Name:
Class:
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chapter 2
Indicate whether the statement is true or false.
1. The integrated financial statement approach has built-in controls to ensure that all transactions are correctly analyzed,
recorded, and summarized.
a. True
b. False
2. Dividends are an example of an expense.
a. True
b. False
3. Miscellaneous expenses are expenses that have an undetermined amount to be paid.
a. True
b. False
4. The accounting equation is expressed as follows: Assets = Liabilities + Stockholders’ Equity.
a. True
b. False
5. The basic elements of a financial accounting system include a framework for preparing financial statements.
a. True
b. False
6. When a notes payable account is paid in cash, the stockholders’ equity in the business increases.
a. True
b. False
7. It is possible for a transaction to change the makeup of assets but not affect assets in total.
a. True
b. False
8. Accounts receivable is less liquid than furniture, so it is listed after furniture on a balance sheet.
a. True
b. False
9. Fees earned and received in cash will increase cash flows from operating activity as well as retained earnings.
a. True
b. False
10. On a statement of cash flows, each cash transaction is recorded and classified as an operating, investing, or financing
activity.
a. True
b. False
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chapter 2
11. Any given transaction must affect at least two different parts of the accounting equation.
a. True
b. False
12. When comparing operating performance across companies within the same industry, companies prefer common-sized
income statements prepared using net income rather than those prepared using operating income. This is because other
income and expenses are influenced by a variety of factors that are independent of operations and that can vary
significantly across companies.
a. True
b. False
13. When an account receivable is collected in cash, the total assets of the business increase.
a. True
b. False
14. The accounting equation can be expressed as: Assets − Liabilities = Revenues.
a. True
b. False
15. Retained earnings will be increased by the amount in the dividend account.
a. True
b. False
16. The effect of every transaction is an increase or a decrease in one or more of the accounting equation elements.
a. True
b. False
17. When common stock is issued by a corporation for cash, both the income statement and the balance sheet are affected.
a. True
b. False
18. The payment of utilities expense in cash would affect the operating activities in the statement of cash flows and the
income statement but not the balance sheet.
a. True
b. False
19. A business receives $10,000 cash for a sale of merchandise and records this receipt of cash as an increase in accounts
receivable by mistake. The accounting equation is still in balance.
a. True
b. False
20. By keeping a running total of the effects of transactions, the accounting equation provides a framework for
summarizing the effects of a series of transactions.
a. True
b. False
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Class:
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chapter 2
21. Equality of the accounting equation means that no errors have occurred.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
22. Sunlight, Inc. had the following assets and liabilities as of September 30, 20X8:
Assets $60,600
Liabilities $27,500
If assets increased by $4,350 and equity increased by $2,900 during October, what is the increase or decrease in liabilities
of Sunlight as of October 31, 20X8?
a. ($1,450)
b. $1,450
c. $7,250
d. ($7,250)
23. Which of the following group of accounts are all assets?
a. Cash, Accounts Payable, Buildings
b. Accounts Receivable, Revenue, Cash
c. Prepaid Expenses, Buildings, Patents
d. Unearned Revenues, Prepaid Expenses, Cash
24. For EFG Co., the transaction “payment of quarterly taxes” would _____.
a. increase total assets
b. decrease total assets
c. have no effect on total assets
d. increase stockholders’ equity
25. ABC Company deposited $20,000 in a bank account in return for issuing shares in the corporation. This transaction
would affect which two financial statement elements?
a. Assets and stockholders’ equity
b. Assets and liabilities
c. Liabilities and stockholders’ equity
d. None of these
26. For EFG Co., the transaction “payment of dividends” would _____.
a. increase total assets
b. decrease total assets
c. have no effect on total assets
d. increase stockholders’ equity
27. The gross increases in stockholders’ equity attributable to business activities are called _____.
a. assets
b. liabilities
c. revenues
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chapter 2
d. net income
28. WFC Company paid wages of $50,000 and received interest of $60,000. As a result of these transactions, the
stockholders’ equity _____.
a. increases by $ 60,000
b. decreases by $110,000
c. increases by $10,000
d. decreases by $50,000
29. Declaring and paying cash dividends affects which account(s)?
a. Cash only
b. Common stock only
c. Cash and retained earnings
d. Cash and common stock
30. Brite Inc. had the following assets and liabilities at the end of the year:
Assets $54,800
Liabilities $32,000
What is the year-end stockholders’ equity of Brite Inc.?
