Question 1

The owners' equity section of the balance sheet indicates the claims a firm's owners have against their company's assets.

Accepted Answer

The owners' equity section of the balance sheet represents the portion of a company's assets that belongs to its owners. This includes any investments made by the owners, any profits earned by the company that have not been distributed to shareholders as dividends, and any other equity contributions. Therefore, the owners' equity section reflects the claims that the owners have on the company's assets.

Question 2

A statement of cash flows is the financial statement identifying a firm's sources and uses of cash in a given accounting period.

Accepted Answer

This is a correct statement. The statement of cash flows is a financial statement that shows the inflows and outflows of cash in a company during a specific accounting period. It identifies the sources and uses of cash, including operating activities, investing activities, and financing activities.

Question 3

The accounting entity approach is an accounting method that recognizes revenue when it is earned and matches expenses to the revenues produced.

Accepted Answer

The accounting entity approach refers to treating a business as separate from its owners for accounting purposes, not to the recognition of revenue and matching of expenses. The description given aligns more closely with the accrual basis of accounting.

Question 4

Accrual-basis accounting is the method that recognizes revenue when it is earned and matches expenses to those revenues.

Accepted Answer

Accrual-basis accounting recognizes revenue when it is earned, regardless of when payment is received, and matches expenses to those revenue, even if payment is not made until a later date.

Question 5

Revenues are increases in a firm's assets resulting from the sale of goods, the provision of services, or other activities intended to earn income.

Accepted Answer

This statement defines revenues accurately.

Question 6

Net income is the difference between the revenue a firm earns and the expenses it incurs in a given time period.

Accepted Answer

Net income is indeed calculated by subtracting the total expenses from the total revenue earned by a firm in a given time period.

Question 7

Balance sheets only reflect the assets and liabilities of the cost of goods sold.

Accepted Answer

Balance sheets reflect all assets and liabilities of a company, not just those related to the cost of goods sold.

Question 8

The statement of retained earnings shows how retained earnings have changed from one accounting period to the next. By subtracting dividends paid to shareholders from net income, managers will see changes in this statement over time.

Accepted Answer

The statement of retained earnings is used to show the changes in retained earnings between accounting periods. By subtracting dividends paid from net income, changes in retained earnings can be seen over time.

Question 9

A company's balance sheet will "balance" even if it is on the verge of bankruptcy.

Accepted Answer

The balance sheet equation, Assets = Liabilities + Equity, must always balance regardless of the financial health of the company. However, if a company is in financial trouble, the values of its assets and liabilities may be inaccurate or overstated, which can be a red flag for investors and creditors.

Question 10

According to the accounting equation, Assets - Expenses = Net Income.

Accepted Answer

The correct accounting equation is Assets = Liabilities + Owner's Equity. Expenses are subtracted from Revenue to calculate Net Income. Therefore, the correct equation for Net Income is Revenue - Expenses = Net Income.

Question 11

Liabilities could include bank loans and current payments owed to suppliers.

Accepted Answer

Liabilities are any financial obligations or debts owed by a company or individual, and can include bank loans and current payments owed to suppliers.

Question 12

A balance sheet is a financial statement reporting the financial position of a firm at a particular point in time by identifying and reporting the value of the firm's assets, liabilities, and owners' equity.

Accepted Answer

A balance sheet is indeed a financial statement that shows the assets, liabilities, and owners' equity of a company at a specific point in time. It is also known as a statement of financial position.

Question 13

Expenses are listed on the left side of a balance sheet.

Accepted Answer

Expenses are not listed on a balance sheet. The left side of a balance sheet shows the assets, while the right side shows the liabilities and shareholders' equity.

Question 14

The statement of cash flows shows the cash flowing in and out of the firm from three types of activities: operations, investing, and financing. It also shows the net increase or decrease in cash from all three sources and the total amount of cash on hand at the end of the period.

Accepted Answer

This statement is true. The statement of cash flows is a financial statement that shows the cash inflows and outflows from a company's operations, investing, and financing activities. It also shows the net change in cash for the period and the ending cash balance.

Question 15

Revenue, expenses, and net income are the key sections found on a statement of cash flows.

Accepted Answer

Revenue, expenses, and net income are not found on a statement of cash flows, they are typically found on an income statement. A statement of cash flows shows the inflows and outflows of cash for a specific period of time.

Question 16

An income statement is the financial statement that reports revenues, expenses, and net income resulting from a firm's operations over an accounting period.

Accepted Answer

An income statement is indeed the financial statement that reports revenues, expenses, and net income resulting from a firm's operations over an accounting period.

Question 17

The cash balance reported at the bottom of the statement of cash flows should equal the amount of cash reported for a balance sheet prepared at the end of the same accounting period.

Accepted Answer

The statement of cash flows explains the changes in cash and cash equivalents during a period, including the opening balance of cash, the sources and uses of cash, and the closing balance of cash. The closing balance of cash reported in the statement of cash flows should match the amount of cash reported on the balance sheet prepared at the end of the same accounting period since the cash balance is a key component of the balance sheet. Therefore, the answer is A.

Question 18

Business expenses are available resources that stakeholders control.

Accepted Answer

Business expenses are costs incurred in the operation of a business, not resources controlled by stakeholders.

Question 19

The accounting equation is based on the fact that the value of a firm's assets is, by definition, exactly equal to the financing provided by creditors and by owners for the purchase of those assets.

Accepted Answer

The accounting equation states that assets are equal to liabilities plus equity. This means that the value of a firm's assets is indeed equal to the financing provided by creditors and owners.

Question 20

Assets are the tangible and intangible resources of value owned by a firm.

Accepted Answer

Assets include physical items such as property, equipment, and inventory, as well as intangible items such as patents, trademarks, and goodwill.

Quiz 7: Accounting: Decision Making by the Numbers