Chapter 1 An Introduction to Accounting
54) What is the amount of total assets that will be reported on Lexington's balance sheet at the end of Year 1? A) $11,000 B) $12,000 C) $1,600 D) $7,600
A Explanation: $0 beginning balance + $6,000 (cash) + $4,400 (cash) + $6,200 (cash) − $4,800 (cash) − $800 (cash) = $11,000
53) What was the net cash flow from financing activities reported on Lexington's statement of cash flows for Year 2? A) $2,880 outflow B) $2,880 inflow C) $1,000 outflow D) $1,000 inflow
A Explanation: $1,000 cash inflow from issuing stock − $2,600 cash outflow for loan repayment − $1,280 cash outflow for dividends = $2,880 cash outflow for financing activities
47) The amount of assets on Packard's Year 2 balance sheet is A) $2,115. B) $440. C) $2,215. D) $395.
A Explanation: $1,720 beg. balance + $325 - $220 + $750 - $360 - $100 = $2,115
57) As of December 31, Year 1, Mason Company had $500 cash. During Year 2, Mason earned $1,200 of cash revenue and paid $800 of cash expenses. What is the amount of cash that will be reported on the balance sheet at the end of Year 2? A) $900 B) $400 C) $1,700 D) $2,500
A Explanation: $500 beginning balance + $1,200 revenue − $800 expenses = $900
48) What is the net cash inflow from operating activities that will be reported on Packard's statement of cash flows for Year 1? A) $400 B) $650 C) $350 D) $820
A Explanation: $650 inflow from revenue − $250 outflow for expenses = $400 inflow
26) Which of the following could describe the effects of an asset exchange transaction on a company's total assets, total liabilities and total equity? Assets = Liab. + Equity A. NA = NA + NA B. + = NA + + C. − = NA + − D. NA = NA + + − A) Option A B) Option B C) Option C D) Option D
A Explanation: An asset exchange transaction is one that increases one asset account and decreases another, resulting in no net change in assets. There are no changes to the company's liabilities and stockholders' equity either.
65) Which of the following could represent the effects of an asset source transaction on the accounting equation? Assets = Liabilities + Stockholders' Equity A. + = + + NA B. − = NA + − C. +− = NA + NA D. NA = + + − A) Option A B) Option B C) Option C D) Option D
A Explanation: An asset source transaction increases assets and can either increase liabilities (in the case of borrowing cash) or equity (in the case of issuing stock or earning revenue).
The financial statements of Calloway Company prepared at the end of the current year contained the following elements and corresponding amounts: Assets = $50,000; Liabilities = ?; Common Stock = $15,000; Revenue = $22,000; Dividends = $1,500; Beginning Retained Earnings = $3,500; Ending Retained Earnings = $7,500. 32) What was the amount of total liabilities reported on the balance sheet as of the end of the current year? A) $27,500 B) $31,500 C) $35,000 D) $42,500
A Explanation: Assets = Liabilities + Common Stock + Ending Retained Earnings $50,000 = Liabilities + $15,000 + $7,500 Liabilities = $27,500
14) A company's total assets increased during the period while its liabilities and common stock were unchanged. No dividends were declared or paid during the period. Which of the following would explain this situation? A) Revenues were greater than expenses during the period. B) Retained earnings were less than net income during the period. C) No dividends were paid during the period. D) The company must have purchased assets with cash during the period.
A Explanation: Assets = Liabilities + stockholders' equity Assets = Liabilities + Common stock + Retained earnings If a company's total assets increased while liabilities and common stock were unchanged, retained earnings must have increased. In order for retained earnings to increase, the company must have reported net income. In other words, its revenues must have been greater than its expenses.
22) At the end of Year 2, retained earnings for the Baker Company was $3,500. Revenue earned by the company in Year 2 was $1,500, expenses paid during the period were $800, and dividends paid during the period were $500. Based on this information alone, what was the amount of retained earnings at the beginning of Year 2? A) $3,300 B) $3,700 C) $2,800 D) $3,800
A Explanation: Beginning Retained Earnings + Revenue − Expenses − Dividends = Ending Retained Earnings Beginning Retained Earnings + $1,500 − $800 − $500 = $3,500 Beginning Retained Earnings = $3,300
30) Jackson Company had a net increase in cash from operating activities of $10,000 and a net decrease in cash from financing activities of $2,000. If the beginning and ending cash balances for the company were $4,000 and $11,000, what was the net cash change from investing activities? A) An outflow or decrease of $1,000 B) An inflow or increase of $2,000 C) An inflow or increase of $1,000 D) Zero
A Explanation: Beginning cash balance + Increase from operating activities − Decrease from financing activities +/− Increase or decrease from investing activities = Ending cash balance $4,000 + $10,000 − $2,000 +/− Increase or decrease from investing activities = $11,000 $1,000 = Decrease from investing activities
24) Borrowing cash from the bank is an example of which type of transaction? A) Asset source B) Claims exchange C) Asset use D) Asset exchange
A Explanation: Borrowing cash is an asset source transaction that increases a business's assets (cash) and increases its liabilities (notes payable).
