Chapter 2 The operating activities of a business are critical to its ongoing

Document Type
Test Prep
Book Title
Financial Accounting: A Bridge to Decision Making 6th Edition
Authors
Robert W. Ingram, Thomas L. Albright
47
Chapter 2--Business Activities--The Source of Accounting Information
True/
False
L.O.’s
Level of Diffi-
culty
True/
False
L.O.’s
Level of Diffi-
culty
True/
False
L.O.’s
Level of Diffi-
culty
1
3
EASY
8
2
MOD
15
4
EASY
2
1
MOD
9
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16
5
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6
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13
4
MOD
20
5
MOD
7
2
MOD
14
4
EASY
L.O.’s
Level of
Difficulty
L.O.’s
Level of
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Multiple
Choice
L.O.’s
Level of
Difficulty
1
EASY
2
MOD
50
5
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1,2
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3
EASY
51
5
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48 Chapter 2
Matching
L.O.’S
Level of
Difficulty
Matching
L.O.’s
Level of
Difficulty
Matching
L.O.’s
Level of
Difficulty
1
2
EASY
11
2
EASY
20
4
MOD
2
4
MOD
12
3
MOD
21
3
MOD
3
2
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1
MOD
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1
DIFF
4
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23
1
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3
DIFF
7
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27
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28
1
DIFF
10
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Problem
L.O.’s
Level of
Difficulty
Problem
L.O.’s
Level of
Difficulty
Problem
L.O.’s
Level of
Difficulty
1
12,3,4
MOD
6
1,2,3,4
DIF
11
5
DIF
2
1,2,3,4
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7
1-5
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3
1,2,3,4
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8
1,2,4,5
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Essay
L.O.’s
Level of
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Essay
L.O.’s
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1
2
EASY
6
5
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2
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MOD
7
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3
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Business ActivitiesThe Source of Accounting Information 49
TRUE/FALSE
1. Investing activities are those that require the use of resources to produce, sell, and distribute goods
and services.
2. Equity is created when a company obtains financial resources from owner(s).
3. The sale of equipment is a financing activity.
4. Assets are resources controlled by an organization and available for its use in the future.
5. A transaction is an event that will cause changes in a firm's resources.
6. Liabilities are amounts invested in an organization by its owners.
7. Liabilities represent legal obligations of an organization to provide cash or goods or services to
external parties in the future.
8. Transactions are events that result from the transformation process.
9. A balance among the elements of the accounting equation must maintained at all times.
50 Chapter 2
10. Investing decisions involve choices about when and where to obtain financial resources and the
amount needed.
11. Someone who loans financial resources to an organization is considered an owner of the business.
12. Revenues represent resources received from selling goods or services that constitute the primary
operating activities of an organization.
13. Contributions of resources into the business by its owner(s) are known as revenues.
14. The operating activities of a business are critical to its ongoing success.
15. The payment of wages is a financing activity.
16. The purpose of financial reports is to provide information useful to current and potential investors
and creditors in making decisions.
17. In accounting, debit refers to decreases in account balances.
18. Equipment is purchased on credit. This transaction would be recorded with a debit to an asset
account and a credit to a liability.
19. Accounting can be described as a link between business activities and business decisions.
Business ActivitiesThe Source of Accounting Information 51
20. Return on Assets is an analytical tool that can be used to evaluate profitability of a company.
MULTIPLE CHOICE
1. ________ activities result when a company obtains financial resources from owners.
a.
Investing
b.
Operating
c.
Financing
d.
Risk free
2. The following amounts of capital were obtained to start operations of Lightning Enterprises at the
beginning of 2007:
Owners' contribution of cash
$80,000
Owners' contribution of machinery & equipment
18,000
Loan from the bank
46,000
$144,000
What is the amount of liabilities for this firm?
a.
$18,000
b.
$46,000
c.
$98,000
d.
$126,000
e.
$144,000
3. The Angstrom Company was established at the beginning of 2007 with the following capital:
Owners' cash contributions
$46,000
Cash obtained from a group of creditors
30,000
Loan obtained from the local bank
10,000
Total
$86,000
What is the amount of the contributed capital for this firm?
a.
$10,000
b.
$40,000
c.
$46,000
d.
$76,000
e.
