Deck 2: Basic Financial Statements

Question 1

Total assets always equal total liabilities plus total equity.

Answer 1

True

Question 2

The recognition principle states that the activities of an entity should be kept separate from those of its owner.

Answer 2

False

Question 3

Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford.

Answer 3

False

Question 4

The practice of showing assets on the balance sheet at their cost rather than at their current market value is explained in part by the fact that cost is supported by objective evidence that can be verified by independent experts.

Question 5

A business entity is regarded as separate from the personal activities of its owners whether it is a sole proprietorship, a partnership, or a corporation.

Question 6

The collection of an account receivable will cause total assets to decrease.

Question 7

The going concern principle assumes that the business will continue indefinitely.

Question 8

Assets need not always have physical characteristics such as buildings, machinery or inventory.

Question 9

Any business event that might affect the future profitability of a business should be reported in its balance sheet.

Question 10

In a business organized as a corporation, it is not necessary to list the equity of each shareholder on the balance sheet.

Question 11

The accounting equation may be stated as "assets minus liabilities equals equity."

Question 12

Notes payable and accounts payable are written promises to pay an amount owed by a certain date. Notes payable generally have interest but accounts payable generally do not.

Question 13

The sale of additional shares of share capital will cause treasury shares to increase.

Question 14

Articulation between the financial statements means that they relate closely to each other.

Question 15

The payment of a liability causes an increase in equity.

Question 16

A transaction that causes an increase in an asset may also cause a decrease in another asset, an increase in a liability, or an increase in equity.

Question 17

Total assets plus total liabilities equals total equity.

Question 18

The entity principle states that the affairs of the owners are not part of the financial operations of a business entity and should be separated.

Question 19

A profit results from having more revenues than liabilities.

Question 20

A cash flow statement reports revenue and expense activities for a specific time period such as one month or one year.

Question 21

Which of the following is the primary objective of financial statements?

A) Providing managers with detailed information tailored to the managers' specific information needs.
B) Providing people outside the business organization with information about the company's financial position and operating results.
C) Reporting to the tax authority the company's taxable income.
D) Indicating to investors in a particular company the current market values of their investments.

Question 22

If a company purchases equipment for cash, its total assets will increase.

Question 23

Equity in a business decreases as a result of which of the following?

A) Investments of cash by the owners.
B) Profits from operating the business.
C) Losses from unprofitable operation of the business
D) Repaying a loan to a commercial bank

Question 24

The Public Company Accounting Oversight Board was created by the American Institute of CPAs to oversee the public accounting profession.

Question 25

Profitability may be defined as:

A) The ability to pay the debts of the company as they fall due.
B) The ability to increase retained earnings.
C) Distributing dividends
D) Having excess cash

Question 26

The owner of a sole proprietorship is personally liable for the debts of the business, whereas the shareholders of a corporation are not personally liable for the debts of the business.

Question 27

Which of the following best describes liquidity?

A) The ability to increase the value of retained earnings
B) The ability to pay the debts of the company as they become due.
C) Being able to buy everything the company requires for cash.
D) Purchasing everything the company requires on credit.

Question 28

According to Sarbanes-Oxley, internal controls must be audited by the same accounting firm that audits the financial statements.

Question 29

If a company purchases equipment by issuing a note payable, its total assets will not change.

Question 30

Which of the following is descriptive of the proper form of a balance sheet?

A) The heading sets forth the period of time covered.
B) Cash is always the first asset listed, followed by permanent assets (such as land and buildings), and finally by assets such as receivables and supplies.
C) Liabilities are listed before equity.
D) A subtotal for total assets plus total liabilities is shown.

Question 31

Equity in a business increases as a result of which of the following?

A) Payments of cash to the owners.
B) Losses from unprofitable operation of the business.
C) Earnings from profitable operation of the business.
D) Borrowing from a commercial bank.

Question 32

When a business borrows money from a bank, the immediate effect is an increase in total assets and a decrease in liabilities or equity.

Question 33

The major outgrowth from business failures and allegations of fraudulent financial reporting during the 1990's was the passage of the Securities and Exchange Act.

Question 34

The principle of adequate disclosure means that a company should disclose:

A) Only the important monetary information.
B) All confidential information regarding the company.
C) Any financial facts that a reasonable informed person would consider necessary for the proper interpretation of the financial statements.
D) Only subsequent events.

Question 35

A balance sheet is designed to show:

A) How much a business is worth.
B) The profitability of the business during the current year.
C) The assets, liabilities, and equity of a business as of a particular date.
D) The cost of replacing the assets and of paying off the liabilities at December 31.

Question 36

It is not unusual for an entity to report a significant increase in cash from operating activities, but a decrease in the total amount of cash.

Question 37

Blue Wholesale Shirt Co. sold shirts to Pink Retail Shoppe. The owner of Pink Retail said she would pay Blue at a later date which Blue Wholesale Shirt Co. agreed to. Blue Wholesale Shirt Co. is considered to be a:

A) borrower
B) liability
C) creditor
D) debtor

Question 38

The purchase of an asset such as office equipment, for cash will cause equity to decrease.

