Chapter 1
ACCOUNTING IN BUSINESS
True / False Questions
1. Accounting is an information and measurement system that identifies, records, and
communicates relevant, reliable, and comparable information about an organization’s business
activities.
2. Bookkeeping is the recording of transactions and events and is only part of accounting.
3. An accounting information system communicates data to help users make better decisions.
4. Financial accounting is the area of accounting that provides internal reports to assist the
decision making needs of internal users.
5. Internal operating activities include research and development, distribution, and human
resources.
6. The primary objective of managerial accounting is to provide general purpose financial
statements to help external users analyze and interpret an organization’s activities.
7. External auditors examine financial statements to verify that they are prepared according to
generally accepted accounting principles.
8. External users include lenders, shareholders, customers, and regulators.
9. Regulators often have legal authority over certain activities of organizations.
10. Internal users include lenders, shareholders, brokers and managers.
11. Opportunities in accounting include auditing, consulting, market research, and tax
planning.
12. Identifying the proper ethical path is usually easy.
13. The Sarbanes-Oxley Act (SOX) requires each issuer of securities to disclose whether it
has adopted a code of ethics for its senior financial officers and the contents of that code.
14. The fraud triangle asserts that the three factors that must exist for a person to commit
fraud are opportunity, pressure, and rationalization.
15. The Sarbanes-Oxley Act (SOX) does not require public companies to apply both
accounting oversight and stringent internal controls.
16. A partnership is a business owned by two or more people.
17. Owners of a corporation are called shareholders or stockholders.
18. In the partnership form of business, the owners are called stockholders.
19. The balance sheet shows a company’s net income or loss due to earnings activities over a
period of time.
20. The Financial Accounting Standards Board is the governmental agency that sets both
broad and specific accounting principles.
21. The business entity principle means that accounting information reflects a presumption
that the business will continue operating instead of being closed or sold.
22. Generally accepted accounting principles are the basic assumptions, concepts, and
guidelines for preparing financial statements.
23. The business entity assumption means that a business is accounted for separately from
other business entities, including its owner or owners.
24. As a general rule, revenues should not be recognized in the accounting records when
earned, but rather when cash is received.
25. Specific accounting principles are basic assumptions, concepts, and guidelines for
preparing financial statements and arise out of long-used accounting practice.
26. General accounting principles arise from long-used accounting practices.
27. A sole proprietorship is a business owned by one or more persons.
28. Unlimited liability and separate taxation of the business are advantages of a sole
proprietorship.
29. Understanding generally accepted accounting principles is not necessary to effectively use
and interpret financial statements.
30. The International Accounting Standards board (IASB) has the authority to impose its
standards on companies around the world.
31. Objectivity means that financial information is supported by independent, unbiased
evidence.
32. The idea that a business will continue to operate instead of being closed or sold underlies
the going-concern assumption.
33. According to the cost principle, it is necessary for managers to report an approximation of
an asset’s market value upon purchase.
34. The monetary unit assumption means that all companies doing business in the United
States must express transactions and events in US dollars.
35. The International Accounting Standards Board (IASB) is the government group that
establishes reporting requirements for companies that issue stock to the public.
36. A limited liability company offers the limited liability of a partnership or proprietorship
and the tax treatment of a corporation.
37. The Securities and Exchange Commission (SEC) is a government agency that has legal
authority to establish GAAP.
38. The three common forms of business ownership include sole proprietorship, partnership,
and non-profit.
39. The three major types of business activities are operating, financing, and investing.
40. Planning involves defining an organization’s ideas, goals, and actions.
41. Strategic management is the process of determining the right mix of operating activities
for the type of organization, its plans, and its market.
42. Investing activities are the means an organization uses to pay for resources like land,
buildings, and equipment to carry out its plans.
43. Investing activities are the acquiring and disposing of resources that an organization uses
to acquire and sell its products or services.
44. Owner financing refers to resources contributed by creditors or lenders.
45. Revenues are increases in equity from a company’s sales of products and services to
customers.
46. A net loss occurs when revenues exceed expenses.
47. Net income occurs when revenues exceed expenses.
48. Liabilities are the owner’s claim on assets.
49. Assets are the resources a company owns or controls that are expected to yield future
benefits.
50. Dividends are expenses.
51. The accounting equation can be restated as: Assets – Equity = Liabilities.
52. The accounting equation implies that: Assets + Liabilities = Equity.
53. Common stock is an increase in equity from a company’s earnings activities.
54. Every business transaction leaves the accounting equation in balance.
55. An external transaction is an exchange within an entity that may or may not affect the
accounting equation.
56. From an accounting perspective, an event is a happening that affects the accounting
equation, but cannot be measured.
57. Stockholders’ equity is increased when cash is received from customers in payment of
previously recorded accounts receivable.
58. A stockholder’s investment in a business normally creates an asset (cash), a liability
(note payable), and stockholders’ equity (investment.)
59. Return on assets is often stated in ratio form as the amount of average total assets divided
by income.
60. Return on assets is also known as return on investment.
61. Return on assets is useful to decision makers for evaluating management, analyzing and
forecasting profits, and in planning activities.
62. Arrow’s net income of $117 million and average assets of $1,400 million results in a
return on assets of 8.36%.
63. Return on assets reflects a company’s ability to generate profit through productive use of
its assets.
64. Risk is the uncertainty about the return we will earn.
65. Generally the lower the risk, the higher the return that can be expected.
66. U. S. Government Treasury bonds provide low return and low risk to investors.
67. The four basic financial statements include the balance sheet, income statement, statement
of retained earnings, and statement of cash flows.
68. An income statement reports on investing and financing activities.
69. A balance sheet covers activities over a period of time such as a month or year.
70. The income statement describes revenues earned and expenses incurred over a specified
period of time due to earnings activities.
71. The statement of cash flows shows the net effect of revenues and expenses for a reporting
period.
72. The income statement shows the financial position of a business on a specific date.
73. The first section of the income statement reports cash flows from operating activities.
74. The balance sheet is based on the accounting equation.
75. Investing activities involve the buying and selling of assets such as land and equipment
that are held for long-term use in the business.
76. Operating activities include long-term borrowing and repaying cash from lenders, and
cash investments or dividends to stockholders.
77. The purchase of supplies appears on the statement of cash flows as an investing activity
because it involves the purchase of assets.
78. The income statement reports on operating activities at a point in time.
79. The statement of cash flows identifies cash flows separated into operating, investing, and
financing activities over a period of time.
80. Ending retained earnings on the statement of retained earnings is calculated by adding
stockholder investments and net losses and subtracting net income and dividends.
81. Accounting is an information and measurement system that does all of the following
except:
A. Identifies business activities.
B. Records business activities.
C. Communicates business activities.
D. Eliminates the need for interpreting financial data .
E. Helps people make better decisions.
82. Technology:
A. Has replaced accounting.
B. Has not improved the clerical accuracy of accounting.
C. Reduces the time, effort and cost of recordkeeping.
D. In accounting has replaced the need for decision makers.
E. In accounting is only available to large corporations.
83. The primary objective of financial accounting is to:
A. Serve the decision-making needs of internal users.
B. Provide accounting information that serves external users.
C. Monitor and control company activities.
D. Provide information on both the costs and benefits of looking after products and services.
E. Know what, when, and how much product to produce.
84. The area of accounting aimed at serving the decision making needs of internal users is:
A. Financial accounting.
B. Managerial accounting.
C. External auditing.
D. SEC reporting.
E. Bookkeeping.
85. External users of accounting information include all of the following except:
A. Shareholders.
B. Customers.
C. Purchasing managers.
D. Government regulators.
E. Creditors.
86. All of the following regarding a Certified Public Accountant are true except:
A. Must meet education and experience requirements.
B. Must pass an examination.
C. Must exhibit ethical character.
D. May also be a Certified Management Accountant.
E. Cannot hold any certificate other than a CPA.
87. Ethical behavior requires that:
A. Auditors’ pay not depend on the success of the client’s business.
B. Auditors invest in businesses they audit.
C. Analysts report information favorable to their companies.
D. Managers use accounting information to benefit themselves.
E. Auditors’ pay depends on the success of the client’s business.
88. The conceptual framework that the Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board (IASB) are attempting to converge and enhance
includes the following broad areas to guide standard setting except:
A. Objectives
B. Qualitative characteristics
C. Uniformity
D. Elements
E. Recognition and measurement
89. All of the following are true regarding ethics except:
A. Ethics are beliefs that separate right from wrong.
B. Ethics rules are often set for CPAs.
C. Ethics do not affect the operations or outcome of a company.
D. Are critical in accounting.
E. Ethics can be difficult to apply.
90. The accounting concept that requires financial statement information to be supported by
independent, unbiased evidence is:
A. Business entity assumption.
B. Revenue recognition principle.
C. Going-concern assumption.
D. Time-period assumption.
E. Objectivity principle
91. A corporation is:
A. A business legally separate from its owners.
B. Controlled by the FASB.
C. Not responsible for its own acts and own debts.
D. The same as a limited liability partnership.
E. Not subject to double taxation.
92. The independent group that is attempting to harmonize accounting practices of different
countries is the:
A. AICPA.
B. IASB.
C. CAP.
D. SEC.
E. FASB.
93. The private-sector group that currently has the authority to establish generally accepted
accounting principles in the United States is the:
A. APB.
B. FASB.
C. AAA.
D. AICPA.
E. SEC.
94. The accounting concept that requires every business to be accounted for separately from
other business entities, including its owner or owners is known as the:
A. Time-period assumption.
B. Business entity assumption.
C. Going-concern assumption.
D. Revenue recognition principle.
E. Cost principle.
95. The rule that requires financial statements to reflect the assumption that the business will
continue operating instead of being closed or sold, unless evidence shows that it will not
continue, is the:
A. Going-concern assumption.
B. Business entity assumption.
C. Objectivity principle.
D. Cost Principle.
E. Monetary unit assumption.
96. If a company is considering the purchase of a parcel of land that was acquired by the seller
for $85,000, is offered for sale at $150,000, is assessed for tax purposes at $95,000, is
recognized by the purchaser as easily being worth $140,000, and is purchased for $137,000,
the land should be recorded in the purchaser’s books at:
A. $95,000.
B. $137,000.
C. $138,500.
D. $140,000.
E. $150,000.
97. To include the personal assets and transactions of a business’s stockholders in the records
and reports of the business would be in conflict with the:
A. Objectivity principle.
B. Monetary unit assumption.
C. Business entity assumption.
D. Going-concern assumption.
E. Revenue recognition principle.
98. The accounting principle that requires accounting information to be based on actual cost
and requires assets and services to be recorded initially at the cash or cash-equivalent amount
given in exchange, is the:
A. Accounting equation.
B. Cost principle.
C. Going-concern assumption.
D. Realization principle.
E. Business entity assumption.
99. The rule that (1) requires revenue to be recognized at the time it is earned, (2) allows the
inflow of assets associated with revenue to be in a form other than cash, and (3) measures the
amount of revenue as the cash plus the cash equivalent value of any noncash assets received
from customers in exchange for goods or services, is called the:
A. Going-concern assumption.
B. Cost principle.
C. Revenue recognition principle.
D. Objectivity principle.
E. Business entity assumption.
100. The question of when revenue should be recognized on the income statement according
to GAAP is addressed by the:
A. Revenue recognition principle.
B. Going-concern assumption.
C. Objectivity principle.
D. Business entity assumption.
E. Cost principle.
101. The International Accounting Standards Board (IASB):
A. Hopes to create harmony among accounting practices of different countries to improve
comparability.
B. Is the government group that establishes reporting requirements for companies that issue
stock to the investing public.
C. Has the authority to impose its standards on companies around the world.
D. Is the only source of generally accepted accounting principles (GAAP).
E. Only applies to companies that are members of the European Union.
102. The Superior Company acquired a building for $500,000. The building was appraised at
a value of $575,000. The seller had paid $300,000 for the building 6 years ago. Which
accounting principle would require Superior to record the building on its records at
$500,000?
A. Monetary unit assumption.
B. Going-concern assumption.
C. Cost principle.
D. Business entity assumption.
E. Revenue recognition principle.
103. On December 15 of the current year, Conrad Accounting Services signed a $40,000
contract with a client to provide bookkeeping services to the client in the following year.
Which accounting principle would require Conrad Accounting Services to record the
bookkeeping revenue in the following year and not the year the cash was received?
A. Monetary unit assumption.
B. Going-concern assumption.
C. Cost principle.
D. Business entity assumption.
E. Revenue recognition principle.
104. Marsha Bogswell is the owner of Bogswell Legal Services, Inc. Which accounting
principle requires Marsha to keep her personal financial information separate from the
financial information of Bogswell Legal Services, Inc.?
A. Monetary unit assumption.
B. Going-concern assumption.
C. Cost principle.
D. Business entity assumption.
E. Matching principle.
105. A limited partnership:
A. Includes a general partner with unlimited liability.
B. Is subject to double taxation.
C. Has owners called stockholders.
D. Is the same as a corporation.
E. May only have two partners.
106. A partnership:
A. Is also called a sole proprietorship.
B. Has unlimited liability for its partners.
C. Has to have a written agreement in order to be legal.
D. Is a legal organization separate from its owners.
E. Has owners called shareholders.
107. Which of the following accounting principles require that all goods and services
purchased be recorded at actual cost?
A. Going-concern assumption.
B. Matching principle.
C. Cost principle.
D. Business entity assumption.
E. Consideration assumption.
108. Which of the following accounting principles prescribes that a company record its
expenses incurred to generate the revenue reported?
A. Going-concern assumption.
B. Matching principle.
C. Cost principle.
D. Business entity assumption.
E. Consideration assumption.
109. Revenue is properly recognized:
A. When the customer makes an order.
B. Only if the transaction creates an account receivable.
C. At the end of the accounting period.
D. Upon completion of the sale or when services have been performed and the business
obtains the right to collect the sales price.
E. When cash from a sale is received.
110. Which of the following purposes would financial statements serve for external users?
A. To find information about projected costs and revenues of proposed products.
B. To assess employee performance and compensation.
C. To assist in monitoring consumer needs and price concerns.
D. To fulfill regulatory requirements for companies whose stock is sold to the public.
E. To determine purchasing needs.
111. In a business decision where there are ethical concerns, the preferred course of action
should be one that:
A. Is agreed upon by the most managers.
B. Maximizes the company’s profits.
C. Results in maintaining operations at the current level.
D. Costs the least to implement.
E. Avoids casting doubt on the decision maker and upholds trust.
112. If a company uses $1,300 of its cash to purchase supplies, the effect on the accounting
equation would be:
A. Assets increase $1,300 and liabilities decrease $1,300.
B. One asset increases $1,300 and another asset decreases $1,300, causing no effect.
C. Assets decrease $1,300 and equity decreases $1,300.
D. Assets decrease $1,300 and equity increases $1,300.
E. Assets increase $1,300 and liabilities decrease $1,300.
113. If a company receives $12,000 from the stockholders to establish a corporation, the
effect on the accounting equation would be:
A. Assets decrease $12,000 and equity decreases $12,000.
B. Assets increase $12,000 and liabilities decrease $12,000.
C. Assets increase $12,000 and liabilities increase $12,000.
D. Liabilities increase $12,000 and equity decreases $12,000.
E. Assets increase $12,000 and equity increases $12,000.
114. If a company purchases equipment costing $4,500 on credit, the effect on the accounting
equation would be:
A. Assets increase $4,500 and liabilities decrease $4,500.
B. Equity decreases $4,500 and liabilities increase $4,500.
C. Liabilities decrease $4,500 and assets increase $4,500.
D. Assets increase $4,500 and liabilities increase $4,500.
E. Equity increases $4,500 and liabilities decrease $4,500.
115. An example of a financing activity is:
A. Buying office supplies.
B. Obtaining a long-term loan.
C. Buying office equipment.
D. Selling inventory.
E. Buying land.
116. An example of an operating activity is:
A. Paying wages.
B. Purchasing office equipment.
C. Borrowing money from a bank.
D. Selling stock.
E. Paying off a loan.
117. Operating activities:
A. Are the means organizations use to pay for resources like land, buildings and equipment.
B. Involve using resources to research, develop, purchase, produce, distribute and market
products and services.