2) The Heritage Company is a manufacturer of office furniture. Which term best describes Heritage's role in society? A) Conversion agent B) Regulatory agency C) Consumer D) Resource owner
A Explanation: Businesses serve as conversion agents in the marketplace, transforming basic resources provided by resource owners into goods and services that consumers demand. Regulatory agencies set policies that affect the way that businesses operate.
58) Expenses are reported on which of the following financial statement(s)? A) Income statement B) Balance sheet C) Statement of changes in stockholders' equity D) Income statement and statement of changes in stockholders' equity
A Explanation: Expenses and revenues are reported on the income statement. Net income is reported on the statement of stockholders' equity, but expenses are not.
6) Financial accounting standards are known collectively as GAAP. What does that acronym stand for? A) Generally Accepted Accounting Principles B) Generally Applied Accounting Procedures C) Governmentally Approved Accounting Practices D) Generally Authorized Auditing Principles
A Explanation: Generally Accepted Accounting Principles are established by the Financial Accounting Standards Board.
13) Ballard Company reported assets of $500 and liabilities of $200. What amount will Ballard's report for stockholders' equity? A) $300 B) $500 C) $700 D) Cannot be determined
A Explanation: In the accounting equation, assets equal claims (liabilities + stockholders' equity). If assets are $500, total claims must also be $500. Therefore, stockholders' equity must be $500 − $200, or $300.
64) Garrison Company acquired $23,000 by issuing common stock. Which of the following accurately reflects how this event affects the company's accounting equation? Assets = Liabilities + Common Stock + Retained Earnings A. 23,000 = NA + 23,000 + NA B. NA = 23,000 + (23,000) + NA C. NA = NA + 23,000 + (23,000) D. 23,000 = NA + NA + 23,000 A) Option A B) Option B C) Option C D) Option D
A Explanation: Issuing common stock increases assets (cash) and equity (common stock). It does not affect the income statement, but is reported as a cash inflow for financing activities on the statement of cash flows.
67) Chico Company experienced an accounting event that affected its accounting equation as indicated below: Assets = Liabilities + Common Stock + Retained Earnings + = NA + + + NA Which of the following accounting events could have caused these effects on Chico's statements? A) Issued common stock. B) Paid cash expenses. C) Borrowed money from a bank. D) Paid a cash dividend.
A Explanation: Issuing common stock would increase assets (cash) and increase stockholders' equity (common stock).
5) Which of the following statements is false regarding managerial accounting information? A) It is often used by investors. B) It is more detailed than financial accounting information. C) It can include nonfinancial information. D) It focuses on divisional rather than overall profitability.
A Explanation: Managerial accounting provides information primarily for internal users, or managers, of businesses. Managers require more detailed information about a business than do external users, and sometimes that information is nonfinancial in nature. Managerial accounting information focuses on divisional rather than overall profitability and is not typically made available to external users, such as investors.
73) What does negative retained earnings indicate? A) The company has lost some or all of the owners' investment B) The company experienced a large cash outflow during the year C) The company's liabilities are greater than its assets D) The company's common stock is negative
A Explanation: Negative retained earnings occurs when the company's expenses have been greater than the provided resources.
19) On January 1, Year 2, Chavez Company had beginning balances as follows: total assets of $12,500, total liabilities of $4,500, and common stock of $3,000. During Year 2, Chavez paid dividends to its stockholders of $2,000. Given that retained earnings amounted to $6,000 at the end of Year 2, what was Chavez's net income for Year 2? A) $3,000 B) $5,000 C) $7,000 D) $2,000
A Explanation: On January 1, Year 2: Assets = Liabilities + Common Stock + Retained Earnings $12,500 = $4,500 + $3,000 + Retained Earnings Retained Earnings = $5,000 During Year 2: Beginning retained earnings + Net income − Dividends = Ending retained earnings $5,000 + Net Income − $2,000 = $6,000 Net Income = $3,000
70) The statement of changes in stockholders' equity presents A) an explanation of the changes in the beginning and ending balances of stockholders' equity. B) a comparison of the benefits and the sacrifices a company experiences from its operations. C) information in three categories including operating, investing, and financing activities. D) a list of a company's assets and the sources of those assets.
A Explanation: The income statement compares the benefits and sacrifices the company experiences from its operations. The statement of cash flows shows the cash inflows and outflows in categories such as operating, investing, and financing activities. The balance sheet shows the company's assets and the sources of those assets. 71) Which of the financial statements are required by the Generally Accepted Accounting Principles (GAAP)? A) Income Statement B) Statement of Changes in stockholders' equity C) Statement of Cash Flows D) Balance Sheet E) All of these financial statements are required by GAAP Answer: E Explanation: GAAP requires all four financial statements.