a. $32,000
b. $22,800
c. $86,800
d. Cannot be determined with this information
31. For EFG Co., the transaction “payment to creditors” would _____.
a. increase total assets
b. decrease total assets
c. have no effect on total assets
d. decrease stockholders’ equity
32. For EFG Co., the transaction “purchase of store equipment with cash” would _____.
a. increase total assets
b. decrease total assets
c. have no effect on total assets
d. decrease stockholders’ equity
33. Blue Inc. has the following transactions for the month of April:
Fees earned in cash $640,000
Expenses paid $300,000
Dividends paid $50,000
As a result of these transactions, Blue Inc.’s profitability metric _____.
a. increases by $340,000
b. decreases by $300,000
c. increases by $290,000
d. decreases by $640,000
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Class:
Date:
chapter 2
34. Johnson, Inc., receives $5,000 cash for fees earned. What is the effect of this transaction?
a. Total assets remain unchanged.
b. Cash flow from Financing Activities will increase.
c. Net income will increase.
d. Retained earnings will remain unchanged.
35. A common-sized income statement is prepared by expressing income statement amounts as a percent of _____.
a. sales
b. purchases
c. total assets
d. profit
36. Johnson, Inc., purchased land for cash. What effect does this transaction have?
a. Increase in Cash and decrease in Land
b. Decrease in Cash and decrease in Land
c. Increase in Cash and increase in Land
d. Decrease in Cash and increase in Land
37. For EFG Co., the transaction “cash sales to customers at a profit” would _____.
a. increase total assets
b. decrease total assets
c. have no effect on total assets
d. decrease stockholders’ equity
38. Anthony, Inc., buys land for $50,000 cash. The net effect on assets is _____.
a. $50,000 increase
b. $0
c. $50,000 decrease
d. $25,000 increase
39. ABC Inc. borrows $50,000 from a bank to finance its operations. Which of the following statements regarding the
effect of this transaction on the company’s liquidity and profitability metric is true?
a. The transaction decreases the liquidity and increases the profitability of ABC Inc.
b. The transaction increases the liquidity and decreases the profitability of ABC Inc.
c. The transaction has no effect on the liquidity and profitability of ABC Inc.
d. The transaction increases the liquidity and has no effect on the profitability of ABC Inc.
40. An increase in Stockholders’ Equity from revenues earned will also result in an increase in _____.
a. liabilities
b. assets
c. expenses
d. cash flow from financing activities
41. The following are the summaries of balance sheet of LCF Company:
Total Assets Total Liabilities
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chapter 2
Beginning of the year $250,000 $180,000
End of the year $500,000 $370,000
Determine the net income (or loss) for the year, assuming $80,000 of common stock was issued and no dividends were
paid during the year.
a. $140,000
b. ($20,000)
c. $160,000
d. ($60,000)
42. A to Z Corporation paid a $10,000 cash dividend. On the Statement of Cash Flows, the transaction would be classified
as _____.
a. Cash Flows from Operating Activities
b. Cash Flows from Investing Activities
c. Cash Flows from Financing Activities
d. Noncash transaction
43. The first month of operations showed the net cash from operating activities to be $1,850, the net cash from investing
activities to be ($3,000), and the ending cash balance to be $1,600. The net cash from financing activities must be _____.
a. $450
b. $2,750
c. $3,250
d. $6,450
44. The following is the summary of the balance sheet of AWR Company:
Total Assets Total Liabilities
Beginning of the year $250,000 $180,000
End of the year $500,000 $370,000
Determine the net income (or loss) for the year, assuming no common stock was issued and no dividends were paid during
the year.
a. $70,000
b. $200,000
c. $60,000
d. $130,000
45. For EFG Co., the transaction “receipt of interest income” would _____.
a. increase total assets
b. decrease total assets
c. have no effect on total assets
d. decrease total liabilities
46. Jade Inc. paid rent of $25,000 for the current month. This transaction _____.
a. decreases the profitability of the company
b. has no effect on the profitability of the company
c. increases the liquidity of the company
d. has no effect on the liquidity of the company
47. The statement of stockholders’ equity is prepared _____.
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Class:
Date:
chapter 2
a. before the preparation of the income statement
b. after the preparation of the statement of cash flows
c. before the preparation of the balance sheet
d. after the audit of the financial statements
48. Paying expenses affects which financial statement elements?
a. Assets only
b. Stockholders’ equity only
c. Assets and stockholders’ equity
d. Assets and liabilities
49. Lazer Company paid a utility bill of $12,000 and paid rent of $20,000. As a result of these transactions, the
stockholders’ equity _____.
