Horngren Ima16 Tif 15 GE

Introduction to Management Accounting, 16e, Global Edition (Horngren)
Chapter 15 Basic Accounting: Concepts, Techniques, and Conventions
15.1 Questions
1) Which financial statement summarizes the operating performance of a company over a period of time?
A) statement of cash flows
B) statement of stockholders' equity
C) balance sheet
D) income statement
Answer: D
Diff: 1
LO: 15-1
AACSB: Reflective thinking skills
Learning Outcome: None
2) I want to know where a company stands financially at December 31, 2014. Which financial statement
should I use?
A) statement of cash flows
B) statement of stockholders' equity
C) statement of retained earnings
D) balance sheet
Answer: D
Diff: 2
LO: 15-1
3) What do liabilities and stockholders' equity have in common?

A) They are both held by nonowners of the company.
B) They are both held by owners of the company.
C) They are both creditors.
D) They are both claims on a company's assets
Answer: D
Diff: 2
LO: 15-1
1
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4) The income statement summarizes a company's operating performance ________ and the balance sheet
shows a company's financial position ________.
A) at a point in time; over a period of time
B) at a point in time; at a point in time
C) over a period of time; over a period of time
D) over a period of time; at a point in time
Answer: D
Diff: 1
LO: 15-1
5) Any event that affects the financial position of an organization and requires recording is called a(n)
________.
A) transaction
B) account
C) posting
D) recognition principle
Answer: A
Diff: 1
LO: 15-1
6) The statement of financial position is also called the ________.

A) income statement
B) statement of cash flows
D) balance sheet
Answer: D
Diff: 1
LO: 15-1
7) Economic resources that a company owns and expects to provide future benefits are called ________.
A) stockholders' equity
B) assets
C) liabilities
D) retained earnings
Answer: B
Diff: 1
LO: 15-1
2
8) For a corporation, the excess of assets over liabilities are called ________.
A) retained earnings
B) paid-in capital
C) common stock
D) stockholders' equity
Answer: D
Diff: 1
LO: 15-1
9) An entity's economic obligations to nonowners are called ________.

A) owners' equity
B) liabilities
C) assets
Answer: B
Diff: 1
LO: 15-1
10) Which financial statement discloses the economic resources of the organization and the claims against
those resources?
A) income statement
B) statement of cash flows
D) balance sheet
Answer: D
Diff: 1
LO: 15-1
11) The main sections of the balance sheet include ________.

A) revenues, assets and liabilities
B) assets, liabilities and expenses
C) expenses, revenues and stockholders' equity
D) assets, liabilities and stockholders' equity
Answer: D
Diff: 1
LO: 15-1
3
12) Which of the following statements is FALSE?
A) Assets are economic resources that are expected to provide future benefits.
B) Liabilities are economic obligations or claims against the assets of an organization by nonowners.
C) Assets must always equal the sum of liabilities and owners' equity.
D) Owners' equity equals the sum of assets and liabilities.
Answer: D
Diff: 1
LO: 15-1
AACSB: Analytic skills
13) The ownership claim arising from funds contributed by the owners of the business is called ________.
A) liabilities
B) retained earnings
C) note payable
D) paid-in capital
Answer: D
Diff: 1
LO: 15-1
14) The ownership claim arising from the reinvestment of previous profits is called ________.
A) net assets
B) stockholders' equity
C) investment income
Answer: D
Diff: 1
LO: 15-1
15) In a corporation, stockholders' equity has two parts called ________ and ________.
A) dividends; net profit
B) paid in capital; dividends
C) net profit; retained earnings
D) paid-in capital; retained earnings
Answer: D
Diff: 1
LO: 15-1
4
16) A transaction is any event that affects the financial position of an organization and requires recording.
Answer: TRUE
Diff: 1
LO: 15-1
17) Accounting information only helps assess past financial performance.

Answer: FALSE
Diff: 1
LO: 15-1
18) A corporation is not a separate legal entity from its owners.

Answer: FALSE
Diff: 1
LO: 15-1
19) The balance sheet shows a company's financial status at only one point in time.
Answer: TRUE
Diff: 1
LO: 15-1
20) Liabilities are economic resources.

Answer: FALSE
Diff: 1
LO: 15-1
21) Owners' equity represents the excess cash a company has made.
Answer: FALSE
Diff: 2
LO: 15-1
22) Liabilities are the entity's economic obligations to owners.

Answer: FALSE
Diff: 1
LO: 15-1
5
23) For a corporation, assets must equal liabilities plus paid-in capital.
Answer: FALSE
Diff: 2
LO: 15-1
24) Stockholders' equity is composed of paid-in capital and retained earnings.

Answer: TRUE
Diff: 1
LO: 15-1
15.2 Questions
1) Amounts owed to vendors for purchases on credit are called ________. Amounts due from customers
for credit sales are called ________.
A) accounts payable; notes receivable
B) notes payable; notes receivable
C) accounts payable; accounts receivable
D) debt payable; debt receivable
Answer: C
Diff: 2
LO: 15-2
2) A stockholders contributed $100,000 in exchange for stock in the company. What is the effect of this
transaction?
A) assets increase and liabilities increase
B) assets increase and revenues increase
C) expenses increase and revenues increase
D) assets increase and paid-in capital increases
Answer: D
Diff: 2
LO: 15-2
6
3) Which of the following statements report the amount of net income earned by a company for a period
of time?
A) balance sheet and income statement only
B) income statement and statement of cash flows only
C) income statement, statement of retained earnings and statement of stockholders' equity
D) balance sheet and statement of cash flows only
Answer: C
Diff: 2
LO: 15-2
4) Which of the following explains the change in Retained Earnings from the beginning of the year to the
end of the year?
A) revenues and expenses
B) contributions by owners
C) purchases of inventory
D) a purchase of a plant asset
Answer: A
Diff: 2
LO: 15-2
5) Cash collections from customers who purchased goods on credit will decrease ________.
A) Accounts Receivable
B) Accounts Payable
C) Cash
D) Retained Earnings
Answer: A
Diff: 2
LO: 15-2
6) A sale of inventory results in a(n) ________ in stockholders' equity equal to the selling price of the
inventory. A sale of inventory also results in a(n) ________ in stockholders' equity equal to the cost of the
inventory sold.
A) decrease; increase
B) increase; increase
C) increase; decrease
D) decrease; decrease
Answer: C
Diff: 2
LO: 15-2
7
7) The acquisition of inventory for cash will ________.
A) increase liabilities and decrease stockholders' equity
B) decrease assets and decrease liabilities
C) increase assets and decrease liabilities
D) increase assets and decrease assets
Answer: D
Diff: 2
LO: 15-2
8) The acquisition of inventory on account will ________.

