Accounting Exam 1 – Flashcards

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What is accounting?
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-Measures business activities -Processes data into reports and communicates the data to decision makers -is often called the language of business
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A disadvantage of general partnership is:
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each partner may conduct business in the name of the entity and make agreements that legally bind all partners
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True statement for a limited liability company?
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Members have limited liability for the debts of the business
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Two types of accounting:
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-Financial -Managerial
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Decision makers who use accounting info include:
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-creditors -the Securities and Exchange Commission -the Internal Revenue Service
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The ____________ is elected by the stockholders and is responsible for setting policy and appointing officers
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Board of Directors
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Owners of an LLC are called:
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Members
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Advantages of a corporation include:
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Limited liability of the stockholders for the corporation's debts
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Shareholders of a corporation:
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Have limited liability for the corporation's debts
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An important fact to consider when determining how to organize a business is that:
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For accounting purposes, a proprietorship is a distinct entity from the proprietor
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Characteristics of faithfully representative info do NOT include:
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Relevant
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Enhancing qualitative characteristics of accounting info do NOT include:
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Materiality
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Information must be sufficiently transparent so that it makes sense to reasonably informed users of the financial statements, such as creditors. This qualitative characteristic of info is called:
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understandability
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The fair value of a plant asset is equal to:
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The amount the business could sell the asset for
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TRUE OR FALSE U.S. Generally Accepted Accounting Principles are used by many countries in the world
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False
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To be useful, accounting info must have the fundamental qualitative characteristics of:
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Relevance and Faithful Reprensentation
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TRUE OR FALSE The entity assumption draws a sharp boundary around each entity
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True
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TRUE OR FALSE The entity assumption ensures that the business will continue indefinitely
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False
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TRUE OR FALSE Under the entity assumption, the entity is any organization that stands apart as a separate economic unit
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True
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TRUE OR FALSE The transactions of the business cannot be combined with the transactions of the owner
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True
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Verifiability means that the info:
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Must be capable of being checked for accuracy, completeness, and reliability
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The stable monetary unit assumption:
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Enables accountants to ignore the effect of inflation on the accounting records
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The principle stating that assets acquired by the business should be recorded at their actual cost on the date of the purchase is the:
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Historical cost principal
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The accounting equation can be stated as:
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Assets-Liabilities= Stockholder's Equity
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Another way to state the accounting equation is:
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Assets=Liabilities + Paid - in capital+ Retained Earnings
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Liabilities are:
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Debts payable to outsiders called creditors
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What increases retained earnings?
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Net income
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Net income is computed as:
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Revenues-Expenses
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All of the following are expenses EXCEPT for:
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Dividends
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Which of the following statements is TRUE?
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Dividends reduce retained earnings
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Receivables are classified as:
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assets
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Net income:
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is often referred to as the "bottom line" on an income statement
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Revenues are:
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increases in retained earnings resulting from delivering goods or services to customers
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Expenses of a business include:
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cost of goods sold and salaries expense
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What is an accounts payable?
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It is a liability for goods or services purchased on credit and supported by the credit standing of the purchaser
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Which financial statement answers the following question: What is the company's financial position?
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Balance sheet
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Which financial statement answers the following question: What is the company's operating performance over the past year?
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Income statement
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Which financial statement reports cash payments and cash receipts over a period of time?
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Statement of cash flows
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The CORRECT data flow from one financial statement to the next is:
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income statement, statement of retained earnings, balance sheet, statement of cash flows
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The balance sheet is also known as the:
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statement of financial posititon
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The balance sheet reports information about:
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assets, liabilities, and owner's equity
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On the statement of retained earnings:
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a net loss is shown in parentheses as a deduction
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The current portion of a long-term note payable is classified on the balance sheet as a:
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current liability
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The ending balance of Retained Earnings is reported on the:
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-Balance Sheet -Statement of Retained Earnings
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The ending balance of Cash is reported on the:
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-Balance Sheet -Statement of Cash Flows
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The Statement of Retained Earnings is used to prepare the:
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Balance Sheet
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On the Statement of Cash Flows, the ending balance of cash is also found on the:
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Balance Sheet
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Dividends declared are reported on the:
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Statement of Retained Earnings
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The three factors that influence business and accounting decisions are:
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economic,legal, and ethical
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The ________ factor recognizes that while certain actions might be both economically profitable and legal, they still may not be right
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Ethical
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The economic factor in decision making requires the decision maker to:
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maximize the economic benefit to the decision maker
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TRUE OR FALSE A transaction is any event that has a financial impact on the business and that can be measured reliably.