C. Involve acquiring and disposing of resources that a business uses to acquire and sell its
products or services.
D. Are also called asset management.
E. Are also called strategic management.
118. An example of an investing activity is:
A. Paying wages of employees.
B. Dividends paid by the company.
C. Purchase of land.
D. Selling inventory.
E. Contributions from s tockholders.
119. Net Income:
A. Decreases equity.
B. Represents the amount of assets stockholders put into a business.
C. Equals assets minus liabilities.
D. Is the excess of revenues over expenses.
E. Represents stockholders’ claims against assets.
120. If equity is $300,000 and liabilities are $192,000, then assets equal:
A. $108,000.
B. $192,000.
C. $300,000.
D. $492,000.
E. $792,000.
121. If assets are $300,000 and liabilities are $192,000, then equity equals:
A. $108,000.
B. $192,000.
C. $300,000.
D. $492,000.
E. $792,000.
122. Resources a company owns or controls that are expected to yield future benefits are:
A. Assets.
B. Revenues.
C. Liabilities.
D. Stockholders’ Equity.
E. Expenses.
123. Increases in equity from a company’s sales of products or services are:
A. Assets.
B. Revenues.
C. Liabilities.
D. Stockholders’ Equity.
E. Expenses.
124. The difference between a company’s assets and its liabilities, or net assets is:
A. Net income.
B. Expense.
C. Equity.
D. Revenue.
E. Net loss.
125. Creditors’ claims on the assets of a company are called:
A. Net losses.
B. Expenses.
C. Revenues.
D. Equity.
E. Liabilities.
126. Decreases in equity that represent costs of providing products or services to customers,
used to earn revenues are called:
A. Liabilities.
B. Equity.
C. Dividends.
D. Expenses.
E. Common Stock.
127. The description of the relation between a company’s assets, liabilities, and equity, which
is expressed as Assets = Liabilities + Equity, is known as the:
A. Income statement equation.
B. Accounting equation.
C. Business equation.
D. Return on equity ratio.
E. Net income.
128. Revenues are:
A. The same as net income.
B. The excess of expenses over assets.
C. Resources owned or controlled by a company
D. The increase in equity from a company’s sales of products and services.
E. The costs of assets or services used.
129. If assets are $99,000 and liabilities are $32,000, then equity equals:
A. $32,000.
B. $67,000.
C. $99,000.
D. $131,000.
E. $198,000.
130. Another name for equity is:
A. Net income.
B. Expenses.
C. Net assets.
D. Revenue.
E. Net loss.
131. When expenses exceed revenues, the resulting change in equity is:
A. Net assets.
B. Negative equity.
C. Net loss.
D. Net income.
E. A liability.
132. A resource that the stockholder receives from the company is called a(n):
A. Liability.
B. Dividend.
C. Expense.
D. Common stock.
E. Investment.
133. Distributions of cash or other resources by a business to its stockholders are called:
A. Dividends.
B. Expenses.
C. Assets.
D. Retained earnings.
E. Net Income.
134. The assets of a company total $700,000; the liabilities, $200,000. What are the net
assets?
A. $900,000.
B. $700,000.
C. $500,000.
D. $200,000.
E. It is impossible to determine unless the amount of the common stock is known.
135. On May 31 of the current year, the assets and liabilities of Riser, Inc. are as follows:
Cash $20,500; Accounts Receivable, $7,250; Supplies, $650; Equipment, $12,000; Accounts
Payable, $9,300. What is the amount of stockholders’ equity as of May 31 of the current
year?
A. $8,300
B. $13,050
C. $20,500
D. $31,100
E. $40,400
136. On August 31 of the current year, the assets and liabilities of Gladstone, Inc. are as
follows: Cash $30,000; Supplies, $600; Equipment, $10,000; Accounts Payable, $8,500. What
is the amount of stockholders’ equity as of August 31 of the current year?
A. $49,100
B. $32,100
C. $12,100
D. $10,900
E. $30,900
137. Assets created by selling goods and services on credit are:
A. Accounts payable.
B. Accounts receivable.
C. Liabilities.
D. Expenses.
E. Equity.
138. An exchange of value between two entities that yields a change in the accounting
equation is called:
A. The accounting equation.
B. Recordkeeping or bookkeeping.
C. An external transaction.
D. An asset.
E. Net Income.
139. Saddleback Company paid off $30,000 of its accounts payable in cash. What would be
the effects of this transaction on the accounting equation?
A. Assets, $30,000 increase; equity, $30,000 increase.
B. Assets, $30,000 decrease; liabilities, $30,000 decrease.
C. Assets, $30,000 decrease; liabilities, $30,000 increase.
D. Liabilities, $30,000 decrease; equity, $30,000 increase.
E. Assets, $30,000 decrease; equity $30,000 decrease.
140. If Houston Company billed a client for $10,000 of consulting work completed, the
accounts receivable asset increases by $10,000 and:
A. Accounts payable decreases $10,000.
B. Accounts payable increases $10,000.
C. Cash increases $10,000.
D. Revenue increases $10,000.
E. Revenue decreases $10,000
141. Alpha Company has assets of $600,000, liabilities of $250,000, and equity of $350,000.
It buys office equipment on credit for $75,000. What would be the effects of this transaction
on the accounting equation?
A. Assets increase by $75,000 and expenses increase by $75,000.
B. Assets increase by $75,000 and expenses decrease by $75,000.
C. Liabilities increase by $75,000 and expenses decrease by $75,000.
D. Assets decrease by $75,000 and expenses decrease by $75,000.
E. Assets increase by $75,000 and liabilities increase by $75,000.
142. Contessa Company collected $42,000 cash on its accounts receivable. The effects of this
transaction as reflected in the accounting equation are:
A. Total assets decrease and equity increases.
B. Both total assets and total liabilities decrease.
C. Neither assets, total liabilities, nor equity are changed.
D. Both total assets and equity are unchanged and liabilities increase.
E. Total assets increase and equity decreases.
143. If the liabilities of a business increased $75,000 during a period of time and the
stockholders’ equity in the business decreased $30,000 during the same period, the assets of
the business must have:
A. Decreased $105,000.
B. Decreased $45,000.
C. Increased $30,000.
D. Increased $45,000.
E. Increased $105,000.
144. If the assets of a business increased $89,000 during a period of time and its liabilities
increased $67,000 during the same period, equity in the business must have:
A. Increased $22,000.
B. Decreased $22,000.
C. Increased $89,000.
D. Decreased $156,000.
E. Increased $156,000.
145. If the liabilities of a company increased $74,000 during a period of time and equity in the
company decreased $19,000 during the same period, what was the effect on the assets?
A. Assets would have increased $55,000.
B. Assets would have decreased $55,000.
C. Assets would have increased $19,000.
D. Assets would have decreased $19,000.
E. None of these.
146. If a company paid $38,000 of its accounts payable in cash, what was the effect on the
accounting equation?
A. Assets would decrease $38,000, liabilities would decrease $38,000, and equity would
decrease $38,000.
B. Assets would decrease $38,000, liabilities would decrease $38,000, and equity would
increase $38,000.
C. Assets would decrease $38,000 and liabilities would decrease $38,000.
D. There would be no effect on the accounts because the accounts are affected by the same
amount.