74) A net loss occurs when A) expenses are greater than revenues B) liabilities are greater than assets C) cash inflow is less than cash outflow D) the ending cash balance is lower than the beginning cash balance
A Explanation: When expenses are greater than revenues there is a net loss. When revenues are greater than expenses there is net income.
Yowell Company began operations on January 1, Year 1. During Year 1, the company engaged in the following cash transactions: 1) issued stock for $40,000 2) borrowed $25,000 from its bank 3) provided consulting services for $39,000 4) paid back $15,000 of the bank loan 5) paid rent expense for $9,000 6) purchased equipment costing $12,000 7) paid $3,000 dividends to stockholders 8) paid employees' salaries for work completed during the year, $21,000 41) What is Yowell's net cash flow from operating activities? A) Inflow of $6,000 B) Inflow of $9,000 C) Inflow of $18,000 D) Inflow of $30,000
B Explanation: $39,000 inflow from consulting services − $9,000 outflow for rent expense − $21,000 outflow for salaries expense = $9,000 inflow
56) What was the amount of liabilities on Lexington's balance sheet at the end of Year 2? A) $1,000. B) $1,800. C) ($2,600). D) $480.
B Explanation: $4,400 beginning balance − $2,600 loan repayment = $1,800
27) Which of the following describes the effects of an asset use transaction on the accounting equation? Assets = Liab. + Equity A. + = + + NA B. − = NA + − C. + − = NA + NA D. NA = + + NA A) Option A B) Option B C) Option C D) Option D
B Explanation: An asset use transaction is one that decreases a business's assets and decreases either liabilities or equity. In this asset use transaction, assets and equity decreased. An example of an asset use transaction with this effect would be paying cash for salary expense.
40) Retained earnings at the beginning and ending of the accounting period were $300 and $800, respectively. Revenues of $1,100 and dividends paid to stockholders of $200 were reported during the period. What was the amount of expenses reported for the period? A) $500 B) $400 C) $900 D) $700
B Explanation: Beginning retained earnings + Revenues − Expenses − Dividends = Ending retained earnings $300 + $1,100 − Expenses − $200 = $800 Expenses = $400
3) Which resource providers lend financial resources to a business with the expectation of repayment with interest? A) Consumers B) Creditors C) Investors D) Owners
B Explanation: Businesses borrow money from creditors, and repay the amount borrowed, plus an additional fee known as interest. Investors, in contrast, provide financial resources in exchange for ownership interest in the business. Consumers demand goods and services from businesses.
21) During Year 2, Millstone Company provided $6,500 of services for cash, paid cash dividends of $1,000 to owners, and paid $4,000 cash for expenses. Liabilities were unchanged. Which of the following statements accurately describes the effect of these events on the elements of the company's financial statements? A) Assets increased by $6,500. B) Assets increased by $1,500. C) stockholders' equity increased by $2,500. D) Assets increased by $5,500.
B Explanation: Cash, an asset, increased by $1,500 (calculated as receipts of $6,500 − payment of $1,000 − payment of $4,000). stockholders' equity also increased by $1,500 (calculated as revenue of $6,500 − dividends of $1,000 − expenses of $4,000).
17) At the time of liquidation, Fairchild Company reported assets of $200,000, liabilities of $120,000, common stock of $70,000 and retained earnings of $10,000. What is the maximum amount of Fairchild's assets that the shareholders are entitled to receive? A) $200,000 B) $80,000 C) $90,000 D) $100,000
B Explanation: Creditors receive first priority in asset distribution during a business liquidation. Therefore, creditors would collect the $120,000 owed to them, leaving the shareholders with the remaining $80,000 ($70,000 common stock + $10,000 retained earnings).
66) Reynolds Company experienced an accounting event that affected its financial statements as indicated below: Assets = Liabilities + Stockholders' Equity + = NA + + Which of the following accounting events could have caused these effects on Reynolds' accounting equation? A) Paid a cash dividend. B) Earned cash revenue. C) Borrowed money from a bank. D) The information provided does not represent a completed event.
B Explanation: Earning cash revenue must have been the event that affected the financial statements as indicated because earning cash revenue increases assets (cash) and increases stockholders' equity (retained earnings).
11) Stosch Company's balance sheet reported assets of $40,000, liabilities of $15,000 and common stock of $12,000 as of December 31, Year 1. Retained earnings on the December 31, Year 2 balance sheet is $18,000 and Stosch paid a $14,000 dividend during Year 2. What is the amount of net income for Year 2? A) $17,000 B) $19,000 C) $13,000 D) $21,000
B Explanation: If assets on December 31, Year 1 totaled $40,000, total claims (including liabilities, common stock, and retained earnings) on that date must have also been $40,000. If liabilities were $15,000 and common stock was $12,000, retained earnings on December 31, Year 1 must have been $13,000. At the end of Year 2, the company reported $18,000 in retained earnings, a $5,000 increase. During Year 2, Stosch paid a $14,000 cash dividend, which reduced retained earnings. Therefore, Year 2 net income must have been $5,000 greater than the dividend paid. $14,000 + $5,000 = $19,000.
