Deck 5: The Accounting Cycle: Reporting Financial Results

Question 1

The current ratio is a measure of liquidity.

Answer 1

True

Question 2

The purpose of the after-closing trial balance is to give assurance that the accounts are in balance and ready for the new accounting period.

Answer 2

True

Question 3

Dividends are closed out directly to retained earnings at year-end.

Answer 3

True

Question 4

At year-end, all equity accounts must be closed.

Question 5

Dividends declared are an expense and reduce net income.

Question 6

Interim financial statements usually report on a period of time greater than one year.

Question 7

Working capital equals current assets divided by current liabilities.

Question 8

The return on equity ratio equals net income divided by common stock.

Question 9

The adjusted trial balance contains income statement accounts and balance sheet accounts, while the after-closing trial balance will only have balance sheet accounts.

Question 10

Publicly owned companies are typically managed by their stockholders.

Question 11

The net income percentage can be measured by dividing net income by total revenue.

Question 12

In regard to disclosures that are required to be contained in annual reports, the FASB has no well-defined list of items that must be included.

Question 13

A current asset may be cash or must be capable of being converted into cash within a relatively short period of time, usually less than five years.

Question 14

Income summary does not appear on the income statement.

Question 15

Real accounts can only be closed at the end of the year with a single compound entry.

Question 16

Measures of profitability tell us how quickly current assets can be converted into profits.

Question 17

The income summary account appears, as stated, on the statement of retained earnings.

Question 18

The report form of the balance sheet lists liabilities and owners' equity below assets.

Question 19

The current ratio equals current assets plus current liabilities.

Question 20

The account, Accumulated Depreciation, is considered a permanent account.

Question 21

The current ratio is a measure of short-term debt paying ability.

Question 22

The closing entry for an expense account would consist of a:

A) Debit to Income Summary and a credit to the expense account.
B) Debit to the expense account and a credit to Income Summary.
C) Credit to Retained Earnings and a debit to the expense account.
D) Credit to Revenue and a debit to the expense account.

Question 23

Return on equity is a commonly used measure of a company's solvency.

Question 24

Of the following, which is not an alternative title for the income statement?

A) Earnings statement.
B) Statement of Operations.
C) Profit and Loss Statement.
D) Statement of Financial Position.

Question 25

What types of information must be disclosed in the financial statements?

A) The comprehensive list issued by the FASB.
B) Only information that is determined by management.
C) Non-financial information that is not included in the basic financial statements.
D) Ratio analysis.

Question 26

The dividends account should be:

A) Closed to income summary.
B) Closed to retained earnings.
C) Closed only if there is a profit.
D) Not closed at all.

Question 27

Closing entries would be prepared before:

A) Financial statements are prepared.
B) A post-closing trial balance.
C) An adjusted trial balance.
D) Adjusting entries.

Question 28

Financial statements are usually prepared before the closing entries are made.

Question 29

A debit balance in the income summary account indicates:

A) An error was made.
B) A Net Profit.
C) A Net Loss.
D) That revenues were greater than expenses.

Question 30

An annual report filed with the Securities and Exchange Commission must include a section called "Management's Predictions of Future Earnings."

Question 31

Dividends declared:

A) Reduce retained earnings.
B) Increase retained earnings.
C) Reduce net income.
D) Increase net income.

Question 32

IFRS 1 requires that management and auditors should depart from compliance with GAAP if it is necessary to achieve a fair presentation when reporting financial results.

Question 33

The Retained Earnings statement is based upon which of the following relationships?

A) Retained Earnings - Net Income - Dividends.
B) Retained Earnings - Net Income + Dividends.
C) Retained Earnings + Net Income + Dividends.
D) Retained Earnings + Net Income - Dividends.

Question 34

When a worksheet is prepared, which account would not be entered into the income statement columns?

A) Depreciation Expense.
B) Unearned Revenue.
C) Service Revenue.
D) Prepaid Insurance.

Question 35

During the closing process:

A) All income statement accounts are credited to income summary.
B) All income statement accounts are debited to income summary.
C) All revenue accounts are credited and expense accounts are debited.
D) All revenue accounts are debited and expense accounts are credited.

Question 36

The income summary account has debits of $85,000 and credits of $75,000. The company had which of the following:

A) Net income of $10,000.
B) Net income of $160,000.
C) Net loss of $10,000.
D) Net loss of $160,000.

Question 37

A worksheet consists of all of the following except:

A) A trial balance.
B) Adjusting entries.
C) An adjusted trial balance.
D) Transaction entries.

Question 38

An after-closing trial balance consists only of asset, liability, and owners' equity accounts.

Question 39

Closing entries do not affect the cash account.

Question 40

In the notes to financial statements, adequate disclosure would typically not include:

A) The accounting methods in use.
B) Lawsuits pending against the business.
C) Due dates of major liabilities.
D) The optimism of the CFO regarding future profits.