E. Assets would increase $38,000 and liabilities would decrease $38,000.
147. If assets are $365,000 and equity is $120,000, then liabilities are:
A. $120,000.
B. $245,000.
C. $365,000.
D. $485,000.
E. $610,000.
148. Rushing had income of $150 million and average invested assets of $1,800 million. Its
return on assets is:
A. 8.3%.
B. 83.3%.
C. 12%.
D. 120%.
E. 16.7%.
149. Cage Company had income of $350 million and average invested assets of $2,000
million. Its return on assets (ROA) is:
A. 1.8%.
B. 35%.
C. 17.5%.
D. 5.7%.
E. 3.5%.
150. Speedy has net income of $18,955, and assets at the beginning of the year of $200,000.
Assets at the end of the year total $246,000. Compute its return on assets.
A. 7.7%.
B. 8.5%.
C. 9.5%.
D. 11.8%.
E. 13.0%.
151. Chou Co. has a net income of $43,000, assets at the beginning of the year are $250,000
and assets at the end of the year are $300,000. Compute its return on assets.
A. 8.4%
B. 17.2%
C. 14.3%
D. 15.6%
E. 1.5%
152. U. S. government bonds are:
A. High-risk and high-return investments.
B. Low-risk and low-return investments.
C. High-risk and low-return investments.
D. Low-risk and high-return investments.
E. High risk and no-return investments.
153. Risk is:
A. Net income divided by average total assets.
B. The reward for investment.
C. The uncertainty about the return expected to be earned.
D. Unrelated to return expected.
E. Derived from the idea of getting something back from an investment.
154. The statement of cash flows reports all of the following except:
A. Cash flows from operating activities.
B. Cash flows from investing activities.
C. Cash flows from financing activities.
D. The net increase or decrease in assets for the period reported.
E. The net increase or decrease in cash for the period reported.
155. The basic financial statements include all of the following except:
A. Balance Sheet.
B. Income Statement.
C. Statement of Retained Earnings.
D. Statement of Cash Flows.
E. Statement of Changes in Assets.
156. The statement of retained earnings:
A. Reports how retained earnings changes at a point in time.
B. Reports how retained earnings changes over a period of time.
C. Reports on cash flows for operating, financing, and investing activities over a period of
time.
D. Reports on cash flows for operating, financing, and investing activities at a point in time.
E. Reports on amounts for assets, liabilities, and equity at a point in time.
157. The financial statement that reports whether the business earned a profit and also lists the
revenues and expenses is called the:
A. Balance sheet.
B. Statement of retained earnings.
C. Statement of cash flows.
D. Income statement.
E. Statement of financial position.
158. A balance sheet lists:
A. The types and amounts of the revenues and expenses of a business.
B. Only the information about what happened to equity during a time period.
C. The types and amounts of assets, liabilities, and equity of a business as of a specific date.
D. The inflows and outflows of cash during the period.
E. The assets and liabilities of a company but not the retained earnings.
159. A financial statement providing information that helps users understand a company’s
financial status, and which lists the types and amounts of assets, liabilities, and equity as of a
specific date, is called a(n):
A. Balance sheet.
B. Income statement.
C. Statement of cash flows.
D. Statement of retained earnings.
E. Financial Status Statement.
160. The financial statement that identifies a company’s cash receipts and cash payments over
a period of time is the:
A. Statement of financial position.
B. Statement of cash flows.
C. Balance sheet.
D. Income statement.
E. Statement of changes in stockholders’ equity.
161. The financial statement that shows the beginning balance of retained earnings; the
changes in retained earnings that resulted from , net income (or net loss); dividends; and
the ending balance, is the:
A. Statement of financial position.
B. Statement of cash flows.
C. Balance sheet.
D. Income statement.
E. Statement of retained earnings.
162. Cash investments by stockholders are listed on which of the following statements?
A. Balance sheet.
B. Income statement.
C. Statement of retained earnings. .
D. Statement of cash flows. .
E.
163. Accounts payable appear on which of the following statements?
A. Balance sheet.
B. Income statement.
C. Statement of retained earnings.
D. Statement of cash flows.
E. Transaction statement.
164. The income statement reports all of the following except:
A. Revenues earned by a business.
B. Expenses incurred by a business.
C. Assets owned by a business.
D. Net income or loss earned by a business.
E. The time period over which the earnings occurred.
165. Use the following information as of December 31 to determine equity.
Cash…………………… 57,000
Buildings…………………… 175,000
Equipment…………….. 206,000
Liabilities……………… $141,000
A. $57,000.
B. $141,000.
C. $297,000.
D. $438,000.
E. $579,000.
166. Use the following information for Meeker Corp to determine the amount of equity to
report.
Cash…………………… 70,000
Buildings…………………… 125,000
Land………………….. 205,000
Liabilities……………… $130,000
A. $390,000.
B. $140,000.
C. $20,000.
D. $530,000.
E. $270,000.
167. Determine the net income of a company for which the following information is available
for the month of July.
Employee salaries expense…. $180,000
Interest expense……………….. 10,000
Rent expense…………………… 20,000
Consulting revenue…………… 400,000
A. $190,000.
B. $210,000.
C. $230,000.
D. $400,000.
E. $610,000.
168. Determine the net income of a company for which the following information is available
for the month of September.
Service revenue……………………. $300,000
Rent expense……………………….. 48,000
Utilities expense…………………… 3,200
Salaries expense…………………… 81,000
A. $263,800.
B. $432,200.
C. $171,000.
D. $167,800.
E. $252,000.
169. A company acquires equipment for $75,000 cash. This represents a(n):
A. Operating activity.
B. Investing activity.
C. Financing activity.
D. Revenue activity.
E. Expense activity.
170. A company borrows $125,000 from the Northern Bank and receives the loan proceeds in
cash. This represents a(n):
A. Revenue activity.
B. Operating activity.
C. Expense activity.
D. Investing activity.
E. Financing activity.
171. Zippy had cash inflows from operations $60,500; cash outflows from investing activities
of $47,000; and cash inflows from financing of $25,000. The net change in cash was:
A. $38,500 increase.
B. $38,500 decrease.
C. $132,500 decrease.
D. $132,000 increase.
E. $11,500 decrease.
172. Zapper has beginning equity of $257,000, net income of $51,000, dividends of $40,000
and investments by stockholders of $6,000. Its ending equity is:
A. $223,000.
B. $240,000.
C. $268,000.
D. $274,000.
E. $208,000.
173. Cragmont has beginning equity of $277,000, net income of $63,000, dividends of
$25,000 and no additional investments by stockholders during the period. Its ending equity
is:
A. $365,000.
B. $239,000.
C. $189,000.
D. $315,000.
E. $277,000.
174. Rent expense appears on which of the following statements?
A. Balance sheet.
B. Income statement.
C. Statement of retained earnings.
D. Statement of periodic expenses.
E. Statement of cash flows only.
175. A company’s balance sheet shows: cash $22,000, accounts receivable $16,000, office
equipment $50,000, and accounts payable $17,000. What is the amount of stockholders’
equity?
A. $17,000.
B. $29,000.
C. $71,000.
D. $88,000.
E. $105,000.
176. A company reported total equity of $145,000 at the beginning of the year. The company
reported $210,000 in revenues and $165,000 in expenses for the year. Liabilities at the end of
the year totaled $92,000. What are the total assets of the company at the end of the year?
A. $45,000.
B. $92,000.
C. $98,000.
D. $210,000.
E. $282,000.
177. Flitter reported net income of $17,500 for the past year. At the beginning of the year the
company had $200,000 in assets and $50,000 in liabilities. By the end of the year, assets had
increased to $300,000 and liabilities were $75,000. Calculate its return on assets:
A. 8.8%
B. 7.0%
C. 5.8%
D. 35.0%
E. 23.3%
178. Dawson Electronic Services had revenues of $80,000 and expenses of $50,000 for the
year. Its assets at the beginning of the year were $400,000. At the end of the year assets were
worth $450,000. Calculate its return on assets.
