Q&A Hero

Q: Your company contracted for a 30-second commercial (an advertisement) that aired during the Super Bowl at a cost of $1.2 million. It is legally obligated to pay for the commercial, but has not yet done so. How is your company's balance sheet affected on the day the commercial aired? A) It increases both assets and liabilities by $1.2 million. B) It increases assets and decreases stockholders' equity by $1.2 million each. C) It does not affect the balance sheet. D) It increases liabilities and decreases stockholders' equity by $1.2 million each.

Q: The Sarbanes-Oxley Act was enacted to make corporate managers, board members, and auditors more accountable for the accuracy of the financial statements that their respective firms provide. a. True b. False

Q: During the credit crisis, the U.S. governments Troubled Asset Relief Program (TARP) injected capital into banks by purchasing their preferred stock to provide them with a cushion against loan losses. a. True b. False

Q: Which of the following groups of accounts contains only those that normally have credit balances? A) Accounts Payable, Service Revenue, and Retained Earnings B) Cash, Equipment, and Common Stock C) Notes Payable, Salaries and Wages Payable, and Rent Expense D) Cash, Accounts Receivable, and Retained Earnings

Q: State banks are regulated by the Comptroller of the Currency. a. True b. False

Q: Which of the following statements about revenue and expense accounts is correct? A) Revenue accounts are a subset of assets, and expense accounts are subcategories of liabilities. B) Both revenue accounts and expense accounts are subcategories of assets. C) Both revenue accounts and expense accounts are subcategories of Retained Earnings. D) Revenue accounts are a subcategory of Cash and expense accounts are a subcategory of Accounts Payable.

Q: Shareholders and managers of banks may prefer that banks be required to hold higher levels of capital because this would allow for higher share prices for the banks and larger bonuses for bank managers. a. True b. False

Q: The Sarbanes-Oxley Act (2002) was enacted in response to some banks taking on too much risk. a. True b. False

Q: A company had the following assets and liabilities at the beginning and end of the current year: Assets Liabilities Beginning of year $214,000 $88,000 End of the year 245,000 75,000 Common stock in the amount of $15,000 was issued and dividends of $5,000 were paid during the year. What is the amount of net income for the year? A) $44,000. B) $34,000. C) $24,000. D) $54,000.

Q: Deposit insurance now covers all bank deposits without any limit. a. True b. False

Q: In September, a customer signed a contract to have his house painted and paid for the job in October. The painting company bought the paint in August on account and paid for it in September. The painting company painted the house in November. Assuming accrual basis accounting is used, the painting company should record the: A) revenues in November and the expenses in September. B) revenues and the expenses in September. C) revenues and the expenses in November. D) revenues in September and the expenses in August.

Q: When a bank acts as an intermediary on an interest rate swap and guarantees payment in the event that one of the parties to the swap defaults, the bank is engaging in an off-balance sheet commitment. a. True b. False

Q: Your company orders and receives supplies in January, pays for them in February, provides services to customers that use those supplies in March, and is paid by its customers for the services in April. Using the accrual basis of accounting: A) expenses are recorded in February and revenues are recorded in April. B) expenses are recorded in February and revenues are recorded in March. C) expenses and revenues are recorded in March. D) expenses are recorded in January and revenues are recorded in April.

Q: The act of taking on more risk because of protection from adverse consequences due to the risk is referred to as a moral hazard problem. a. True b. False

Q: Which of the following statements about the income statement is not correct? A) Amounts received from customers for services performed in the current month would be revenues on the income statement. B) Costs incurred in the current month but not paid as of the end of the month would be expenses on the income statement for the current month. C) Amounts received from customers in payment of their accounts arising from service in the prior period would be revenues in the income statement for the current period. D) Amounts received from customer as deposits for services to be rendered next month will not be recorded as revenues on the income statement for the current month.

