Accounting 209 Exam 1 Name FORM A SOLUTIONS AT END OF EXAM Remember the Aggie Honor Code An Aggie does not lie cheat or steal or tolerate those who do By signing and turning in your scantron you are acknowledging your compliance with the honor code COMPLETION Use the following terms to complete the statements below NOTE that the same letter is used to identify more than one term You may use a term once more than once or not at all 2 points each a accounting b accrual c balance sheet d cash e contributed capital a double entry b Financial Accounting Standards Board c GAAP d income statement e a b c d e matching profitability retained earnings revenue recognition source documents stockholders equity 1 is a process of communication Its purpose is to provide economic information about an organization that will be useful to those who need to make decisions regarding that organization 2 is the difference between the assets of an entity and its liabilities and consists of two distinct elements 3 as represented by capital stock is the original contribution to the company by the owners 4 represents the earnings of the company that have not been paid out in dividends A 5 is a statement of financial position that is dated at a specific point in time Its purpose is to show the financial position of an entity as of a particular point in time The purpose of the 6 is to summarize the revenues and expenses of a company for a period of time It is an indicator of a company s 7 for that period The Securities and Exchange Commission has generally allowed the accounting profession through the 8 to establish accounting rules in the United States These rules or guidelines are known as 9 Two important principles in accounting are the 10 principle which states that revenue should be reported when it is earned and the 11 principle which states that expenses should be reported in the same period as the revenue that the expense helped generate Revenues and expenses are not recorded based on whether cash has been received or paid Together these two principles define the 12 basis of accounting The 13 system of accounting means that every transaction must be entered into at least two accounts and in such a way that the equality of the balance sheet equation is maintained 14 omit ACCOUNT CLASSIFICATION Classify each of the following accounts as an asset liability or stockholders equity item as shown on the balance sheet or as a non balance sheet account Mark your scantron as follows 1 point each a asset b liability c equity d not a balance sheet account 15 Retained earnings 20 Prepaid rent 16 Common stock 21 Machinery 17 Accounts payable 22 Service revenue 18 Sales 23 Dividends 19 Accounts receivable 24 Inventory FINANCIAL STATEMENTS Use the following information to answer the next three 3 questions While each of the financial statements is likely to aid in any business decision it is often the case that a particular statement may be best suited to help in a particular situation Consider each case below independently and determine which statement is most likely to be of use You may use each financial statement once more than once or not at all Mark your scantron as follows 2 points each a income statement b balance sheet c statement of equity or statement of retained earnings 25 You are trying to determine how much of a firm s net income it distributes to its stockholders 26 You are trying to determine if a specific company is a good investment You want to invest in a firm that has strong revenue growth 27 You are employed as a financial analyst for a large investment firm You are trying to assess the riskiness of a particular investment opportunity You understand that the more debt a firm has relative to its stockholders equity the riskier the firm is MULTIPLE CHOICE Choose the best answer 4 points each 28 Which of the following statements is false a Accounting is the information system that collects and measures business activities processes that information into reports and communicates the results to decision makers b Financial statements report financial information about a business entity to decision makers c Owners of a corporation are personally liable for the debits of the corporation d The purpose of financial accounting is to provide information to people outside of the entity such as creditors and investors e None of the above statements is false Use the following information to answer the next two 2 questions Tommy Jones owns a music store called Tommy s Tunes and More Tommy rents the building in which the store is located but owns the equipment and fixtures inside of it Last week Tommy s Tunes made sales of 3 000 some of these sales were for cash but some were made to customers who have an account with the store and are billed at the end of each month Last month Tommy s Tunes borrowed 10 000 from the local bank to expand the business 29 Which of the following is not an asset owned by Tommy s Tunes and More a the inventory of musical instruments b the building in which the store is located c the amount owed to Tommy s Tunes by the customers d the equipment and fixtures in the store e none of the above 30 Which of the following is true a Tommy s Tunes is too small a business for anyone to care about its financial information b The sales Tommy s Tunes made last week are considered revenue c The intent of Tommy s Tunes to expand his business is an asset d The sales Tommy s Tunes made on account credit sales last week cannot be considered revenue until cash is received from the customers e none of the above Use the following information to answer the next five 5 questions Several friends started a new business Aggie Inc by investing 70 cash in the business in exchange for company stock The following accounts and balances are taken from the accounting records of Aggie Company at the end of the company s first year of operations Accounts payable Cash Common stock Dividends Land Utilities expense Notes payable due in 3 years Service revenue 21 25 70 88 2 28 63 Prepaid rent Equipment Retained earnings Accounts receivable Office supplies Salaries expense Rent expense 12 10 4 5 8 5 31 Total assets for Aggie Inc at the end of the year are a 150 b 181 c 144 d 158 e none of the above 32 Aggie Inc s net income for the year is a 48 b 33 c 140 d 58 e none of the above 33 How much did Aggie Inc pay in dividends during the year a 0 b 8 c 23 d 33 e none of the above 34 omit 35 Assume that immediately after