A. 7.1%
B. 7.5%
C. 6.7%
D. 20.0%
E. 18.8%
179. Rico’s Taqueria had cash inflows from operating activities of $27,000; cash outflows
from investing activities of $22,000, and cash outflows from financing activities of $12,000.
Calculate the net increase or decrease in cash.
A. $61,000 increase.
B. $37,000 increase.
C. $7,000 decrease.
D. $7,000 increase.
E. $34,000 decrease.
180. Charlie’s Chocolates Inc.’s stockholders made investments of $50,000 and dividends of
$20,000. The company has revenues of $83,000 and expenses of $64,000. Calculate its net
income.
A. $30,000.
B. $83,000.
C. $64,000.
D. $19,000.
E. $49,000.
181. Savvy Sightseeing had beginning equity of $72,000; revenues of $90,000, expenses of
$65,000, and dividends to stockholders of $9,000. Calculate the ending equity.
A. $88,000.
B. $25,000.
C. $97,000.
D. $38,000.
E. $47,000.
182. Doc’s Ribhouse had beginning equity of $52,000; net income of $35,000, and Dividends
by the company of $12,000. Calculate the ending equity.
A. $(5,000).
B. $29,000.
C. $5,000.
D. $99,000.
E. $75,000.
183. A company’s balance sheet shows: cash $24,000, accounts receivable $30,000,
equipment $50,000, and equity $72,000. What is the amount of liabilities?
A. $104,000.
B. $76,000.
C. $32,000.
D. $68,000.
E. $176,000.
184. If a company has excess space in its building that it rents to another company for $700,
what is the effect on the accounting equation when the first rent payment is collected?
A. Assets would decrease $700 and liabilities would decrease $700.
B. Assets would decrease $700 and equity would increase $700.
C. Assets would increase $700 and equity would decrease $700.
D. Assets would increase $700 and equity would increase $700.
E. Liabilities would decrease $700 and equity would increase $700.
185. All of the following are classified as assets except:
A. Accounts Receivable.
B. Supplies.
C. Equipment.
D. Accounts Payable.
E. Land.
186. Which of the following accounts is not included in the calculation of a company’s ending
stockholders’ equity?
A. Revenues.
B. Expenses.
C. Dividends.
D. Common stock.
E. Cash.
187. All of the following are classified as liabilities except:
A. Supplies.
B. Bonds Payable.
C. Wages Payable.
D. Accounts Payable.
E. Interest Payable.
188. Billington Corp borrows $80,000 cash from Second National Bank. How does this
transaction affect the accounting equation for Billington?
A. Assets would decrease $80,000 and liabilities would decrease $80,000.
B. Assets would decrease $80,000 and equity would increase $80,000.
C. Assets would increase $80,000 and equity would decrease $80,000.
D. Assets would increase $80,000 and liabilities would increase $80,000.
E. Liabilities would decrease $80,000 and equity would increase $80,000.
189. If the assets of a company increase by $55,000 during the year and its liabilities increase
by $25,000 during the same year, then the change in equity of the company during the year
must have been:
A. An increase of $80,000.
B. A decrease of $80,000.
C. An increase of $30,000.
D. A decrease of $30,000.
E. An increase of $25,000.
190. All of the following are classified as liabilities except:
A. Accounts Receivable.
B. Notes Payable.
C. Wages Payable.
D. Accounts Payable.
E. Taxes Payable.
191. Grandmark Printing pays $2,000 rent to the landlord of the building where its facilities
are located. How does this transaction affect the accounting equation for Grandmark?
A. Assets would decrease $2,000 and liabilities would decrease $2,000.
B. Assets would decrease $2,000 and equity would decrease $2,000.
C. Assets would increase $2,000 and equity would increase $2,000.
D. Assets would increase $2,000 and liabilities would increase $2,000.
E. Liabilities would decrease $2,000 and equity would increase $2,000.
192. Atkins Company collected $1,750 as payment for the amount owed by a customer from
services provided the prior month on credit. How does this transaction affect the accounting
equation for Atkins?
A. Assets would decrease $1,750 and liabilities would decrease $1,750.
B. One asset would increase $1,750 and a different asset would decrease $1,750, causing no
effect.
C. Assets would increase $1,750 and equity would increase $1,750.
D. Assets would increase $1,750 and liabilities would increase $1,750.
E. Liabilities would decrease $1,750 and equity would increase $1,750.
193. The accounting equation for Ying Company shows a decrease in its assets and a decrease
in its equity. Which of the following transactions could have caused that effect?
A. Cash was received from providing services to a customer.
B. The company paid an amount due on credit.
C. Equipment was purchased for cash.
D. A utility bill was received for the current month, to be paid in the following month.
E. Advertising expense for the month was paid in cash.
194. The accounting equation for Long Company shows an increase in its assets and an
increase in its liabilities. Which of the following transactions could have caused that effect?
A. Cash was received from providing services to a customer.
B. Cash was received in exchange for common stock.
C. Equipment was purchased on credit.
D. Supplies were purchased for cash.
E. Advertising expense for the month was paid in cash.
195. Match the following terms with the appropriate definition.
a. Financial accounting
b. Ethics
c. Recordkeeping
d. Internal users
e. Accounting
f. Certified Public Accountant (CPA)
g. Fraud triangle
h. Managerial accounting
i. External users
____ 1. An information and measurement system that identifies, records and communicates
relevant reliable and comparable information about an organization’s business activities.
____ 2. The part of accounting that involves recording transactions and events, either
electronically or manually.
____ 3. Persons using accounting information who are not directly involved in running the
organization.
____ 4. Persons using accounting information who are directly involved in managing and
operating the organization.
____ 5. The area of accounting that serves the decision-making needs of internal users.
____ 6.The area of accounting aimed at serving external users by providing them with
general-purpose financial statements.
____ 7. Accounting specialists that have met educational and experience requirements, passed
an examination and exhibit ethical characteristics to achieve a professional certification.
____ 8. Beliefs that distinguish right from wrong, considered accepted standards of good and
bad behavior.
____ 9. A model that asserts the factors that must exist for a person to commit fraud.
1. E; 2. C; 3. I; 4. D; 5. H; 6. A; 7. F; 8. B; 9. G
Blooms: Remember
AACSB: Communication
AACSB: Ethics
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Reporting
Difficulty: 1 Easy
Learning Objective: 01-C1
Learning Objective: 01-C2
Learning Objective: 01-C3
Topic: Importance of Accounting
Topic: Users of Accounting Information
Topic: Ethics
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196. Match each of the following terms with the most appropriate definition.
a. Return on assets
b. Assets
c. Expenses
d. Risk
e. Liabilities
f. Dividends
g. Accounting equation
h. Common stock
____ 1. The uncertainty about the return to be earned.
____ 2.Resources such as cash that a stockholder puts into the company.
____ 3. A financial ratio stated as income divided by assets invested.
____ 4. Creditor’s claims on a company’s assets.
____ 5. Decreases in equity from costs of providing products or services to customers.
____ 6.Resources such as cash that a stockholder r receives from the company for personal
use.
____ 7.Resources a company owns or controls that are expected to yield future benefit.
____ 8. Expresses the relation of assets, liabilities and equity in a company, comparing the
resources the company owns to the sources of funds to acquire the resources.
1. D; 2. H; 3. A; 4. E; 5. C; 6. F; 7. B; 8. G
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: 1 Easy
Learning Objective: 01-A1
Learning Objective: 01-A2
Learning Objective: 01-A3
Topic: The Accounting Equation
Topic: Return on Assets
Topic: Return and Risk Analysis
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McGraw-Hill Education.