Q: Regulators put much emphasis on a bank's sensitivity to interest rate movements, since many banks have liabilities that are repriced more frequently than their assets and are adversely affected by rising interest rates. a. True b. False

Q: During the credit crisis, the U.S. government purchased the common stock of the largest banks in order to inject funds into the banks and cushion their losses. a. True b. False

Q: During April, the Grass is Greener Company buys and pays for a six-month supply of fertilizer in order to receive a bulk discount. The company uses accrual basis accounting. The cost of fertilizer recorded: A) immediately as an expense. B) as a liability, which will later be reduced as the fertilizer used. C) partially as an expense and partially as a liability. D) as an asset, which will later be reduced as the fertilizer is used.

Q: All state banks are required to be members of the Federal Reserve System. a. True b. False

Q: Assume accrual basis accounting is used. Which of the following statements about income statement accounts is correct? A) Costs incurred to help generate revenue are only reported as expenses on the income statement if they are paid in cash in the same period as the revenue received. B) Revenue accounts are shown after the amount of expense accounts on the income statement. C) Revenue accounts include Cash, Accounts Receivable, and Unearned Revenue. D) There is no Net Income account.

Q: Assume that accrual basis accounting is used. Which of the following errors would most likely lead to an overstatement of net income in the current year? A) Recording revenue when the cash is collected next year although it is earned in the current year. B) Recording an expense when paid next year although it is incurred this year. C) Failing to adjust the Unearned Revenue account for the portion of rent earned this year. D) Recording revenue earned in the current year when cash is collected this year.

Q: When a bank holds a lower level of capital, a given dollar level of profits represents a lower return on equity. a. True b. False

Q: Banks that are insured by the Federal Deposit Insurance Corporation (FDIC) are also regulated by the FDIC. a. True b. False

Q: The expense recognition principle indicates: A) where expenses should be presented on the income statement. B) how expenses should be split between the income statement and the balance sheet. C) the ordering of current assets and current liabilities on the balance sheet. D) when costs are recognized as expenses on the income statement.

Q: A dance studio accepts $1,500 to provide a series of dance lessons to a youth group during the month of July. The studio decides to record the revenue in July. The studio incurs rent, utilities, and salaries expenses in July. The studio decides to record those expenses in August, when it pays for them. One or both of these decisions: A) violate the expense recognition principle. B) are an example of accrual accounting. C) violate the revenue recognition principle. D) violate the accounting equation.

Q: The Reigle-Neal Interstate Banking and Branching Efficiency Act allowed banks to achieve economies of scale through nationwide interstate banking. a. True b. False

Q: Which of the following is an expense of this period? A) Costs of items used up this period but paid for next period B) Costs of items paid for in this period but used up next period C) Cost of land purchased and paid for this period D) Repayment of debt from a loan in a prior period

Q: In general, a bank defines its value-at-risk as the estimated potential loss from its trading businesses that could result from adverse movements in market prices. a. True b. False

Q: Expenses include all of the following except: A) using supplies. B) making a payment on account. C) paying for electricity used during the current period. D) paying wages for production workers for work performed during the current period.

Q: The fair value accounting that is used to value a banks assets for purposes of meeting capital requirements requires a bank to periodically mark its assets to market. a. True b. False

Q: Use the information above to answer the following question. Assuming the company uses accrual basis accounting, what is net income for May? A) $400. B) $300. C) $350. D) $600.

Q: Some publicly traded banks have incurred larger reporting expenses as a result of having to comply with the Sarbanes-Oxley Act. a. True b. False

Q: Use the information above to answer the following question. Assuming that the company uses cash basis accounting, what is net income for May? A) $800. B) $300. C) $350. D) $600.

Q: The Sarbanes-Oxley Act (SOX) was enacted to ensure a more transparent process for reporting on a firms productivity and financial condition. a. True b. False

Q: Your company receives advance payment in October for services that are provided during November. Which of the following statements is correct? A) A liability is recorded in October; revenue will be recorded in November. B) Revenue is recorded in October and an expense will be recorded in November. C) An expense is recorded in October; revenue will be recorded in November. D) Revenue and expenses are recorded in October.

Q: Indicate whether the statement is true or false.Banks commonly use depositor funds to invest in stocks.a. Trueb. False

Q: Which of the following statements about accrual basis accounting is not correct? A) It uses the revenue recognition principle. B) It uses the expense recognition principle. C) It is required for external accounting reports. D) It requires the timing of cash receipts be in the same period as revenues are recognized.

