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3) The stock exchange is ________.
A) where all companies must register to exchange goods and services
B) regulated by the Securities and Exchange Commission (SEC)
C) regulated by the Internal Revenue Service (IRS)
D) regulated by the Public Company Accounting Oversight Board (PCAOB)
4) CPA stands for Certified Private Accountant.
5) The Sarbanes-Oxley Act of 2002 required a new independent board called the Public
Company Accounting Oversight Board to be formed to oversee the auditing profession and the
audits of public companies.
6) The Public Company Accounting Oversight Board is required to oversee the Internal Revenue
Service.
7) Generally Accepted Accounting Principles (GAAP) are the rules companies must follow when
they prepare their income tax returns.
8) The Financial Accounting Oversight Board is the group that oversees the audits of publicly
traded companies.
9) All liabilities represent the costs incurred to generate revenues.
10) To be considered useful, financial information must be relevant and reliable.
11) To be useful, information must be accurate and reliable.
12) Only Internal Revenue Service (IRS) agents may conduct audits of financial statements.
13) The Securities and Exchange Commission (SEC) requires all publicly traded companies to
have a fiscal yearend of December 31.
14) The International Accounting Standards Board (IASB) is responsible for setting the
International Financial Reporting Standards (IFRS).
15) The Securities and Exchange Commission (SEC) is responsible for overseeing all publicly-
traded companies from all countries.
16) Describe who needs information about a business and why they may need it.
17) Match the following terms with the appropriate definitions. Each term is to be used only
once.
a. Audit
b. FASB
c. Certified Public Accountant (CPA)
d. Creditors
e. IASB
f. Internal Revenue Service (IRS)
g. XBRL
_____ 1. The governmental agency responsible for tax collection.
_____ 2. An independent examination of a company's financial statements and the accounting
system that produced the statements.
_____ 3. Professional accountant, licensed by states to perform audits.
_____ 4. People and firms who lend money.
_____ 5. A group of professional business people, accountants, and scholars who have the
responsibility of setting current accounting standards in the U.S.
_____ 6. A group of professional business people, accountants, and scholars who have the
responsibility of setting current accounting standards internationally.
_____ 7. Standardized, interactive format used for filing reports with the SEC.
18) Match the following terms with the appropriate definitions. Each term is to be used only
once.
a. Accounting period
b. Operating cycle
c. Expenses
d. Revenues
e. Dividends
_____ 1. A period beginning with cash, conversion of cash to inventory, sales of inventory, and
receipt of cash from sales.
_____ 2. The amount a company has earned from providing goods or services to customers.
_____ 3. The costs incurred to generate revenue.
_____ 4. Distribution of earnings to the owners of the corporation.
_____ 5. Any length of time that a company uses to evaluate its performance.
Learning Objective 1-4
1) Team Shirts, Inc. pays $600 for insurance. This transaction ________.
A) causes total assets to increase and total liabilities to increase
B) causes total liabilities to increase and retained earnings to decrease
C) is an investing activity
D) is an operating activity
2) A balance sheet ________.
A) describes the financial situation of a company at a specific point in time
B) is a summary of all of the revenues minus all of the expenses for an accounting period
C) shows the changes that took place in the amount of shareholders' equity during a period
D) is a list of all the cash collected and cash paid during a period
3) An income statement ________.
A) describes the financial situation of a company at a specific point in time
B) is a summary of all of the revenues minus all of the expenses for an accounting period
C) shows the changes that took place in the amount of shareholders' equity during a period
D) is a list of all the cash collected and cash paid during a period
4) The statement of changes in shareholders' equity ________.
A) describes the financial situation of a company at a specific point in time
B) is a summary of all of the revenues minus all of the expenses for an accounting period
C) shows the changes that took place in the amount of shareholders' equity during a period
D) is a list of all the cash collected and cash paid during a period
5) The statement of cash flows ________.
A) describes the financial situation of a company at a specific point in time
B) is a summary of all of the revenues minus all of the expenses for an accounting period
C) shows the changes that took place in the amount of shareholders' equity during a period
D) is a list of all the cash collected and cash paid during a period
6) Team Shirts' Statement of Cash Flows for October showed the following:
Cash from operating activities $ 3,000
Cash for investing activities $(2,000)
Cash from financing activities $ ?
Net change in cash $ 5,000
Cash flows from financing activities were ________.
A) $5,000
B) $(1,000)
C) $4,000
D) $6,000
7) Wok N Roll, Inc. shows $300,000 of assets and $60,000 of shareholders' equity on its balance
sheet. Liabilities must equal ________.
A) $360,000
B) $300,000
C) $240,000
D) $60,000
8) A single-step income statement ________.
