Hardest Accounting Exam Quiz

The given accounting equation is incorrect. The correct accounting equation is: Assets = Liabilities + Owners Equity. This equation represents the fundamental relationship between a company's assets, liabilities, and owners' equity. It states that the total value of a company's assets is equal to the sum of its liabilities and owners' equity.

The statement "Sometimes your balance sheet will not balance, and in those situations it is ok" is false. A balance sheet is a financial statement that shows a company's assets, liabilities, and shareholders' equity at a specific point in time. It is crucial for a balance sheet to balance, meaning that the total assets should equal the total liabilities and shareholders' equity. If the balance sheet does not balance, it indicates errors in the financial records or calculations, which need to be identified and corrected. Therefore, it is not okay for a balance sheet to not balance.

The net income/loss for the year can be calculated by subtracting the ending retained earnings from the beginning retained earnings. In this case, the beginning retained earnings are $175,000 and the ending retained earnings are $125,000. Subtracting the ending retained earnings from the beginning retained earnings gives us a net loss of $50,000.

The correct answer is that the person needs to read/study the material prior to coming to class. This is because the person states that in order for them to pass the class, they need to do this. The other options mentioned are not directly related to the person's success in the class.

The given statement is false. The correct accounting equation is Assets = Liabilities + Owners Equity. The equation represents the fundamental relationship between a company's assets, liabilities, and owners' equity. It states that the total value of a company's assets is equal to the sum of its liabilities and owners' equity. By mistakenly subtracting owners' equity instead of adding it, the given statement is incorrect.

The accounting equation is the foundation of double-entry bookkeeping, ensuring that every financial transaction has a balanced effect on a company's accounts. It states that a company's assets (what it owns) are equal to the sum of its liabilities (what it owes to others) and equity (the owners' stake in the business). This balance is maintained through debits and credits, which ensure that every transaction affects at least two accounts, keeping the equation in equilibrium.

The accounting equation is: Assets = Liabilities + Equity. Retained Earnings is a component of Equity, but it is not part of the accounting equation itself. The equation represents the fundamental principle of double-entry bookkeeping, where the total value of assets must always equal the total value of liabilities and equity.

The statement of cash flows is a financial statement that shows how cash changed during a specific period. It provides information on the inflows and outflows of cash from operating activities, investing activities, and financing activities. This statement helps users understand the sources and uses of cash within the entity and provides insights into its liquidity and cash management. It is a mandatory financial statement required by accounting standards and provides valuable information for decision-making and analysis.

The net income for the year can be calculated by subtracting the beginning retained earnings from the ending retained earnings. In this case, the beginning retained earnings are $100,000 and the ending retained earnings are $250,000. Therefore, the net income for the year is $250,000 - $100,000 = $150,000.

The purpose of the income statement is to show the net income or net loss for the period covered by the statement. This statement provides a summary of the company's revenues, expenses, and profits or losses over a specific period of time, typically a fiscal quarter or year. It helps stakeholders, such as investors and creditors, evaluate the financial performance and profitability of the company. By subtracting the total expenses from the total revenues, the income statement calculates the net income (profit) or net loss for the period, which indicates the company's financial health and viability.

The correct answer is False because the accounting equation is Assets = Liabilities + Owner's Equity, not Contributed Capital. Owner's Equity includes both contributed capital and retained earnings.

An accounts receivable results from the sale of goods and services to customers on account. This means that the customers have not paid for the goods and services at the time of the sale, and the amount owed by the customers is recorded as an accounts receivable. This is a common practice in businesses where customers are allowed to make purchases on credit and pay at a later date. The other options, such as selling property, plant and equipment for cash or selling goods and services for cash, do not result in an accounts receivable as the payment is received immediately. The firm's common stock is not related to the sale of goods and services to customers.

The retained earnings can be calculated by subtracting the total liabilities and contributed capital from the total assets. In this case, 350,000 - 200,000 - 50,000 = 100,000. Therefore, the retained earnings is 100,000.

The three sections of the Cash Flow Statement are operating, investing, and financing. The operating section includes cash flows from the company's core business activities, such as sales and expenses. The investing section includes cash flows from the buying or selling of long-term assets, such as property or equipment. The financing section includes cash flows from activities related to the company's capital structure, such as issuing or repurchasing stock, or taking out loans. This division allows for a clear understanding of how cash is generated and used within the company.