Q: ____ are the largest bank source of funds as a percentage of total liabilities. a. Savings and small time deposits b. Large deposits c. Transaction deposits d. Borrowed funds e. Bank capital and bonds issued by the bank

Q: This month, a company performed $517,000 of services and incurred total expenses of $438,000. The company was paid in cash for all its services and paid cash for all its expenses. These transactions would cause: A) revenues to increase by $517,000, expenses to increase by $438,000, and Retained Earnings to decrease by $79,000. B) Cash to increase by $517,000, expenses to increase by $438,000, and Common Stock to increase by $79,000. C) revenues to increase by $517,000, expenses to increase by $438,000, and Cash to increase by $79,000. D) revenues to increase by $79,000, expenses to increase by $438,000, and Cash to increase by $517,000.

Q: Before establishing foreign branches, a U.S. bank must obtain the approval of the a. U.S. Treasury. b. U.S. Commerce Department. c. Federal Deposit Insurance Corporation. d. Federal Reserve.

Q: Sparkling Pools performed $1,600 of pool maintenance services during July; the customers had paid in advance for these services in June. The company performed $1,000 of pool maintenance services during July and collected payment from those customers in August. Also, during July, the company accepted an order to perform $500 of pool maintenance services in August; the customers will pay for these services in August. The company uses accrual basis accounting. The Service Revenue account should be credited for: A) $1,600 in June, $1,000 in July, and $500 in August. B) $1,600 in June, $0 in July, and $1,500 in August. C) $0 in June, $1,600 in July, and $1,500 in August. D) $0 in June, $2,600 in July, and $500 in August.

Q: ​Bank capital represents funds obtained through ____ and through ____. a. ​issuing stock; offering long-term CDs b. ​issuing repurchase agreements; issuing bonds c. ​issuing stock; retaining earnings d. ​offering long-term CDs; issuing bonds

Q: During June, the Grass is Greener Company mows 100 lawns a week and is paid in July by those customers. The company uses the accrual basis of accounting. Which financial statement is impacted by these transactions? A) The income statement shows the effects of the transactions in June. B) The income statement shows the effects of the transactions in July. C) The balance sheet shows no effect from the transactions in June. D) The transactions have no effect on the balance sheet.

Q: ​A(n) ____ account provides checking and debit card services as well as interest. a. ​demand deposit b. ​negotiable order of withdrawal (NOW) c. ​passbook savings d. ​time deposit

Q: During November 2015, Asler Inc. performs consulting services. The client does not pay Asler until January, 2016. A) Using the accrual basis of accounting, the revenue is reported in January 2016. B) Using the cash basis of accounting, the revenue is reported in November 2015. C) Using the accrual basis of accounting, the revenue is reported in November 2015. D) Using the accrual basis of accounting, the revenue is reported when Asler's expenses are paid.

Q: ____ is (are) NOT a major source of funds for commercial banks. a. Deposit accounts b. Borrowed funds c. Commercial loans d. Bank capital

Q: Transaction deposits do NOT include a. demand deposits. b. NCDs. c. NOW accounts. d. All of these are transaction deposits.

Q: Which of the following statements about cash basis accounting and accrual basis accounting is correct? A) If payment is received at the same time a service is provided, it does not matter whether cash basis accounting or accrual basis accounting is used; both would record the transaction with the same journal entry. B) The cash basis of accounting works best when a lengthy delay exists between the timing of cash flows and the underlying business activities to which they relate. C) If a company receives a bill for rent for the period and decides to delay payment, the rent will not be recorded as an expense if accrual basis accounting is used. D) If the cash basis of accounting is used, the Unearned Revenue account is increased when a company receives a deposit in advance of services to be performed by the company.

