Module 1 Summative Assessment

Question 1

1. Which of the following would not be considered valid documentation when the accounting department of a firm prepares a journal entry?

Sales invoice
Customer phone log
Purchase order
Bank statement

Answer 1

A customer phone log is not a valid document for an accounting group to prepare a journal entry as it would not provide enough financial details to be relevant.

Question 2

2. Deluxe Glass Inc. generated net income of $31,000,000 and declared cash dividends of $4,500,000 for the year ended December 31, 2022. The company had current liabilities of $22,000,000 and long-term liabilities of $74,000,000 as well as common stock of $40,000,000 at fiscal 2022 year-end. Assuming retained earnings of $80,000,000 at the beginning of 2022, what is the total assets of Deluxe Glass on December 31, 2022?

$202,500,000
$242,500,000
$247,000,000
$216,000,000

Answer 2

Remember not to excluded the cash dividend from the equity calculation.

Question 3

3. The double-entry accounting system requires that for each journal entry the debit amount should equal the credit amount, but each side can have multiple accounts affected.

True
False

Answer 3

This represents an accurate statement since all debit amounts must equal all credit amounts on every journal entry, even though one or both sides of a journal entry may contain multiple accounts.

Question 4

4. Which of the following account activities would be improperly reflected in the chart of accounts of a firm?

Increase expenses, credit-related accounts.
Decrease liabilities, debit-related accounts.
Increase assets, debit-related accounts.
Decrease equities, debit-related accounts.

Answer 4

Decrease liabilities, debit-related accounts. - This is properly reflected in the chart of accounts.

Question 5

5. The accountants use the trial balance they prepare to close income statement accounts at period end.

True
False

Answer 5

True

Another purpose of the trial balance, besides using it to prepare the financial statements, is to close income statement accounts at period end. Income statement accounts are temporary accounts and are closed to zero at the end of each period.

Question 6

6. XYZ Company’s administrative staff get paid on the 30th day of each month with all administrative employees earning a daily total amount of $9,000. Assuming October 31st falls on a Wednesday, how would the company’s accounting department treat the above?

Salary expenses would be recognized along with the cash impact for the additional day.
No accounting entry recorded.
Salary expenses would be recognized along with salary payable for the additional day.
Salary payable would be recognized for the additional day.

Answer 6

The salaries expenses must also be recognized for the additional day.

Question 7

7. Receiving timely financial statements is associated with which qualitative characteristic of financial information?

Reliability
Comparability
Relevance
Understandability

Answer 7

To have relevance, financial statements must be prepared and be issued to the public on a timely basis.

Question 8

8, On October 31, 2022, a local newspaper signed a one-year agreement with an advertising agency where they will print retail advertisements in their daily newspaper and receive a monthly fee of $10,000 payable the first week of the following month. Assuming the advertisements will be posted in the daily newspaper at the start of November, what is the journal entry recorded by the newspaper at October month end?

Debit accounts receivable $10,000, credit advertising revenue $10,000
Debt account receivable $10,000, credit unearned revenue $10,000
Footnote transaction
Debit advertising revenue $10,000, credit accounts receivable $10,000

Answer 8

Nothing is recorded by the company at October month-end.

Question 9

9. In the accounting transaction flow process, after the accounting department prepares all journal entries for the period, what happens next?

Journal entries are posted to the chart of accounts.
A trial balance is prepared.
Source documentation to support transaction is obtained.
Financial statements are prepared.

Answer 9

The trial balance (incorrect) is prepared at the end of the period when all transaction activity is completed.

Question 10

10. A decrease in the accounts receivable asset account pertaining to the firm being paid by one of its customers would accurately be reported as which of the following in the chart of accounts?

Debit retained earnings
Debit account receivable
Credit accounts receivable
Credit cash

Answer 10

Credit accounts receivable

If the accounts receivable account declines from the prior period, it indicates that some customers have paid the company cash to remove the account receivable amount that was owed. Since accounts receivable is an asset, if it is paid down there is a credit recorded to reduce the accounts receivable balance.

Question 11

11. Which of the following U.S. GAAP principles indicates that a transaction should only be recorded when it has actually incurred?