Question 39

Which one of the following is not considered one of the three primary financial statements?

A) Balance sheet.
B) Income statement.
C) Statement of cash flows.
D) Statement of budgeting activities.

Question 40

The cash flow statement provides a link between two balance sheets by showing how profit (or loss) has changed equity from one balance sheet date to the next.

Question 41

The amount of equity in a business is not affected by:

A) The percentage of total assets held in cash.
B) Investments made in the business by the owner.
C) The profitability of the business.
D) The amount of dividends paid to shareholders.

Question 42

Which of the following best defines an asset?

A) Something with physical form that is valued at cost in the accounting records.
B) An economic resource owned by a business and expected to benefit future operations.
C) An economic resource representing cash or the right to receive cash in the near future.
D) Something owned by a business that has a ready market value.

Question 43

Each year the accountant for Southern Real Estate Company adjusts the recorded value of each asset to its market value. Using these market value figures on the balance sheet violates:

A) The accounting equation.
B) The stable-dollar assumption.
C) The business entity concept.
D) The cost principle.

Question 44

The way in which financial statements relate is known as:

A) Solvency.
B) Objectivity.
C) Articulation.
D) Entity.

Question 45

Which business organization is recognized as a separate legal entity under the law?

A) Corporation.
B) Sole proprietorship.
C) Partnership.
D) All three.

Question 46

A balance sheet:

A) Provides owners, investors, and other interested parties with all the financial information they need to evaluate the financial strength, profitability, and future prospects of a given business entity.
B) Shows the current market value of the equity in the business at the balance sheet date.
C) Assists creditors in evaluating the debt-paying ability of a business by showing the assets and liabilities of the business combined with those of its owner (or owners).
D) Shows the assets, liabilities, and equity of a business entity, valued in conformity with generally accepted accounting principles.

Question 47

If cash flows from operating activities is a negative amount:

A) The company must have a loss for the year.
B) The company must have a net profit for the year.
C) The company must have paid off more debts than it earned during the year.
D) The company may have profit or a loss for the year.

Question 48

Eton Corporation purchased land in 1990 for $190,000. In 2008, it purchased a nearly identical parcel of land for $430,000. In its 2008 balance sheet, Eton valued these two parcels of land at a combined value of $860,000. Reporting the land in this manner violated the:

A) Cost principle.
B) Principle of the business entity.
C) Objectivity principle.
D) Going-concern assumption

Question 49

If total assets equal $270,000 and total liabilities equal $202,500, the total equity must equal:

A) $472,500.
B) $67,500.
C) Can not be determined from the information given.
D) Some other amount.

Question 50

Which of the following is correct when a company uses cash to pay for an expense?

A) Total assets will decrease.
B) Retained earnings will decrease.
C) Equity will decrease.
D) All three of the above statements are correct.

Question 51

From an accounting viewpoint, when is a business considered an entity separate from its owner(s)?

A) Only when organized as a sole proprietorship.
B) Only when organized as a partnership.
C) Only when organized as a corporation.
D) In each of the above situations, the business is an accounting entity separate from the activities of the owner(s).

Question 52

The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurant's balance sheet. The reporting of this item in this manner violated the:

A) Cost principle.
B) Business entity concept
C) Objectivity principle.
D) Going-concern assumption.

Question 53

To appear in a balance sheet of a business entity, an asset need not:

A) Be an economic resource.
B) Have a ready market value.
C) Be expected to benefit future operations.
D) Be owned by the business.

Question 54

If total assets equal $345,000 and total equity equal $120,000, then total liabilities must equal:

A) $465,000.
B) $225,000.
C) Can not be determined from the information given.
D) Some other amount.

Question 55

Bob Bertolucci, owner of Bob's Bazaar, also owns a personal residence that cost $575,000, but has a market value of $725,000. During preparation of the financial statements for Bob's Bazaar, the accounting principle most relevant to the presentation of Bob's home is:

A) The concept of the business entity.
B) The cost principle.
C) The going-concern assumption.
D) The objectivity principle.

Question 56

Which of the following will not cause a change in the equity of a business?

A) Payment of an interest free business debt.
B) Withdrawal of cash by the owner.
C) Sale of land at a profit.
D) Losses from unprofitable operations.

Question 57

If a company purchases equipment for $65,000 by issuing a note payable:

A) Total assets will increase by $65,000.
B) Total assets will decrease by $65,000.
C) Total assets will remain the same.
D) The company's total equity will decrease.

Question 58

The valuation of assets in the balance sheet is based primarily upon:

A) What it would cost to replace the assets.
B) Cost, because cost is usually factual and verifiable.
C) Current fair market value as established by independent appraisers.
D) Cost, because in the event of liquidation, the assets would be sold at an amount equal to their original cost.

Question 59

Which of the following is correct f a company purchases equipment for $70,000 cash?

A) Total assets will increase by $70,000.
B) Total assets will decrease by $70,000.
C) Total assets will remain the same.
D) The company's total equity will decrease.

