Introduction to Financial Statements
1-21
116. Which financial statement is prepared first?
a. Balance sheet
b. Income statement
c. Retained earnings statement
d. Statement of cash flows
117. An income statement shows
a. revenues, liabilities, and stockholders’ equity.
b. expenses, dividends, and stockholders’ equity.
c. revenues, expenses, and net income.
d. assets, liabilities, and stockholders’ equity.
118. In a study session, a classmate makes this statement “Dividends are listed as expenses
on the income statement.” What is your best response to this statement?
a. I’ve been struggling with that concept and I feel that dividends should be shown on the
balance sheet as assets.
b. You are right. Revenues and expenses are shown on the income statement.
Dividends are a cost of generating revenues and that makes them an expense. Why
else would a corporation pay dividends?
c. Dividends represent a portion of corporate profits that are paid to the shareholders.
They belong on the retained earnings statement.
d. Dividends are deducted from retained earnings on the balance sheet.
119. Henson Company began the year with retained earnings of $330,000. During the year, the
company recorded revenues of $500,000, expenses of $380,000, and paid dividends of
$40,000. What was Henson’s retained earnings at the end of the year?
a. $490,000
b. $410,000
c. $790,000
d. $450,000
120. Pinson Company began the year with retained earnings of $570,000. During the year, the
company recorded revenues of $600,000, expenses of $380,000, and paid dividends of
$140,000. What was Pinson’s retained earnings at the end of the year?
a. $930,000
b. $650,000
c. $1,030,000
d. $500,000
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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121. Finney Company began the year by issuing $40,000 of common stock for cash. The
company recorded revenues of $370,000, expenses of $320,000, and paid dividends of
$20,000. What was Finney’s net income for the year?
a. $30,000
b. $70,000
c. $50,000
d. $90,000
122. Lankston Company began the year by issuing $90,000 of common stock for cash. The
company recorded revenues of $825,000, expenses of $720,000, and paid dividends of
$45,000. What was Lankston’s net income for the year?
a. $60,000
b. $150,000
c. $105,000
d. $195,000
123. Gilkey Corporation began the year with retained earnings of $465,000. During the year,
the company issued $630,000 of common stock, recorded expenses of $1,800,000, and
paid dividends of $120,000. If Gilkey’s ending retained earnings was $495,000, what was
the company’s revenue for the year?
a. $1,830,000
b. $1,950,000
c. $2,460,000
d. $2,580,000
124. Kilmer Corporation began the year with retained earnings of $620,000. During the year,
the company issued $840,000 of common stock, recorded expenses of $2,400,000, and
paid dividends of $160,000. If Kilmer’s ending retained earnings was $660,000, what was
the company’s revenue for the year?
a. $2,440,000
b. $2,600,000
c. $3,280,000
d. $33,440,000
125. A balance sheet shows
a. revenues, liabilities, and stockholders’ equity.
b. expenses, dividends, and stockholders’ equity.
c. revenues, expenses, and dividends.
d. assets, liabilities, and stockholders’ equity.
Introduction to Financial Statements
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126. The accounting equation may be expressed as
a. Assets = Stockholders’ Equity – Liabilities.
b. Assets = Liabilities + Stockholders’ Equity.
c. Assets + Liabilities = Stockholders’ Equity.
d. Assets + Stockholders’ Equity = Liabilities.
127. Which of the following is not a satisfactory statement of the accounting equation?
a. Assets = Stockholders’ Equity – Liabilities
b. Assets = Liabilities + Stockholders’ Equity
c. Assets – Liabilities = Stockholders’ Equity
d. Assets – Stockholders’ Equity = Liabilities
128. Jimmy’s Repair Shop started the year with total assets of $200,000 and total liabilities of
$160,000. During the year the business recorded $420,000 in revenues, $220,000 in
expenses, and dividends of $40,000. Stockholders’ equity at the end of the year was
a. $240,000.
b. $200,000.
c. $160,000.
d. $180,000.
129. Jimmy’s Repair Shop started the year with total assets of $200,000 and total liabilities of
$160,000. During the year the business recorded $420,000 in revenues, $220,000 in
expenses, and dividends of $40,000. The net income reported by Jimmy’s Repair Shop
for the year was
a. $160,000.
b. $200,000.
c. $120,000.
d. $380,000.