68) Delta Company experienced an accounting event that affected its financial statements as indicated below: Assets = Liabilities + Common Stock + Retained Earnings - = NA + NA + - Which of the following accounting events could have caused these effects on Delta's statements? A) Purchased land for cash. B) Incurred a cash expense. C) Borrowed money from a bank. D) Earned cash revenue.
B Explanation: Incurring a cash expense would decrease assets (cash) and decrease stockholders' equity (retained earnings). 69) Which of the following would not describe the effects of an asset source transaction on the accounting equation? Assets = Liabilities + Common Stock + Retained Earnings A. + = + + NA + NA B. + = NA + NA + + C. + = NA + + + NA D. +− = NA + NA + NA A) Option A B) Option B C) Option C D) Option D Answer: D Explanation: An asset source transaction is any transaction that results in a net increase in assets. It could be accompanied by an increase in liabilities (as in the case of borrowing cash), an increase in common stock (as in the case of issuing common stock), or an increase in retained earnings (as in the case of earning revenue).
60) Liabilities are reported on which of the following financial statement(s)? A) Income statement B) Balance sheet C) Statement of cash flows D) Statement of changes in stockholders' equity
B Explanation: Liabilities is an element on the balance sheet. As such, liabilities do not appear on the income statement, statement of cash flows, or the statement of changes in stockholders' equity.
62) Jackson Company paid $500 cash for salary expenses. Which of the following accurately reflects how this event affects the company's accounting equation? Assets = Liab. + Equity A. 500 = 500 + NA B. (500) = NA + (500) C. (500) = (500) + NA D. (500) = NA + 500 A) Option A B) Option B C) Option C D) Option D
B Explanation: Paying cash for expenses decreases assets (cash) and decreases stockholders' equity (retained earnings).
15) Li Company paid cash to purchase land. What happened as a result of this business event? A) Total assets decreased. B) Total assets were unaffected. C) Total equity decreased. D) Both assets and total equity decreased.
B Explanation: Paying cash for land is an asset exchange transaction that increases one asset (land) and decreases another asset (cash). The result is no overall change in total assets.
20) When a business provides services for cash, which elements of the accounting equation are affected? A) Revenue and Expense B) Cash and Revenue C) Cash and Expense D) Cash and Dividends
B Explanation: Providing services for cash increases a company's assets (cash) and stockholders' equity (retained earnings). Revenue increases on the income statement.
39) Glavine Company repaid a bank loan with cash. The cash flow from this event should be reported as: A) an outflow for investing activities on the Statement of Cash Flows B) an outflow for financing activities on the Statement of Cash Flows C) an inflow for investing activities on the Statement of Cash Flows D) an inflow for operating activities on the Statement of Cash Flows
B Explanation: Repaying a bank loan is a cash outflow for financing activities that decreases assets (cash) and decreases liabilities (notes payable).
7) International accounting standards are formulated by the IASB. What does that acronym stand for? A) Internationally Accepted Standards Board B) International Accounting Standards Board C) International Accountability Standards Bureau D) International Accounting and Sustainability Board
B Explanation: The International Accounting Standards Board establishes accounting standards for most countries outside of the U.S.
33) Which of the following financial statements provides information about a company as of a specific point in time? A) Income statement B) Balance sheet C) Statement of cash flows D) Statement of changes in stockholders' equity
B Explanation: The balance sheet provides information about a company as of a specific point in time, the other three statements provide information about a period of time such as a month, a quarter, or a year.
45) The amount of total liabilities on Packard's Year 1 balance sheet is A) $200 B) $340 C) $420 D) $670
C Explanation: $0 beg. balance + $420 borrowed from the bank = $420 total liabilities
10) Algonquin Company reported assets of $50,000, liabilities of $22,000 and common stock of $15,000. Based on this information only, what is the amount of the company's retained earnings? A) $7,000. B) $57,000. C) $13,000. D) $87,000.
C Explanation: Assets = Liabilities + Equity; Equity includes common stock and retained earnings. $50,000 = $22,000 + $15,000 + Retained earnings; Retained earnings = $13,000
The financial statements of Calloway Company prepared at the end of the current year contained the following elements and corresponding amounts: Assets = $50,000; Liabilities = ?; Common Stock = $15,000; Revenue = $22,000; Dividends = $1,500; Beginning Retained Earnings = $3,500; Ending Retained Earnings = $7,500. 31) Based on this information, what was the amount of expenses reported on Calloway's income statement for the current year? A) $18,500 B) $13,000 C) $16,500 D) $10,000
C Explanation: Beginning retained earnings + Revenue − Expenses − Dividends = Ending retained earnings $3,500 + $22,000 − Expenses − $1,500 = $7,500 Expenses = $16,500
8) Which of the following is an example of revenue? A) Cash received as a result of a bank loan B) Cash received from investors from the sale of common stock C) Cash received from customers at the time services were provided D) Cash received from the sale of land for its original selling price
C Explanation: Cash received from providing services to customers is an example of revenue, and is an asset source transaction. Cash received from the result of a bank loan results in a liability, notes payable. Cash investments made by owners increase the stockholders' equity account common stock. Cash received from the sale of land for its original selling price is an asset exchange transaction that decreases one asset, land, and increases another asset, cash.
