Deck 2: Financial Statements for Decision Making

Question 1

How well an entity attains its goals is referred to as:

A) efficiency.
B) planning.
C) organising.
D) effectiveness.

Answer 1

D

Question 2

A) $17 000.
B) $14 000.
C) $16 000.
D) $12 000.

Answer 2

A

Question 3

The statement of changes in equity:

A) indicates the ability of the entity to generate cash flow.
B) shows the selling price of the entity's assets.
C) shows how profit was determined.
D) serves as a connecting link between the income statement and the balance sheet.

Answer 3

D

Question 4

Which of the following statements is incorrect?:

A) The liability of shareholders to contribute to the debts of an insolvent company is limited.
B) A sole proprietorship is an accounting entity.
C) Individual partners are personally liable for partnership debts.
D) Partnerships are regarded as separate legal entities.

Question 5

Assume you are examining a financial statement headed 'As at the 31 December 2014'. The heading indicates the statement is the:

A) trial balance.
B) income statement.
C) statement of changes in equity.
D) balance sheet.

Question 6

A balance sheet:

A) is classified into operating, investing and financing activities.
B) measures the entities financial performance.
C) lists assets, liabilities and equity at a specific point in time.
D) shows how profit was determined.

Question 7

On 2 January 2014 Fife Corp buys goods from O'Brien and agrees to pay for them within 60 days. On the balance sheet for Fife Corp at 2 January 2014 the amount owing to O'Brien would be reported as:

A) an advance payment by a customer.
B) accounts receivable.
C) accounts payable.
D) an expense.

Question 8

A) $8300.
B) $27 300.
C) $5300.
D) $13 300.

Question 9

Which of the following statements concerning the cash flow statement is correct?

A) It provides the connecting link between the income statement and the balance sheet.
B) It summarises the cash flows into and out of an entity.
C) An alternative name is the cash budget.
D) It includes cash and non-cash items.

Question 10

A business transaction creating an inflow of net assets resulting from the sale of goods or services is a(n):

A) expense transaction.
B) income transaction.
C) cash disbursement.
D) capital transaction.

Question 11

A) $160 000.
B) $120 000.
C) $300 000.
D) $220 000.

Question 12

Which statement is not true?

A) The balance sheet can be presented in account form or narrative form.
B) The account form balance sheet lists all the elements in one column.
C) In Australia the narrative form balance sheet is the most common.
D) The basic layout for the account form balance sheet is assets = liabilities + equity.

Question 13

Which statement is not correct?

A) Information in the cash flow statement is useful in assessing the ability of an entity to pay its debts as they fall due.
B) A comparison of the cash flow statement and the income statement can indicate to what extent the profit is represented by cash inflows.
C) The cash flow statement classifies cash flows into operating investing and financing groupings.
D) Operating activities are concerned with activities involving the sales and purchases of fixed assets.

Question 14

Which of the following is the correct expression of the accounting equation?

A) Assets + liabilities = equity.
B) Assets = liabilities - equity.
C) Assets + equity = liabilities.
D) Assets = liabilities + equity.

Question 15

Junction Plants had the following transactions during August. Which transaction represents an expense for August under the accrual basis of accounting?

A) Used $90 worth of office telephone calls. The account will be paid during September.
B) Paid $3300 in settlement of a loan obtained three months earlier.
C) Paid a plumber $500 for repair work performed in July.
D) Purchased a computer for $3000 cash.

Question 16

The assets of Frank's business increased by $40 000 and the liabilities increased by $10 000 during the current year. If the profit for this period was $25 000, what additional contribution or withdrawal was made by the owner? (Assume only a withdrawal or a contribution was made.)

A) Drawings $10 000
B) Contribution $10 000
C) Contribution $5000
D) Drawings $5000

Question 17

In order to avoid later disputes it is desirable that a partnership agreement:

A) is in writing.
B) should have the partners sharing profits and losses equally.
C) should set up the partnership as a separate legal entity.
D) should set out in detail how the how all likely transactions are to be recorded.

Question 18

Which of the following statements concerning the income statement is not true?

A) The heading must indicate the length of time the report covers.
B) It shows the change in the entity's cash balance for the period.
C) If expenses exceed income than a loss has been incurred for the period.
D) An alternative name is the statement of financial performance.