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True
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Which of the following is NOT a business transaction?
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A company fired 10 percent of the employees due to lackluster sales
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TRUE OR FALSE The account is the basic summary device used in accounting
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True
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TRUE OR FALSE An accounts receivable usually specifies an interest rate
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False
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TRUE OR FALSE Assets include cash, land, and accounts payable
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False
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TRUE OR FALSE Prepaid expenses are an asset
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True
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A record of all the changes in a particular asset during a period of time is found in a(n):
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account
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TRUE OR FALSE Retained Earnings is considered an asset?
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False
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Notes Receivable
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Asset
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Cash
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Asset
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Prepaid Expenses
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Asset
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Which account includes bank account balances in multiple checking accounts?
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Cash
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Notes payable, accounts payable, taxes payable and salaries payable are all examples of:
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Liabilities
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The debt created by a business when it makes a purchase of inventory on account is a(n):
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account payable
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Which of the following transactions will increase Stockholder's Equity?
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The company issues common stock to new shareholders
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Which of the following transactions will increase one asset and decrease another asset?
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The purchase of equipment for cash
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A company performed services for a customer for cash. This transaction increased assets and:
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increased revenues
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A company receives an utility bill and immediately pays it. With this transaction:
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stockholders' equity is decreased
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Company Z sells land for the same amount it paid for it three years ago. When the company records this transaction:
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one assets is increased and another asset is decreased
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When a company borrows money from the bank, which type of account(s) is(are) increased?
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asset and liability accounts
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When a company pays an amount it owes a creditor:
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assets are decreased and liabilities are decreased
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Purchasing supplies on account would:
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increase total assets and increase total liabilities
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Which of the following transactions would decrease an asset and decrease stockholders' equity?
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The declaration and payment of a dividend to the shareholders
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A company received $35,000 cash and issued common stock in exchange. In transaction analysis, how does this transaction affect the accounting equation?
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Add $35,000 to Cash account and add $35,000 to common stock account
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A company purchased supplies of $4,000 on account. In transaction analysis, how does this transaction affect the accounting equation?
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Add $4,000 to Supplies account and add $4,000 to Accounts Payable account
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On May 1, a company provided legal services for a new client. The lawyer asked for $1,300 and the client paid with a check on May 1 before leaving the office. In transaction analysis, how does this transaction affect the accounting equation?
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Add $1,300 to Cash account and add $1,300 to Retained Earnings account
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A company went to the bank and borrowed $15,000 on a long-term note. In transaction analysis, how does this transaction affect the accounting equation?
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Add $15,000 to Cash account and add $15,000 to Notes Payable account
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A company declared and paid dividends of $900. In transaction analysis, how does this transaction affect the accounting equation?
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Subtract $900 from Retained Earnings account and subtract $900 from Cash account
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The left side of a T-account is always the:
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Debit side
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The proper order for the accounting process is:
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Transaction occurs, transaction analyzed, journalizing, and posting
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The ledger:
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contains all the accounts used by a business
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Posting is:
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copying the information from the journal to the ledger
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Every journal entry:
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must debit at least one account and credit at least one account
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An owner makes an investment of cash into the business and receives shares of stock. This transaction would include a:
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debit to Cash, and a credit to Common Stock
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A business paid $44,000 cash to purchase equipment. The business would:
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debit Equipment for $44,000 and credit Cash for $44,000
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A business purchased office supplies of $10,000 on account. The business would:
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debit supplies for $10,000 and credit Accounts payable for $10,000
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A business paid $2,000 on account. The journal entry would:
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debit Accounts Payable for $2,000 and credit Cash for $2,000
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Two employees worked a week and the business paid salaries of $1,500. The journal entry would:
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debit Salary Expense for $1,500 and credit Cash for $1,500
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TRUE OR FALSE Accounts are listed in random order in a trial balance
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False
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TRUE OR FALSE A trial balance is one of a company's major financial statements
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False
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TRUE OR FALSE Although a trial balance can be prepared at any time, the most common time is at the end of the accounting period
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True
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The normal balance of an expense account is a _________ because expenses decrease ____________.
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debit, Retained Earnings
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The normal balance of an account:
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falls on the side where increases are recorded
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The normal balance of a revenue account is a ____________ because revenues increase ___________.