Question 60

Which of the following is not a generally accepted accounting principle relating to the valuation of assets?

A) The cost principle - in general, assets are valued at cost, rather than at estimated market values.
B) The objectivity principle - accountants prefer to use objective, rather than subjective, information as the basis for accounting information.
C) The safety principle - assets are valued at no more than the value for which they are insured.
D) The going-concern assumption - one reason for valuing assets such as buildings and equipment at cost rather than at their current market values is the assumption that the business will use these assets rather than sell them.

Question 61

The concept of adequate disclosure means that:

A) The accounting department of a business must inform management of the accounting principles used in preparing the financial statements.
B) The company must inform users of any significant facts necessary for proper interpretation of the financial statements, including events occurring after the financial statement date.
C) The independent auditors must disclose in the financial statements any and all errors detected in the company's accounting records.
D) The financial statements should include a comprehensive list of each transaction that occurred during the year.

Question 62

Share capital represents:

A) The amount invested in the business by shareholders when shares were initially issued by a corporation.
B) The equity for a business organized as a corporation.
C) The equity accumulated through profitable operations that have not been paid out as dividends.
D) The price paid by the current owners to acquire shares in the corporation, regardless of whether they bought the shares directly from the corporation or from another shareholder.

Question 63

The accounting principle that assumes that a company will operate in the foreseeable future is:

A) Going concern.
B) Objectivity.
C) Liquidity.
D) Disclosure.

Question 64

Which of the following transactions would cause an increase in both assets and equity?

A) Investment of cash in the business by the owner.
B) Sale of land for a price less than its cost.
C) Borrowing money from a bank.
D) Sale of land for cash at a price equal to its cost.

Question 65

Retained earnings is:

A) The positive cash flows of a company.
B) Net worth of a company.
C) The equity that has accumulated as a result of profitable operations.
D) Equal to the total assets of a company.

Question 66

An expense is best defined as:

A) Any payment of cash for the benefit of the company.
B) Past, present or future payments of cash required to generate revenues.
C) Past payments of cash required to generate revenues.
D) Future payments of cash required to generate revenues.

Question 67

The change in equity from one balance sheet to the next is partially explained by the:

A) Statement of cash flows.
B) Statement of financial position.
C) Income statement.
D) Tax return.

Question 68

If cash increases during a year, it must mean that:

A) There was positive profit on the income statement.
B) Retained earnings increased.
C) The net worth of a company increased.
D) None of the three statements above must necessarily be true.

Question 69

The balance sheet item that represents the portion of equity resulting from profitable operation of the business is:

A) Accounts receivable.
B) Cash.
C) Share capital.
D) Retained earnings.

Question 70

Retained earnings appears on:

A) The income statement.
B) The balance sheet.
C) The statement of cash flows.
D) All three statements.

Question 71

A revenue transaction results in all of the following except:

A) An increase in assets.
B) An increase in equity.
C) A positive cash flow in either the past, present, or future.
D) An increase in liabilities.

Question 72

Which of the following activities is not a category into which cash flows are classified?

A) Marketing activities.
B) Operating activities.
C) Financing activities.
D) Investing activities.

Question 73

Which of the following transactions would cause a change in equity?

A) Repayment of the principal on a bank loan.
B) Purchase of a delivery truck on credit.
C) Sale of land on credit for a price above cost.
D) Borrowing money from a bank.

Question 74

The payment of a business debt not including interest:

A) Decreases total assets.
B) Increases total liabilities.
C) Increases the equity in the business.
D) Decreases the equity in the business.

Question 75

Deerpark Corporation recently borrowed $70,000 cash from its bank. Which of the following was unaffected by this transaction?

A) Assets.
B) Liabilities.
C) Equity.
D) Cash.

Question 76

A transaction caused an increase in both assets and equity. This transaction could have been:

A) A sale of service to a customer producing revenue.
B) Sale of land for a price less than its cost.
C) Borrowing money from a bank.
D) Sale of land for cash at a price equal to its cost.

Question 77

Which of the following statements regarding liquidity and profitability is not true?

A) If a business is unable to pay its debts as they come due, it is operating unprofitably.
B) A business may be liquid, yet operate unprofitably for several years.
C) A business may operate profitably, yet be unable to meet its obligations.
D) In order to survive in the long run, a business must both remain liquid and operate profitably.

Question 78

If a company has a profit:

A) Assets will be equal to liabilities plus equity.
B) Assets will be less than liabilities plus equity.
C) Assets will be greater than liabilities plus equity.
D) Equity will be greater than its assets.

Question 79

If a transaction causes an asset account to decrease, which of the following related effects may occur?

A) An increase of equal amount in an equity account.
B) An increase in a liability account.
C) An increase of equal amount in another asset account.
D) An increase in the combined total of liabilities and equity.

Question 80

Decreases in equity are caused by:

A) Purchases of assets and payment of liabilities.
B) Purchases of assets and incurrence of liabilities.
C) Payment of liabilities and unprofitable operations.
D) Distributions of assets to the owner and unprofitable operations.