$86,000
52 Chapter 2
4. Investing activities involve
a.
the purchase of machinery and equipment
b.
purchasing office supplies
c.
obtaining financial resources from financial markets
d.
payment of employee salaries
5. The methods an organization uses to obtain financial resources from investors, owners, and
creditors are called
a.
operating activities
b.
financing activities
c.
investing activities
d.
marketing activities
6. A decision whether to borrow money or sell stock is an example of
a.
a financing decision
b.
an investing decision
c.
an operating decision
d.
a future decision
7. Which of the following is a financing activity?
a.
inventory for resale is purchased on credit
b.
equipment to be used in the firm is purchased with cash
c.
employees are paid their weekly wages in cash
d.
a loan is obtained from the bank
8. Which one of the following is an investing activity?
a.
sale of worn out factory equipment
b.
sale of inventory to customers
c.
collection of a loan
d.
borrowing money from a bank
9. Paying off of a bank loan is a(n) ____________ activity?
a.
operating
b.
financing
c.
investing
d.
operating if it was a short-term loan; financing if it was a long-term loan
Business ActivitiesThe Source of Accounting Information 53
10. Assets can be defined as
a.
resources under an organization's legal control
b.
obligations of the organization
c.
the amount of investment made by owners in a business
d.
the profits earned by a corporation
11. Liabilities can be defined as
a.
resources under an organization's legal control
b.
obligations owed by an organization to its creditors
c.
the amount of investment made by owners in a business
d.
the profits earned by a corporation
12. Owners’equity will decrease when
a.
owners receive money from their corporation
b.
an organization's profits are reinvested in the company
c.
an organization borrows money
d.
an organization pays cash for equipment
13. Which one of the following is NOT an asset?
a.
revenue
b.
cash
c.
inventory
d.
equipment
14. Which of the following is the correct representation of the accounting equation?
a.
Assets = Liabilities + Owners' Equity - (Revenues - Expenses)
b.
Assets + (Revenues + Expenses) = Liabilities + Owners' Equity
c.
Assets + Liabilities + Owners' Equity = Revenues - Expenses
d.
Assets - Liabilities = Owners' Equity + (Revenues - Expenses)
15. Which of the following is NOT one of the categories of accounts used by the accounting
information system?
a.
asset
b.
liability
c.
cash flow
d.
expense
54 Chapter 2
16. During an accounting period, total assets increased by $500 while owners’ equity increased by
$800. The change in total liabilities during this period must have been a
a.
$300 increase
b.
$300 decrease
c.
$1,300 increase
d.
$1,300decrease
17. Which of the following accounts is a liability?
a.
interest expense
b.
interest payable
c.
interest revenue
d.
interest receivable
18. The record that reflects changes in dollar amounts associated with a specific resource or activity is
referred to as a(n)
a.
transaction
b.
system
c.
balance
d.
account
19. A transaction is
a.
a record of increases and decreases in the dollar amount associated with a resource
b.
an event that causes increases or decreases in an account balance
c.
another term for the accounting process
d.
a check register for a bank account
20. Marvin and Clark formed a sports marketing partnership. Each contributed $60,000 cash to the
new company. When this information is recorded in the new company's accounting system, it will
affect which of the following?
a.
assets only
b.
assets and liabilities
c.
assets and owners' equity
d.
liabilities and owners' equity
Business ActivitiesThe Source of Accounting Information 55
21. At the end of an accounting period, the amount of net income earned by a company is transferred
to the balance sheet and reported under which one of the following categories?
a.
owners' equity
b.
liabilities
c.
assets
d.
all of the above
22. Which of the following is not an asset?
a.
inventory
b.
contributed capital
c.
equipment
d.
furniture
23. The Fast Freight Company purchased a new delivery truck by making a cash down payment and
signing a note payable for the balance. How will assets, liabilities, and owners’ equity be affected
by this transaction?
Assets Liabilities Equity
a.
decreased increased no change
b.
increased increased no change
c.
increased decreased increased
d.
no change increased decreased
e.
no change decreased increased
24. Arch Company is a retailer. It sold goods to customers for cash, from its inventory. Which of the
following effects would occur as part of this event?
An asset would An asset would
be decreased be increased
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
56 Chapter 2
25. Lunar Company sold goods to customers from its inventory at a price greater than its cost. Which
of the following effects would occur as part of this event?
Total assets Total owners
would increase equity would increase
a.
No No
b.