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197. The following is a list of selected users of accounting information. Match the appropriate
user to the following decisions they make with accounting information.
a. Suppliers
b. Lenders
c. Shareholders
d. Purchasing Managers
e. Regulators
____ 1. Know what, when, and how much to purchase.
____ 2. Judge the soundness of a customer before making sales on credit.
____ 3. Assess whether a company has paid all required taxes and complied with securities
rules.
____ 4. Assess whether an organization is likely to repay its loans with interest.
____ 5. Decide whether to buy, hold, or sell a company’s stock.
1. D; 2. A; 3. E; 4. B; 5. C
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Reporting
AICPA FN: Risk Analysis
Difficulty: 1 Easy
Learning Objective: 01-C2
Topic: Users of Accounting Information
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McGraw-Hill Education.
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198. Match the following definitions with terms 1 through 8. Place the letter that identifies
the best definition in the blank space next to the term.
____ 1. Generally accepted accounting principles
____ 2. Time period assumption
____ 3. Statement of retained earnings.
____ 4. Balance sheet
____ 5. Objectivity principle
____ 6. Cost principle
____ 7. Securities and Exchange Commission
____ 8. IASB
____ 9. Full disclosure principle
____10. Statement of cash flows
a. Prescribes that assets and services to be recorded initially on a cash or equal-to-cash basis.
b. A principle that requires the information in financial statements to be supported by
independent unbiased evidence.
c. An independent group consisting of individuals from many countries that identify preferred
accounting practices.
d. Presumes that the life of a company can be divided into periods for reporting purposes.
e. The concepts and rules that govern financial accounting.
f. A financial statement that reports the changes in retained earnings over the reporting
period; including increases such as net income and for decreases such as dividends or net
loss.
g. A report that identifies cash receipts and cash payments over a period of time.
h. Prescribes that a company report the details behind financial statements that would impact
user decisions.
i. The governmental agency that has the legal authority to establish accounting rules.
j. A report that describes a company’s financial position at a point in time.
1. E; 2. D; 3. F; 4. J; 5. B; 6. A; 7. I; 8. C; 9. H; 10. G
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Reporting
AIPCA FN: Measurement
Difficulty: 1 Easy
Learning Objective: 01-C4
Learning Objective: 01-P2
Topic: Generally Accepted Accounting Principles
Topic: Financial Statements
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McGraw-Hill Education.
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199. Match the following definitions with the terms 1 through 9. Place the letter that identifies
the best definition in the blank space next to the term.
____ 1. Statement of cash flows
____ 2. Events
____ 3. Monetary unit principle
____ 4. Business entity principle
____ 5. Revenue recognition principle
____ 6. Accounting equation
____ 7. Income statement
____ 8. Expenses
____ 9. Liabilities
a. The relation between a company’s assets, liabilities, and equity.
b. Happenings, such as changes in market value, that effect the accounting equation and are
reliably measured.
c. The principle that assumes transactions and events can be expressed in money units.
d. Describes a company’s revenues and expenses along with the resulting net income or loss
over a period of time.
e. A financial statement that lists cash inflows (receipts) and cash outflows (payments); the
cash flows are arranged by operating, investing, and financing activities.
f. Creditor’s claims on assets.
g. Wages paid to earn revenues.
h. The principle that requires a business to be accounted for separately from its owners.
i. The principle that revenue is recorded when earned through providing goods or services.
1. E; 2. B; 3. C; 4. H; 5. I; 6. A; 7. D; 8. G; 9. F
Blooms: Understand
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Reporting
AICPA FN: Measurement
Difficulty: 2 Medium
Learning Objective: 01-C4
Learning Objective: 01-C5
Learning Objective: 01-A1
Learning Objective: 01-P2
Topic: Generally Accepted Accounting Principles
Topic: Business Activities and the Accounting Equation
Topic: The Accounting Equation
Topic: Financial Statements
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McGraw-Hill Education.
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200. Identify each of the following business activities 1 through 6 into the appropriate
category a, b, and c.
a. Operating
b. Investing
c. Financing
____ 1. Paid utilities expenses.
____ 2. Withdrawal of funds by stockholders.
____ 3. Purchase of land.
____ 4. Sale of used equipment.
____ 5. Borrowed money from a bank on a long-term note.
____ 6. Paid employee wages.
____ 7. Received investment from owner.
____ 8. Paid an amount due on a long-term bank loan.
1. A; 2. C; 3. B; 4. B; 5. C; 6. A; 7. C; 8. C
Blooms: Apply
AACSB: Communication
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 01-C5
Topic: Business Activities and the Accounting Equation
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McGraw-Hill Education.
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201. Match each of the following items 1 through 8 with the financial statement a through d in
which each item would most likely appear. An item may appear on more than one statement.
a. Income statement
b. Statement of retained earnings
c. Balance sheet
d. Statement of cash flows
_____1. Assets.
_____2. Dividends .
_____3. Revenues.
_____4. Cash from investing activities.
_____5. Expenses.
_____6. Liabilities.
_____7. Cash from operating activities.
_____8. Cash from financing activities.
1. C; 2. B; 3. A; 4. D; 5. A; 6. C; 7. D; 8. D
Blooms: Apply
AACSB: Communication
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: 2 Medium
Learning Objective: 01-P2
Topic: Financial Statements
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McGraw-Hill Education.
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202. Classify the following activities according to the appropriate section of the statement of
cash flows.
a. Operating activity
b. Investing activity
c. Financing activity
____ 1. Cash received from a one-time sale of used office equipment.
____ 2. Cash paid for dividends to stockholders.
____ 3. Cash received from customers.
____ 4. Cash received from owner contributions.
____ 5. Cash paid for utilities.
____ 6. Cash paid for a delivery van to be used in the business.
1. B; 2. C; 3. A; 4. C; 5. A; 6. B
Blooms: Apply
AACSB: Communication
AICPA BB: Industry
AICPA FN: Reporting
Difficulty: 3 Hard
Learning Objective: 01-C5
Learning Objective: 01-P2
Topic: Business Activities and the Accounting Equation
Topic: Financial Statements
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McGraw-Hill Education.
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Short Answer Questions
203. Explain the role of accounting in the information age.
204. What is the balance sheet? What is its purpose?
205. Identify the users and uses of accounting information.
206. Identify several opportunities in accounting and distinguish between private accounting
and public accounting.
207. Explain why ethics are an integral part of accounting.
208. Describe the three important guidelines for revenue recognition.
209. Identify the three basic forms of business organizations and their key attributes.
210. How does the objectivity principle support ethical behavior?
211. Identify and describe the two main groups involved in establishing generally accepted
accounting principles.
212. How does the going-concern principle affect reporting asset values of a business?
213. Describe the income statement and the relation between revenues, expenses, and net
income or loss.
214. Explain the accounting equation and define its terms.
215. What distinguishes liabilities from equity?
216. What is the purpose of return on assets as an analytical tool?
217. Define risk and return and discuss the relation between them.
218. Describe the three types of activities reported on the statement of cash flows.
219. Identify and describe the four basic financial statements:
220. The characteristics below apply to at least one of the forms of business organization.
a. Is a separate legal entity.
b. Is allowed to be owned by one person only.
c. Partners or sole proprietors are personally liable for debts of the business.
d. Is a separately taxable entity.
e. Is a business entity.
f. May have a contract specifying the division of profits among the partners.
g. Has an unlimited life
Use the following format to indicate (with a “yes” or “no”) whether or not a characteristic
applies to each type of business organization.
Proprietorship
Partnership
Corporation
a.
b.
c.
d.
e.
f.
g.
221. A parcel of land is offered for sale at $600,000, is assessed for tax purposes at $500,000,
is recognized by its purchasers as easily being worth $575,000, and is sold for $570,000. At
what amount should the land be recorded in the purchaser’s books? What accounting principle
supports your answer?
222. You are reviewing the accounting records of Buddy’s Foreign Automotive, Inc., owned
by Bruce Jones. You have uncovered the following situations. List the appropriate accounting
principle related to each independent scenario and suggest a correct action for each .