130. Ashley’s Accessory Shop started the year with total assets of $140,000 and total liabilities
of $80,000. During the year the business recorded $220,000 in revenues, $110,000 in
expenses, and dividends of $40,000. Stockholders’ equity at the end of the year was
a. $120,000.
b. $110,000.
c. $130,000.
d. $70,000.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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131. Ashley’s Accessory Shop started the year with total assets of $140,000 and total liabilities
of $80,000. During the year the business recorded $220,000 in revenues, $110,000 in
expenses, and dividends of $40,000. The net income reported by Ashley’s Accessory
Shop for the year was
a. $80,000.
b. $100,000.
c. $130,000.
d. $110,000.
132. If total liabilities increased by $75,000 and stockholders’ equity increased by $25,000
during a period of time, then total assets must change by what amount and direction
during that same period?
a. $100,000 decrease
b. $100,000 increase
c. $125,000 increase
d. $150,000 increase
133. If total liabilities decreased by $75,000 and stockholders’ equity increased by $25,000
during a period of time, then total assets must change by what amount and direction
during that same period?
a. $100,000 increase
b. $50,000 decrease
c. $50,000 increase
d. $75,000 decrease
134. If total liabilities decreased by $50,000 and stockholders’ equity increased by $10,000
during a period of time, then total assets must change by what amount and direction
during that same period?
a. $40,000 decrease
b. $40,000 increase
c. $50,000 increase
d. $60,000 increase
Introduction to Financial Statements
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135. If total liabilities decreased by $75,000 and stockholders’ equity decreased by $25,000
during a period of time, then total assets must change by what amount and direction
during that same period?
a. $100,000 increase
b. $50,000 decrease
c. $100,000 decrease
d. $50,000 decrease
136. If total liabilities increased by $46,000 during a period of time and stockholders’ equity
decreased by $18,000 during the same period, then the amount and direction (increase or
decrease) of the period’s change in total assets is a(n)
a. $46,000 increase.
b. $64,000 increase.
c. $28,000 decrease.
d. $28,000 increase.
137. The balance sheet
a. summarizes the changes in retained earnings for a specific period of time.
b. reports the changes in assets, liabilities, and stockholders’ equity over a period of
time.
c. reports the assets, liabilities, and stockholders’ equity at a specific date.
d. presents the revenues and expenses for a specific period of time.
138. The retained earnings statement
a. summarizes the changes in retained earnings for a specific period of time.
b. reports the changes in assets, liabilities, and stockholders’ equity over a period of
time.
c. reports the assets, liabilities, and stockholders’ equity at a specific date.
d. presents the revenues and expenses for a specific period of time.
139. Liabilities
a. are future economic benefits.
b. are debts and obligations.
c. possess service potential.
d. are things of value owned by a business.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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140. Liabilities of a company are owed to
a. debtors.
b. owners.
c. creditors.
d. stockholders.
141. Stockholders’ equity can be described as claims of
a. creditors on total assets.
b. owners on total assets.
c. customers on total assets.
d. debtors on total assets.
142. Payments to stockholders are called
a. expenses.
b. liabilities.
c. dividends.
d. distributions.
143. Common stock is reported on the
a. statement of cash flows.
b. retained earnings statement.
c. income statement.
d. balance sheet.
144. Stockholders’ equity is comprised of
a. common stock and dividends.
b. common stock and retained earnings.
c. dividends and retained earnings.
d. net income and retained earnings.
145. Stockholders’ equity
a. is usually equal to cash on hand.
b. is equal to liabilities and retained earnings.
c. includes retained earnings and common stock.
d. is shown on the income statement.
146. Retained earnings is
a. the stockholders’ claim on total assets.
b. equal to cash.
c. equal to revenues.
d. the amount of net income kept in the corporation for future use.
Introduction to Financial Statements
1-27
147. Which financial statement would best indicate whether the company relies on debt or
stockholders’ equity to finance its assets?
a. Statement of cash flows
b. Retained earnings statement
c. Income statement
d. Balance sheet
148. The primary purpose of the statement of cash flows is to report
a. a company’s investing transactions.
b. a company’s financing transactions.
c. information about cash receipts and cash payments of a company.
d. the net increase or decrease in cash.
149. Claims of owners are called
a. dividends.
b. stockholders’ equity.
c. liabilities.
d. income payable.