A) increase assets and decrease stockholders' equity
B) decrease assets and decrease liabilities
C) increase assets and increase liabilities
D) increase assets and increase stockholders' equity
Answer: C
Diff: 2
LO: 15-2
9) A cash payment on accounts payable will ________.

A) increase assets and increase liabilities
B) increase assets and increase stockholders' equity
C) decrease assets and decrease liabilities
D) decrease assets and increase stockholders' equity
Answer: C
Diff: 2
LO: 15-2
10) Increases in ownership claims arising from the delivery of goods are called ________.
A) expenses
B) profits
C) assets
D) revenues
Answer: D
Diff: 1
LO: 15-2
8
11) Decreases in ownership claims arising from the delivery of goods are called ________.
A) revenues
B) profits
C) liabilities
D) expenses
Answer: D
Diff: 1
LO: 15-2
12) Consider a firm that provides services to customers. To record revenue, which of the following
conditions must be met?
A) the firm must render the services only
B) the firm must render the services and receive cash or a promise of payment in the future
C) the firm must render the services and receive cash
D) the firm must promise to render the services in the future and receive cash
Answer: B
Diff: 3
LO: 15-2
13) Increases in revenues will ________. Increases in expenses will ________ .

A) increase Retained Earnings; increase Retained Earnings
B) increase Retained Earnings; decrease Retained Earnings
C) decrease Paid in Capital; decrease Paid in Capital
D) increase assets; increase liabilities
Answer: B
Diff: 1
LO: 15-2
9
14) The following information was extracted from the accounting records of Vogel Company:
Beginning Paid-in Capital $90,000

Beginning Retained Earnings $300,000
Beginning Assets $455,000
Contributions by Owners $0
Revenues $200,000
Expenses $155,000
At the beginning of the period, what is the total amount of liabilities?

A) $65,000
B) $100,000
C) $155,000
D) $245,000
Answer: A
Diff: 2
LO: 15-2
15) The following information was extracted from the accounting records of Brankov Company:
Beginning Paid-in Capital $90,000

Beginning Retained Earnings $300,000
Beginning Assets $455,000
Contributions by Owners $0
Cash dividends declared $0
Revenues $200,000
Expenses $155,000
At the end of the period, what is the total amount of stockholders' equity?
A) $65,000
B) $135,000
C) $390,000
D) $435,000
Answer: D
Diff: 2
LO: 15-2
10
16) The following information was extracted from the accounting records of Kristie Company:
Paid-in Capital, December 31, 2014 $87,000

Retained Earnings, December 31, 2014 $211,000
Total Assets, December 31, 2014 $455,000
Revenues for year ended December 31, 2015 $200,000
Expenses for year ended December 31, 2015 $165,000
Cash Dividends Declared $0
Additional investments by owners in 2015 $0
At December 31, 2015, what is the total amount of liabilities?

A) $45,000
B) $150,000
C) $157,000
D) $272,000
Answer: D
Diff: 2
LO: 15-2
17) The following information was extracted from the accounting records of Yamaguchi Company:

Revenues for year ended December 31, 2015 $200,000
Expenses for year ended December 31, 2015 $165,000
Additional investments by owners in 2015 $10,000
At December 31, 2014, what is the total amount of liabilities?

A) $45,000
B) $150,000
C) $157,000
D) $272,000
Answer: C
Diff: 2
LO: 15-2
11
18) Amounts due from customers are called accounts payable.
Answer: FALSE
Diff: 2
LO: 15-2
19) When a company purchases inventory for cash, the net effect on the amount of total assets is zero.
Answer: TRUE
Diff: 2
LO: 15-2
20) A cash payment of accounts payable does not affect stockholders' equity.
Answer: TRUE
Diff: 2
LO: 15-2
21) Revenues do not affect stockholders' equity.

Answer: FALSE
Diff: 2
LO: 15-2
22) The excess of revenues over expenses is called a net profit.

Answer: TRUE
Diff: 1
LO: 15-2
23) The balance sheet is not linked to the income statement.

Answer: FALSE
Diff: 2
LO: 15-2
24) The income statement measures performance over a given amount of time.
Answer: TRUE
Diff: 1
LO: 15-2
12
25) Revenue and expense accounts are permanent stockholders' equity accounts.
Answer: FALSE
Diff: 1
LO: 15-2
13
26) The following transactions occurred at Clarkson Company:
1. The company acquired $200 of inventory on credit.