No Yes
c.
Yes No
d.
Yes Yes
26. Orlando owns a supper club and needed to obtain funds for the business. A bank loaned the supper
club $20,000. Concerning the supper club, which of the following increased as a result of this
loan?
a.
owners' equity
b.
liabilities
c.
revenues
d.
expenses
27. Which of the following events is properly classified as an investing activity?
a.
purchase of equipment
b.
borrowing money from creditors
c.
selling goods to customers
d.
running the factory
28. Which of the following is an operating activity?
a.
purchase of equipment
b.
payment of cash dividends
c.
sale of equipment
d.
purchase of inventory
29. What effect do revenues and expenses eventually have on Retained Earnings?
Revenues Expenses
a.
decrease decrease
b.
decrease increase
c.
increase increase
d.
increase decrease
Business ActivitiesThe Source of Accounting Information 57
30. Revenues are recorded when a business
a.
creates resources by selling goods or services
b.
borrows money
c.
receives money from owners of the business
d.
pays its employees
31. Expenses are recorded when a business
a.
sells equipment
b.
consumes resources during the production and sale of goods or services
c.
distributes money to owners
d.
hires employees
32. Which of these is NOT an expense?
a.
cost of goods sold
b.
wages paid to employees for services consumed
c.
merchandise inventory purchased
d.
taxes paid to government
33. Tiger Associates provided business services to another organization. As a result of this transaction,
Tiger's assets increased. Which accounting term best describes the concept involved in this
situation?
a.
liability
b.
revenue
c.
financing activity
d.
investing activity
34. Which type of activity is involved when goods are produced and delivered to customers or when
services are provided to customers?
a.
financing activities
b.
investing activities
c.
operating activities
d.
accounting activities
58 Chapter 2
35. When starting a new business, in general, which of the following types of activities would have to
occur before operating activities could begin?
Investing Activities Financing Activities
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
36. Match the event below to the proper category of activity.
Operating Activity Financing Activity
a.
paying employee salaries paying off a bank loan
b.
obtaining a loan designing a new product
c.
buying factory equipment refunding a customer's money
d.
paying off a bank loan buying new tools
37. Which one of the following statements is generally TRUE regarding the relationship between the
items mentioned?
a.
an increase in assets will always cause an increase in owners' equity
b.
a decrease in assets will always cause a decrease in liabilities
c.
an increase in revenues increases owners' equity
d.
expenses decrease revenues
38. Shari started a computer software firm by investing $20,000 of her own money. She spent 3/4 of it
on office furniture, fixtures for the business. After borrowing $8,000 from First National Bank,
she spent 1/2 of these funds on computer hardware. At this point, what balances should be
recorded in her accounting system for total assets and total expenses?
Total Assets Total Expenses
a.
$28,000 $16,000
b.
$12,000 $16,000
c.
$16,000 $0
d.
$28,000 $0
Business ActivitiesThe Source of Accounting Information 59
39. Cohen Enterprises sold inventory for which it had paid $20,000. When this event is recorded in
the company's accounting system, it will affect which of the following categories?
a.
assets only
b.
liabilities and owners' equity
c.
assets, revenues, and expenses
d.
owners' equity only
40. Revenues and expenses have what effect on the basic accounting equation of
Assets = Liabilities + Owners' Equity?
a.
revenues and expenses are not related to the equation
b.
the difference between revenues and expenses increases liabilities
c.
revenues increase equity while expenses decrease it
d.
revenues increase equity while expenses increase liabilities
41. When an organization purchases a machine for $12,000 cash, which of the following is true?
a.
total equity stays the same
b.
total liabilities decrease
c.
total expenses increase
d.
total assets increase
42. During May, the Family Resort had revenues of $20,000 and expenses of $8,000. The owner
withdrew $7000 cash from the business during the month. If owners' equity on May 31 was
$18,200, owners' equity on May 1 must have been
a.
$13,200
b.
$12,000
c.
$6,200
d.
