Question 1

Which of the following best describes a liability?
A) Liabilities are future economic benefits to which a company is entitled.
B) Liabilities are a form of share capital.
C) Liabilities are economic obligations to creditors to be paid at some future date by the company.
D) Liabilities are accounts receivable of the company.

Accepted Answer

Liabilities are economic obligations that a company owes to its creditors or other entities. These obligations can come in the form of debts or other financial obligations that the company has to pay in the future. Unlike assets, liabilities do not provide any economic benefits to the company, but instead represent costs and obligations that it must fulfill.

Question 2

Claims held by the shareholders (owners) of a corporation are referred to as:
A) share capital
B) share capital plus retained earnings
C) retained earnings
D) share capital minus retained earnings

Accepted Answer

Shareholders' claims on a corporation consist of both the initial capital they have invested (share capital) and the earnings retained in the business over time (retained earnings). These retained earnings are profits that have not been distributed to shareholders as dividends and are reinvested in the business. Therefore, the total claims held by shareholders are the sum of share capital and retained earnings.

Question 3

The main source of cash for a business normally arises from:
A) operating activities
B) investing activities
C) current assets
D) financing activities

Accepted Answer

Operating activities are the primary source of cash flow for a business, which includes the cash generated from the day-to-day operations of the business such as sales, collections from customers, and payment of expenses. Investing activities involve the purchase and sale of long-term assets such as property, plant, and equipment, while financing activities involve the issuance and repayment of debt and equity. Current assets are a component of the balance sheet and include cash, accounts receivable, and inventory, but do not necessarily represent the main source of cash for a business.

Question 4

When a repurchase of shares is done by a company it:
A) increases the amount of owners' equity
B) decreases the amount of total liabilities
C) decreases the amount of owners' equity
D) increases the amount of total liabilities

Accepted Answer

Repurchasing shares reduces the number of outstanding shares, which in turn decreases the amount of owners' equity in the company. Therefore, option C is the correct choice. A repurchase of shares has no impact on total liabilities.

Question 5

Dividends:
A) always affect net income
B) are expenses
C) must be paid to shareholders when the company earns a profit
D) are distributions to shareholders of assets (usually cash) generated by net income

Accepted Answer

Dividends are distributions to shareholders of assets, usually cash, generated by net income. They do not affect net income and are not expenses. Additionally, dividends do not have to be paid to shareholders even if the company earns a profit, as the company may choose to reinvest the profits instead.

Question 6

Losses are reported on the:
A) balance sheet
B) income statement
C) cash flow statement
D) statement of retained earnings

Accepted Answer

Losses are expenses that are deducted from revenues on the income statement to calculate net income (or loss) for a period. Therefore, losses are reported on the income statement.

Question 7

Which financial statement is based on the accounting equation?
A) income statement
B) balance sheet
C) cash flow statement
D) statement of retained earnings

Accepted Answer

The balance sheet is based on the accounting equation, which is Assets = Liabilities + Equity. The balance sheet shows the total assets, liabilities, and equity of a company at a specific point in time.

Question 8

On January 1, 2020, total assets for Liftoff Technologies were $125,000; on December 31, 2020, total assets were $145,000. On January 1, 2020, total liabilities were $110,000; on December 31, 2020, total liabilities were $115,000. What are the amount of the change and the direction of the change in Liftoff Technologies shareholders' equity for 2020?
A) increase of $15,000
B) decrease of $30,000
C) decrease of $15,000
D) increase of $30,000

Accepted Answer

Shareholders' equity is calculated as total assets minus total liabilities. On January 1, 2020, equity was $15,000 ($125,000 - $110,000). On December 31, 2020, equity was $30,000 ($145,000 - $115,000). The change is an increase of $15,000.

Question 9

Shareholders' equity for Raisin Corporation on January 1, 2020 and December 31, 2020 were $60,000 and $75,000, respectively. Assets on January 1, 2020 and December 31, 2020 were $115,000
And $105,000, respectively. Liabilities on January 1, 2020 were $55,000. What is the amount of liabilities on December 31, 2020?
A) $30,000
B) $55,000
C) $15,000
D) $40,000

Accepted Answer

The answer of Shareholders' equity for Raisin Corporation on January...

Question 10

How do revenues for a period relate to the beginning and ending balances in retained earnings?
A) Revenues less expenses will either increase or decrease the ending balance of retained earnings for the period.
B) Revenues will increase the beginning balance of retained earnings for the period.
C) Revenues will decrease the beginning balance of retained earnings for the period.
D) Revenues less expenses will either increase or decrease the beginning balance of retained earnings for the period.

Accepted Answer

Revenues less expenses (net income or net loss) is one of the components of retained earnings. Therefore, if revenues exceed expenses, this will result in an increase in the ending balance of retained earnings for the period. Conversely, if expenses exceed revenues, this will result in a decrease in the ending balance of retained earnings for the period.

Question 11

Expenses are:
A) increases in retained earnings resulting from operations
B) increases in liabilities resulting from purchasing assets
C) decreases in retained earnings resulting from operations
D) increases in assets resulting from operations

Accepted Answer

Expenses are costs incurred in the process of generating revenue, which reduces the company's retained earnings.