Question 41

If Income Summary has a net credit balance, it signifies:

A) A net loss.
B) Net income.
C) A reduction of net worth.
D) Dividends have been declared.

Question 42

Publicly owned companies are:

A) Managed and owned by the government.
B) Must be not-for-profit companies.
C) Usually listed on a stock exchange.
D) Not permitted to be owned by individuals.

Question 43

The concept of adequate disclosure requires a company to inform financial statement users of each of the following, except:

A) The accounting methods in use.
B) The due dates of major liabilities.
C) Destruction of a large portion of the company's inventory on January 20, three weeks after the balance sheet date, but prior to issuance of the financial statements.
D) Income projections for the next five years based upon anticipated market share of a new product; the new product was introduced a few days before the balance sheet date.

Question 44

Which account will appear on an after-closing trial balance?

A) Dividends.
B) Prepaid Expenses.
C) Retained Earnings, at the beginning of the period.
D) Sales.

Question 45

Return on equity measures:

A) Solvency.
B) Profitability.
C) Leverage.
D) All three of the above.

Question 46

After preparing the financial statements for the current year, the accountant for Exquisite Gems closed the Dividends account at year-end by debiting Income Summary and crediting the Dividends account. What is the effect of this entry on current-year net income and the balance in the Retained Earnings account at year-end?

A) Net income is overstated and the balance in the Retained Earnings account is correct.
B) Net income is correct and the balance in the Retained Earnings account is overstated.
C) Net income is understated and the balance in the Retained Earnings account is understated.
D) Net income is understated and the balance in the Retained Earnings account is overstated.

Question 47

Which of the following account titles would not be debited in the process of preparing closing entries for Andrew's Auto Shop?

A) Income Summary.
B) Fees Earned.
C) Dividends.
D) Retained Earnings.

Question 48

The balance in Income Summary:

A) Should equal retained earnings.
B) Will always be equal to the increase in retained earnings.
C) Will equal net income less dividends.
D) Will equal net income or net loss.

Question 49

A statement of retained earnings shows:

A) The changes in the Cash account occurring during the accounting period.
B) The revenue, expense, and dividends of the period.
C) The types of assets which have been purchased with the earnings retained during the accounting period.
D) The changes in the Retained Earnings account occurring during the accounting period.

Question 50

Retained Earnings at the end of a period:

A) Is equal to the balance in the Retained Earnings account in the adjusted trial balance at the end of a period.
B) Is determined in the statement of Retained Earnings.
C) Is equal to Retained Earnings at the beginning of the period, minus net income (or plus net loss) for the period.
D) Appears in the income statement for the period.

Question 51

When closing the accounts at the end of the period, which of the following is closed directly into the Retained Earnings account?

A) Depreciation Expense.
B) Accumulated Depreciation.
C) Revenue and liability accounts.
D) The Income Summary account.

Question 52

The purpose of making closing entries is to:

A) Prepare revenue and expense accounts for the recording of the next period's revenue and expenses.
B) Enable the accountant to prepare financial statements at the end of the accounting period.
C) Establish new balances in the balance sheet accounts.
D) Reduce the number of expense accounts.

Question 53

Publicly traded companies must file audited financial statements with the:

A) AICPA.
B) IRS.
C) SEC.
D) AAA.

Question 54

The section of the annual report titled "Management Discussion and Analysis" is:

A) Required by the SEC.
B) Not required but may be included by management.
C) Required by GAAP.
D) Reported to the SEC but not included in the annual report.

Question 55

The normal order in which the financial statements are prepared is:

A) Balance sheet, income statement, statement of retained earnings.
B) Income statement, statement of retained earnings, balance sheet.
C) Income tax return, income statement, balance sheet.
D) Income statement, statement of cash flows, balance sheet.

Question 56

Income Summary appears on which financial statement:

A) Income statement.
B) Balance sheet.
C) Retained Earnings statement.
D) Income summary does not appear on any financial statement.

Question 57

The worksheet:

A) Is one of the basic financial statements.
B) Is prepared throughout the year.
C) Is not a formal step in the accounting cycle.
D) Starts with the first column being the adjusted trial balance.

Question 58

The concept of adequate disclosure:

A) Does not apply to information which is immaterial.
B) Grants users of the financial statements access to a company's accounting records.
C) Does not apply to events occurring after the balance sheet date.
D) Specifies which accounting methods must be used in a company's financial statements.

Question 59

Which account will not appear on an after-closing trial balance?

A) Dividends.
B) Prepaid Expenses.
C) Unearned Revenue.
D) Retained Earnings, at the end of the period.

Question 60

Closing entries never involve posting a credit to the:

A) Income Summary account.
B) Accumulated Depreciation account.
C) Dividends.
D) Depreciation Expense account.