2. The company rendered services billed at $100 on account.
3. The company paid $175 in accounts payable.
4. The company's owner invested $375 in cash.
5. The company acquired equipment costing $575 on account.
6. The company paid $25 for inventory.
Required:
In the chart below, indicate if each transaction increases, decreases or has no effect on Assets, Liabilities
and Stockholders' Equity.
Transaction Assets Liabilities Stockholders' Equity

1. Increase Increase No effect
--------------------------------------------------------------------------------------------------------------------
2.
--------------------------------------------------------------------------------------------------------------------
3.
--------------------------------------------------------------------------------------------------------------------
4.
--------------------------------------------------------------------------------------------------------------------
5.
--------------------------------------------------------------------------------------------------------------------
6.
--------------------------------------------------------------------------------------------------------------------
Answer: __________________________________________________________________
Transaction Assets Liabilities Stockholders' Equity
--------------------------------------------------------------------------------------------------------------------
2. Increase No effect Increase
--------------------------------------------------------------------------------------------------------------------
3. Decrease Decrease No effect
--------------------------------------------------------------------------------------------------------------------
4. Increase No effect Increase
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
6. Increase and No effect No effect
Decrease
--------------------------------------------------------------------------------------------------------------------
Diff: 3
LO: 15-2
14
15.3 Questions
1) Under accrual basis accounting, we record revenue when ________.

A) cash is received from customers
B) cash is received for any reason
C) it meets the criteria for revenue recognition
D) a company receives cash from a customer on account
Answer: C
Diff: 2
LO: 15-3
2) Under accrual basis accounting, we record expenses when ________.

A) a company pays cash to a supplier
B) a company incurs a liability
C) a company uses resources
D) a company pays cash to anyone
Answer: C
Diff: 2
LO: 15-3
3) For nonprofit organizations, the income statement is ________.

A) used
B) replaced with the statement of stockholders' equity
C) replaced with the statement of activities
D) replaced with the statement of cash flows
Answer: C
Diff: 2
LO: 15-3
4) For nonprofit organizations, the stockholders' equity section of the balance sheet is replaced with
________.
A) retained earnings
B) partners' capital
C) partners' withdrawals
D) net assets
Answer: D
Diff: 2
LO: 15-3
15
5) Which of the following is(are) a deficiency(deficiencies) of cash-basis accounting?
A) it omits key revenues and expenses from the balance sheet
B) it fails to match revenues and expenses to measure economic performance
C) it omits key assets and key liabilities from the balance sheet
D) B and C
Answer: D
Diff: 2
LO: 15-3
6) The cash basis of accounting recognizes the impact of transactions in the period when ________.
A) revenues and expenses occur
B) cash is received or disbursed
C) the accounting equation changes
D) assets or liabilities change
Answer: B
Diff: 1
LO: 15-3
7) Nicholson Company sold inventory costing $1,000 for $3,000 on account. Nicholson Company operates
under the accrual basis. What effect will the transaction have on the liabilities and owners' equity of the
company?
A) liabilities will decrease by $2,000
B) liabilities will increase by $2,000
C) owners' equity will increase by $2,000
D) owners' equity will increase by $3,000
Answer: C
Diff: 2
LO: 15-3
16
8) Patrick Company had the following transactions:
1. The owner started the company by investing $10,000 of cash.

2. The company paid $2,000 for six months of rent. The rent was paid in advance.
3. The company acquired $3,300 in inventory and put one-third of the purchase on account. The company
paid $2,200 cash.
4. The company sold inventory costing $1,400 for $2,900 on account.
After all these transactions, what is the balance in the cash account?
A) $1,600
B) $2,900
C) $5,800
D) $8,000
Answer: C
Diff: 2
LO: 15-3
9) Cudahy Company had the following transactions:

1. The owner started the company by investing $10,000 of cash.
2. The company paid $2,000 for six months of rent. The rent was paid in advance.
3. The company acquired $3,000 in inventory for cash.
4. The company sold inventory costing $1,400 for $2,900 on account.
After all these transactions, what is the balance in the cash account?
A) $2,100
B) $3,500
C) $5,000
D) $8,000
Answer: C
Diff: 2
LO: 15-3
17
10) The activity of Sterling Company for the month of April is presented below:
Cost of goods sold $62,000

Cash purchases of inventory $25,000
Credit purchases of inventory $50,000
Cash paid for credit purchase of inventory $22,000
Cash dividend paid $7,000
Wages earned and paid $14,000
Wages earned and unpaid $2,000
Rent paid for April, May and June $6,000
Using the accrual basis of accounting, the total expenses for Sterling Company for the month of April is
________.
A) $62,000
B) $78,000
C) $80,000
D) $86,000
Answer: C
Diff: 2
LO: 15-3
11) The activity of Vegas Company for the month of April is given below:

Cash payment for credit purchases of inventory $12,000
Using the cash basis of accounting, the total expenses for Vegas Company for the month of April are
________.
A) $35,000
B) $78,000
C) $80,000
D) $95,000
Answer: B
Diff: 2
LO: 15-3
18
12) Given below are the activities of the Tamara Company:
Credit sales $90,000

Cash sales $50,000
Cash collections from credit customers $36,000
Purchased inventory on account $27,000
Using the cash basis of accounting, the total revenues for Tamara Company are ________.
A) $56,000
B) $86,000
C) $90,000
D) $173,000
Answer: B
Diff: 2
LO: 15-3
13) Given below are the activities of the Phoenix Company:
Owners invested cash in business $20,000

Cash sales $20,000
Purchased inventory on account $37,000
Using the accrual basis of accounting, the total revenues for Phoenix Company are ________.
A) $46,000
B) $90,000
C) $100,000
D) $173,000
Answer: C
Diff: 2
LO: 15-3
14) Source documents are associated with ________.