a. increases by $8,000
b. decreases by $32,000
c. increases by $20,000
d. decreases by $12,000
50. Stockholders’ equity will be reduced by _____.
a. a payment of dividends
b. an increase in revenues
c. an owners’ investments
d. an issuance of bonds
51. For EFG Co., the transaction “receipt of a utility bill” would _____.
a. increase total assets
b. decrease total assets
c. have no effect on total assets
d. decrease total liabilities
52. Blue Lilly Co. paid $50,000 of dividends to stockholders. As a result of this transaction, _____.
a. the liquidity of Blue Lilly Co. increases
b. the profitability of Blue Lilly Co. remains unchanged
c. the profitability of Blue Lilly Co. decreases
d. the liquidity of Blue Lilly Co. remains unchanged
53. The stockholders’ equity will increase as a result of the _____.
a. issue of common stock
b. repayment of long-term debt
c. buyback of common stock
d. issue of long-term debt
54. The payment of $20,000 for expenses was incorrectly recorded by Elite Co. as an increase in cash of $20,000 and a
decrease in retained earnings of $20,000. What is the effect of this error on the accounting equation?
a. Total assets will exceed total liabilities and stockholders’ equity by $20,000.
b. Total assets will exceed total liabilities and stockholders’ equity by $40,000.
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chapter 2
c. Total assets will be less than total liabilities and stockholders’ equity by $40,000.
d. The error will not affect the accounting equation.
55. A common-sized balance sheet is prepared by expressing each asset as a percent of _____.
a. total current assets
b. total assets
c. total long-term assets
d. total liabilities
56. JNC Co. buys equipment for $1,500,000 cash. This transaction _____.
a. decreases JNC Co.’s liquidity and has no effect on its profitability metric
b. has no effect on JNC Co.’s liquidity and profitability
c. increases JNC Co.’s liquidity and profitability
d. has no effect on JNC Co.’s liquidity and decreases its profitability
57. For EFG Co., the transaction “billed a customer for fees earned” would _____.
a. increase total assets
b. decrease total assets
c. have no effect on total assets
d. increase total liabilities
58. Expenses can be defined as _____.
a. assets consumed
b. services used in the process of generating revenues
c. costs that have been incurred during the normal course of business
d. all of these
59. Johnson, Inc., paid rent expense of $3,500 for the month of October. How are the accounts affected due to this
transaction?
a. Increase in cash $3,500 and increase in retained earnings $3,500
b. Increase in cash $3,500 and decrease in retained earnings $3,500
c. Decrease in cash $3,500 and decrease in retained earnings $3,500
d. Decrease in cash $3,500 and increase in retained earnings $3,500
60. Which of the following is considered to be a liability?
a. Prepaid expenses
b. Investments
c. Unearned revenues
d. Accrued revenues
61. If total assets increased by $500,000 during a period and total liabilities increased by $420,000 during the same period,
determine the net income (or loss) for the period, assuming no common stock was issued and dividends of $40,000 were
paid.
a. $40,000
b. $210,000
c. $120,000
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chapter 2
d. $290,000
62. Inventory is less liquid than _____.
a. accounts receivable
b. land
c. plant and equipment
d. patents
63. Glocal Inc. has retained earnings of $60,000, common stock of $110,000, and liabilities of $35,000. The total assets of
the company are worth _____.
a. $205,000
b. $145,000
c. $95,000
d. $170,000
64. Lewis Company has $25,000 in retained earnings, $40,000 in assets, and $11,000 in liabilities. How much is in
common stock?
a. $29,000
b. $25,000
c. $14,000
d. $4,000
65. Navy Inc. buys land for $500,000 cash in the month of March. In March, it also paid wages of $100,000. Which of the
following statements is true with regards to the above transactions?
a. Navy Inc.’s profitability decreases by $500,000, and liquidity decreases by $100,000.
b. Navy Inc.’s liquidity decreases by $600,000, and profitability remains unchanged.
c. Navy Inc.’s liquidity and profitability decrease by $600,000.
d. Navy Inc.’s liquidity decreases by $600,000, and profitability decreases by $100,000.