Question 12

The owners' interest in the assets of a corporation is known as:
A) shareholders' equity
B) expenses
C) assets
D) revenues

Accepted Answer

Shareholders' equity represents the owners' residual interest in the assets of a corporation after deducting liabilities. Therefore, the owners' interest in the assets of a corporation is known as shareholders' equity. Expenses, revenues, and assets are all related to the financial transactions and operations of a corporation, but they do not represent the owners' interest in the same way that shareholders' equity does.

Question 13

Which of the following financial statements would a potential investor most likely use to evaluate a company's financial performance for the current period?
A) cash flow statement
B) retained earnings statement
C) balance sheet
D) income statement

Accepted Answer

Most investors would use the income statement to evaluate a company's financial performance for the current period. The income statement shows a company's revenues and expenses during a specific time period, which allows investors to see if the company is profitable or not. The other financial statements (cash flow statement, retained earnings statement, and balance sheet) provide important information but may not be as relevant for evaluating performance in the current period.

Question 14

Increases in shareholders' equity arise from:
A) net income earned during the period
B) payment of dividends
C) investments by the owner
D) both investments by the owner and net income earned during the period

Accepted Answer

Increases in shareholders' equity can arise from both investments made by the owner and net income earned during the period. Net income is added to equity through the retained earnings account, while investments by the owner directly increase the owner's equity in the business. Payment of dividends reduces shareholders' equity.

Question 15

The stable-monetary-unit assumption is the basis for ignoring:
A) the effect of inflation in the accounting records
B) the difference between the appraised value and the actual cost when recording an asset at its historical cost
C) the possibility that the value of inventory might drop below its historical cost
D) fluctuations in the value of the Canadian dollar relative to foreign currencies

Accepted Answer

The stable-monetary-unit assumption assumes that the value of the monetary unit used in accounting remains constant over time, ignoring the effects of inflation on the accounting records. Choices B, C, and D are not related to the stable-monetary-unit assumption.

Question 16

Which of the following persons or groups have the ultimate control of a corporation?
A) the audit committee
B) the shareholders
C) the board of directors
D) the chief executive officer

Accepted Answer

Shareholders have the ultimate control of a corporation as they elect the board of directors, who in turn oversee the management and make major decisions.

Question 17

Which financial statement must be prepared before the others?
A) balance sheet
B) cash flow statement
C) income statement
D) retained earnings statement

Accepted Answer

The income statement must be prepared before the other financial statements because it provides information about the company's revenues and expenses during a specific period, which is necessary to determine the net income or loss. The information from the income statement is then used to prepare the balance sheet and cash flow statement. The retained earnings statement is prepared after the other financial statements using information from the balance sheet and income statement.

Question 18

Current assets are assets expected to be converted to cash, sold, or consumed:
A) within the next 12 months or within the business's normal operating cycle if longer than a year
B) within the next 6 months
C) within the next 24 months
D) within the next 12 months or within the business's normal operating cycle if less than a year

Accepted Answer

Current assets are expected to be converted to cash, sold, or consumed within the next 12 months or within the business's normal operating cycle, even if that cycle is longer than a year.

Question 19

An investor wishes to assess a company's financial position at the end of the period. Which financial statement would the investor probably examine?
A) the statement of retained earnings
B) the income statement
C) the cash flow statement
D) the balance sheet

Accepted Answer

The balance sheet provides a snapshot of the company's financial position at a specific point in time by showing its assets, liabilities, and equity. It is often used by investors to assess the company's overall financial health, liquidity, and ability to pay off its debts. The other financial statements may provide valuable information, but they do not give a complete picture of the company's financial position.

Question 20

What is one component of shareholders' equity?
A) notes payable
B) common shares
C) property, plant, and equipment
D) cash

Accepted Answer

Common shares are a component of shareholders' equity, representing the amount of money paid in by shareholders in exchange for ownership in the company. Notes payable are a liability, not a component of shareholders' equity. Property, plant, and equipment are assets, not shareholders' equity. Cash is also an asset, not a component of shareholders' equity.

Quiz 1: The Financial Statements

Which of the following best describes a liability?

Claims held by the shareholders (owners) of a corporation are referred to as:

The main source of cash for a business normally arises from:

When a repurchase of shares is done by a company it:

Dividends:

Losses are reported on the:

Which financial statement is based on the accounting equation?

How do revenues for a period relate to the beginning and ending balances in retained earnings?

Expenses are:

The owners' interest in the assets of a corporation is known as:

Which of the following financial statements would a potential investor most likely use to evaluate a company's financial performance for the current period?

Increases in shareholders' equity arise from:

The stable-monetary-unit assumption is the basis for ignoring:

Which of the following persons or groups have the ultimate control of a corporation?

Which financial statement must be prepared before the others?

Current assets are assets expected to be converted to cash, sold, or consumed:

An investor wishes to assess a company's financial position at the end of the period. Which financial statement would the investor probably examine?

What is one component of shareholders' equity?