A) Generally Accepted Accounting Principles
B) implicit transactions
C) explicit transactions
D) compound entries
Answer: C
Diff: 1
LO: 15-3
19
15) An example of an explicit transaction is ________.
A) recording depreciation expense
B) paying cash for three months' rent in advance
C) accruing wages expense at the end of the month
D) accruing interest expense at the end of the year
Answer: B
Diff: 2
LO: 15-3
16) Journal entries for the expiration of unexpired assets are usually made before the related cash flows.
Answer: FALSE
Diff: 1
LO: 15-3
17) Under the accrual basis of accounting, the impact of transactions is recorded when cash is received or
paid.
Answer: FALSE
Diff: 1
LO: 15-3
18) Under the cash basis of accounting, expenses are matched with the revenues they help generate.
Answer: FALSE
Diff: 2
LO: 15-3
19) Adjusting entries at the end of an accounting period record explicit transactions.
Answer: FALSE
Diff: 2
LO: 15-3
20) An example of an implicit transaction is cash received on account.

Answer: FALSE
Diff: 2
LO: 15-3
20
15.4 Questions
1) On July 1, 2012, Slowinski Company borrows $100,000 on a 10% note due to a bank in one year. The
accounts of Slowinski Company are affected by the adjusting entry at December 31, 2012 in which of the
following ways?
A) increase assets and decrease expenses
B) increase assets and increase liabilities
C) increase expenses and increase liabilities
D) increase expenses and increase stockholders' equity
Answer: C
Diff: 2
LO: 15-4
2) On June 1, 2012, a company borrows $100,000 on a 10% note due to a bank in one year. What amount of
interest expense is reported for the year ending December 31, 2012?
A) $5,000
B) $5,833
C) $1,000
D) $10,000
Answer: B
Diff: 2
LO: 15-4
3) On April 1, 2012, Company X lends $200,000 to Company Y on a 8% note. On April 1, 2012, which of
the following accounts of Company X will be affected by this transaction?
A) Cash and Note Payable
B) Cash and Note Receivable
C) Cash and Interest Revenue
D) Cash and Interest Expense
Answer: B
Diff: 2
LO: 15-4
21
4) On April 1, 2012, Company Z lends $200,000 to Company Y on a 8% note. For the six months ending
June 30, 2012, what amount of interest revenue will Company Z report on this note?
A) $4,000
B) $8,000
C) $12,000
D) $16,000
Answer: A
Diff: 2
LO: 15-4
5) On March 1, a landlord received $10,000 rent for the month of April. On March 1, the landlord will
________.
A) increase Cash and increase Rent Revenue
B) increase Cash and increase Unearned Rent Revenue
C) increase Cash and increase Paid-in Capital
D) increase Rent Expense and decrease Cash
Answer: B
Diff: 2
LO: 15-4
6) On March 1, a landlord received $10,000 rent for the month of April. On April 1, the landlord will
________.
A) decrease Cash and increase Rent Revenue
B) decrease Cash and increase Unearned Rent Revenue
C) decrease Paid-in Capital and increase Interest Revenue
D) decrease Unearned Rent Revenue and increase Rent Revenue
Answer: D
Diff: 2
LO: 15-4
7) On May 1, Gomez Company paid $36,000 for rent. The rent covers the period May 1 through August
31. Gomez Company recorded Prepaid Rent of $36,000. What is the balance in the Prepaid Rent account
on June 1?
A) $0
B) $9,000
C) $18,000
D) $27,000
Answer: D
Diff: 2
LO: 15-4
22
8) On May 1, Gonzalez Company paid $36,000 for rent. The rent covers the period May 1 through August
31. Gonzalez Company recorded Prepaid Rent of $36,000. What is the Rent Expense for the period, May 1
through June 30?
A) $0
B) $9,000
C) $18,000
D) $27,000
Answer: C
Diff: 2
LO: 15-4
9) On January 1, Latinovich Company paid $16,000 for rent. The rent covers the period January 1 through
April 30. Latinovich Company recorded Prepaid Rent of $16,000. What is the balance in the Prepaid Rent
account on April 1?
A) 0
B) $4,000
C) $8,000
D) $12,000
Answer: B
Diff: 2
LO: 15-4
10) On July 1, Singh Company paid 6 months' insurance in advance. The policy covers the period of July 1
through December 31. The total payment was $5,400. At the time of the payment, the company set up the
Prepaid Insurance account for $5,400. What is the balance in the Prepaid Insurance account on August 31?
A) 0
B) $1,800
C) $2,700
D) $3,600
Answer: D
Diff: 2
LO: 15-4
23
11) Seavers Company paid $2,700 for 6 months' insurance, covering the period of April 1 to September 30.
At the time of the payment, the entire amount was used to increase the balance in the Prepaid Insurance
account. The balance in the Prepaid Insurance account on May 31 is ________.
A) $0
B) $900
C) $1,800
D) $2,250
Answer: C
Diff: 2
LO: 15-4
12) Under accrual basis accounting, unexpired costs are considered to be ________.
A) expenses if cash has been paid
B) expenses if cash has not been paid
C) assets
D) accrued liabilities
Answer: C
Diff: 1
LO: 15-4
13) Under accrual basis accounting, research and development expenses for new products are recorded as
________.
A) assets and written off systematically over the expected life
B) assets and expensed when paid in cash
C) assets and expensed when the related products are sold
D) expenses immediately
Answer: D
Diff: 2
LO: 15-4
14) Depreciation expense is recorded for ________.