150. Which of the following is not a common way that managers use the balance sheet?
a. To analyze the balances of assets, liabilities, and stockholders’ equity throughout the
accounting period
b. To determine if the cash balance is sufficient for future needs
c. To analyze the balance between debt and common stock financing
d. To analyze the balance of accounts receivable on the last day of the accounting
period
151. Why are financial statement users interested in the statement of cash flows?
a. It is the easiest financial statement to evaluate.
b. It provides information about an important company resource.
c. It is the first statement that is presented to users.
d. It helps users decide whether assets such as office equipment should be replaced.
152. Why should the income statement be prepared first?
a. The statement of cash flows should be prepared first because it determines the
sources of cash. That information is then used in preparing the income statement.
b. Net income from the income statement flows into the retained earnings statement. The
ending retained earnings balance then flows into the balance sheet.
c. The income statement does not have to be prepared first. Financial statements can be
prepared in any order.
d. None of these answer choices are correct.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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153. Elston Company compiled the following financial information as of December 31, 2014:
Service revenue $700,000
Common stock 150,000
Equipment 200,000
Operating expenses 625,000
Cash 175,000
Dividends 50,000
Supplies 25,000
Accounts payable 100,000
Accounts receivable 75,000
Retained earnings, 1/1/14 375,000
Elston’s assets on December 31, 2014 are
a. $1,175,000.
b. $850,000.
c. $400,000.
d. $475,000.
154. Elston Company compiled the following financial information as of December 31, 2014:
Service revenue $700,000
Common stock 150,000
Equipment 200,000
Operating expenses 625,000
Cash 175,000
Dividends 50,000
Supplies 25,000
Accounts payable 100,000
Accounts receivable 75,000
Retained earnings, 1/1/14 375,000
Elston’s retained earnings on December 31, 2014 are
a. $375,000.
b. $450,000.
c. $400,000.
d. $ 25,000.
Introduction to Financial Statements
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155. Elston Company compiled the following financial information as of December 31, 2014:
Service revenue $700,000
Common stock 150,000
Equipment 200,000
Operating expenses 625,000
Cash 175,000
Dividends 50,000
Supplies 25,000
Accounts payable 100,000
Accounts receivable 75,000
Retained earnings, 1/1/14 375,000
Elston’s stockholders’ equity on December 31, 2014 is
a. $525,000.
b. $550,000.
c. $400,000.
d. $600,000.
156. Benedict Company compiled the following financial information as of December 31, 2014:
Service revenue $560,000
Common stock 120,000
Equipment 160,000
Operating expenses 500,000
Cash 140,000
Dividends 40,000
Supplies 20,000
Accounts payable 80,000
Accounts receivable 60,000
Retained earnings, 1/1/14 300,000
Benedict’s assets on December 31, 2014 are
a. $940,000.
b. $680,000.
c. $320,000.
d. $380,000.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
1-30
157. Benedict Company compiled the following financial information as of December 31, 2014:
Service revenue $560,000
Common stock 120,000
Equipment 160,000
Operating expenses 500,000
Cash 140,000
Dividends 40,000
Supplies 20,000
Accounts payable 80,000
Accounts receivable 60,000
Retained earnings, 1/1/14 300,000
Benedict’s retained earnings on December 31, 2014 are
a. $300,000.
b. $360,000.
c. $320,000.
d. $ 20,000.
158. Benedict Company compiled the following financial information as of December 31, 2014:
Service revenue $560,000
Common stock 120,000
Equipment 160,000
Operating expenses 500,000
Cash 140,000
Dividends 40,000
Supplies 20,000
Accounts payable 80,000
Accounts receivable 60,000
Retained earnings, 1/1/14 300,000
Benedict’s stockholders’ equity on December 31, 2014 is
a. $420,000.
b. $440,000.
c. $320,000.
d. $480,000.
159. The heading on the statement of cash flows identifies all of the following except
a. the preparer of the statement.
b. the company
c. the time period covered by the statement.
d. the type of statement.
Introduction to Financial Statements
1-31
160. All of the following are interrelationships that are important to understand when preparing
financial statements except
a. the net income from the income statement is used in the retained earnings statement.
b. the ending retained earnings from the retained earnings statement is used in the
stockholder’s equity section of the balance sheet.
c. the cash on the balance sheet should be equal to the cash at the end of the period on
the statement of cash flows.
d. all of the payments on the balance sheet should be equal to the cash payments for
operating activities on the statement of cash flows.