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Credit, Retained Earnings
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When computing the normal balance of an account:
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accounts payable should have a credit balance
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The trial balance is used to determine if:
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total debits of all the accounts equal total credits of all the accounts
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What is true regarding a trial balance?
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-A trial balance shows the total debits equals total credits -A trial balance is a list of all accounts used in a business with their balances -A trial balance may be prepared at any time during the accounting period
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A trial balance has which of the following features?
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Totals for all accounts listed in the ledger
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Which account has a normal debit balance?
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Advertising Expense
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The normal balance of the Accounts Receivable account is a ________ because it is a(n) __________ account
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debit, asset
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When listing the accounts on the trial balance, where is the account Dividends listed?
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After Retained Earnings
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The dollar amounts listed on the trial balance are obtained from the:
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ending balances in the ledger accounts
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The trial balance is used to prepare the:
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-statement of retained earnings -balance sheet -income statement only
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A doctor performed surgery in March and did not receive cash from the patient until July. Under accrual- basis accounting, the doctor recognizes revenue:
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in March
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A doctor performed surgery in April and did not receive cash payment from the patient until August. Under cash-basis accounting, the doctor recognizes revenue:
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in August
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Under accrual-basis accounting, revenue is recorded:
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when the services are performed, regardless of when the cash is received
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Which of the following transactions would be recorded under accrual- basis accounting but NOT under cash-basis accounting?
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Purchasing of inventory on account
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Which of the following is a CORRECT statement about the different accounting methods?
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GAAP requires accrual-basis accounting
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The method of accounting that records revenues ONLY when cash is received is the:
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cash-basis method
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When cash -basis accounting is used, and services are provided on account:
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both the income statement and the balance sheet will be incorrect
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An expense occurred in 2013, but it is not paid until 2014. Using the accrual basis of accounting, the expense should appear on:
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the 2013 income statement
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An expense occurred in 2013, and it is not paid until 2014. Using cash- basis accounting, the expense should appear on:
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the 2014 income statement
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An interim period used for reporting purposes is generally:
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less than one year
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The requirement to report accounting information at regular intervals is know as the:
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time-period concept
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Under cash- basis accounting, cash receipts are treated as __________ and cash payments are treated as __________.
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revenues;expenses
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The revenue principle governs two things:
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when to record revenue and the amount of revenue to record
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The revenue principle requires that a business record revenue when the business:
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delivers goods or services to a customer
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Following the expense recognition principle, recognizing expenses along with the related revenues means to:
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subtract expenses from the related revenues to compute net income or net loss
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The following accounts are up-to-date and need no adjustment at the end of the period:
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Cash,Land and Common Stock
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Adjusting entries:
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-adjust Unearned Revenue -are made before the financial statements can be prepared
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Prepaid expenses will:
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become expenses when their future benefits expire
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__________ is the allocation of the cost of an asset over the asset's useful life.
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Depreciation
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__________ will be increased when a company receives cash before performing the services
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Unearned Service Revenue
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The book value of a plant asset is the:
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cost of the asset less the accumulated depreciation
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With an accrual of revenue:
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the cash is received after the revenue is recorded
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When an adjustment is made for prepaid rent:
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an asset decreases and an expense increases
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Which account is credited in the adjusting entry to allocate the cost of equipment to an expense account?
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Accumulated Depreciation
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Which accounts are used in the adjusting entry to record salaries owed to employees, but not paid until the next accounting period?
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Salaries Expense and Salaries Payable
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At the end of the accounting period, a company has accrued interest revenue that they will not receive until the next accounting period. The adjusting entry would include a:
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debit to Interest Receivable
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The Accumulated Depreciation account:
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is a contra asset account
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Which of the following financial statement(s) is(are) prepared using the adjusted trial balance?
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Balance sheet, income statement, and statement of retained earnings
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Which of the following is NOT a correct statement about adjusting entries?
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Every adjusting entry affects Cash
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The adjustment for an accrued expense:
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increases expenses and increases liabilities
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The adjustment for an accrued revenue:
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is necessary because a business often earns revenue before they receive the cash
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The adjusting entry to record the accrual of income tax expense includes a:
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credit to Income Tax Payable
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If adjusting entries are not prepared, which financial statements are misstated?
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income statement, balance sheet and statement of retained earnings
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What form of business organization will give the most freedom to manage the business as someone wishes?
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Proprietorship
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Proprietorship offers the most freedom because
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there is a single owner, so the owner has absolute control over the business
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What form of organization will give creditors the maximum protection in the event that a corporation fails and cannot pay its debts?