A) equipment and land
B) land and buildings
C) equipment and buildings
D) equipment, land and building
Answer: C
Diff: 2
LO: 15-4
24
15) On January 1, 2015, Arizona Company acquired a machine for $33,000. Annual depreciation expense
equals $3,000. The residual value of the machine is $3,000. What is the book value of the machine on
December 31, 2016?
A) $3,000
B) $27,000
C) $30,000
D) $33,000
Answer: B
Diff: 2
LO: 15-4
16) Radison Company owns a fixed asset with an original cost of $100,000. The company estimates it will
use the fixed asset for 5 years, at which time the fixed asset will be sold for $5,000. The company uses
straight-line depreciation. The annual depreciation expense is ________.
A) $0
B) $10,000
C) $18,000
D) $19,000
Answer: D
Diff: 2
LO: 15-4
17) Saint Paul Company owns a fixed asset with an original cost of $100,000. The company estimates it
will use the fixed asset for four years, at which time it will be sold for $10,000. The company uses straight-
line depreciation. The book value of the fixed asset after three years of use is ________.
A) $22,500
B) $25,000
C) $32,500
D) $35,000
Answer: C
Diff: 2
LO: 15-4
25
18) The adjusting entry for ________ increases expenses and decreases assets.
A) wages expense
B) depreciation expense
C) unearned revenue
D) accruing interest expense
Answer: B
Diff: 2
LO: 15-4
19) The adjusting entry that recognizes revenue earned on deferred revenues results in a(n) ________.
A) increase in liabilities and a decrease in stockholders' equity
B) decrease in liabilities and a decrease in stockholders' equity
C) increase in liabilities and an increase in stockholders' equity
D) decrease in liabilities and an increase in stockholders' equity
Answer: D
Diff: 2
LO: 15-4
20) Cash collected from customers before goods are delivered is known as ________.
A) unearned revenue
B) deferred revenue
C) customer advances
D) all of the above
Answer: D
Diff: 2
LO: 15-4
21) Cash collected from customers before goods are delivered will increase ________.
A) assets and increase revenues
B) revenues and decrease liabilities
C) liabilities and increase assets
D) liabilities and decrease revenues
Answer: C
Diff: 2
LO: 15-4
26
22) A magazine publisher sells annual subscriptions for magazines. The publisher requires cash payment
before the magazines are sent out. When the first monthly issue is sent out, the company will ________.
A) increase liabilities and increase assets
B) increase assets and increase revenues
C) increase revenues and decrease liabilities
D) increase liabilities and decrease revenues
Answer: C
Diff: 2
LO: 15-4
23) Butters Company pays wages of $400 per day. The work week begins on Monday and ends on Friday.
Wages are paid weekly on Friday. The current month ends on a Wednesday. The adjusting entry at the
end of the month will ________.
A) increase liabilities by $400
B) increase liabilities by $800
C) increase liabilities by $1,200
D) increase liabilities by $2,000
Answer: C
Diff: 2
LO: 15-4
24) The adjusting entry for wages earned but unpaid results in a(n) ________.
A) increase in expenses and an increase in liabilities
B) increase in expenses and a decrease in liabilities
C) decrease in expenses and a decrease in liabilities
D) decrease in expenses and an increase in liabilities
Answer: A
Diff: 2
LO: 15-4
25) On January 1, 2012, a company paid $3,000 for rent. The rent covers the period January 1, 2012
through June 30, 2012. On June 30, 2012, the fiscal year end, the company prepares an adjusting entry.
What is the effect of this adjusting entry on stockholders' equity?
A) increases
B) decreases
C) no effect
D) not enough information to determine
Answer: B
Diff: 2
LO: 15-4
27
26) Unexpired costs are expenses.
Answer: FALSE
Diff: 1
LO: 15-4
27) Rent received in advance of the rental period would be considered to be a prepaid asset by the
landlord.
Answer: FALSE
Diff: 2
LO: 15-4
28) Companies must record research and development costs as expenses immediately.
Answer: TRUE
Diff: 2
LO: 15-4
29) When depreciating a fixed asset, the residual value is not considered.
Answer: FALSE
Diff: 2
LO: 15-4
15.5 Questions
1) In order for the board of directors of a corporation to declare a cash dividend, there must be sufficient
________ and ________.
A) revenues; expenses
B) net income; cash
C) retained earnings; cash
D) revenues; cash
Answer: C
Diff: 2
LO: 15-5
28
2) Retained earnings are a general claim against ________.
A) stockholders
B) creditors
C) paid in capital
D) total assets
Answer: D
Diff: 2
LO: 15-5
3) When cash dividends are declared, ________ decrease(s) and ________ increase(s).
A) retained earnings; cash
B) cash; retained earnings
C) retained earnings; liabilities
D) cash; liabilities
Answer: C
Diff: 2
LO: 15-5
4) The board of directors of Schwinn Company declared a cash dividend. Two weeks later, the dividend
was disbursed to stockholders. The dividend disbursement will ________.
A) decrease net income
B) decrease stockholders' equity
C) decrease liabilities
D) increase stockholders' equity
Answer: C
Diff: 2
LO: 15-5
29
5) Paquin Company has the following information available for the most current year:
Paid-in capital, January 1, 2014 $475,000

Retained earnings, January 1, 2014 $50,000
Total revenues in 2014 $890,000
Total expenses in 2014 $550,000
Dividend declared in 2014 $70,000
What was the balance in Retained Earnings at December 31, 2014?

A) $270,000
B) $320,000
C) $390,000
D) $405,000
Answer: B
Diff: 2
LO: 15-5
6) Moody Company has the following information available for the most current year:

Dividend paid in 2014 $0
Investments by owners in 2014 $10,000
What was the total amount of stockholders' equity for Moody Company at December 31, 2014?
A) $250,000
B) $350,000
C) $485,000
D) $835,000
Answer: D
Diff: 2
LO: 15-5
30
7) Barber Company has the following information available for the most current year:

What was the total amount of Retained Earnings for Barber Company at December 31, 2014?
A) $30,000
B) $250,000
C) $350,000
D) $420,000
Answer: C
Diff: 2
LO: 15-5
8) Fahnstock Company has the following information available for the most current year:

What was the total amount of paid-in capital for Fahnstock Company at December 31, 2014?
A) $475,000
B) $485,000
C) $535,000
D) $835,000
Answer: B
Diff: 2
LO: 15-5
9) Retained earnings indicate the amount of cash available for distribution to shareholders.
Answer: FALSE
Diff: 1
LO: 15-5
31
10) Dividends paid are considered an expense on the income statement.
Answer: FALSE
Diff: 1
LO: 15-5
11) Dividends reduce stockholders' equity when paid.