Question 19

Maintaining a satisfactory relationship between an entity's resource inputs and its output of product or services is referred to as:

A) planning.
B) efficiency.
C) organising.
D) effectiveness.

Question 20

Which of the following statements concerning equity is true?

A) It is the owner's claim to the assets of the entity after deducting liabilities.
B) It is fixed at the amount initially contributed when the business was established.
C) It is decreased by profit.
D) Assets + liabilities = equity.

Question 21

Which of these does not fit the accounting definition of an asset?

A) Accounts receivable
B) Staff skill and experience
C) Goodwill
D) Cash at bank

Question 22

In order to assess an entity's cash performance it is common to classify its activities into operating, investing and financing. For the local cricket club which of the following would be a financing activity?

A) Paying for lawn mowing.
B) Renovating the clubhouse.
C) Paying the annual subscription to the cricket association.
D) Borrowing $40 000 from a bank.

Question 23

Which of the following statements is true?

A) The profit of an entity is always represented by an increase in cash.
B) A withdrawal of cash for private use by the owner is shown in the income statement as an expense.
C) Equity can be thought of as the owner's claim to the assets of the entity after deducting all liabilities.
D) Profit can be calculated as net assets at the end of the year less net assets at the beginning of the year less drawings.

Question 24

If income is $180 000, rent expense is $120 000 and advertising expense is
$10 500, profit or loss is which of the following?

A) $300 500 profit
B) $49 500 profit
C) $49 500 loss
D) $300 500 loss

Question 25

In order to assess an entity's cash performance it is common to classify its activities into operating, investing and financing. For a medical practice, which of the following would be an operating activity?

A) Billing a patient for a consultation.
B) Purchasing new equipment for the surgery.
C) Repaying a portion of a loan.
D) Selling an old computer.

Question 26

A balance sheet would normally balance at:

A) total assets.
B) total liabilities.
C) the bank balance.
D) the owner's initial capital contribution.

Question 27

Which of these is not an alternative term for equity?

A) Proprietorship
B) Owners' equity
C) Bank account balance
D) Capital

Question 28

__________ is/are resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

A) Liabilities
B) Assets
C) Equity
D) Income

Question 29

Julio's opening capital at 1 July 2011 was $50 000, his profit for the year was
$18 000 and his drawings were $15 000. What is the final balance of his capital at the end of the year?

A) $68 000
B) $50 000
C) $83 000
D) $53 000

Question 30

Which of these is not income?

A) Receipts from the sale of goods.
B) Receipts from the provision of services.
C) Interest received.
D) Additional capital contributed by the owner.

Question 31

Which of these is not an alternative name for the income statement?

A) Operating statement
B) Profit and loss statement
C) Profit report
D) Statement of financial position

Question 32

Which of these is not a liability?

A) GST payable
B) Bank overdraft
C) Wages paid
D) Creditor

Question 33

The income statement reports the financial:

A) position of an entity at a specific period of time.
B) performance of an entity over a specified period of time.
C) position of an entity over a specified period of time.
D) performance of an entity at a specific period of time.

Question 34

Users of accounting information want to know about an entity's ______________________, that is, its control over economic resources, financial structure, capacity for adaptation and solvency.

A) financial position
B) accounting equation
C) liabilities
D) performance

Question 35

On 31 July 2014 Comfy Heaters sells goods to Barker who agrees to pay for them within 45 days. On the balance sheet of Comfy Heaters at 31 July 2014 the amount owing by Barker would be reported as the asset:

A) cash at bank.
B) accounts payable.
C) accounts receivable.
D) creditor.

Question 36

If an entity has assets of $168 900 and liabilities of $70 000 its equity is:

A) $238 900.
B) $28 900.
C) $98 900.
D) unable to be calculated.

Question 37

If the loss for the period is $15 000 and total income is $115 000, total expenses for the period are:

A) $100 000.
B) $130 000.
C) $115 000.
D) $145 000.

Question 38

The statement that measures an entity's financial position is the:

A) income statement.
B) balance sheet.
C) statement of cash flows.
D) statement of changes in equity.

Question 39

From the point of view of a business entity, a person or business to whom a debt is owed is known as a:

A) debtor.
B) creditor.
C) debitor.
D) bank.