Unearned revenue is not usually associated with owners' equity because it represents advance payments made by customers for goods or services that have not yet been delivered. It is considered a liability because the company has an obligation to provide the goods or services in the future. Owners' equity, on the other hand, includes accounts such as contributed capital, retained earnings, and common stock, which represent the owners' investment in the business and the accumulated profits or losses.

The expanded version of the accounting equation includes the assets (A) on one side and the liabilities (L), contributed capital, beginning retained earnings, revenue (Rev), expenses (Exp), and dividends on the other side. This equation shows the relationship between the different components of a company's financial position and how they contribute to the overall balance.

The given statement is true. Disclosing the valuation methods used by a company in the notes section is important because it allows investors to compare the company's data with other companies. This transparency helps investors make informed decisions and understand how the company arrived at its valuation. By providing this information, the company demonstrates its commitment to openness and accountability, which can enhance investor confidence.

The answer of 26.5% is the Gross Profit Margin calculated based on the given data. The Gross Profit Margin is calculated by subtracting the Cost of Goods Sold (COGS) from 100% and dividing the result by 100%. In this case, since the COGS is given as 73.5%, subtracting it from 100% gives us 26.5%. This means that the company's gross profit is 26.5% of its total revenue.

The given journal entry correctly records the depreciation expense for the year on a given piece of equipment. Depreciation expense is an expense that reflects the decrease in value of an asset over time. By debiting the Depreciation Expense account for $100,000, the entry recognizes the expense. On the other hand, by crediting the Accumulated Depreciation account for the same amount, the entry reflects the accumulated depreciation of the equipment. This entry follows the basic accounting principle of recording expenses and their corresponding offsetting accounts accurately. Therefore, the answer is true.

The statement is false because companies have a responsibility to disclose significant events that occur after the balance sheet date but before the financial statements are released to the public. This is because these events may have a material impact on the financial position and performance of the company, and shareholders have the right to be informed about any potential risks or changes that could affect their investment. Failing to disclose such events could be seen as a violation of transparency and could lead to legal and reputational consequences for the company.

Shifting current expenses to an earlier or later period is not acceptable as it goes against the principle of accrual accounting. Accrual accounting requires expenses to be recorded in the period in which they are incurred, regardless of when the payment is made. This ensures that financial statements accurately reflect the financial position and performance of a company during a given period. Therefore, it is not okay to shift current expenses to a different period.

An accounts payable is a liability that arises when a company purchases goods or services from suppliers on credit. This means that the company does not pay for the goods or services immediately but instead agrees to pay at a later date. The other options, purchasing supplies for cash and purchasing property, plant and equipment for cash, do not result in an accounts payable because they involve immediate payment rather than credit. Therefore, the correct answer is purchasing goods and services from suppliers on credit.

Recording revenue "too soon" is not acceptable even if there is a contract signed with the customer and plans to ship the product later. Revenue recognition should follow the matching principle, which states that revenue should be recognized when it is earned and the related goods or services have been delivered or provided. Recording revenue before the product is shipped would be considered premature and not in accordance with generally accepted accounting principles (GAAP). Therefore, it is not just a timing issue and can have significant implications for financial reporting.

The accounts mentioned in the question, short-term investments, accounts payable, cash equivalents, and wages payable, all have something in common. They would all be classified as "current". This means that they are all expected to be settled or realized within a short period, usually within one year. Classifying them as current helps in analyzing the liquidity and financial health of a company.

The statement is false because there are significant differences between GAAP (Generally Accepted Accounting Principles) prepared financial statements and tax forms prepared using IRS rules. GAAP is a set of accounting standards that companies use to prepare their financial statements, while IRS rules are specific regulations set by the Internal Revenue Service for tax reporting purposes. The main difference lies in the timing of recognizing revenues and expenses, as well as the treatment of certain items such as depreciation and inventory valuation. Therefore, financial statements prepared under GAAP may not align with the amounts reported on tax forms.