36) Chow Company earned $1,500 of cash revenue, paid $1,200 for cash expenses, and paid a $200 cash dividend to its owners. Which of the following statements is true? A) The net cash inflow from operating activities was $100. B) The net cash outflow for investing activities was $200. C) The net cash inflow from operating activities was $300. D) The net cash outflow for investing activities was $100.
C Explanation: Cash revenue and cash expenses are operating activities. Paying dividends is a financing activity. $1,500 revenue − $1,200 expense = $300 cash inflow from operating activities.
61) Frank Company earned $15,000 of cash revenue. Which of the following accurately reflects how this event affects the company's accounting equation? Assets = Liabilities + Common Stock + Retained Earnings A. 15,000 = NA + 15,000 + NA B. 15,000 = NA + 7,500 + 7,500 C. 15,000 = NA + NA + 15,000 D. 15,000 = 15,000 + NA + NA A) Option A B) Option B C) Option C D) Option D
C Explanation: Earning cash revenue increases assets (cash) and stockholders' equity (retained earnings).
72) What is the process of dividing up assets and allocating them to resource providers (creditors and investors)? A) Equity distribution B) Stock repayment C) Liquidation D) Utilization
C Explanation: If a business ceases to operate, its remaining assets are sold and the sale proceeds are returned to the creditors and investors through a process called business liquidation.
44) What is Packard Company's net cash flow from financing activities for Year 2? A) $220 outflow B) $320 outflow C) $5 inflow D) $225 inflow
C Explanation: Net cash flow from financing activities = $325 inflow from stock − $220 outflow for loan repayment − $100 outflow for dividends = $5
63) Perez Company paid a $300 cash dividend. Which of the following accurately reflects how this event affects the company's financial statements? Assets = Liabilities + Common Stock + Retained Earnings A. 300 = 300 + NA + NA B. (300) = NA + (300) + NA C. (300) = NA + NA + (300) D. 300 = NA + NA + 300 A) Option A B) Option B C) Option C D) Option D
C Explanation: Paying cash dividends decreases assets (cash) and decreases stockholders' equity (retained earnings).
34) In which section of a statement of cash flows would the payment of cash dividends be reported? A) Investing activities. B) Operating activities. C) Financing activities. D) Dividends are not reported on the statement of cash flows.
C Explanation: Paying cash dividends, and any cash exchanged between a company and its stockholders, is a financing activity.
28) Which of the following cash transactions would not affect total assets? A) Borrowing cash from a bank B) Issuing common stock for cash C) Purchasing land for cash D) Providing services for cash
C Explanation: Purchasing land for cash is an asset exchange transaction that does not affect total assets. Issuing stock to owners is an asset source transaction that increases assets. Borrowing cash from a bank is an asset source transaction that increases assets. Expense transactions do not increase assets.
35) Which financial statement matches asset increases from operating a business with asset decreases from operating the business? A) Balance sheet B) Statement of changes in equity C) Income statement D) Statement of cash flows
C Explanation: The income statement matches asset increases from operations (revenues) with asset decreases from operations (expenses).
55) What was the amount of retained earnings that will be reported on Lexington's balance sheet at the end of Year 1? A) $6,200 B) $5,400 C) $1,400 D) $600
D Explanation: $0 beginning balance + $6,200 revenue − $4,800 expense − $800 dividends = $600
50) Santa Fe Company was started on January 1, Year 1, when it acquired $9,000 cash by issuing common stock. During Year 1, the company earned cash revenues of $4,500, paid cash expenses of $3,750, and paid a cash dividend of $250. Which of the following is true based on this information? A) The December 31, Year 1 balance sheet would show total equity of $8,750. B) The Year 1 income statement would show net income of $500. C) The Year 1 statement of cash flows would show net cash inflow from operating activities of $4,500. D) The Year 1 statement of cash flows would show a net cash inflow from financing activities of $8,750.
D Explanation: $9,000 cash inflow from issuing stock − $250 cash outflow for dividends = $8,750 net cash inflow from financing activities
42) What is Yowell's ending notes payable balance? A) $0 B) $25,000 C) ($15,000) D) $10,000
D Explanation: Beginning notes payable balance $0 + $25,000 loan − $15,000 repayment = $10,000 ending balance 43) What is Yowell's net income? A) $9,000 B) $30,000 C) $18,000 D) $6,000 Answer: A Explanation: $39,000 revenue − $9,000 rent expense − $21,000 salaries expense = $9,000 net income
25) Tandem Company borrowed $32,000 of cash from a local bank. Which of the following choices accurately reflects how this event affects the accounting equation? Assets = Liabilities + Common Stock + Retained Earnings A. NA = 32,000 + NA + 32,000 B. 32,000 = NA + 32,000 + NA C. 32,000 = NA + NA + 32,000 D. 32,000 = 32,000 + NA + NA A) Option A B) Option B C) Option C D) Option D
D Explanation: Borrowing cash increases assets (cash) and increases liabilities (notes payable). It does not affect the income statement, but it is reported as a cash inflow for financing activities on the statement of cash flows.