Answer: FALSE
Diff: 2
LO: 15-5
15.6 Questions
1) A multiple step income statement ________.

A) lists all the expenses together and calculates a total
B) has a subtotal for gross profit
C) has a subtotal for total assets
D) has a subtotal for total retained earnings
Answer: B
Diff: 2
LO: 15-6
32
2) Sunday Company reports the following information on December 31, 2014:
Cash $20,000
Accounts receivable 112,000
Accounts payable 91,000
Accrued wages payable 6,000
Unearned revenue 2,000
Paid-in capital 59,000
Retained earnings 80,000
Inventory 30,000
Prepaid rent 4,000
Equipment (net) 12,000
What are total assets at December 31, 2014?

A) $162,000
B) $166,000
C) $178,000
D) $180,000
Answer: C
Diff: 2
LO: 15-6
3) Zeman Company reports the following information on December 31, 2014:
Cash $20,000
Inventory 30,000
Prepaid rent 4,000
What are total liabilities at December 31, 2014?

A) $91,000
B) $97,000
C) $99,000
D) $179,000
Answer: C
Diff: 2
LO: 15-6
33
4) Marianne Company reports the following information on December 31, 2011:
Cash $70,000
Retained earnings ?
Inventory 30,000
Prepaid rent 4,000
What is total stockholders' equity at December 31, 2011?

A) $20,000
B) $80,000
C) $139,000
D) $170,000
Answer: C
Diff: 2
LO: 15-6
5) The stockholders' equity section of a corporation's balance sheet can be divided into ________.
A) net income and retained earnings
B) retained earnings and paid-in capital
C) net income and paid-in capital
D) liabilities and retained earnings
Answer: B
Diff: 1
LO: 15-6
34
6) Double Company has the following data available:
Dividends declared in 2015 $8,000

Net income for the year ended December 31, 2015 $14,000
What is the balance in Retained Earnings on December 31, 2015?

A) $2,000
B) $24,000
C) $36,000
D) $44,000
Answer: C
Diff: 2
LO: 15-6
7) Christian Company has the following data available:

Net income for the year ended December 31, 2015 $14,000
What is the company's total stockholders' equity on December 31, 2015?

A) $36,000
B) $46,000
C) $62,000
D) $101,000
Answer: C
Diff: 2
LO: 15-6
35
8) California Company opened for business on April 1. Given below is the activity of the company for the
month of April.
Owners invested cash in business $40,000

Cash sales $20,000
Cash payment for credit purchases of inventory $44,000
Cash borrowed on note payable $54,000
Equipment purchased for cash $18,000
Under accrual basis accounting, what is the net income for the month of April?
A) $8,000
B) $12,000
C) $18,000
D) $22,000
Answer: D
Diff: 2
LO: 15-6
36
9) Arizona Company has the following information available for the month of April:
Sales $100,000
Interest expense $2,000
Income tax expense $1,000
Wages expense $12,000
Dividends declared $3,000
Equipment purchased $20,000
Rent expense $4,000
The company uses the accrual basis of accounting. What is the net income for the month of April?
A) $21,000
B) $22,000
C) $24,000
D) $27,000
Answer: A
Diff: 2
LO: 15-6
10) Hope Company has the following data available:
Retained Earnings, January 1, 2011 $12,000

Net income for the year ending December 31, 2011 $3,000
Paid-in Capital, January 1, 2011 $50,000
Total liabilities, January 1, 2011 $40,000
What is the retained earnings balance on December 31, 2011?

A) $12,000
B) $13,000
C) $14,000
D) $63,000
Answer: B
Diff: 2
LO: 15-6
11) A multiple-step income statement includes a subtotal for gross profit.

Answer: TRUE
Diff: 2
LO: 15-6
37
12) Gross profit is the excess of sales over all expenses.
Answer: FALSE
Diff: 2
LO: 15-6
38
13) Cooley Company reports the following accounts and balances at December 31, 2015:
Accounts Payable $22,800

Accounts Receivable 18,800
Cash 24,400
Land 82,400
Machine 129,200
Merchandise Inventory 63,600
Long-term Note Payable 79,200
Short-term Note Payable 14,400
Paid-in Capital 200,000
Retained Earnings ?
Sales Revenue 122,000
Cost of Goods Sold 80,000
Operating Expenses 40,000
Required:
Prepare a balance sheet at December 31, 2015. Also, prepare an income statement for the year ended
December 31, 2015. Ignore depreciation expense and interest expense.
39
Answer: Cooley Company
Balance Sheet
December 31, 2015
Assets:
Cash $24,400
Land 82,400
Machine 129,200
Total assets $318,400
Liabilities:
Short-term Notes Payable 14,400
Long-term Notes Payable 79,200
Total liabilities $116,400
Stockholders' equity:
Paid-in Capital $200,000
Retained Earnings 2,000
Total stockholders' equity $202,000
Total liabilities and stockholders' equity $318,400
Cooley Company
Income Statement
For the Year Ended December 31, 2015
Sales Revenue $122,000

Cost of Goods Sold 80,000
Gross Profit 42,000
Operating Expenses 40,000
Net Income $2,000
Diff: 2
LO: 15-6
40
14) The Monk Company reports the following accounts and balances on December 31, 2015.

