Deck 1: The Role of Accounting in Decision Making

Question 1

Outside investors would ordinarily use financial accounting information to decide whether or not to invest in a business.

Answer 1

True

Question 2

Liabilities represent creditors' claims on the business's assets.

Answer 2

True

Question 3

The owners' claims to the assets of the business are called:

A) liabilities.
B) expenses.
C) revenues.
D) owners' equity.

Answer 3

D

Question 4

The economic resources of a business such as furniture,building and land are its:

A) assets.
B) revenues.
C) liabilities.
D) drawings.

Question 5

Accounting is 'the language of business'.

Question 6

Which of the following are likely to be users of financial accounting information?

A) Taxing authorities
B) Potential investors
C) Creditors
D) All of the above

Question 7

Management accounting focuses on information for decision makers outside of the business,such as outside investors and lenders.

Question 8

Scott's Camera Shop started the year with total assets of $90,000 and total liabilities of $60,000.During the year,the business earned revenues of $150,000 and incurred expenses of $60,000.Scott made no additional capital contributions during the year,but did make drawings of $70,000.What is the amount of owners' equity at the end of the year?

A) $150,000
B) $70,000
C) $50,000
D) $60,000

Question 9

Which of the following are most likely to be users of management accounting information?

A) Business managers
B) Potential investors
C) Customers
D) Creditors

Question 10

The right side of the accounting equation measures the amount that the business owes to creditors and to the owner.

Question 11

An investor is someone who lends money to a business.

Question 12

Which of the following is the CORRECT accounting equation?

A) Assets + Revenue = Liabilities + Expenses
B) Assets = Liabilities + Owners' equity
C) Assets + Revenue = Owners' equity
D) Assets + Liabilities = Owners' equity

Question 13

Accounting is the information system that measures business activity,processes the data into reports and communicates the results to decision makers.

Question 14

Different users of financial statements (investors,creditors,tax authorities,etc.)all focus on the same parts of the financial statements for the information they need.

Question 15

A creditor is a party that has an ownership interest in a business.

Question 16

A debt that a business owes to an outside party is called:

A) revenue.
B) an asset.
C) a liability.
D) owners' equity.

Question 17

The profit of a business is $21,000.The beginning and ending capital balances were $34,000 and $50,000,respectively.No capital contributions were made by the owner during the year.
Calculate the amount of owner's drawings.

A) $15,000
B) $12,000
C) $5000
D) $13,000

Question 18

Which of the following statements BEST describes management accounting?

A) Management accounting provides information for taxing authorities.
B) Management accounting focuses on information for internal decision making.
C) Management accounting provides information for the public.
D) Management accounting focuses on outside investors and lenders.

Question 19

Scott's Camera Shop started the year with total assets of $90,000 and total liabilities of $55,000.During the year,the business earned revenues of $120,000 and incurred expenses of $50,000.Scott made no additional capital contributions during the year,but did make drawings of $70,000.
Calculate Scott's profit for the year.

A) $120,000
B) $90,000
C) $70,000
D) $50,000

Question 20

The total of amount of assets that a business possesses may or may not equal the total of liabilities and equity of the business.

Question 21

Martin Supply Service received $1 000 cash from a customer which was owed to the business from the previous month.What is the effect of the cash receipt on the accounts of the business?

A) Cash increases; Accounts payable decreases.
B) Accounts payable increases; Owners' capital account decreases.
C) Accounts receivable decreases; Owners' capital account decreases.
D) Cash account increases; Accounts receivable decreases.

Question 22

Equipment is sold for cash in an amount equal to the cost of the equipment recorded on the books.How does this sale affect the accounting equation?

A) Assets increase; liabilities increase.
B) Assets increase; owners' equity increases.
C) One asset increases; one asset decreases.
D) Assets increase; liabilities decrease.

Question 23

Tim contributes capital into his business.The two accounts affected are:

A) two asset accounts.
B) a liability and an owners' equity.
C) an asset and a liability.
D) an asset and an owners' equity.

Question 24

A business performs services for its customers.Payment is expected to be received next month.How does the performance of services affect the accounting equation?

A) Assets increase; owners' equity increases.
B) Liabilities increase; owners' equity decreases.
C) Assets decrease; owners' equity decreases.
D) Assets increase; owners' equity decreases.

Question 25

Hamilton Lawn Service incurred an $800 repair expense and paid the repair company in cash.Which account,besides Cash,decreased?

A) Accounts payable
B) Owners' capital
C) Equipment
D) Accounts receivable

Question 26

Owner's drawings are the expenses of a business.

Question 27

Equity increases when revenues are earned.

Question 28

A proprietor makes a cash withdrawal from the proprietorship.How does this affect the accounting equation?