A) is the preferred method of reporting revenues, expenses, and cash because of the ease of
preparation
B) groups all revenues together and shows all expenses deducted from total revenue
C) includes the subtotal Gross profit in the presentation
D) is preferred by business owners because the information presented is timely, and thus useful
9) The four financial statements used to report a company's financial condition include
________.
A) balance sheet, income statement, statement of changes in shareholders' equity, and statement
of cash flows
B) changes in balance sheet, statement of flows, statement of changes in balances, and statement
of cash flows
C) balance sheet, statement of earnings, statement of changes in shareholders' equity, and
statement of budgets
D) income sheet, balance of earnings, statement of changes in shareholders' equity, and statement
of cash flows
10) Team Shirts, Inc. repays a $2,000 loan. This transaction ________.
A) causes total assets to increase
B) causes total liabilities to decrease
C) is an investing activity
D) causes total shareholders' equity to increase
11) The Team Shirts' balance sheet has assets of $6,500 and liabilities of $4,000. Its
shareholders' equity is ________.
A) $10,500
B) $2,500
C) $6,500
D) $4,000
12) For the month of June, Team Shirts, Inc., received $6,000 in contributed capital, $3,000 in
sales revenue, paid $2,000 in expenses, and $500 in dividends. Its net income was ________.
A) $9,000
B) $7,000
C) $1,000
D) $500
13) On March 1, Team Shirts had a beginning balance in retained earnings of $1,200. During
March, Team Shirts paid $200 in dividends and had net income of $2,000. The March 31 balance
in retained earnings was ________.
A) $3,000
B) $3,200
C) $3,400
D) $1,200
14) The purpose of the financial statements is to provide financial information needed by
________.
A) investor and creditors
B) regulators
C) vendors and customers
D) all of these
15) How many of a company's four financial statements report information about the company at
a specific point in time?
A) one
B) two
C) three
D) four
16) How many of a company's four financial statements report information about the company
over a specific period of time?
A) one
B) two
C) three
D) four
17) Dividends are ________.
A) the same as expenses
B) a reduction in retained earnings
C) owners' contributions to the firm
D) another term for each partner's share of partnership income
18) Net income flows from ________.
A) the income statement to the statement of changes in shareholders' equity
B) the income statement to the balance sheet
C) the balance sheet to the statement of cash flows
D) the statement of cash flows to the income statement
19) Which financial statement shows Inventory?
A) balance sheet
B) income statement
C) statement of changes in shareholders' equity
D) statement of cash flows
20) Comparative balance sheets ________.
A) include balances of two consecutive years
B) include gross profit and operating income
C) report financial ratios for the current year which are compared to the prior year's
D) report revenues for both the current and previous years
21) Which of the following increases retained earnings?
A) issuance of stock
B) revenues
C) purchase of inventory
D) dividends
22) Mia Hero, Inc. had a retained earnings balance of $7,000 on December 31, 2011. For the
year 2012, sales revenues are $15,000 and expenses are $13,000. If no dividend is declared or
paid in 2012, retained earnings at December 31, 2012 equals ________.
A) $9,000
B) $10,000
C) $35,000
D) some other amount
23) Team Shirts, Inc. had the following balances on its balance sheet:
Assets Liabilities
December 31, 2011 $300,000 $250,000
December 31, 2012 $400,000 $320,000
During 2012, Team Shirts had revenues of $500,000 and expenses of $420,000. No new stock
was issued. The amount of dividends for 2012 was ________.
A) $130,000
B) $50,000
C) $10,000
D) $80,000
24) Team Shirts, Inc. had the following balances on its balance sheet:
Assets Liabilities
December 31, 2011 $500,000 $300,000
December 31, 2012 $700,000 $400,000
During 2012, Team Shirts had revenues of $500,000, expenses of $420,000, and issued $20,000
of new stock. The amount of dividends for 2012 was ________.
A) $130,000
B) $50,000
C) $0
D) $60,000
25) Team Shirts, Inc. had the following balances on its balance sheet:
Assets Liabilities
December 31, 2011 $500,000 $300,000
December 31, 2012 $700,000 $400,000
During 2012, Team Shirts issued $20,000 of new stock and paid $10,000 of dividends. The
amount of net income for 2012 was ________.
A) $290,000
B) $310,000
C) $90,000
D) $10,000
26) Tim's Tots, Inc.
September 30, 2012
Cash $ 5,000 Accounts Payable $3,200
Accounts receivable $ 3,500 Notes payable $6,500
Inventory ________ Common stock $5,000
Equipment $10,500 Retained earnings $7,300
Total assets ________ Total liabilities & shareholders' equity ________
What is the name of the financial statement above?
A) income statement
B) balance sheet
C) statement of cash flows
D) statement of changes in shareholders' equity
27) Tim's Tots, Inc.