Cash 26,000
Equipment 80,000
Land 56,000
Long-term Note Payable 70,000
Paid-in Capital ?
Retained Earnings 14,400
Required:
Prepare a balance sheet at December 31, 2015.
Answer: Monk Company

Balance Sheet
December 31, 2015
Assets:
Cash $26,000
Land 56,000
Equipment 80,000
Total assets $198,800
Liabilities:
Long-term Notes Payable 70,000
Total liabilities $84,400
Stockholders' equity:
Paid-in capital $100,000
Total stockholders' equity $114,400
Total liabilities and stockholders' equity $198,800
Diff: 2
LO: 15-6
41
15) Foward Company had the following data available:
Net income for the year ending December 31, 2015 $50,000
Dividends declared during 2015 $47,000
Dividends paid during 2015 $32,000
Required:
Prepare a statement of retained earnings for Forward Company for the year ended December 31, 2015.
Answer: Forward Company
Statement of Retained Earnings
For the Year Ended December 31, 2015
Retained Earnings, January 1, 2015 $59,000

Add: Net income 50,000
Subtotal 109,000
Less: Dividends declared (47,000)
Diff: 2
LO: 15-6
15.7 Questions
1) In a partnership, a partner's capital account is increased by ________.

A) dividends
B) a partner's share of net income
C) contributions made by a partner
D) B and C
Answer: D
Diff: 2
LO: 15-7
2) A sole proprietorship has ________ owner's equity account(s). A partnership with three partners has
________ owners' equity account(s).
A) one; one
B) two; one
C) one; three
D) one; four
Answer: C
Diff: 1
LO: 15-7
42
3) The distinction between paid-in capital and retained earnings is not made for ________.
A) corporations
B) corporations and partnerships
C) corporations and sole proprietorships
D) partnerships and sole proprietorships
Answer: D
Diff: 1
LO: 15-7
4) A sole proprietorship is a business organized as a separate legal entity and owned by its stockholders.
Answer: FALSE
Diff: 2
LO: 15-7
5) Financial statements for partnerships do not make distinctions between paid-in capital and retained
earnings.
Answer: TRUE
Diff: 2
LO: 15-7
15.8 Questions
1) In the United States, Generally Accepted Accounting Principles are developed primarily by ________.
A) International Accounting Standards Board
B) Financial Accounting Standards Board
C) Securities and Exchange Commission
D) International Accounting Federation
Answer: B
Diff: 1
LO: 15-8
43
2) Audits of the financial statements of publicly held companies are conducted in accordance with
standards approved by the ________.
A) Financial Accounting Standards Board
B) Securities and Exchange Commission
C) Institute of Certified Public Accountants
D) Public Company Accounting Oversight Board
Answer: D
Diff: 2
LO: 15-8
3) An audit guarantees that there are absolutely no mistakes in the financial statements.
Answer: FALSE
Diff: 2
LO: 15-8
4) Generally Accepted Accounting Principles in the United States are developed by the International
Accounting Standards Committee.
Answer: FALSE
Diff: 2
LO: 15-8
15.9 Questions
1) Most companies that follow accrual basis accounting recognize revenue after they ________.
A) receive cash from the customer
B) deliver goods or perform services
C) pay cash for operating expenses
D) provide warranty service on a product
Answer: B
Diff: 2
LO: 15-9
44
2) One of the limitations of the balance sheet is that the dollar amounts for different assets reflect different
levels of inflation. That is the result of the ________ assumption.
A) recognition
B) matching
C) stable monetary unit
D) conservatism
Answer: C
Diff: 1
LO: 15-9
3) The matching concept matches ________ and ________.

A) assets; liabilities
B) assets; expenses
C) revenues; expenses incurred to generate revenues
D) net profit; expenses
Answer: C
Diff: 2
LO: 15-9
4) The matching convention attempts to match revenues and assets to a particular period.
Answer: FALSE
Diff: 2
LO: 15-9
15.10 Questions
1) The ________ assumption implies that a company will continue to use existing resources and pay
existing liabilities at maturity in an orderly manner.
A) conservatism
B) relevance
C) going concern
D) materiality
Answer: C
Diff: 1
LO: 15-10
45
2) The accounting convention of ________ means selecting the method of measurement that provides the
most pessimistic immediate results.
A) cost benefit
B) objectivity
C) materiality
D) conservatism
Answer: D
Diff: 1
LO: 15-10
3) The accounting convention of ________ permits a company to immediately expense assets with long
useful lives and small dollar costs.
A) objectivity
B) materiality
C) continuity
D) conservatism
Answer: B
Diff: 2
LO: 15-10
4) The main qualities of accounting information that make accounting information useful for decision
making are ________ and ________.
A) relevance; reliability
B) relevance; comparability
C) consistency; comparability
D) relevance; faithful representation
Answer: D
Diff: 2
LO: 15-10
5) Information is relevant if it has ________ and ________.

A) verifiability; comparability
B) timeliness; materiality
C) predictive value; confirmatory value
D) reliability; feedback value
Answer: C
Diff: 2
LO: 15-10
46
6) A company uses the going concern convention when it is in a near-bankrupt situation.
Answer: FALSE
Diff: 2
LO: 15-10
7) The materiality concept is not subjective.