$37,200
43. Activities that involve the production or delivery of goods for sale or the providing of services for
sale should be listed under which classification on a statement of cash flows?
a.
financing activities
b.
refunding activities
c.
operating activities
d.
investing activities
60 Chapter 2
44. A firm must depend on its _______ activities to generate profits.
a.
investing
b.
operating
c.
nonrecurring
d.
financing
45. Which of the following is an operating activity?
a.
acquisition of inventory
b.
contribution of cash from the owner(s) of the business
c.
sale of long-term fixed assets
d.
purchase of new factory building
46. Which of the following is an operating activity?
a.
purchase of $10,000 of inventory from suppliers
b.
payoff of a bank loan of $6,000
c.
sale of fully depreciated assets for $1,500 previously used in operations
d.
purchase of new equipment for $80,000 to be used in operations
47. Revenues and expenses are reported on a(n)
a.
asset statement
b.
cash flow statement
c.
balance sheet
d.
income statement
48. Net income can be expressed as
a.
the excess of revenues over expenses that a business records during a period
b.
the excess of expenses over revenues that a business records during a period
c.
the amount of sales that a business reports during a period
d.
the amount of resources created by a business during a period
49. An income statement
a.
is prepared from information from the balance sheet of the business
b.
shows cash flow
c.
reports owner’s equity
d.
reveals expenses and revenues for a fiscal period
Business ActivitiesThe Source of Accounting Information 61
50. Which of the following shows the typical order of the types of activities in the transformation
process that takes place in organizations?
a.
operating, investing, financing
b.
financing, investing, operating
c.
investing, operating, financing
d.
operating, financing, investing
51. After months of planning, Alana opened a Natural Foods store on April 1 by investing $15,000 of
her own money. She spent $10,000 on furnishings and fixtures that had been delivered and set up
the night before. A friend had loaned Alana $5,000 which she used to purchase inventory prior to
opening. When Alana opened for business on April 1, her accounting system should have
contained what balances for total assets and total liabilities?
Total Assets Total Liabilities
a.
$20,000 $0
b.
$20,000 $5,000
c.
$15,000 $5,000
d.
$15,000 $0
52. On October 1, Hanover Trucking started business when Ed and Ralph each contributed $15,000 to
the firm. That same day, a $20,000 truck was purchased with a cash down payment of 5,000 and a
loan to be paid in the future for $15,000. No other transactions occurred in October. What were
total assets equal to immediately after these transactions:
a.
$50,000
b.
$45,000
c.
$30,000
d.
$15,000
53. On June 1, Tropical Tours started business when Fernando and Juanita each contributed $8,000 to
the firm. That same day, the company borrowed $10,000 to purchase a truck. Immediately after
these transactions, total assets equal
a.
$18,000
b.
$26,000
c.
$8,000
d.
$16,000
62 Chapter 2
54. Connie started a business by contributing $30,000 cash and a truck worth $34,000. The company
then purchased equipment by making a $24,000 down payment (which accounted for half its
purchase price) and financed the other half by signing a note payable at the bank. After the above
transactions, Connie's company balance sheet is composed of
Assets Liabilities Equity
a.
$64,000 $0 $64,000
b.
$88,000 $0 $88,000
c.
$88,000 $24,000 $64,000
d.
$112,000 $24,000 $88,000
55. Quick Frame Corporation had the following transactions during the month of August:
1.
Owners started the company by investing $500,000 in cash.
2.
Purchased $100,000 of equipment by making a $50,000 cash down payment and
signed a 90-day note payable for the balance.
3.
Purchased a building for $220,000, paying $20,000 cash and signing a note payable
for the remaining amount.
4.
Earned $60,000 of services revenue.
What are total assets for the Quick Frame Corporation at the end of August?
a.
$600,000
b.
$550,000
c.
$750,000
d.
$810,000
56. The accounting records of Sonia’s Catering show the following balances at December 31:
Cash $ 6,000 Notes payable $ 2,000
Equipment 24,000 Owners' investment 10,000
Merchandise 4,000 Revenue from catering 18,000
Owed to Owners 8,000 Expenses 4,000
Total assets as of December 31 are
a.
$24,000
b.
$44,000
c.
$34,000
d.
$38,000
Business ActivitiesThe Source of Accounting Information 63
57. Net cash flow is generally NOT thought to be a valid measure of an organization's performance
for a period because it
a.
is usually smaller than the amount of net income
b.
includes the results of activities not related to operations
c.
focuses only on the net change in owners' equity
d.
violates the periodic measurement concept
58. Harrison, Inc., had the following transactions during the month of August:
1. sold merchandise for $500,000 cash
2. paid wages of $30,000
3. sold equipment for $100,000
4. paid $60,000 cash for utilities
What was the cash flow from operating activities?
a.