66. A common-sized balance sheet is prepared by expressing each liability item as a percent of _____.
a. total sales
b. total stockholders’ equity
c. total liabilities
d. total liabilities plus stockholders’ equity
67. The income statement for August indicates net income of $100,000. The corporation also paid $25,000 in dividends
during the same period. If the company is in operation for only one month and has no beginning balance in retained
earnings, what is the ending balance in retained earnings?
a. $75,000
b. $100,000
c. $20,000
d. $125,000
68. Buying equipment for cash affects which account(s)?
a. Cash only
b. Retained earnings only
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chapter 2
c. Equipment and retained earnings
d. Cash and equipment
69. Which of the following is a control that is built into the integrated financial statement approach?
a. Assets + Liabilities = Stockholders’ equity.
b. Cash from operating activities is equal to cash on the balance sheet.
c. Net income on the income statement must equal the net effects of revenues and expenses on retained earnings.
d. Total assets on the balance sheet should equal income from investing activities on the statement of cash flows.
70. Rush Corporation borrowed $25,000 from the bank. Which of the following accurately shows the effects of the
transaction?
a. Increase cash $25,000 and decrease notes payable $25,000
b. Increase cash $25,000 and increase notes payable $25,000
c. Decrease cash $25,000 and decrease notes payable $25,000
d. Decrease cash $25,000 and increase notes payable $25,000
71. Yuan Corporation purchased office equipment on account. What is the effect of this transaction?
a. Cash will decrease and office equipment will increase.
b. Total assets will increase, and shareholders’ equity will decrease.
c. Total assets and total liabilities will increase.
d. Cash flow from financing activities will decrease.
72. Which of the following situations increase stockholders’ equity?
a. Supplies are purchased on account.
b. Services are provided on account.
c. Cash is received from customers.
d. Utility bill will be paid next month.
73. Dim Co. issues common stock of $15,000. Which of the following statements regarding the effect of this transaction
on the company’s liquidity and profitability metric is true?
a. The transaction increases the liquidity and decreases the profitability of the company.
b. The transaction decreases the liquidity and increases the profitability of the company.
c. The transaction increases the liquidity and has no effect on the profitability of the company.
d. The transaction has no effect on the liquidity and increases the profitability of the company.
74. The statement of cash flows is integrated with the balance sheet because _____.
a. the cash at the beginning of the period plus or minus the cash flows from operating, investing, and financing
activities equals the end of period cash reported on the balance sheet
b. the cash at the beginning of the period plus or minus the net income equals the end of period cash reported on the
balance sheet
c. the cash at the beginning of the period plus or minus assets and liabilities equals the end of period cash reported
on the balance sheet
d. the cash at the beginning of the period plus or minus the cash flows from operating activities equals the end of
period cash reported on the balance sheet
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Class:
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chapter 2
75. JNC Company sells its products for cash, at a profit of 20%. Which of the following financial statement elements are
affected as a result of this transaction?
a. Assets
b. Assets and liabilities
c. Liabilities and stockholders’ equity
d. Assets and stockholders’ equity
76. Which of the following statements is true about liabilities?
a. Liabilities include insurance premium paid in advance.
b. Liabilities arise when a company sells goods on account.
c. Liabilities equal assets plus stockholders’ equity.
d. Liabilities are the debt owed by a company.
77. The payment of a liability _____.
a. decreases assets and stockholders’ equity
b. increases assets and decreases liabilities
c. decreases assets and increases liabilities
d. decreases assets and decreases liabilities
78. A to Z Corporation issued a $30,000 note payable to borrow cash from the bank. On the Statement of Cash Flows, the
transaction would be classified as _____.
a. Cash Flows from Operating Activities
b. Cash Flows from Investing Activities
c. Cash Flows from Financing Activities
d. Noncash transaction
79. If a $15,000 purchase of equipment for cash is incorrectly recorded as an increase to equipment and as an increase to
cash, at the end of the period assets will _____.
a. exceed liabilities and stockholders’ equity by $15,000
b. equal liabilities and stockholders’ equity
c. exceed liabilities and stockholders’ equity by $30,000
d. exceed liabilities and stockholders’ equity by $40,000
80. Blue Ivy Inc. has the following transactions for the month of March:
Issued common stock $60,000
Purchased land by paying cash $100,000
Paid expenses $25,000
Earned cash fees $75,000
As a cumulative result of these transactions, the liquidity of Blue Ivy Inc. _____.
a. increases by $75,000
b. increases by $10,000
c. decreases by $25,000
d. decreases by $50,000
81. If liabilities have a balance of $10,000 and stockholders’ equity has a balance of $60,000, then assets must have a
balance of _____.
a. $50,000