September 30, 2012
Cash $ 5,000 Accounts Payable $3,200
Accounts receivable $ 3,500 Notes payable $6,500
Inventory ________ Common stock $5,000
Equipment $10,500 Retained earnings $7,300
Total assets ________ Total liabilities & shareholders' equity ________
Using the above financial statement, calculate the missing amount of Inventory.
A) $3,000
B) $19,000
C) $22,000
D) $1,500
28) The Mane Event, Inc. began by selling $200,000 of common stock to its owners in exchange
for cash. The effect of this transaction on the accounting equation is:
A) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Increase No effect Increase No effect
B) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earning
Decrease No effect No effect Decrease
C) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earning
No effect Decrease No effect Increase
D) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Increase No effect Increase No effect
29) Daily Grind, Inc. began by selling $15,000 of common stock to its owners in exchange for
cash. The effect of this transaction on the accounting equation is:
A) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
15,000 cash No effect No effect 15,000 revenue
B) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
15,000 cash No effect 15,000 common stock No effect
C) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
No effect 15,000 cash 15,000 cash No effect
D) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
15,000 cash 15,000 cash No effect Increase
30) Mercy, Inc. purchased a truck for $50,000 cash. The effect of this transaction on the
accounting equation is:
A) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Increase No effect No effect Increase
B) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Decrease No effect No effect Decrease
C) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
No effect No effect No effect No effect
D) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Increase No effect Increase No effect
31) Mercy, Inc. purchased equipment for $5,000 cash. The effect of this transaction on the
accounting equation is:
A) Total shareholders' equity
Total assets Total liabilities Contributed capital
Retained earnings
(5,000) cash No effect No effect (5,000) equipment expense
B) Total shareholders' equity
Total assets Total liabilities Contributed capital
Retained earnings
5,000 cash
(5,000) equipment No effect No effect No effect
C) Total shareholders' equity
Total assets Total liabilities Contributed capital
Retained earnings
5,000 equipment
(5,000) cash No effect No effect No effect
D) Total shareholders' equity
Total assets Total liabilities Contributed capital
Retained earnings
5,000 equipment No effect Increase 5,000 cash
32) Stackables, Inc. paid $8,000 cash for inventory. The effect of this transaction on the
accounting equation is:
A) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Increase No effect No effect Increase
B) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Decrease No effect No effect Decrease
C) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
No effect No effect No effect No effect
D) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Increase No effect Increase No effect
33) Stackables, Inc. paid $2,000 cash for inventory. The effect of this transaction on the
accounting equation is:
A) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained earnings
(2,000) cash No effect No effect (2,000) inventory
B) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained earnings
(2,000) inventory No effect No effect (2,000) cash
C) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained earnings
(2,000) cash (2,000) inventory No effect No effect
D) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained earnings
2,000 inventory
(2,000) cash No effect No effect No effect
34) Squid Roe, Inc. paid $1,000 cash for janitorial services. The effect of this transaction on the
accounting equation is:
A) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Increase No effect Increase No effect
B) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Decrease No effect No effect Decrease
C) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
No effect Decrease No effect Increase
D) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Decrease No effect Decrease No effect
35) Squid Roe, Inc. paid $500 cash for janitorial services. The effect of this transaction on the
accounting equation is:
A) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
(500) cash No effect No effect (500) expense
B) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
500 supplies
(500) cash No effect No effect No effect
C) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
(500) cash (500) expense No effect No effect
D) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
No effect (500) expense No effect (500) cash
36) Poe, Inc. made $7,000 of cash sales to customers. The effect of this transaction on the
accounting equation is:
A) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Increase No effect Increse No effect
B) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Decrease No effect No effect Decrease
C) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
No effect Decrease No effect Increase
D) Total shareholders' equity
Total assets Total liabilities Contributed capital Retained
earnings
Increase No effect No effect Increase
37) During the year, The Mane Event, Inc. had sales of $300,000 and had expenses of $240,000.
The owners were paid $20,000 in dividends. Net income for the year equals ________.
A) $90,000
B) $60,000
C) $50,000
D) $40,000
38) Assume 2011 is the company's first year of business and there were no dividends declared in
2011.
For the year ended
December 31, 2011
Revenues $ 300
Expenses 1. $_____________
Net Income 2. $_____________
December 31, 2011
Assets $ 1,000
Liabilities 3. $_____________
Contributed capital $ 300
Retained earnings $ 200
Determine the missing amounts, 1. Expenses. 2. Net income and 3. Liabilities, in the condensed
income statement and balance sheet for the year ended December 31, 2011.
A) 1. Expenses of $(100); 2. Net income of $200; 3. Liabilities of $500
B) 1. Expenses of $(200); 2. Net income of $500; 3. Liabilities of $1,500
C) 1. Expenses of $(200); 2. Net income of $100; 3. Liabilities of $500
D) 1. Expenses of $(500); 2. Net income of $200; 3. Liabilities of $500