Q: Which of the following statements about cash basis accounting and accrual basis accounting is correct? A) Using the accrual basis of accounting, if payment is received before delivery of goods or a service, revenue is recorded at the time the payment is received. B) Using the accrual basis of accounting, if payment is received after delivery of goods or a service, an asset is recorded at the time the good or service was delivered. C) Using the cash basis of accounting, if payment is received before delivery of goods or a service, net income is affected when goods or services are delivered. D) Using the cash basis, if payment is received after delivery of goods or a service, unearned revenue is recorded.

Q: ​A ____ loan may be especially appropriate when a firm wishes to avoid adding more debt to its balance sheet. a. ​term b. ​bullet c. ​direct lease d. ​revolving credit

Q: Time Warner is a publishing and communications company, specializing in magazines, cable television operation, television program development, and other telecommunication services. Its financial statements show $37,666 in an account called Unearned Revenue, which represents amounts that customers have paid in advance of receiving magazines, cable television, and internet services. What type of account is this and on what statement is it reported? A) Asset; Balance Sheet B) Liability; Balance Sheet C) Revenue; Balance Sheet D) Revenue; Income Statement

Q: ​When a bank obtains funds through a ____, the provider of the funds receives collateral. a. ​retail CD b. ​NOW account c. ​repurchase agreement d. ​money market deposit account

Q: If an apartment leasing company receives the rent for January 2016 from a tenant in December 2015, this will be reported by the leasing company as: A) revenue in 2015. B) an expense in 2015. C) a liability in 2015. D) stockholders equity in 2015.

Q: ​____ loans are primarily used to finance the purchase of fixed assets. a. ​Term b. ​Working capital c. ​Informal line of credit d. ​Revolving credit

Q: During June, the Grass is Greener Company mows 100 lawns a week; the company was paid in advance during May by those customers. The company uses the accrual basis of accounting. How will these events affect the companys financial statements? A) The income statement shows the effects of the transactions in May. B) The income statement shows the effects of the transactions in June. C) The balance sheet shows no effect from the transactions in May. D) The balance sheet shows no effect from these transactions in May or June.

Q: The interest rate charged on loans from the Federal Reserve to banks is commonly referred to as the a. federal funds rate. b. primary credit rate. c. repo rate. d. None of these are correct.

Q: A company's revenue recognition policy: A) affects the income statement but not the balance sheet. B) defines when its revenue should be collected. C) is usually described in the notes to a company's financial statements. D) states that revenues should not be recorded until payments are received from customers.

Q: The primary credit rate is determined by a. the Federal Reserve. b. Congress. c. the Treasury. d. the President of the United States.

Q: Which of the following statements about cash basis accounting and accrual basis accounting is correct? A) Net income is generally larger under accrual basis accounting than cash basis accounting. B) GAAP does not require the use of accrual basis accounting for external reporting. C) Accrual basis accounting and cash basis accounting will always produce the same amount of net income. D) Accrual basis accounting provides a better measure of operating performance than cash basis accounting.

Q: When banks obtain funds in the federal funds market, the funds are provided by a. other depository institutions. b. nonfinancial corporations. c. consumers. d. the Federal Reserve.

Q: The Rainbow House Painting Company has been contracted to paint a house for $3,600. One-half of that amount will be paid up front; the rest will be paid upon satisfactory completion. Rainbow should recognize the revenue when: A) the work begins. B) the first payment is received. C) half of the work is complete and half of the payments have been received. D) the work is complete.

Q: ​With a _________, a bank agrees to purchase a firms __________ if the firm cannot place the issue in the market at an acceptable interest rate. a. ​note issuance facility; commercial paper b. ​note issuance facility; bonds c. ​paper placement commitment; commercial paper d. ​bond placement commitment; bonds

Q: The Fastbank Motorcycle Service Company wins a $10 million bid to provide the repair services for a recall on a popular brand of motorcycles. No money is exchanged. The repair services are expected to be performed early next year. How will these events affect the balance sheet prepared at the end of this year? A) Accounts Receivable will increase by $10 million. B) Both Accounts Receivable and Accounts Payable will each increase by $10 million. C) Both Accounts Receivable and Stockholders' Equity will each increase by $10 million. D) These events will not impact the balance sheet.