Question 40

The statement that explains the changes in equity and serves as a link between the balance sheet and the income statement is which of the following?

A) Statement of cash flows
B) Statement of changes in equity
C) Operating statement
D) Statement of financial position

Question 41

The accounting assumption that gives rise to the equity element in the accounting equation is:

A) the accrual basis assumption.
B) the economic substance assumption.
C) the entity assumption.
D) the materiality assumption.

Question 42

Jane is an accountant operating as a sole proprietor. On 1 February she does some work for a client who pays her $320 in cash. Which of the following represents the effect of this transaction on the accounting equation?

A) Increase in cash at bank $320; decrease in liability accounts payable $320.
B) Increase in cash at bank $320; increase in equity $320.
C) Increase in cash at bank $320; increase in asset accounts receivable $320.
D) Increase in cash at bank $320; increase in liability accounts payable $320.

Question 43

The cost assumption by accountants means that assets are valued at:

A) acquisition cost.
B) market value.
C) resale value.
D) replacement cost.

Question 44

The assumption which requires transactions to be recognised in the accounting reports when they occur and not when the cash is received or paid is:

A) accrual basis.
B) accounting entity.
C) faithful representation.
D) accounting period.

Question 45

The system where every transaction affects at least two components of theaccounting equation is known as:

A) historical cost accounting.
B) the going concern system.
C) the accounting entity system.
D) double-entry accounting.

Question 46

Which of these is the most important consideration in ensuring that information is relevant for decision making?

A) A high degree of accuracy
B) Historical record
C) Monetary assumption
D) Timeliness

Question 47

The accounting assumption that the business will continue indefinitely into the future is the ________________________ assumption.

A) accounting period
B) faithful representation
C) understandability
D) going concern

Question 48

Drop Zone Parachuting has decided to prepare its financial statements every three months. Which accounting assumption is it implementing?

A) Cost assumption
B) Accounting entity
C) Accounting period
D) Going concern assumption

Question 49

In comparison to historical costs, estimated market values are usually considered by accountants to be____________________ for decision making.

A) more reliable but less relevant
B) less reliable but more relevant
C) more material but less comparable
D) more comparable but less material

Question 50

Which of these effects of a single transaction on the accounting equation is not possible?

A) Increase in assets at the same time as an equal increase in equity.
B) Decrease in assets at the same time as an equal decrease in liabilities.
C) Increase in liabilities at the same time as an equal decrease in liabilities.
D) Decrease in liabilities and at the same time an equal decrease in equity.

Question 51

Liz, after qualifying at university and having several years' experience decides to set up her own dental practice. On 1 March she deposits $25 000 into a bank account she has opened for the practice. Which of the following represents the effect of this transaction on the accounting equation?

A) Increase in assets of $25 000; increase in equity of $25 000.
B) Increase in assets of $25 000; decrease in equity of $25 000.
C) Increase in assets of $25 000; increase in liabilities of $25 000.
D) Decrease in assets of $25 000; increase in equity of $25 000.

Question 52

Historical cost is widely used for asset valuation as it is regarded as providing more ____________ information than estimated market value.

A) subjective
B) relevant
C) reliable
D) accounting entity

Question 53

Which assumption is the basis upon which the personal assets of the owner are excluded from the business's balance sheet?

A) Going concern
B) Accrual basis
C) Materiality
D) Accounting entity

Question 54

In order to prepare financial information for interested parties Hobart Company divides the economic activity of the firm into three-month segments and prepares financial statements at the end of each segment. Which accounting assumption is Chambers applying?

A) Accounting period
B) Materiality
C) Accounting entity
D) Going concern

Question 55

On 1 March Speedy Window Cleaning pays $1200 in cash for the March rent of its business premises. Which of the following is the effect on the accounting equation?

A) Decrease in cash at bank $1200; decrease in liability accounts payable $1200.
B) Decrease in cash at bank $1200; increase in liability accounts payable $1200.
C) Decrease in cash at bank $1200; decrease in equity $1200.
D) Decrease in cash at bank $1200; increase in equity $1200.

Question 56

The concept which permits information to be grouped together with other information as long as this does not mislead statement users in their decision making is called:

A) grouping.
B) materiality.
C) clustering.
D) accrual basis.

