Chapter 1 - Accounting in Action

10. (LO 4) During 2020, Xia Lin Company's assets decreased ¥500,000 and its liabilities decreased ¥900,000. Its equity therefore: a. increased ¥400,000. b. decreased ¥1,400,000. c. decreased ¥400,000. d. increased ¥1,400,000

10. a. Using the basic accounting equation, Assets = Liabilities + Equity, −¥500,000 = −¥900,000 + Equity, so equity increased ¥400,000, not (b) decreased ¥1,400,000, (c) decreased ¥400,000, or (d) increased ¥1,400,000.

11. (LO 4) Payment of an account payable aff ects the components of the accounting equation in the following way. a. decreases equity and decreases liabilities. b. increases assets and decreases liabilities. c. decreases assets and increases equity. d. decreases assets and decreases liabilities.

11. d. Payment of an account payable results in an equal decrease of assets (cash) and liabilities (accounts payable). The other choices are incorrect because payment of an account payable (a) does not affect equity, (b) does not increase assets, and (c) does not affect equity

12. (LO 5) Which of the following statements is false? a. A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. b. A statement of financial position reports the assets, liabilities, and equity at a specific date. c. An income statement presents the revenues, expenses, assets, and liabilities for a specific period of time. d. A retained earnings statement summarizes the changes in retained earnings for a specific period of time.

12. c. An income statement presents the revenues and expenses for a specific period of time but not assets and liabilities. The other choices are true statements.

13. (LO 5) On the last day of the period, Jim Otto Company buys a $900 machine on credit. This transaction will affect the: a. income statement only. b. statement of financial position only. c. income statement and retained earnings statement only. d. income statement, retained earnings statement, and statement of financial position

13. b. This transaction will cause assets to increase by $900 and liabilities to increase by $900. The other choices are incorrect because this transaction (a) will have no eff ect on the income statement, (c) will have no eff ect on the income statement or the retained earnings statement, and (d) will aff ect the statement of fi nancial position but not the income statement or the retained earnings statement.

4. (LO 2) Which of the following statements about basic assumptions is correct? a. Basic assumptions are the same as accounting principles. b. The economic entity assumption states that there should be a particular unit of accountability. c. The monetary unit assumption enables accounting to measure employee morale. d. Partnerships are not economic entities

4. b. The economic entity assumption states that there should be a particular unit of accountability. The other choices are incorrect because (a) basic assumptions are not the same as accounting principles, (c) the monetary unit assumption allows accounting to measure economic events, and (d) partnerships are economic entities

5. (LO 2) The three types of business entities are: a. proprietorships, small businesses, and partnerships. b. proprietorships, partnerships, and corporations. c. proprietorships, partnerships, and large businesses. d. financial, manufacturing, and service companies.

5. b. Proprietorships, partnerships, and corporations are the three types of business entities. Choices (a) and (c) are incorrect because small and large businesses only denote the sizes of businesses. Choice (d) is incorrect because fi nancial, manufacturing, and service companies are types of businesses, not business entities.

6. (LO 3) Net income will result during a time period when: a. assets exceed liabilities. b. assets exceed revenues. c. expenses exceed revenues. d. revenues exceed expenses.

6. d. Net income results when revenues exceed expenses. The other choices are incorrect because (a) assets and liabilities are not used in the computation of net income; (b) revenues, not assets, are included in the computation of net income; and (c) when expenses exceed revenues, a net loss results.

7. (LO 3) As of December 31, 2020, Stoneland AG has assets of €3,500 and equity of €2,000. What are the liabilities for Stoneland AG as of December 31, 2020? a. €1,500. b. €1,000. c. €2,500. d. €2,000.

7. a. Using a variation of the basic accounting equation, Assets − Equity = Liabilities, €3,500 − €2,000 = €1,500. The other choices are therefore incorrect.

8. (LO 4) Performing services on account will have the following effects on the components of the basic accounting equation: a. increase assets and decrease equity. b. increase assets and increase equity. c. increase assets and increase liabilities. d. increase liabilities and increase equity.

8. b. When services are performed on account, assets are increased and equity is increased. The other choices are incorrect because when services are performed on account (a) equity is increased, not decreased; (c) liabilities are not affected; and (d) equity is increased and liabilities are not affected

9. (LO 4) Which of the following events is not recorded in the accounting records? a. Equipment is purchased on account. b. An employee is terminated. c. A cash investment is made into the business. d. The company pays a cash dividend.

9. b. If an employee is terminated, this represents an activity of a company, not a business transaction. Assets, liabilities, and equity are not affected. Thus, there is no effect on the accounting equation. The other choices are incorrect because they are all recorded: (a) when equipment is purchased on account, both assets and liabilities increase; (c) when a cash investment is made into a business, both assets and equity increase; and (d) when a dividend is paid, both assets and equity decrease

1. (LO 1) Which of the following is not a step in the accounting process? a. Identification. b. Economic Entity c. Recording d. Communication

b. Economic Entity

3. (LO 2) The historical cost principle states that: a. assets should be initially recorded at cost and adjusted when the fair value changes. b. activities of an entity are to be kept separate and distinct from its owner. c. assets should be recorded at their cost. d. only transaction data capable of being expressed in terms of money be included in the accounting records.

c. The historical cost principle states that assets should be recorded at their cost. The other choices are incorrect because (a) the historical cost principle does not say that assets should be adjusted for changes in fair value, (b) describes the economic entity assumption, and (d) describes the monetary unit assumption.

14. (LO 5) The financial statement that reports assets, liabilities, and equity is the: a. income statement. b. retained earnings statement. c. statement of financial position. d. statement of cash flows.

c. The statement of financial position is the statement that reports assets, liabilities, and equity. The other choices are incorrect because (a) the income statement reports revenues and expenses, (b) the retained earnings statement reports details about equity, and (d) the statement of cash fl ows reports infl ows and outfl ows of cash.

2. (LO 1) Which of the following statements about users of accounting information is incorrect? a. Management is an internal user. b. Taxing authorities are external users. c. Present creditors are external users. d. Regulatory authorities are internal users.

d. Regulatory Authorities