Q: ​A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, a minimum deposit of $100,000 or more, and a secondary market. a. ​retail CD b. ​negotiable CD c. ​market CD d. ​protective CD

Q: Which of the following statements about the cash basis of accounting is correct? A) It can lead to a distorted view of the companys financial performance. B) It is the only acceptable method for external reporting. C) It reports revenues when earned and expenses when incurred. D) It is used when cash is paid at the same time as the cost is incurred, but is not used when cash is paid before the expense is incurred.

Q: ​Which of the following is most appropriate for a business that may experience a sudden need for funds but does not know precisely when? a. ​working capital loan b. ​direct lease loan c. ​term loan d. ​informal line of credit

Q: The Federal Reserve provides loans to banks in order to a. resolve permanent shortages of funds experienced by banks. b. resolve temporary shortages of funds experienced by banks. c. finance the shortages of funds of finance companies. d. None of these are correct.

Q: Which of the following statements about accrual basis accounting is correct? A) If a company uses accrual basis accounting, the company should not record revenue until payments is actually received. B) If a company uses accrual basis accounting, the company should, the company should record expenses in the same period as the revenues they generate. C) IFRS does not allow accrual basis accounting for external reporting of income. D) The items reported on the income statement continue to have an impact beyond the current period, whereas the items reported on the balance sheet impact just the current period.

Q: During 2016, a company provided services for cash of $21,000 and services on credit of $15,000. The company collected accounts receivable of $8,000 and incurred operating expenses of $22,700, $14,000 of which were paid during the year. The amount of net income (loss) for the year is: A) $13,300 B) ($1,700) C) $22,700 D) $6,300

Q: Which of the following is true in regard to money market deposit accounts? a. MMDAs specify a maturity. b. MMDAs offer limited check-writing privileges. c. MMDAs are less liquid than retail CDs. d. MMDAs require no minimum balance.

Q: Banks sometimes need funds temporarily and sometimes have excess funds available. Which of the following is commonly a source of bank funds and a use of bank funds? a. MMDAs b. federal funds c. the Federal Reserves lending facility d. retail CDs

Q: Which of the following statements about the income statement of a company that was formed 10 years ago is correct? A) Reports a Net Loss for the year if expenses are more than revenues. B) Reports the financial effects of activities that have occurred since the companys inception. C) Reports the amount of the increase in stockholders equity this year as a result of the companys operations. D) Reports Net Income which is not an account in the ledger.

Q: All other things being equal, when banks issue new stock, they a. increase reported earnings per share. b. decrease their ability to absorb operating losses. c. dilute the ownership of the bank. d. increase reported earnings per share AND decrease their ability to absorb operating losses.

Q: Which of the following would not be reported on the income statement? A) Utilities expense in the amount of a bill received for utilities used during the current period but unpaid as of the end of the period. B) Rent expense in the amount of rent paid during the period for use of a storage facility in the current period. C) Revenue in the amount of services provided to customers who promise to pay in the next period. D) Cost of land purchased with cash for future use.

Q: Which of the following items is not a specific account in a company's chart of accounts? A) Income Tax Expense B) Sales Revenue C) Unearned Revenue D) Net Income

Q: Which of the following types of deposits offer check-writing privileges? a. NOW accounts b. money market deposit accounts (MMDAs) c. retail CDs d. NOW accounts AND money market deposit accounts (MMDAs)

Q: Which of the following represents a subtotal rather than an account? A) Advertising Expense B) Service Revenue C) Supplies Expense D) Total Revenues

Q: Which of the following statements is NOT correct? a. The five largest U.S. banks now account for more than 50 percent of bank assets. b. Acquisitions have been a convenient method for banks to grow quickly and capitalize on economies of scale. c. The banking industry has become less concentrated in recent years. d. All of these statements are correct.

Q: Which of the following is an operating activity? A) Repaying a bank loan B) Paying a dividend to owners C) Purchasing a new building D) Purchasing goods to be offered for sale

Q: When a bank engages in proprietary trading, it a. uses its own funds to make investments. b. is not subject to regulations. c. lends the funds in the federal funds market. d. normally uses the funds to build its capital.