Answer: FALSE
Diff: 2
LO: 15-10
15.11 Questions
1) Yesterday Company's accountant recorded a debit to Accounts Payable and a credit to Cash. This
transaction will ________.
A) increase Cash and decrease Accounts Payable
B) decrease Cash and increase Accounts Payable
C) increase Cash and increase Accounts Payable
D) decrease Cash and decrease Accounts Payable
Answer: D
Diff: 2
LO: 15-11
2) Uptown Company purchases $4,000 of inventory on account. Uptown Company should debit
________.
A) Cash for $1,000, and credit Accounts Payable for $4,000
B) Cash for $1,000, and credit Note Payable for $4,000
C) Inventory for $4,000, and credit Cash for $4,000
D) Inventory for $4,000, and credit Accounts Payable for $4,000
Answer: D
Diff: 2
LO: 15-11
47
3) Jackson Company collected $1,200 on account. Jackson will ________.
A) Debit Cash $1,200 and Credit Accounts Payable $1,200
B) Debit Accounts Receivable $1,200 and Credit Cash $1,200
C) Debit Accounts Payable $1,200 and Credit Cash $1,200
D) Debit Cash $1,200 and Credit Accounts Receivable $1,200
Answer: D
Diff: 3
LO: 15-11
4) On January 1, 2014, Everest Company paid $4,000 for insurance that covers the period, February 1, 2014
through January 31, 2015. Which of the following journal entries is prepared on January 1, 2014?
A) Debit Insurance Expense $4,000 and Credit Cash $4,000
B) Debit Prepaid Insurance $4,000 and Credit Cash $4,000
C) Debit Cash $4,000 and Credit Insurance Expense $4,000
D) Debit Cash $4,000 and Credit Insurance Revenue $4,000
Answer: B
Diff: 2
LO: 15-11
48
5) Listed below are the transactions for Kaiman Company:
1. The owners invest $100,000 in the company in exchange for common stock.
2. The company purchases equipment costing $30,000 with a note payable. The equipment has a ten year
life and no salvage value. The company uses the straight-line method of depreciation.
3. The company purchases inventory costing $10,000 by paying cash.
4. The company paid $8,000 for four months' rent in advance.
5. The company sold inventory for $9,000 cash. The cost of the inventory was $5,000.
6. The company used one month of rent.
7. The company declared a cash dividend of $500.
8. Depreciation expense on the equipment was recorded for the month.
Required:
Prepare journal entries for the above transactions.
Answer:
1. Cash 100,000
Common Stock 100,000
2. Equipment 30,000
Note Payable 30,000
3. Inventory 10,000
Cash 10,000
4. Prepaid Rent 8,000
Cash 8,000
5. Cost of Goods Sold 5,000
Inventory 5,000
Cash 9,000
Sales Revenue 9,000
6. Rent Expense 2,000
Prepaid Rent 2,000
7. Dividend 500
Dividend Payable 500
8. Depreciation Expense 250
Accumulated Depreciation 250
Diff: 2
LO: 15-11
49

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Introduction to Management Accounting, 16e, Global Edition (Horngren)

Chapter 15 Basic Accounting: Concepts, Techniques, and Conventions

3) What do liabilities and stockholders' equity have in common?

6) The statement of financial position is also called the ________.

9) An entity's economic obligations to nonowners are called ________.

11) The main sections of the balance sheet include ________.

17) Accounting information only helps assess past financial performance.

18) A corporation is not a separate legal entity from its owners.

20) Liabilities are economic resources.

22) Liabilities are the entity's economic obligations to owners.

24) Stockholders' equity is composed of paid-in capital and retained earnings.

8) The acquisition of inventory on account will ________.

9) A cash payment on accounts payable will ________.

13) Increases in revenues will ________. Increases in expenses will ________ .

Beginning Paid-in Capital $90,000

At the beginning of the period, what is the total amount of liabilities?

Beginning Paid-in Capital $90,000

Paid-in Capital, December 31, 2014 $87,000

At December 31, 2015, what is the total amount of liabilities?

Paid-in Capital, December 31, 2014 $87,000

At December 31, 2014, what is the total amount of liabilities?

21) Revenues do not affect stockholders' equity.

22) The excess of revenues over expenses is called a net profit.

23) The balance sheet is not linked to the income statement.

1. The company acquired $200 of inventory on credit.

Transaction Assets Liabilities Stockholders' Equity

1) Under accrual basis accounting, we record revenue when ________.

2) Under accrual basis accounting, we record expenses when ________.

3) For nonprofit organizations, the income statement is ________.

1. The owner started the company by investing $10,000 of cash.

9) Cudahy Company had the following transactions:

Cost of goods sold $62,000

Cash purchases of inventory $45,000

Credit sales $90,000

13) Given below are the activities of the Phoenix Company:

Owners invested cash in business $20,000

14) Source documents are associated with ________.

20) An example of an implicit transaction is cash received on account.

14) Depreciation expense is recorded for ________.

Paid-in capital, January 1, 2014 $475,000

What was the balance in Retained Earnings at December 31, 2014?

Paid-in capital, January 1, 2014 $475,000

Paid-in capital, January 1, 2014 $475,000

Paid-in capital, January 1, 2014 $475,000

11) Dividends reduce stockholders' equity when paid.

1) A multiple step income statement ________.

What are total assets at December 31, 2014?

3) Zeman Company reports the following information on December 31, 2014:

What are total liabilities at December 31, 2014?

What is total stockholders' equity at December 31, 2011?

Dividends declared in 2015 $8,000

What is the balance in Retained Earnings on December 31, 2015?

7) Christian Company has the following data available:

Dividends declared in 2015 $8,000

What is the company's total stockholders' equity on December 31, 2015?

Owners invested cash in business $40,000

10) Hope Company has the following data available:

Retained Earnings, January 1, 2011 $12,000

What is the retained earnings balance on December 31, 2011?

11) A multiple-step income statement includes a subtotal for gross profit.

Accounts Payable $22,800

Sales Revenue $122,000

Accounts Payable $14,400

Answer: Monk Company

13) Increases in revenues will . Increases in expenses will .

3) The matching concept matches and .

5) Information is relevant if it has and .