A) Assets decrease; owners' equity increases.
B) This has no effect on assets, liabilities or owners' equity.
C) Assets increase; liabilities decrease.
D) Assets decrease; owners' equity decreases.

Question 29

Joe purchased office equipment for $1 250 cash.What is the effect on accounts?

A) One asset account increases; another asset account decreases.
B) One asset account increases; one owners' equity account increases.
C) Two asset accounts increase.
D) One asset account increases; one liability account increases.

Question 30

Hamilton Lawn Service earned $1 000 for services rendered.The customer promised to pay at a later time.What is the effect on accounts?

A) Cash account increases; Accounts receivable decreases.
B) Accounts receivable increases; Owners' capital increases.
C) Cash and Accounts receivable both increase.
D) Accounts receivable decreases; Owners' capital increases.

Question 31

A business settles a liability by making a payment with cash.How does paying this liability affect the accounting equation?

A) Liabilities decrease; owners' equity increases.
B) Assets increase; liabilities increase.
C) Assets increase; liabilities decrease.
D) Assets decrease; liabilities decrease.

Question 32

Ace Ltd had the following transactions in June: sold goods for $2000 on account; received cash on account,$4000; paid $600 for repair expense; paid $2000 to a supplier that it owed from the previous month.What is the combined effect on Cash of the June transactions?

A) a $1400 increase
B) a $1400 decrease
C) a $2600 decrease
D) a $4000 increase

Question 33

The proprietor of Martin Supply Service took a $5 000 cash withdrawal.What is the effect of the withdrawal on the accounts of the business?

A) Cash account increases; Accounts receivable decreases.
B) Cash account decreases; Owners' capital account decreases.
C) Accounts payable increases; Owners' capital account decreases.
D) Cash account increases; Owners' capital account decreases.

Question 34

A business receives a bill for services rendered from one of its suppliers.The business will pay the supplier next month.When the business receives the bill from its supplier,how does this affect the accounting equation?

A) Liabilities increase; owners' equity increases.
B) Assets decrease; owners' equity decreases.
C) Liabilities increase; owners' equity decreases.
D) Assets increase; liabilities increase.

Question 35

A $5 000 account payable is paid by the business.How is the accounting equation affected?

A) Assets decrease $5 000; liabilities decrease $5 000.
B) Assets decrease $5 000; owners' equity increases $5 000.
C) Assets increase $5 000; owners' equity decreases $5 000.
D) Assets increase $5 000; liabilities increase $5 000.

Question 36

Hamilton Lawn Service earned $1 000 for services rendered and collected cash from its customer.What is the effect on accounts?

A) Cash account increases; Accounts receivable increases.
B) Cash account increases; Owners' capital account increases.
C) Cash account increases; Supplies account decreases.
D) Cash account increases; Accounts payable increases.

Question 37

Equity decreases with expenses and revenues.

Question 38

The business receives cash from a customer that is owed to the company 'on account',based on services rendered to the customer previously.How does the collection of the cash affect the accounting equation?

A) One asset increases; one asset decreases.
B) Assets increase; owners' equity increases.
C) Assets increase; liabilities increase.
D) Assets decrease; owners' equity decreases.

Question 39

Martin Supply Service paid $350 cash to a materials supplier that it owed from the previous month.What is the effect of the cash payment on account of the business?

A) Accounts payable increases; Owners' capital account decreases.
B) Cash account decreases; Accounts payable decreases.
C) Materials account increases; Owners' capital account decreases.
D) Cash account decreases; Accounts payable increases.

Question 40

Venus Ltd paid $10,000 for an account payable.How does this transaction affect the accounting equation of Venus?

A) assets decrease by $10,000 and liabilities decrease by $10,000
B) assets increase by $10,000 and liabilities increase by $10,000
C) assets increase by $10,000 and equity decreases by $10,000
D) assets decrease by $10,000 and equity increases by $10,000

Question 41

The total assets and the total liabilities of Samantha Financial Services are shown below.There were no capital contributions and withdrawals during the year.
$$\begin{array} { | l | l | r | } \hline & \text { Assets } & \text { Liabilities } \\\hline \text { Beginning of year } & \$ 405,000 & \$ 275,000 \\\hline \text { End of year } & 445,000 & 305,000 \\\hline\end{array}$$
What was the amount of profit for the year?

A) $30,000
B) $70,000
C) $40,000
D) $10,000

Question 42

Which of the following statements BEST defines financial statements?

A) Financial statements are documents that report on a business in monetary terms, providing information to help people make informed business decisions.
B) Financial statements are plans and forecasts for future time periods.
C) Financial statements are the verbal statements made to business news organisations by chief financial officers.
D) Financial statements are the information systems that record and measure business transactions.

Question 43

Which of the following financial statements shows the changes in Owners' equity during a period of time?