161. Marvin Services Corporation had the following accounts and balances:
Accounts payable
$18,000
Equipment
$21,000
Accounts receivable
3,000
Land
21,000
Buildings
?
Unearned service revenue
6,000
Cash
9,000
Total stockholders’ equity
?
If the balance of the Buildings account was $42,000 and $3,000 of Accounts Payable
were paid in cash, what would be the balance of the total stockholders’ equity?
a. $81,000
b. $72,000
c. $102,000
d. $78,000
162. Marvin Services Corporation had the following accounts and balances:
Accounts payable
$18,000
Equipment
$21,000
Accounts receivable
3,000
Land
21,000
Buildings
?
Unearned service revenue
6,000
Cash
9,000
Total stockholders’ equity
?
If the balance of the Buildings account was $24,000 and $6,000 of Accounts Payable
were paid in cash, what would be the total liabilities and stockholders’ equity?
a. $54,000
b. $78,000
c. $48,000
d. $72,000
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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163. Marvin Services Corporation had the following accounts and balances:
Accounts payable
$18,000
Equipment
$21,000
Accounts receivable
3,000
Land
21,000
Buildings
?
Unearned service revenue
6,000
Cash
9,000
Total stockholders’ equity
?
If total stockholder’s equity was $57,000, what would be the balance of the Buildings
Account?
a. $21,000
b. $81,000
c. $87,000
d. $27,000
164. Marvin Services Corporation had the following accounts and balances:
Accounts payable
$18,000
Equipment
$21,000
Accounts receivable
3,000
Land
21,000
Buildings
?
Unearned service revenue
6,000
Cash
9,000
Total stockholders’ equity
?
If the balance of the Buildings account was $45,000 and the equipment was sold for
$21,000, what would be the total of stockholders’ equity?
a. $39,000
b. $54,000
c. $69,000
d. $75,000
165. Marvin Services Corporation had the following accounts and balances:
Accounts payable
$18,000
Equipment
$21,000
Accounts receivable
3,000
Land
21,000
Buildings
?
Unearned service revenue
6,000
Cash
9,000
Total stockholders’ equity
?
If the balance of the Buildings account was $51,000, what would be the total of liabilities
and stockholders’ equity?
a. $102,000
b. $105,000
c. $81,000
d. $75,000
Introduction to Financial Statements
1-33
166. Notes to the financial statements include all of the following except
a. descriptions of significant accounting policies used.
b. explanations of uncertainties.
c. quantifiable accounting information.
d. statistics needed to understand the statements.
167. The management discussion and analysis (MD&A) section of the annual report covers all
of the following aspects except the
a. ability of the company to pay near-term obligations.
b. certification criteria of the company’s auditors.
c. company’s ability to fund operations and expansion.
d. results of the company operations.
168. An annual report includes all of the following except
a. management discussion and analysis section.
b. notes to the financial statements.
c. an auditor’s report.
d. salary information for all the executives.
169. Which of the following clarifies information presented in the financial statements, as well
as expanding upon it where additional detail is needed?
a. Auditor’s report
b. Management discussion and analysis section
c. Notes to the financial statements
d. President’s state of the company report
170. The information needed to determine whether a company is using accounting methods
similar to those of its competitors would be found in the
a. auditor’s report.
b. balance sheet.
c. management discussion and analysis section.
d. notes to the financial statements.
171. In the annual report, where would a financial statement reader find out if the company’s
financial statements give a fair depiction of its financial position and operating results?
a. Notes to the financial statements
b. Management discussion and analysis section
c. Balance sheet
d. Auditor’s report
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
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172. Management’s views on the company’s short-term debt paying ability, expansion
financing, and results of operations are found in the
a. auditor’s report.
b. management discussion and analysis section.
c. notes to the financial statements.
d. president’s state of the company report.
173. Which of the following statements is true?
a. Publicly traded U.S. companies must provide an annual report to their shareholders
when operating conditions change significantly.
b. An unqualified independent auditor’s report must be included in the annual report.
c. Notes to the financial statements do not need to be included in the annual report
because that information is only for internal users.
d. None of these answer choices are correct.
174. Notes to the financial statements
a. are optional.
b. help clarify information presented in the financial statements.
c. are generally brief and few in number.
d. need not be read in detail if an unqualified opinion accompanies the financial
statements.
Answers to Multiple Choice Questions
Introduction to Financial Statements
FOR INSTRUCTOR USE ONLY
1-35
BRIEF EXERCISES
Be. 175
Indicate in the space by letter whether each statement below applies to a sole proprietorship (S),
partnership (P), or corporation (C). More than one answer may be appropriate.