$510,000
b.
$410,000
c.
$470,000
d.
$540,000
59. During the first month of operations, Rodriguez Tax Service provided services and billed
customers in the amount of $7,000. By the end of the first month, $4,600 had been collected and it
was expected that the other $2,400 would be collected during the following month. On Rodriguez'
income statement for the first month, what amount of revenue should be reported?
a.
$0
b.
$2,400
c.
$4,600
d.
$7,000
64 Chapter 2
60. Blackbeard has the following account balances in its accounting system at year end:
Advertising revenue
$1200
Salaries & wages expense
680
Rent expense
240
Machinery
400
Insurance expense
140
Interest revenue
80
Interest expense
100
The net income (or loss) for the period is
a.
$520
b.
$(280)
c.
$120
d.
$40
e.
$(520)
61. At the end of April 2007, the CleanWater Company received $270,000 from customers for water
used during March, 2007. CleanWater’s employees were paid $70,000 during April and the
company paid $10,000 in rent on their building and $4,000 in utility cost during the month.
Determine profit from operations for the month of April, 2007.
Net Profit
a.
$200,000
b.
$210,000
c.
$186,000
d.
$190,000
62. Cat Production Company began operations and acquired inventory for $80,000 on the first day of
August. One-half of the inventory purchase price was paid in cash with the balance due in 60 days.
During August, one-fourth of the inventory was sold to customers for $64,000 cash. Wages of
$10,000 were paid to employees in cash. By month-end, a $600 electric bill had been received but
not paid. Determine net cash flow from operations for August.
Net Cash Flow
a.
$14,000
b.
$64,000
c.
$(26,000)
d.
$13,400
Business ActivitiesThe Source of Accounting Information 65
63. Merchandise inventory costing $20,000 was sold to customers for $28,000 cash. What amount of
revenue and cash flow resulted from this transaction?
Revenue Cash Flow
a.
$20,000 $28,000
b.
$28,000 $28,000
c.
$28,000 $8,000
d.
$8,000 $20,000
e.
$0 $0
64. Tyler & Company had the following account balances at the end of September:
Cash received from customers
$5,400
Sales revenue (all on account)
7,000
Purchase of land (all for cash)
700
Cash paid for equipment
2,200
Cost of goods sold
3,000
Other operating expenses
900
What amounts should be reported for each of the following?
Net Income Cash Flow
a.
$8,500 $1,600
b.
$3,800 $3,200
c.
$6,300 $(500)
d.
$3,100 $2,500
65. The statement of cash flows reflects
a.
the costs of resources consumed in producing, selling, and distributing goods and services
and the prices of goods and services sold during a period
b.
the cash consequences of financing, investing, and operating activities during a period
c.
the resources available for use in the transformation process and claims to those resources
at a point in time
d.
summaries of accounts by general categories
66. Which of the following financial statements reports the resources available for use in the
transformation process and claims to those resources at a point in time?
a.
the income statement
b.
the cash-flow statement
c.
the balance sheet
d.
the retained earnings statement
66 Chapter 2
67. Which of the following is a cash flow from an investing activity?
a.
payment for advertising
b.
cash receipt from a customer for a previous credit sale
c.
cash received from sale of equipment
d.
purchase of inventory
68. Which financial statements cover a specific period of time?
a.
Income Statement and Balance Sheet
b.
Balance Sheet and Statement of Cash Flows
c.
Income Statement and Statement of Cash Flows
d.
Statement of Cash Flows and Statement of Assets, Liabilities and Owners' Equity
69. The statement of cash flows is designed to report
a.
how the previous period's income statement relates to the current period's income
statement
b.
only the uses of cash during the current period
c.
the cash received and used from operating, financing and investing activities of the
company during the current period
d.
the effects of the current period's income statement on the current period's balance sheet
70. A statement of cash flows has been prepared. The sum of the three major components (operating
activities, investing activities, financing activities) will add up to an amount equal to
a.
the ending amount of working capital
b.
the net change in the cash account during a fiscal period
c.
the ending cash balance reported on the balance sheet
d.
net income for the period on the accrual basis
71. Which of the following accounts would be increased as a result of the sale of inventory to a
customer?
a.
cost of goods sold
b.
owners' equity
c.
accounts payable
d.
inventory

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