9) Which of the following is not an element of the financial statements? A) Net income B) Revenue C) Assets D) Cash
D Explanation: Cash is not an element of the financial statements. It is an account that is part of the element assets.
59) Dividends paid by a company are reported on which of the following financial statement(s)? A) Income statement B) Statement of changes in stockholders' equity C) Statement of cash flows D) Statement of changes in stockholders' equity and statement of cash flows
D Explanation: Dividends are not included on the income statement. They are, however, reported as a deduction from retained earnings on the statement of changes in stockholders' equity and as a cash outflow for financing activities on the statement of cash flows.
4) Which type of accounting information is intended to satisfy the needs of external users of accounting information? A) Cost accounting B) Managerial accounting C) Tax accounting D) Financial accounting
D Explanation: Financial accounting is intended to satisfy the needs of external users of accounting information. Managerial accounting, including cost accounting, is intended for the needs of internal users, or managers, of a business. Tax accounting is specifically intended for tax regulatory agencies.
18) As of December 31, Year 2, Bristol Company had $100,000 of assets, $40,000 of liabilities and $25,000 of retained earnings. What percentage of Bristol's assets were obtained through investors? A) 60% B) 25% C) 40% D) 35%
D Explanation: If assets total $100,000, claims must also total $100,000. Claims include liabilities, common stock and retained earnings. Because liabilities and retained earnings equal $65,000, common stock must be $35,000. The common stock account represents the assets that were obtained through investors. $35,000 is 35% of $100,000.
12) Hazeltine Company issued common stock for $200,000 cash. What happened as a result of this event? A) Assets increased. B) Equity increased. C) Claims increased. D) Assets, claims, and equity all increased.
D Explanation: Issuing common stock increases both assets (cash) and stockholders' equity (common stock). stockholders' equity and liabilities collectively make up claims in the accounting equation.
49) Which of the following would be reported in the cash flow from financing activities section of a statement of cash flows? A) Paid cash for dividends B) Received cash for common stock C) Sold land for cash D) Paying cash for dividends and receiving cash from common stock
D Explanation: Paying cash for dividends and receiving cash for common stock are financing activities. Selling land for cash is an investing activity.
51) Robertson Company paid $1,850 cash for rent expense. What happened as a result of this business event? A) Total equity decreased. B) Liabilities decreased. C) The net cash flow from operating activities decreased. D) Both total equity and net cash flow for operating activities decreased.
D Explanation: Paying cash for rent expense decreases assets (cash) and decreases equity (expense decreases retained earnings). Liabilities are not affected. It is reported as a cash outflow for operating activities on the statement of cash flows.
52) Mayberry Company paid $30,000 cash to purchase land. What happened as a result of this business event? A) Total equity was not affected. B) The net cash flow from investing activities decreased. C) Total assets were not affected. D) Total assets and total equity were not affected, and net cash flow from investing activities decreased.
D Explanation: Paying cash to purchase land is an asset exchange transaction that decreases one asset (cash) and increases another asset (land); therefore, there is no overall effect on total assets, total liabilities, or total equity. It is reported as a cash outflow for investing activities on the statement of cash flows.
23) Which of the following is not an example of an asset use transaction? A) Paying cash dividends B) Paying cash expenses C) Paying off the principal of a loan D) Paying cash to purchase land
D Explanation: Paying cash to purchase land is an asset exchange transaction. The asset account, cash, decreases and the asset account, land, increases. Total assets are not affected.
37) Yi Company provided services to a customer for $5,500 cash. Based on this information alone, which of the following statements is true? A) Total assets increased and total equity decreased. B) Total assets were unchanged. C) Liabilities decreased and net income increased. D) Total assets increased and net income increased.
D Explanation: Providing services to a customer for cash increases assets and stockholders' equity on the balance sheet. It also increases revenue, and therefore, net income on the income statement.
29) Which of the following appears in the investing activities section of the statement of cash flows? A) Cash inflow from interest revenue B) Cash inflow from the issuance of common stock C) Cash outflow for the payment of dividends D) Cash outflow for the purchase of land
D Explanation: Purchasing land (a long-lived asset) for cash is an investing activity. Issuing common stock and paying dividends are both financing activities. Cash inflow from interest revenue is an operating activity.
16) Turner Company reported assets of $20,000 (including cash of $9,000), liabilities of $8,000, common stock of $7,000, and retained earnings of $5,000. Based on this information, what can be concluded? A) 25% of Turner's assets are the result of prior earnings. B) $5,000 is the maximum dividend that can be paid to shareholders. C) 40% of Turner's assets are the result of borrowing from creditors. D) 25% of Turner's assets are from prior earnings, $5,000 is the maximum possible dividend, and 40% of assets are the result of borrowed resources.