A) Balance sheet
B) Statement of changes in equity
C) Cash flow statement
D) Income statement

Question 44

Land is purchased by a business for $140,000 .The company pays for the land by a cash payment of $24,000 and promised to pay the remaining amount at a later period.What is net effect of this transaction on the business's accounting equation?

A) Assets increase by $140,000 ; liabilities decrease by $116,000.
B) Assets increase by $116,000; liabilities increase by $116,000.
C) Assets increase by $140,000; liabilities decrease by $24,000.
D) Assets increase by $116,000; equity increases by $116,000.

Question 45

Which of the following financial statements reports an increase or decrease in net cash during the time period covered?

A) Income statement
B) Balance sheet
C) Cash flow statement
D) Statement of changes in equity

Question 46

Following is a list of account balances of Wilson Mowing Service as at 31 December of the first year of operation:
$$\begin{array} { | l | l | } \hline \text { Accounts receivable } & \$ 6000 \\\hline \text { Accounts payable } & 7000 \\\hline \text { Salary expense } & 7000 \\\hline \text { Repairs expense } & 800 \\\hline \text { Truck } & 10,000 \\\hline \text { Equipment } & 12,000 \\\hline \text { Loans payable } & 8100 \\\hline \text { Cash } & 7400 \\\hline \text { Supplies expense } & 1300 \\\hline \text { Service revenue } & 35,000 \\\hline \text { Petrol expense } & 2900 \\\hline \text { Salary payable } & 300 \\\hline\end{array}$$
At the end of the year,what is the amount of total liabilities?

A) $24,500
B) $15,100
C) $15,400
D) $27,400

Question 47

Financial statements are prepared after an entity's transactions are analysed and recorded.Which of the following reports is NOT one of the required financial statements?

A) Income statement
B) Statement of drawings
C) Balance sheet
D) Cash flow statement

Question 48

Following is an extract of account balances of Wilson Mowing Service as at 31 December of the first year of operation:
$$\begin{array} { | l | l | } \hline \text { Accounts receivable } & \$ 4000 \\\hline \text { Accounts payable } & 7000 \\\hline \text { Salary expense } & 5000 \\\hline \text { Repairs expense } & 700 \\\hline \text { Truck } & 11,000 \\\hline \text { Equipment } & 9000 \\\hline \text { Loans payable } &8400 \\\hline \text { Cash } & 7000 \\\hline \text { Supplies expense } & 1000 \\\hline \text { Service revenue } & 32,000 \\\hline \text { Petrol expense } & 2900 \\\hline \text { Salary payable } & 300 \\\hline\end{array}$$
At the end of the year,what is the amount of total assets?

A) $27,000
B) $20,000
C) $31,000
D) $15,000

Question 49

Star Homes Ltd just recorded a transaction in its books of accounts.If this transaction increased the total liabilities by $12,000:

A) assets or equity must decrease by $12,000
B) assets must increase or equity must decrease by $12,000
C) assets must decrease by $12,000
D) both assets and equity must each decrease by $6000

Question 50

Each financial statement includes a heading giving three pieces of data.Which of the following items is NOT included in these headings?

A) Name of the preparer of the statement
B) Name of the business
C) Name of the financial statement
D) Date or time period covered

Question 51

The statement of changes in equity shows the changes in Owners' equity.Which one of these statements is TRUE?

A) Decreases in Owners' equity result from owner investments.
B) Decreases in Owners' equity result from profit.
C) Decreases in Owners' equity result from revenues earned.
D) Decreases in Owners' equity result from losses.

Question 52

The income statement presents a summary of an entity's revenues and expenses for a period of time.Which of the following statements is TRUE?

A) There is profit when total revenues are greater than total expenses.
B) There is a loss when total expenses are greater than total revenue.
C) There is a loss when withdrawals are made.
D) Both A and B are true.

Question 53

A business owner starts a new business and invests $6 000 of capital.This transaction results in an increase in the business's liabilities.

Question 54

The balance sheet shows whether or not a business is earning a profit.

Question 55

Which of the following financial statements reports cash receipts and cash payments during a period of time?

A) Balance sheet
B) Statement of changes in equity
C) Income statement
D) Cash flow statement

Question 56

The relative proportion of economic resources and obligations would be shown by the balance sheet.

Question 57

Which of the following financial statements lists the entity's assets,liabilities and owners' equity as at a specific date?

A) Cash flow statement
B) Balance sheet
C) Income statement
D) Statement of changes in equity

Question 58

The balance sheet of a business represents the account balances as at a particular date in time.

Question 59

Sharon Samson starts a plumbing service called Reliable Waterworks.Transactions of Reliable Waterworks during the first year of operations are given below:
A)Sharon deposited $10,000 into a new cheque account for the business and recorded the capital contribution.
B)Paid $1200 cash for equipment to be used for plumbing repairs.
C)Borrowed $14,000 from a local bank and deposited the money in the cheque account.
D)Paid $400 rent for the year.
E)Purchased $300 of office supplies by cash.
F)Completed a plumbing repair project for a local lawyer and received $3500 cash.
Calculate the amount of total liabilities at the end of the first year.