1. In August, a check for $500 was written to Community Sports. This amount represents
soccer camp for his daughter Cassie.
2. Bruce plans a Going Out of Business Sale for June, since he will be closing the business
for a month-long vacation in July. He plans to reopen August 1 and will continue operating
Buddy’s Foreign Automotive indefinitely.
3. Buddy received a shipment of tools from Ontario, Canada. The invoice was stated in
Canadian dollars.
4. Sandy Lane paid $1,500 for a major repair services. The amount was recorded as revenue.
The parts for the repair must be ordered from overseas and the service won’t be complete
until the following month.
1. Business entity assumption. Buddy should refund the $500 to the business or record it as a
dividend. In the future, he should use a personal check to pay for soccer camp.
2. Going-concern assumption. Buddy’s Foreign Automotive is not going out of business. The
business is just closing for vacation. He could hold an appropriate sale to generate extra
business before going on vacation.
3. Monetary unit assumption. The invoice should be restated in U.S. dollars for accounting
purposes.
4. Revenue recognition principle. Since the service has not been completed, revenue should
not be recognized. The $1,500 should be placed in an account such as Deposits Received from
Customers (a type of unearned revenue) until the service is completed.
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
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McGraw-Hill Education.
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AICPA BB: Legal
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 01-C4
Topic: Generally Accepted Accounting Principles
223. At the beginning of the year, a company had $120,000 worth of liabilities. During the
year, assets increased by $160,000 and at year–end they equaled $360,000. Liabilities
decreased $20,000 during the year. Calculate the beginning and ending values of equity.
224. At the beginning of the period, a company had $350,000 worth of assets, $110,000
worth of liabilities, and $240,000 worth of equity. Assume the only change during the period
was a $30,000 purchase of equipment by issuing a note payable. Show the accounting
equation with the appropriate amounts at the end of the period.
225. The accounts of Odie Company with the increases or decreases that
occurred during the past year are as follows:
Account Increase Decrease
Cash………………………………. $25,000
Accounts receivable............ $(5,000)
Accounts payable…………….. (11,000)
Notes payable..….…….......... 16,000
Except for net income, an investment of $3,000 by the stockholder, and a dividend of
$11,000 by the stockholder, no other items affected the stockholders’ equity balance. Using
the balance sheet equation, compute net income for the past year.
226. The accounts of Mason Company at the end of the past year report the following
amounts:
Accounts Amount
Dividends……. $15,500
Revenues…………………………… $97,000
Expenses……………………………. $43,800
Common stock…………….. 2,000
If the beginning equity for the year was $173,000, calculate the ending equity for Mason
Company.
227. Cornelia’s Closet has the following account balances for the dates given:
October 1
October 31
Cash……………………………………………..…….$40,000 60,000
Accounts Receivable.…….………….............. 40,000 38,000
Accounts payable……….……….................... 6,000 ?
Also, its net income, for October 1 through October 31 was $20,000 and there were no
investments or withdrawals by the owner. Determine the equity at both October 1 and October
31.
228. If the liabilities of a company increased $92,000 during a period of time and equity in the
business decreased $30,000 during the same period, did the assets of the company increase or
decrease? By what amount?
229. Soo Lin, the sole stockholder, began an Internet Consulting practice organized as a
corporation and completed these transactions during April of the current year:
April. 1 Invested $100,000 of her personal savings into a checking
account opened in the name of the business.
2 Rented office space and paid $1,200 cash for the month of
September.
3 Purchased office equipment for $30,000, paying $8,000 cash
and agreeing to pay the balance in one year.
4 Purchased office supplies for $750 cash.
8 Completed work for a client and immediately collected
$2,700 cash for the services.
15 Completed $3,600 services for a client on credit.
20 Received $3,600 from a client for the work completed on
September 15.
30 Paid the office secretary’s monthly salary, $3,000 cash.
30 The corporation paid a $2,000 dividend.
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Show the effects of the above transactions on the accounting equation of Soo Lin, Consultant.
Use the following format for your answers. The first item is shown as an example.
Increase = I Decrease = D No effect = N
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Date Assets Liabilities Equity
Example:
April 1
I N I
230. For each of the following transactions, identify the effects as reflected in the accounting
equation. Use “+” to indicate an increase and “-” to indicate a decrease. Use “A”, “L”, and
“E” to indicate assets, liabilities, and equity, respectively. Part A has been completed as an
example.
a. L. Chester invested $100,000 in a
corporation +A +E
b. Land was purchased for $50,000.
A down payment of $15,000 cash
was made and a note was signed
for the balance.
c. Services were rendered to
customers for cash.
d. A building was purchased for cash.
e. Supplies were purchased for cash.
f. Paid the office secretary’s salary.
g. The amount owed on the land
from Part (b) was paid.
231. The following schedule reflects shows the first month’s transactions of the Green
Construction Company Inc. :
Accounts Accounts
Cash +
Receivabl
e+Supplies +
Equipmen
t=Payable +
Stockholder
s’ Equity
1.
+20,00
0 +20,000
2. –5,000 +5,000
3. +$1,500 +1,500
4. +3,000 +3,000
5. +1,000 +1,500 +2,500
6. –750 –750
7. +500 –500
8. –400 –400
9. –2,000 –2,000
Provide descriptions for each transaction.
1. Investment of cash in business by owner or performed services for cash.
2. Purchased equipment for cash.
3. Purchased supplies on credit.
4. Business sold more common stock.
5. Performed services for both cash and on credit.
6. Paid accounts payable.
7. Received cash for an account receivable.
8. Used supplies in business.
9. Dividends of cash from business to owner for personal use or paid expense of business.
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 01-P1
Topic: Transaction Analysis
Topic: Accounting Equation
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232. The accountant of Action Adventure Games, Inc. prepared a balance sheet after every 10
day period. The only resources invested by the owner were at the start of the company on
June 1. During June, the first month of operation, the following balance sheets were prepared:
ACTION ADVENTURE GAMES, Inc.
Balance Sheet
June 10
Assets Stockholders’ Equity
Cash…………………….. $60,000
Common stock +Retained
earnings…………….. $60,000
Total assets……………… $60,000
Total liabilities
and
equity…………………….. $60,000
ACTION ADVENTURE GAMES, Inc.
Balance Sheet
June 20
Assets Liabilities
Cash……………………. $48,000 Notes payable…….
$18,00
0
Land……………………. 10,000 Stockholders’ Equity
Building………………
… 20,000
Common stock +
Retained
earnings….. 60,000
Total assets………….. $78,000
Total liabilities and
equity……………..
$78,00
0
ACTION ADVENTURE GAMES, Inc.
Balance Sheet
June 30
Assets Liabilities
Cash……………………. $51,000 Accounts payable…. $2,000
Office supplies………… 2,000 Notes payable……. 18,000
Land……………………. 10,000 Stockholders’ Equity
Building………………
… 20,000
Common stock +
Retained earnings….. 63,000
Total assets………….. $83,000
Total liabilities and
equity……………..
$83,00
0
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Required: Describe the nature of each of the four transactions that took place between the
balance sheet dates shown. Assume only one transaction affected each account.
June
10
20
30
233. Identify the risk and the return in each of the following examples.
a. Investing $500 in a certificate of deposit at 4.5% interest.
b. Placing a $100 bet on an NBA game.
c. Investing $10,000 in Microsoft stock.
d. Borrowing $20,000 in student loans.
234. Prepare a April 30 balance sheet in proper form for Two Rivers Vending Service, Inc.
from the following alphabetical list of the accounts at April 30:
Accounts
receivable………………………. $10,000
Accounts
payable………………………….. 18,000
Building…………………………………
……. 28,000
Cash………………………….
………………. 10,000
Notes
payable………………………………. 47,000
Office equipment………………
…………….. 12,000
Stockholders’
equity………………………. ?