D Explanation: Retained earnings of $5,000 is equal to 25% of the company's assets, indicating that 25% of Turner's assets are from prior earnings. $8,000, or 40%, of Turner's assets are liabilities, indicating that those assets are the result of borrowed resources. A company can pay out no more in dividends than it has in its Retained Earnings account.
38) During Year 2, Chico Company earned $1,950 of cash revenue, paid $1,600 of cash expenses, and paid a $150 cash dividend to its owners. Based on this information alone, which of the following statements is not true? A) Net income amounted to $350. B) Total assets increased by $200. C) Cash inflow from operating activities was $350. D) Cash inflow from operating activities was $200.
D Explanation: Revenue minus expenses equal net income of $350 (calculated as $1,950 − $1,600). Total assets increased by $200 (calculated as $1,950 − $1,600 − $150). Cash from operating activities increased by $350 (calculated as $1,950 − $1,600).
1) Which of the following groups has the primary responsibility for establishing generally accepted accounting principles for business entities in the United States? A) Securities and Exchange Commission B) U.S. Congress C) International Accounting Standards Board D) Financial Accounting Standards Board
D Explanation: The Financial Accounting Standards Board is a privately funded group charged with establishing accounting standards for the U.S. It is not a branch of the U.S. government.
46) What is the amount of total stockholders' equity that will be reported on Packard's balance sheet at the end of Year 1? A) $1,350 B) $900 C) $250 D) $1,300
D Explanation: stockholders' equity = Common stock + Retained earnings At end of Year 1: stockholders' equity = $950 common stock issued + ($0 beg. balance + $650 revenue − $250 expenses − $50 dividend) = $1,300
84) The value created by a business is created by its assets.
FALSE Explanation: This is false. A business creates value by earning income, so earnings or income describe that value, not assets.
98) The four financial statements prepared by a business bear no relationship to each other.
FALSE Explanation: This is false. All four financial statements are interconnected.
97) An asset use transaction does not affect the total amount of claims to a company's assets.
FALSE Explanation: This is false. Because asset use transactions result in a decrease in total assets, total claims must decrease as well.
85) The stockholders of a business have a priority claim to its assets in the event of liquidation.
FALSE Explanation: This is false. Creditors have priority in business liquidations. This means the business uses its assets first to settle the obligations to the creditors. Any assets remaining after the creditors have been paid are then distributed to the investors.
99) The dividends a business pays to its owners appear on the income statement.
FALSE Explanation: This is false. Dividends are not expenses. Therefore, they are not reported on the income statement. Dividends are reported on the statement of changes in stockholders' equity and the statement of cash flows.
93) Retained earnings reduces a company's commitment to use its assets for the benefit of its stockholders.
FALSE Explanation: This is false. If a business retains the assets, it commits to use those assets for the benefit of the stockholders. This increase in the business's commitments to its stockholders is normally called retained earnings.
90) The information reported in financial statements is organized into ten categories known as accounts.
FALSE Explanation: This is false. The information reported in financial statements is organized into ten categories known as elements. Detailed information about the elements is maintained in records commonly called accounts.
92) Liabilities are not a source of assets for a business.
FALSE Explanation: This is false. There are three sources of assets. First, a business can borrow assets from creditors. The second source of assets is investors. The third source of assets is operations.
89) A business and the person who owns the business are separate reporting entities.
TRUE Explanation: This is true. A business must report its income, assets, liabilities and equity separate from the owner of that business.
95) An asset source transaction increases a business's assets and the claims to assets.
TRUE Explanation: This is true. An asset source transaction increases a business's assets and either liabilities or equity, which make up claims to assets.
96) Borrowing money from the bank is an example of an asset source transaction.
TRUE Explanation: This is true. Borrowing money from the bank is an example of an asset source transaction because the asset cash increases as well as the liability notes payable.
83) In a market, a company that manufactures cars would be referred to as a conversion agent.
TRUE Explanation: This is true. Conversion agents transform resources into goods and services, such as cars, that are desirable to consumers.
87) Financial accounting information is usually less detailed than managerial accounting information.
TRUE Explanation: This is true. Financial accounting information is usually less detailed than managerial accounting information.
91) Liabilities are obligations of a business to relinquish assets, provide services, or accept other obligations.
TRUE Explanation: This is true. Liabilities represent the future obligations of a business entity.
94) The historical cost concept requires that most assets be recorded at the amount paid for them, regardless of increases in market value.
TRUE Explanation: This is true. Once an asset is recorded, it is not adjusted for increases in market value.
82) In a market, creditors are resource providers.
TRUE Explanation: This is true. Resource providers include creditors and investors.
88) The Financial Accounting Standards Board is a privately funded organization with authority for establishing accounting standards for businesses in the US.