Question 57

The extent to which items in accounting reports can be combined or presented separately is covered by the concept of:

A) comparability.
B) faithful representation.
C) economic substance.
D) materiality.

Question 58

The assumption which assumes that the entity will not be liquidated in the near future is the:

A) accounting entity.
B) reliability.
C) accrual basis.
D) going concern.

Question 59

Accountants divide the life of the business into arbitrary time periods of equal length:

A) in order to prepare a balance sheet.
B) in order to calculate comparable profit results.
C) in order to prepare an income statement.
D) because of the accounting entity assumption.

Question 60

Jane is an accountant operating as a sole proprietor. On 1 February she does some work for a client on credit who she invoices for $120. Which of the following represents the effect of this transaction on the accounting equation?

A) Increase in cash at bank $120; decrease in liability accounts payable $120.
B) Increase in equity $120; increase in liability accounts payable $120.
C) Increase in asset accounts receivable $120; increase in equity $120.
D) Increase in cash at bank $120; increase in equity $120.

Question 61

Speedy Window Cleaning received $600 for window cleaning services provided. Which of the following represents the effect on the accounting equation?

A) Increase in assets of $600; increase in equity of $600.
B) Increase in assets of $600; decrease in assets of $600.
C) Increase in assets of $600; increase in liabilities of $600.
D) Decrease in assets of $600; decrease in equity of $600.

Question 62

Laura J set up a part-time business 'Speedy Window Cleaning' by depositing
$6000 into a business bank account. Which of the following represents the effect of this transaction on the accounting equation?

A) Increase in assets of $6000; increase in equity of $6000.
B) Increase in assets of $6000; decrease in equity of $6000.
C) Increase in assets of $6000; increase in liabilities of $6000.
D) Decrease in assets of $6000; increase in equity of $6000.

Question 63

Speedy Window Cleaning purchased 12 months worth of cleaning supplies on credit from Southern Cleaning Supplies for $1500. Which of the following represents the effect on the accounting equation?

A) Increase in assets of $1500; increase in equity of $1500.
B) Increase in assets of $1500; decrease in assets of $1500.
C) Increase in assets of $1500; increase in liabilities of $1500.
D) Decrease in assets of $1500; decrease in equity of $1500.

Question 64

Jane is an accountant operating as a sole proprietor. On 14 February she pays $600 wages in cash to her receptionist for work done during the first half of the month. Which of the following represents the effect of this transaction on the accounting equation?

A) Decrease in cash at bank $600; decrease in liability accounts payable $600.
B) Decrease in cash at bank $600; increase in liability accounts payable $600.
C) Decrease in cash at bank $600; increase in equity $600.
D) Decrease in cash at bank $600; decrease in equity $600.

Question 65

Jane is an accountant operating as a sole proprietor. In January she purchases for $540 some new furniture for her office. The purchase is made on credit. Which of the following represents the effect of this transaction on the accounting equation?

A) Increase in the asset furniture $540; increase in the liability accounts payable $540.
B) Increase in the asset furniture $540; decrease in the asset accounts receivable $540.
C) Increase in the asset furniture $540; increase in equity $540.
D) Increase in the asset furniture $540; increase in the asset accounts receivable $540.

Question 66

Jane is an accountant operating as a sole proprietor. On 1 February she does some work for a client on credit who she invoices for $120. On 10th of February the client pays his account and Jane banks the $120. Which of the following represents the effect of the receipt of cash transaction on the accounting equation for Jane's practice?

A) Increase in cash at bank $120; increase in equity $120.
B) Increase in cash at bank $120; decrease in asset accounts receivable $120.
C) Increase in cash at bank $120; increase in asset accounts receivable $120.
D) Increase in cash at bank $120; decrease in equity $120.

Question 67

Speedy Window Cleaning paid Southern Cleaning Supplies $1500 which was owed for cleaning supplies previously purchased. Which of the following represents the effect on the accounting equation?

A) Decrease in assets of $1500; decrease in equity of $1500.
B) Increase in assets of $1500; decrease in assets of $1500.
C) Increase in assets of $1500; increase in liabilities of $1500.
D) Decrease in liabilities of $1500; decrease in assets of $1500.