Going concern
Objectivity
Business entity
Conservatism

Answer 11

The U.S. GAAP principle conservatism indicates that a transaction should be recorded when it has actually incurred. This does not include possible or probable transactions.

Question 12

12. A firm used $27,000 in cash to pay the principal off on its bank notes payable. The accounting equation for the firm is in balance.

True
False

Answer 12

The accounting equation is Assets = Liabilities + Equity. The accounting equation is in balance because cash (assets) decreased and the bank notes payable (liability) decreased by the same amount.

Question 13

13. Galveston Inc. purchased raw materials for $75,000 on credit from its supplier. Which of the following demonstrates the proper treatment of this transaction when creating a journal entry?

Debit accounts payable - $75,000; credit inventory - $75,000
Debit miscellaneous - $75,000, credit cash pending - $75,000
Debit current assets - $75,000, credit inventory payable - $75,000
Debit inventory - $75,000, credit accounts payable - $75,000

Answer 13

Debit inventory - $75,000, credit accounts payable - $75,000

This is the correct journal entry for this transaction as the current asset is recognized along with the current liability.

Question 14

14. For most recorded transactions by a firm, the accounting equation should be in balance.

True
False

Answer 14

The above statement does not accurately reflect the accounting equation.

Question 15

15. All of the following are accurate regarding the accrual process with the exception for:

Expenses are recorded if incurred.
The matching principle does not apply.
Cash does not need to be received or paid.
Revenues are recorded if incurred.

Answer 15

The matching principle is a premise of the accrual process as all related expenses have to be recorded in the same period as when the revenues are recorded.

Question 16

16. Which of the following is the main purpose of a trial balance prepared by a firm’s accounting department?

• To provide investors with more detailed account information for selected accounts.
• To facilitate the closing of temporary accounts at the end of the period.
• To facilitate the preparation of the firm’s financial statements.
• To ensure that the debit and credit accounts from the period transactions are in balance.

Answer 16

To facilitate the preparation of the firm’s financial statements is incorrect. While this is a function of the trial balance, it is not its main purpose.

Question 17

Which types of transactions are recorded on a firm’s consolidated financial statements?

• Internal transactions only
• Cash transactions only
• Internal and external transactions
• External transactions only

Answer 17

External transactions only

Under U.S. GAAP only external transactions are recorded on a firm’s financial statements as internal transactions are eliminated in the consolidation process.

Question 18

Company X has current assets of $120,000,000 and long-term assets of $230,000,000 at the end of 2022 year-end. The company also had current liabilities of $95,000,000, long-term liabilities of $175,000,000, and common stock of $30,000,000 at the end of 2022. What is the company’s total stockholders’ equity balance at the end of 2022?

• $30,000,000
• $80,000,000
• $110,000,000
• $50,000,000

Answer 18

$80,000,000

To solve for the answer the accounting equation has to be used as follows: $350,000,000 (total assets) - $270,000,000 (total liabilities) = $80,000,000 (total equity)

Question 19

In the accounting transaction process, the company internal auditors examine source documents, prepare journal entries, and post account activity to the company’s chart of accounts.

• False
• True

Answer 19

False

This statement is inaccurate because the internal auditors’ function is to review (audit) the internal controls of the company.

Question 20

A firm completed a consulting project for $50,000 but has not received the cash from its customer yet. The accounting equation for the firm is in balance.

• True
• False

Answer 20

True

The accounting equation is Assets = Liabilities + Equity. The accounting equation is in balance since accounts receivable (asset) increased and revenue increased by the same amount (note: this increase in revenue would increase retained earnings, which is part of equity).

Question 21

In the accounting transaction flow process, after the accounting department prepares all journal entries for the period, what happens next?

• Source documentation to support transaction is obtained.
• A trial balance is prepared.
• Journal entries are posted to the chart of accounts.
• Financial statements are prepared.

Answer 21

Journal entries are posted to the chart of accounts.

Once a journal entry is prepared each side of the journal entry accounts impacted are posted to these individual accounts on the chart of accounts.

Question 22

A firm used $27,000 in cash to pay the principal off on its bank notes payable. The accounting equation for the firm is in balance.

• False
• True

Answer 22

True

The accounting equation is Assets = Liabilities + Equity. The accounting equation is in balance because cash (assets) decreased and the bank notes payable (liability) decreased by the same amount.