TRUE Explanation: This is true. The Financial Accounting Standards Board is charged with establishing accounting standards for US businesses. It is not an agency of the US government, but rather a privately funded organization.
86) The types of resources needed by a business are financial, physical, and labor resources.
TRUE Explanation: This is true. The types of resources needed by a business are financial, physical, and labor resources.
75) Indicate whether each of the following statements about markets is true or false. ________ a) Financial resources can be provided to a business by conversion agents. ________ b) Resource owners are the businesses that transform resources into products that satisfy consumer desires. ________ c) Labor resources include both the physical and intellectual labor of a business's employees. ________ d) Conversion agents purchase their resources from resource owners. ________ e) Consumers are the main providers of resources in any market.
a) F b) F c) T d) T e) F Explanation: Financial resources are provided to a business by investors and creditors. Conversion agents, not resource owners, transform resources into products. Resource owners are the main providers of resources in any market.
80) Indicate whether each of the following statements about financial statements is true or false. ________ a) A cash dividend paid to stockholders is reported in the investing activities section of the statement of cash flows. ________ b) A cash dividend paid to stockholders is reported on the statement of changes in stockholders' equity. ________ c) A cash dividend paid to stockholders is reported on the income statement. ________ d) The balance sheet reports the ending balances of permanent accounts as of the last day of the accounting period. ________ e) Changes in retained earnings during the accounting period are reported on the income statement.
a) F b) T c) F d) T e) F Explanation: A cash dividend paid to stockholders is reported in the financing activities section of the statement of cash flows. A cash dividend paid to stockholders is reported on the statement of changes in equity, not on the income statement. Changes in retained earnings for the accounting period are reported on the statement of changes in equity, not on the income statement.
77) Indicate whether each of the following statements about liabilities is true or false. ________ a) Expenses are reported on the balance sheet. ________ b) The acquisition of a bank loan increases both assets and liabilities. ________ c) The accounting equation requires that liabilities be equal to equity. ________ d) The amount of a company's liabilities is equal to the difference between its assets and its equity. ________ e) Liabilities are reported on the statement of cash flows of a business.
a) F b) T c) F d) T e) F Explanation: Expenses are reported on the income statement, not the balance sheets. The accounting equation requires that assets be equal to liabilities plus equity. Liabilities are reported on the balance sheet, not on the statement of cash flows.
76) Indicate whether each of the following statements about accounting information is true or false. ________ a) Financial accounting is primarily intended to satisfy the information needs of internal stakeholders. ________ b) Managerial accounting information includes financial and nonfinancial information. ________ c) The accounting information intended to satisfy the needs of a company's employees is managerial accounting information. ________ d) GAAP requires that companies adhere to financial accounting standards. ________ e) Managerial accounting information is usually less detailed than financial accounting information.
a) F b) T c) T d) T e) F Explanation: Financial accounting is primarily intended for external, not internal, stakeholders. Managerial accounting information is usually more detailed than financial accounting information.
78) Indicate whether each of the following statements about retained earnings is true or false. ________ a) A dividend paid to stockholders decreases retained earnings. ________ b) Issuing common stock for cash increases retained earnings. ________ c) The amount of net income for a period must equal retained earnings. ________ d) The purchase of a truck decreases retained earnings. ________ e) Net income increases retained earnings.
a) T b) F c) F d) F e) T Explanation: Issuing common stock for cash increases the common stock account, not retained earnings. Net income increases retained earnings, but does not necessarily equal its total. The purchase of a truck increases one asset (truck) and decreases another asset (cash) or increases a liability (note payable). Retained earnings includes all net income that a company has earned in its existence that has not been paid out in dividends.
79) Indicate whether each of the following statements about the types of transactions is true or false. ________ a) An asset source transaction increases total assets and increases claims to assets. ________ b) The issuance of stock to owners for cash would be an example of an asset exchange transaction. ________ c) Purchasing equipment for cash is an example of an asset use transaction. ________ d) Paying a dividend to stockholders is an example of an asset use transaction. ________ e) Making a payment on a bank loan is an example of an asset exchange transaction.
a) T b) F c) F d) T e) F Explanation: The issuance of stock to owners for cash is an example of an assets source, not asset exchange, transaction. Purchasing equipment for cash is an example of an asset exchange transaction in which one asset (cash) decreases and another asset (equipment) increases. Making a payment on a bank loan is an example of an asset use, not asset exchange, transaction.
81) Indicate whether each of the following statements about equity is true or false. ________ a) Expenses decrease retained earnings. ________ b) stockholders' equity and liabilities can be viewed either as sources of assets or claims to assets of the business. ________ c) Retained earnings is increased by loans received from a bank. ________ d) Dividends paid to stockholders decrease common stock. ________ e) Generally, assets are reported at the actual price paid for them when purchased regardless of subsequent changes in market value.
a) T b) T c) F d) F e) T Explanation: Loans received from a bank increase assets and liabilities, but do not affect retained earnings. Dividends paid to stockholders decrease retained earnings, not common stock.