A) $14,000
B) $22,800
C) $3500
D) $10,000

Question 60

Following is a list of account balances of Wilson Mowing Service as at 31 December of the first year of operation:
$$\begin{array} { | l | l | } \hline \text { Accounts receivable } & \$ 4000 \\\hline \text { Accounts payable } & 5000 \\\hline \text { Salary expense } & 5000 \\\hline \text { Repairs expense } & 500 \\\hline \text { Truck } & 12,000 \\\hline \text { Equipment } & 10,000 \\\hline \text { Loans payable } & 24,800 \\\hline \text { Cash } & 12,000 \\\hline \text { Supplies expense } & 10,000 \\\hline \text { Service revenue } & 24,800 \\\hline \text { Petrol expense } & 7200 \\\hline \text { Salary payable } & 1200 \\\hline\end{array}$$
Calculate the profit.

A) $2000
B) $2900
C) $30,300
D) $33,200

Question 61

Which of the following concepts (or principles)would dictate that a person with three different businesses keeps three different bank accounts?

A) Going concern assumption
B) Accrual basis of accounting
C) Accounting period concept
D) Entity concept

Question 62

Bill Rogers has three different businesses.He has only one bank account for transactions relating to all of his various businesses.Which of the following concepts or principles of accounting is Bill violating?

A) Entity concept
B) Accounting period concept
C) Accrual basis accounting
D) Going concern concept

Question 63

Which of the following activities would NOT be included in the role of an accountant in public practice?

A) liquidation
B) internal auditing
C) tax planning
D) external auditing

Question 64

If an analyst wants to know how likely it is that a company would be able to earn a profit,which of the following statements would be MOST useful?

A) Statement of changes in equity
B) Balance sheet
C) Cash flow statement
D) Income statement

Question 65

Which of the following concepts (or principles)require an assumption that the entity will remain in operation for the foreseeable future?

A) Entity concept
B) Accounting period concept
C) Accrual basis of accounting
D) Going concern assumption

Question 66

The return on assets is calculated by:

A) multiplying profit and average assets.
B) dividing profit by average assets.
C) subtracting profit from average assets.
D) adding profit and average assets.

Question 67

The explanation of why the profit differs from change in cash balance for the period is explained in which of the following statements?

A) Balance sheet
B) Income statement
C) Cash flow statement
D) Statement of changes in equity

Question 68

Which of the following is NOT one of the main professional accounting bodies in Australia?

A) Institute of Public Accountants
B) Institute of Chartered Accountants in Australia
C) Certified Public Accountants of Australia
D) Certified Practising Accountants of Australia

Question 69

Accounting firms in public practice are all large,multinational partnerships.

Question 70

Australian Accounting Standards are exactly the same as the International Financial Reporting Standards (IFRS).

Question 71

Which of the following is used to calculate average assets for the return on assets calculation?

A) Average assets = (Beginning assets + Ending assets) × 2
B) Average assets = (Beginning assets - Ending assets) ÷ 2
C) Average assets = (Beginning assets + Ending assets) ÷ 2
D) Average assets = (Beginning assets - Ending assets) × 2

Question 72

You can evaluate business performance in terms of profitability by analysing which financial statement?

A) Balance sheet
B) Cash flow statement
C) Income statement
D) None of the above

Question 73

If an analyst wants to know how likely it is that a business would be able to pay off all its debts,which of the following statements would be MOST useful?

A) Cash flow statement
B) Balance sheet
C) Statement of changes in equity
D) Income statement

Question 74

You can evaluate the economic resources,debt and overall financial position of a company in which of the following financial statements?

A) Cash flow statement
B) Statement of changes in equity
C) Income statement
D) Balance sheet

Question 75

The Australian conceptual framework encompasses non-profit organisations as well as for-profit ones.

Question 76

The financial examination of a company's financial records is called a(n):

A) appraisal.
B) criminal investigation.
C) audit.
D) financial analysis.

Question 77

An accountant working in public practice may provide management consulting services.

Question 78

Assume MetAmbit Ltd had profit of $2500 for the year ended 31 December 2016.Its beginning and ending assets were $35,500 and $18,500,respectively.Calculate MetAmbit's return on assets (ROA).(Round your percentage answer to two decimal places.)

A) 9.26%
B) 4.63%
C) 7.04%
D) 13.51%

Question 79

In Australia,Accounting standards are formulated by the:

A) AASB.
B) FRC.
C) IASB.
D) ASIC.

Question 80

The income statement shows whether or not a business can generate enough cash to pay its liabilities.