____ a. Simple to establish.
____ b. Shared control.
____ c. Easy to transfer ownership.
____ d. No personal liability.
____ e. Tax advantage.
____ f. Easier to raise funds.
Solution 175 (5 min.)
Be. 176
Indicate in the space provided by each item whether it would appear on the statement of cash
flows as a(n): (O) operating activity, (I) investing activity, or (F) financing activity.
____ a. Cash receipts from customers.
____ b. Issuance of common stock for cash.
____ c. Payment of cash dividends.
____ d. Cash purchase of equipment.
____ e. Cash payments to suppliers.
____ f. Sale of old machine for cash.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
1-36
Solution 176 (5 min.)
Be. 177
Use the following information to calculate for the year ended December 31, 2014 (a) net income
(net loss), (b) ending retained earnings, and (c) total assets.
Supplies $ 1,500 Service revenue $19,000
Other operating expenses 10,000 Cash 15,000
Accounts payable 11,000 Dividends 6,000
Accounts receivable 4,000 Notes payable 1,000
Common stock 10,000 Equipment 9,500
Retained earnings (beginning) 5,000
Solution 177 (5 min.)
Be. 178
Use the following information to calculate for the year ended December 31, 2014 (a) net income
(net loss), (b) ending retained earnings, and (c) total assets.
Supplies $ 1,000 Service revenue $18,000
Other operating expenses 12,000 Cash 15,000
Accounts payable 9,000 Dividends 1,000
Accounts receivable 3,000 Notes payable 1,000
Common stock 9,000 Equipment 13,000
Retained earnings (beginning) 5,000
Solution 178 (5 min.)
Introduction to Financial Statements
FOR INSTRUCTOR USE ONLY
1-37
Be. 179
Listed below in alphabetical order are the balance sheet items of Nolan Company at December
31, 2014. Prepare a balance sheet and include a complete heading.
Accounts payable $ 11,000
Accounts receivable 15,000
Buildings 65,000
Cash 11,000
Common stock 80,000
Land 31,000
Equipment 10,000
Retained earnings 41,000
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
1-38
Be. 180
Indicate in the space provided by each item whether it would appear on the income statement
(IS), balance sheet (BS), or retained earnings statement (RE):
a. ____ Service Revenue g. ___ Accounts Receivable
b. ____ Utilities Expense h. ___ Common Stock
c. ____ Cash i. ____ Equipment
d. ____ Accounts Payable j. ____ Advertising Expense
e. ____ Supplies k. ___ Dividends
f. ____ Salaries and Wages Expense l. ____ Notes Payable
Ans: N/A, LO: 4,5, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Reporting
Solution 180 (5 min.)
Be. 181
Cesar Ruiz was reviewing his company’s activities at the end of the year (2014) and decided to
prepare a retained earnings statement. At the beginning of the year his assets were $530,000,
liabilities were $140,000, and common stock was $120,000. The net income for the year was
$250,000. Dividends of $220,000 were paid during the year.
Prepare a retained earnings statement in good form.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Introduction to Financial Statements
FOR INSTRUCTOR USE ONLY
1-39
Solution 181 (5 min.)
Be. 182
From the following list of selected accounts taken from the records of Schmidt Clinic, identify
those that would appear on the balance sheet.
a. Common Stock f. Accounts Payable
b. Service Revenue g. Cash
c. Land h. Advertising Expense
d. Salaries and Wages Expense i. Supplies
e. Notes Payable j. Utilities Expense
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,
IMA: Reporting
Solution 182 (5 min.)
Be. 183
Determine the missing items.
Assets = Liabilities + Stockholders’ Equity
$80,000 $56,000 (a)
(b) $28,000 $34,000
$84,000 (c) $55,000
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 183 (5 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
1-40
Be. 184
Determine the missing items.
Assets = Liabilities + Stockholders’ Equity
$66,000 $50,000 (a)
(b) $18,000 $30,000
$54,000 (c) $40,000
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 184 (5 min.)
Be. 185
Identify which of the following accounts appear on a balance sheet.
(a) Service revenue
(b) Cash
(c) Common stock
(d) Accounts payable
(e) Rent expense
(f) Supplies
(g) Land
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,
IMA: Reporting
Solution 185 (5 min.)