The correct answer is "The internal auditor performs tasks similar to the external auditor – but the internal auditor is employed in industry rather than public accounting." This answer accurately describes the role of an internal auditor, who is responsible for evaluating and assessing the effectiveness of an organization's internal controls, risk management processes, and governance. Unlike external auditors who work for public accounting firms and provide independent opinions on financial statements, internal auditors are employed by the organization they audit and focus on internal processes and controls.

A contra asset account is used to reduce the value of a related asset account on the balance sheet. Contra assets have a credit balance, which means they increase with a credit entry. Therefore, the statement "A contra asset will increase with a credit" is true.

Owners' equity refers to the ownership right of the owner(s) of the entity. This means that it represents the residual interest in the assets of the organization after deducting liabilities. It is the amount that the owners would have left if all the organization's assets were sold and all its debts were paid off. Therefore, the correct answer is "The ownership right of the owner(s) of the entity."

The correct answer is cash and assets expected to be converted to cash within a year. This is because current assets are those that are expected to be used up or converted into cash within a year. These assets are necessary for the day-to-day operations of the company and include items such as cash, accounts receivable, inventory, and prepaid expenses. The other options mentioned, such as assets currently used in operations and marketable securities, may be included in current assets, but they do not encompass the entire category.

The journal entry to record the transaction of purchasing inventory for $470,000 and paying cash would be: Inventory..$470,000 Cash.............$470,000. This is because when inventory is purchased and cash is paid, the inventory account is debited to increase it, and the cash account is credited to decrease it. Therefore, the correct answer is False.

The principal reason for reconciling the cash balance per books with the balance shown on the bank statement is to determine the amount of cash in the account actually available to the entity. This process helps identify any discrepancies between the cash balance recorded in the company's books and the balance reported by the bank. By comparing the two, the company can identify any outstanding checks, deposits in transit, bank fees, or errors that may have caused the difference. Ultimately, this reconciliation ensures that the company has an accurate understanding of its available cash balance.

The role of the auditor is to review and assess the financial statements of an organization to ensure their accuracy, completeness, and compliance with relevant regulations and standards. Auditors are responsible for examining the financial records, transactions, and supporting documents to identify any errors, inconsistencies, or fraudulent activities. They also provide an independent and objective opinion on the fairness and reliability of the financial statements. Therefore, it is true that the role of the auditor is to ensure that the financial statements are perfect.

This statement is false because transactions do not cause the balance sheet to not balance. The purpose of a balance sheet is to show the financial position of a company at a specific point in time, with the assets equaling the liabilities and equity. Transactions may impact the individual components of the balance sheet, but they should still balance out. If the balance sheet does not balance, it is likely due to errors in recording or calculation.

The correct answer is that all costs incurred in the process of earning revenue during a period are recorded as an expense in that period. This concept is known as matching revenue and expense, where expenses are recognized in the same period as the revenue they helped generate. This ensures that the financial statements accurately reflect the costs associated with generating revenue and allows for better analysis of the company's profitability.

General and selling expenses are not included in the calculation for Gross Profit because Gross Profit is calculated by subtracting the Cost of Goods Sold from the Revenue or Net Sales. General and selling expenses are operating expenses that are incurred after the Gross Profit is calculated and are deducted from the Gross Profit to calculate the Operating Profit.

Accumulated depreciation is classified as a contra-asset account. A contra-asset account is used to offset the value of the related asset account on the balance sheet. In the case of accumulated depreciation, it is used to reduce the value of the asset account "Property, Plant, and Equipment" to reflect the decrease in value over time due to wear and tear or obsolescence. Contra-asset accounts have a credit balance, which is opposite to the normal debit balance of asset accounts. Therefore, the correct answer is "a contra-asset".

The company's management is ultimately responsible for the financial statements of the company. They are in charge of overseeing the preparation and accuracy of the financial statements, ensuring compliance with accounting standards and regulations. Management is responsible for making key financial decisions, maintaining internal controls, and providing accurate and transparent financial information to stakeholders. While internal auditors and external auditors play important roles in reviewing and verifying the financial statements, the ultimate responsibility lies with the company's management.

The gross profit is calculated by subtracting the cost of goods sold (COGS) from the sales revenue. In this case, the COGS is given as 50% of the sales, which is $225. Therefore, the gross profit is $450 - $225 = $225.