Trucks…………………………………
…….. 55,000
235. Prepare a December 31 balance sheet in proper form for Smokey River Supplies, Inc.
from the following list of the accounts:
Cash………………………….
…………………… $10,000
Accounts
receivable…………………………….. 8,000
Supplies………………………………………
…. 12,000
Equipment…………………………………….
. 35,000
Land…………………………………………….
…. 18,000
Accounts payable…………………………….. 13,000
Notes payable……………………………….
…. 41,000
Stockholders’ equity……………………….
….. 29,000
236. Prepare a December 31 balance sheet in proper form for Cane Property Management,
Inc. using the following accounts and amounts:
Commissions
earned………………
$40,00
0
Accounts
payable……………… 3,500
Accounts
receivable…………… 5,000
Stockholders’
equity……………
104,50
0
Office
equipment………………. 10,000
Advertising
expense…………. … 3,200
Cash…………………………
…. 7,500
Land………………………………….
……. 35,000
Note
payable…………………………… 50,000
Office
supplies………………………… 1,500
Salaries
expense……………………… 12,000
Salaries
payable……………………… 1,000
Building…………………………….
…….
100,00
0
237. From the information given below, prepare a November income statement, a November
statement of retained earnings, and a November 30 balance sheet. On November 1 of the
current year, Victoria Garza began Garza Décor, Inc. with an initial investment of $50,000
cash. On November 30, her records showed the following (alphabetically arranged) items and
amounts.
Accounts payable……………. $12,000 Office furnishings……….. $40,000
Accounts receivable………. 19,000 Dividends……. 6,000
Cash……………………… 21,200 Rent expense…………… 9,600
Fees earned………………. 34,000 Salaries expense………. 4,200
Notes payable………………… 4,250 Telephone expense……. 250
238. Data for Kennedy Realty are as follows:
Total assets at January 1……................. $100,000
Total liabilities at January 1…..……….... 35,000
Total revenues for the year................... 79,000
Total expenses for the year……............. 47,000
The owner, Finn Kennedy, received a dividend of $30,000 during the year. Using the above
data, prepare Kennedy Realty’s Statement of Retained Earnings for the year ended December
31.
239. Jet Styling, Inc. has the following beginning cash balance and cash transactions for the
month of January. Using this information prepare a statement of cash flows.
a. Beginning cash balance…………….. $ 3,200
b. Cash investment by owner………….. 15,000
c. Cash payment toward long-term loan 1,000
d. Cash payment of rent……………….. 1,800
e. Purchased equipment for cash…….. 7,500
f. Purchased store supplies for cash… 1,500
g. Cash collected from customers……. 7,750
h. Cash dividend to stockholder………….. 2,000
i. Cash payment of wages……………. 4,000
240. The records of Roadmaster Auto Rentals, Inc. show the following information as of
December 31. The owner, Rob Fletcher, the sole stockholder, received a dividend of $52,000
during the year.. Prepare a December income statement, a December statement of retained
earnings, and a December 30 balance sheet.
Accounts payable…….…………........ $36,000 Wages expense……….…….……........ $75,000
Insurance expense……………........... 2,000 Advertising expense…………….….... 22,000
Accounts receivable……………........ 24,000 Cash……….…….………….….............. 11,000
Retained earnings,
January 1 150,000 Office Furniture…….…................... 15,000
Airplanes…………………………………. 150,000 Maintenance expense…………...…… 39,000
Notes payable…..............…............ 47,000 Revenues…..…….………….…………... 217,000
Hangar…….…….……….................... 60,000
241. Verity Siding Company, Inc., owned by S. Verity, began operations in May and
completed the following transactions during that first month of operations. Show the effects
of the transactions on the accounts of the accounting equation by recording increases and
decreases in the appropriate columns in the table below. Do not determine new account
balances after each transaction. Determine the final total for each account and verify that the
equation is in balance.
May 1 S. Verity invested $90,000 cash in the company.
2 The company purchased $25,000 in office equipment. It paid $10,000 in
cash and signed a note payable promising to pay the $15,000 over the next
three years.
2 The company rented office space and paid $3,000 for the May rent.
6 The company installed new vinyl siding for a customer and immediately
collected $5,000.
7 The company paid a supplier $2,000 for siding materials used on the May 6
job.
8 The company purchased a $2,500 copy machine for office use on credit.
9 The company completed work for additional customers on credit in the
amount of $16,000.
1
5
The company paid its employees’ salaries $2,300 for the first half of the
month.
1
7
The company installed new siding for a customer and immediately collected
$2,400.
2
0
The company received $10,000 in payments from the customers billed on
May 9.
2
8
The company paid $1,500 on the copy machine purchased on May 8. It will
pay the remaining balance in June.
3
1
The company paid its employees’ salaries $2,400 for the second half of the
month.
3
1
The company paid a supplier $5,300 for siding materials used on the
remaining jobs completed during May.
3
1
The company paid $450 for this month’s utility bill.
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VERITY SIDING CO.
Assets =
Liabilities
+ Equity
Dat
e Accounts
Account
s Notes
May Cash
Receivabl
e
Equipmen
t Payable
Payabl
e
Common
stock Dividends
Revenue
s
Expense
s
1
2
2
6
7
8
9
15
17
20
28
31
31
31
$
– $ – $ – $ –
$
– $ – $ – $ – $ –
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242. __________________ is an information and measurement system that identifies, records
and communicates relevant, reliable and comparable information about an organization’s
economic activities.
243. A ____________________ is a business that is owned by only one person.
244. ______________ users of accounting information are not directly involved in running
the organization.
245. ______________ is the area of accounting aimed at serving external users by providing
them with general-purpose financial statements.
246. Congress passed the ______________________ to help curb financial abuses at
companies that issue their stock to the public.
247. _________ are beliefs that separate right from wrong and are considered accepted
standards of good and bad behavior.
248. The assumption that requires that a business be accounted for separately from its owners
is the __________________ assumption.
249. The _______________ principle requires that financial information is supported by
independent, unbiased evidence.
250. The ______________ assumption assumes business will continue operating indefinitely
instead of being closed or sold.
251. The ________________ assumption states that transactions and events are expressed in
money units.
252. In accounting, the rule that requires that assets, services, and liabilities be recorded
initially at the cash or cash-equivalent value of what was given up or of the item received is
called the ______________________________.
253. A disadvantage of a sole proprietorship is the fact that the owner has ______________.
254. There are at least three types of partnerships that limit the partners’ liability. They are
1)_____________________, 2) ___________________, and 3)______________________.
255. There are three major types of business activities. ________________ activities are the
means organizations use to pay for resources such as land, building, and equipment to carry
out plans.
256. There are three major types of business activities. ________________ activities involve
the acquisition and disposal of resources that an organization uses to acquire and sell its
products or services.
257. There are three major types of business activities. ______________ activities involve
using resources to research, develop, purchase, produce, distribute, and market products and
services and receiving amounts from selling products and services.
258. Resources such as cash removed from the business by the business owner for personal
use are called ____________.
259. ____________ are the increases in equity from a company’s sales of products and
services to customers.
260. A common characteristic of __________ is their ability to yield expected future benefits
to a business.
261. Creditors’ claims on assets that reflect company obligations to provide assets, products,
or services to others are called ____________________.
262. The stockholders’ claim on assets, also known as net assets, is called
__________________.
263. The accounting equation is ______________________________.
264. The term ___________ refers to a liability that promises a future outflow of resources.
265. Using the accounting equation, equity is equal to ________________________.
266. ______________________, which is one part of accounting, is the recording of
transactions and events, either manually or electronically.
267. _________________ is net income divided by average total assets.
268. Risk is the _________________ about the return an investor expects to earn.
269. ________________________________ explains changes in the stockholders’ claim on
the business’s assets from net income or loss, and dividends over a period of time.
270. The ____________________ describes a company’s revenues and expenses along with
the resulting net income or net loss over a period of time due to earnings activities.