Question 61

If monthly financial statements are desired by management:

A) Journalizing and posting adjusting entries must be done each month.
B) Journalizing and posting closing entries must be done each month.
C) Monthly financial statements can be prepared from worksheets; adjustments and closing entries need not be entered in the accounting records.
D) Adjusting and closing entries must be entered in the accounting records before preparation of interim financial statements.

Question 62

Which account appears on the After-Closing Trial Balance?

A) Service Revenue.
B) Unearned Revenue.
C) Dividends.
D) Retained Earnings, Beginning of Year.

Question 63

Preparation of interim financial statements:

A) Makes the preparation of year-end financial statements unnecessary.
B) Requires the journalizing and posting of adjusting entries.
C) Requires the journalizing and posting of closing entries.
D) Is done monthly or quarterly, in-between the year-end financial statements.

Question 64

Return on equity is calculated by:

A) Dividing net income by total revenue.
B) Dividing net income by average stockholders' equity.
C) Dividing net income by working capital.
D) Dividing dividends by stockholders' equity.

Question 65

Which statement is true regarding the Income Statement?

A) Losses do not appear on income statements.
B) Dividends reduce net income.
C) Dividends declared increase net income.
D) Both losses and gains appear on an income statement.

Question 66

When a worksheet is used:

A) Adjusting entries are not prepared, since adjustments are shown on the worksheet.
B) Revenue and expense accounts do not have to be closed to the Income Summary account, because the income statement is prepared from the worksheet and net income is already computed.
C) Financial statements may be prepared before recording adjusting and closing entries in the accounting records.
D) The Income Statement column and Balance Sheet column of the worksheet eliminate the need to prepare formal financial statements for a business.

Question 67

Interim financial statements:

A) Cover a period less than one year.
B) Cover only periods of a quarter of a year.
C) Cover periods greater than a year.
D) Cannot cover a period of one month or less.

Question 68

Which of the following accounts will be closed to Income Summary?

A) Prepaid Expenses.
B) Unearned Revenue.
C) Dividends.
D) Earned Revenue.

Question 69

A worksheet should be viewed as:

A) A financial statement to be distributed to investors.
B) A financial statement to assist managers in making managerial decisions.
C) A tool to assist accountants in making end-of-period adjustments and in preparing financial statements.
D) A tool to assist auditors in determining that all transactions have been properly recorded throughout the period.

Question 70

Assets are considered current assets if they are cash or will usually be converted into cash:

A) Within a month or less.
B) Within 3 months.
C) Within a year or less.
D) Within 6 months or less.

Question 71

The amount of net income (or loss) will appear on the debit side of the Income Statement columns in a worksheet if:

A) Revenue exceeds total expenses for the period.
B) The trial balance is out of balance.
C) Dividends are more than the income or loss for the period.
D) There is a net loss for the period.

Question 72

Which accounts should not be closed?

A) Expenses and revenues.
B) Dividends.
C) Income summary.
D) Accumulated depreciation.

Question 73

Net income from the Income Statement appears on:

A) The Balance Sheet.
B) The Retained Earnings Statement.
C) Neither the Balance Sheet nor the Retained Earnings Statement.
D) Both the Balance Sheet and the Retained Earnings Statement.

Question 74

Closing entries should be made:

A) Every year.
B) Only when an entity goes out of business.
C) Only if there is a profit.
D) Only if there is a loss.

Question 75

Which of the following is true regarding a worksheet prepared at year-end?

A) The number of account titles applicable to the Adjusted Trial Balance columns is usually greater than the number of account titles applicable to the Trial Balance columns.
B) The worksheet can be issued instead of financial statements.
C) The worksheet eliminates the need to make adjusting and closing entries.
D) An equal number of account titles are applicable to the Income Statement columns and the Balance Sheet columns.

Question 76

Dividends will have what effect upon retained earnings?

A) Increase.
B) Decrease.
C) No effect.
D) Depends upon if there is income or loss.

Question 77

Declaring a dividend will:

A) Increase net income.
B) Decrease net income.
C) Not change net income.
D) Increase the net worth of a company.

Question 78

Which of the following amounts appears in both the Income Statement debit column and the Balance Sheet credit column of a worksheet?

A) Net income.
B) Net loss.
C) Dividends.
D) Retained earnings.

Question 79

Under the Sarbanes-Oxley Act, CFOs and high-ranking corporate officers are now:

A) Personally responsible for the integrity of annual reports.
B) Subject of fines of up to $5 million for knowingly making false statements.
C) Facing prison sentences of up to 20 years for knowingly making false statements.
D) All of the above.

Question 80

If a business closes its accounts only at year-end:

A) Financial statements are prepared only at year-end.
B) Adjusting entries are made only at year-end.
C) Revenue and expense accounts reflect year-to-date amounts throughout the year.
D) Monthly and quarterly financial statements cannot be prepared.