The correct answer is "The entity's accounts". Financial transactions are summarized and recorded in the entity's accounts, which include various financial statements such as the balance sheet, income statement, and cash flow statement. These accounts provide a comprehensive overview of the organization's financial activities and are used for decision-making, analysis, and reporting purposes. The financial statement footnotes and the independent auditor's opinion letter provide additional information and assurance regarding the accuracy and completeness of the entity's accounts.

The net book value of a depreciable asset is the difference between the asset's cost and accumulated depreciation. This means that it is the remaining value of the asset after accounting for the amount that has been depreciated over its useful life. It represents the value of the asset that is still recorded on the balance sheet. The fair market value of the asset and the amount for which it should be insured may be different from the net book value as they are based on external factors such as market conditions and insurance coverage. The depreciation expense, on the other hand, represents the amount of the asset's cost that is allocated as an expense over its useful life.

Accounts receivable are reported at net realizable value because this is the estimated amount that a company expects to collect from its customers. It is calculated by subtracting any allowances for doubtful accounts or discounts from the total accounts receivable balance. This value is considered more conservative and realistic than historical cost, weighted average cost, or market value, as it reflects the actual amount that the company is likely to receive.

The allowance for doubtful accounts is a contra current asset because it is a deduction from accounts receivable, which is a current asset. The allowance is created to account for the possibility that some customers may not pay their outstanding debts. By deducting the allowance from accounts receivable, the company is able to report a more accurate net realizable value of its accounts receivable on the balance sheet.

The given journal entry is incorrect. The correct journal entry would be: Cash................$375,000 AR...................$375,000 Sales......................$750,000 COGS...............$250,000 Inventory.................$250,000. This is because half of the sales, which is $375,000, was received in cash and the other half was recorded as accounts receivable. The cost of goods sold is recorded as $250,000, which is the cost of the sales. The inventory is reduced by the same amount. Therefore, the correct answer is False.

Managerial accounting is the classification of accounting that is most concerned with the use of economic and financial information to plan and control the activities of an entity. It involves analyzing and interpreting financial data to aid in decision-making, budgeting, and performance evaluation. Unlike financial accounting, which focuses on reporting financial information to external stakeholders, managerial accounting is primarily used by internal management to make strategic and operational decisions. Auditing-Public accounting, financial accounting, and income tax accounting are not primarily focused on planning and controlling activities within an entity, making managerial accounting the correct answer.

The distinction between a current asset and other assets is based on when the asset is expected to be converted to cash or used to benefit the entity. Current assets are those that are expected to be converted to cash or used up within a year, while other assets are those that are expected to provide benefits beyond a year. This distinction is important for financial reporting purposes as it helps in assessing the liquidity and financial health of an entity.

Retained earnings represents the portion of a company's net income that has not been distributed to shareholders as dividends but has been reinvested back into the company. It is calculated by subtracting the dividends paid to shareholders from the net income. Retained earnings are an important indicator of a company's profitability and financial health, as they reflect the amount of earnings that have been retained and reinvested to support future growth and expansion.

Accrual of interest expense is likely to cause an increase in a current liability because it represents the amount of interest that has been incurred but not yet paid. When interest is accrued, it is recorded as an expense in the accounting records, which increases the company's liability for the interest owed. This liability is typically classified as a current liability because it is expected to be paid within one year. The other options, such as payment of accrued wages, depreciation of equipment, and accrual of bad debts expense, do not directly impact current liabilities.

Minority interests is not an owner's equity account because it represents the ownership stake in a company held by shareholders who do not have a controlling interest. It is a liability on the balance sheet, not an equity account. The other options listed - common stock, preferred stock, retained earnings, and paid-in-capital in excess of par - are all examples of owner's equity accounts.

A contra-asset account is used to offset the balance in a related asset account. It carries a credit balance, not a debit balance. Therefore, a contra-asset account will increase with a credit, not a debit. Hence, the given statement "A contra-asset will increase with a debit" is false.

The correct answer is the date on which the board of directors declares a dividend. This means that the board of directors of a company announces their intention to distribute dividends to the shareholders. This declaration date is important because it signifies the company's commitment to paying out dividends and allows shareholders to anticipate and plan for the upcoming dividend payment.