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Exam 2: Investing and Financing Decisions and the Accounting System

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Question 1

Multiple Choice

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Which of the following journal entries is correct when a business entity pays cash for advertising to be used next year? A. Cash $\quad$ Advertising expense B. Advertising expense $\quad$ Cash C. Cash $\quad$ Prepaid advertising expense D. Prepaid advertising expense $\quad$ Cash

A) Option A
B) Option B
C) Option C
D) Option D

E) B) and D)
F) B) and C)

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Question 2

True/False

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Common stock and additional-paid in capital are both reported on the balance sheet as a component of shareholders' equity.

A) True
B) False

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Question 3

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Superior has provided the following information for its recent year of operation: The common stock account balance at the beginning of the year was $20,000 and the year-end balance was $25,000. The additional paid-in capital account balance increased $2,500 during the year. The retained earnings balance at the beginning of the year was $75,000 and the year-end balance was $91,000. Net income was $26,000. How much did Superior sell its common stock for during the year?

The primary objective of financial reporting is to provide useful information to external decision makers.

For accounting information to be useful, it must be which of the following?

Financial reporting focuses on reporting the impact of transactions on an entity's financial position.

An objective of preparing the trial balance is to test the equality of debits and credits.

On January 1, 2014, Dr. Beth Hill started a new professional corporation, Beth Hill, P.C., to practice medicine with an initial investment of $100,000 in exchange for 20,000 shares of $2 par value common stock. On June 30, 2014, the accounting records showed the following amounts: $\begin{array} { | l | r | } \hline \text { Accounts Payable } & \$ 2,000 \\\hline \text { Accounts Receivable } & \$ 6,200 \\\hline \text { Cash } & \$ 48,100 \\\hline \text { Common stock } & \$ ? \\\hline \text { Additional paid-in capital } & \$ ? \\\hline \text { Office Equipment } & \$ 60,000 \\\hline \text { Office Supplies } & \$ 3,500 \\\hline \text { Retained Earnings } & \$ 5,800 \\\hline \text { Notes Payable } & \$ 10,000 \\\hline\end{array}$ Requirement: 1. Calculate the amounts for common stock and additional paid-in capital. 2. Prepare a balance sheet as of June 30, 2014.

Complete the following schedule for Blue Eye Company.

Centex, Inc. issued 50,000 shares of its $1 par value common stock for $20 per share. The journal entry to record the stock issue would include which of the following?

A company with a high current ratio should never have liquidity problems.

Which of the following would cause a decrease in cash from investing activities?

The trial balance is a listing of account balances that are found in the general ledger.

The Pioneer Company has provided the following account balances: Cash $38,000; Short-term investments $4,000; Accounts receivable $48,000; Supplies $6,000; Long-term notes receivable $2,000; Equipment $96,000; Factory Building $180,000; Intangible assets $6,000; Accounts payable $30,000; Accrued liabilities payable $4,000; Short-term notes payable $14,000; Long-term notes payable $92,000; Common stock $180,000; Retained earnings $60,000. What are Pioneer's total current liabilities?

Which of the following would result when a company sells additional shares of common stock for cash?

For each of the transactions listed below, indicate whether it is an investing (I) or financing (F) activity on the statement of cash flows. Also, indicate if the transaction increases (+) or decreases (-) cash. $\begin{array} { | l | l | l | l | } \hline { \text { Transaction } } && \text { Type of Activity } & \text { Effect on Cash } \\\hline \text { Ex. } & \text { Paid dividends to the owners } & \text { F } & - \\\hline \text { A. } & \begin{array} { l } \text { Purchased equipment to use in the } \\\text { business. }\end{array} & & \\\hline \text { B. } & \text { Issued stock for cash. } & & \\\hline \text { C. } & \text { Borrowed money at the bank. } & & \\\hline \text { D. } & \begin{array} { l } \text { Sold a piece of land adjacent to the } \\\text { plant. }\end{array} & & \\\hline \text { E. } & \begin{array} { l } \text { Paid the principal balance of a note } \\\text { payable. }\end{array} & & \\\hline\end{array}$

Selling stock to investors for cash would result in which of the following?

Which of the following liability accounts does not usually require a future cash payment?

The trial balance is similar to the balance sheet in that it is a listing of assets, liabilities, and stockholders' equity and is provided to external decision makers.

Describe both the investing activities and financing activities section of the statement of cash flows. Provide some examples of each activity.