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Partnership
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If a _____________ fails and cannot pays its liabilities, creditors ______ force the partners to pay the business's debts from their personal assets
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Partnership, can
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This type of organization (partnership) affords more protection for creditors than a proprietorship because _________________
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there are two or more owners to share the business' debts
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Inflation has been around 5.5% for some time. Woodlake Realtors is considering measuring its land values in inflation-adjusted amounts
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Stable-monetary-unit concept
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You get an especially good buy on a fax machine, paying only $300 when it normally cost $800. What is your accounting value for this fax machine?
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Historical cost Principle
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Burger King, the restaurant chain, sold a store location to McDonald's. How can Burger King determine the sale price of the store-by a professional appraisal, Burger King cost, or the amount actually received from the sale?
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Historical cost principle
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General Motors wants to determine which division of the company- Chevrolet or GMC- is more profitable
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Entity assumption
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What are the economic resources of a business that are expected to be of benefit in the future
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Assets
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_________ represents the claims to the __________ held by the owners of the business
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Owners' equity, assets
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Assets must be at least as large as
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owners' equity
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Owners' equity can be smaller than
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assets
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Both liabilities and owners' equity are claims to
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assets
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_________ are the outsider claims of the assets of a business
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Liabilities
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__________ represents the insider claims to the assets of the business
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Owners' equity
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Accounts Receivable
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Asset
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Long-term debt
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Liability
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Merchandise inventory
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Asset
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Prepaid expenses
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Asset
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Accrued expenses payable
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Liability
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Equipment
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Asset
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Notes Payable
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Liability
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Retained Earnings
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Stockholders' Equity
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Land
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Asset
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Accounts Payable
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Liability
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Common Stock
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Stockholders' Equity
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Supplies
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Asset
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Identify the two basic categories of items on an income statement
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Revenues and expenses
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What do we call the bottom line of the income statement?
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Net income (or net loss)
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Revenues-Expenses =
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Net income
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Assets-Liabilities-Common Stock=
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Retained Earnings
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Accounts Payable (financial statement)
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Balance sheet
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Inventory
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Balance sheet
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Interest revenue
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Income statement
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Long-term debt (financial statement)
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Balance sheet
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Net cash used for financing activites
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Statement of Cash Flows
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Salary expense
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Income statement
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Cash (financial statement)
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Balance sheet and Statement of cash flows
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Dividends
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Statement of cash flows and Statement of retained earnings
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Increase or decrease in cash
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Statement of cash flows
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Net income
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Statement of cash flows, Income sheet, Statement of retained earnings
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Net cash provided by operating activities
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Statement of cash flows
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Retained earnings
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Balance sheet and Statement of retained earnings
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Sales Revenue
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Income statement
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Common stock (financial statement)
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Balance sheet
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Revenue (financial statement)
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Income statement
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Dividends (financial statement)
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Statement of retained earning and Statement of cash flows
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Ending cash balance
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Balance sheet and Statement of cash flows
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Total assets
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Balance sheet
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Selling, general, and administrative expense
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Income statement
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Adjustments to reconcile net income to net cash provided by operations
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Statement of cash flows
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Cash spend to acquire the building (financial statement)
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Statement of cash flows
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Current liabilities (financial statement)
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Balance sheet
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Income tax expense (financial statement)
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Income statement
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Net income (financial statement)
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Income statement, statement of retained earnings, and statement of cash flows
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Common Stock (financial statement)
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Balance sheet
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Ending balance of retained earnings (financial statement)
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Balance sheet and statement of retained earnings
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income tax payable (financial statement)
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balance sheet
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Accounts payable
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Liabilitiy
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How can a business earn large profits but have a small balance of retained earnings?
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Paying large dividends will cause retained earnings to be low
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Give two reasons why a business can have a steady stream of net income over a five-year period and still experience a cash shortage
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heavy investing activity and paying of debts can result in a cash shortage even if net income has been high
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If you could pick a single source of cash for your business, what would it be? Why?
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The single best source of cash for a business is collections from customers. This source of cash is best because it results from the core operating activities of the business
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How can a business be unprofitable several years in a row and still have plenty of cash?
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Borrowing money, issuing stock to stockholders, and selling land, buildings and equipment can bring in cash even when the company has experienced losses.
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Companies prefer to have their largest source of cash come from where?
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Operating activities
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