213. When customers pay with credit cards, the seller records

revenue in the amount of sale less the credit card fees

a receivable

cash equal to the amount of sale

the credit card fee as a credit

revenue for the full sales amount before the credit card fee amount

214. The cost of a company’s returned inventory is $1,000. What is the proper entry to record the returned inventory, assuming it can be sold again?

215. A company invests its cash in an interest-bearing money market account. During the month of January, it earns and receives $500 of interest. What is the proper entry to record the interest received?

216. A company has the following transactions during a day: cash sales: $13,500; credit sales: $32,500; credit card sales: $18,500. The company pays a credit card fee of 2% of credit card sales. What is the correct entry to record the day’s sales?

217–218 Use the following information to answer the questions. A company has the following sales during the day:

Sales on account: $20,000Cash sales: $10,000Credit card sales: $15,000The credit card fee paid to the bank is 2% of sales.

217. What is the total amount of revenue (before fees) recorded for the day?

218. What is the total amount of cash recorded for the day?

Recording Expenses and Losses

219–238

219. How many different expense accounts should a business have in its chart of accounts?

220. Expenses can be recorded by

decreasing assets

increasing assets

decreasing liabilities

increasing losses

increasing revenues

221. Expenses can be recorded by

decreasing liabilities

increasing assets

increasing liabilities

increasing losses

increasing revenues

222. What accounts are usually credited when expenses are recorded?

223. Which of the following type of expense causes a credit to inventory?

bad debt expense

depreciation expense

income tax expense

cost of goods sold

inventory sales expense

224. What account is credited when bad debt expense is recorded if the company doesn’t record any expense until it actually writes off the account?

225. What is the financial impact of paying expenses with cash?

226. What impact in terms of increase and decrease do expenses have on the balance sheet?

227. A company receives a bill for $550 for its electric service for the month of November. No prior entries were recorded related to this bill. What is the proper journal entry to record the payment of this bill?

228. In March, a company makes a payment of $2,500 for rent of its facilities for March. No prior entries were made relating to this. What is the proper journal entry to record the payment?

229. Employees earn a total of $25,000 during a pay period. What is the proper entry to record the payment of these wages?

230. What type of account is accumulated depreciation?

231. What is the correct entry to record depreciation expense?

232.