Question 1

A net profit results from having more revenues than liabilities.

Accepted Answer

Net profit results from having more revenues than expenses, not liabilities. Liabilities are debts or obligations a company owes, not the costs incurred in the operation of the business.

Question 2

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

Accepted Answer

The realization principle refers to recognizing revenue when it is earned, not when cash is received. The concept of keeping an entity's activities separate from its owner is known as the economic entity assumption.

Question 3

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

Accepted Answer

The sale of additional shares of capital stock will not cause treasury stock to increase. Treasury stock is the company's own previously issued shares that have been repurchased and are being held by the company, while capital stock refers to the shares that are currently outstanding and owned by investors. Selling additional shares of capital stock would increase the number of outstanding shares, but it would not affect the quantity of treasury stock held by the company.

Question 4

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

Accepted Answer

Limited liability means that owners of a business are only liable for the debts of the business up to the amount of their investment in the business, not just the amount they can afford. This protects their personal assets from being seized to pay off the business's debts.

Question 5

The payment of a liability causes an increase in owners' equity.

Accepted Answer

The payment of a liability reduces owners' equity because it represents a reduction in the company's assets.

Question 6

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.

Accepted Answer

The entity principle is one of the fundamental principles of accounting and it states that a business is a separate and distinct entity from its owners, and therefore its financial affairs must be considered separately from those of the owners. This means that personal transactions of the owners should be kept separate from the financial transactions of the business.

Question 7

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

Accepted Answer

The collection of an account receivable converts one asset (accounts receivable) into another asset (cash), keeping the total assets unchanged.

Question 8

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.

Accepted Answer

This is a fundamental principle of business law, known as the concept of "legal personality". It means that the business has its own legal rights and liabilities, independent of its owners. This enables it to enter into contracts, sue and be sued, and own property.

Question 9

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.

Accepted Answer

The statement is true. Cost is supported by invoices, receipts, and other documentation that provides objective evidence of the asset's historical cost, which can be verified by independent experts. This is in contrast to market value, which is subjective and can fluctuate over time. Therefore, showing assets at their cost is considered a more reliable and verifiable method of valuation for accounting purposes.

Question 10

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

Accepted Answer

Assets can also include intangible items such as patents, trademarks, and intellectual property.

Question 11

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

Accepted Answer

Articulation refers to the close interrelation between the different financial statements, such as the balance sheet, income statement, and cash flow statement. The information in one statement should be consistent with the information in the others, creating a cohesive picture of the company's financial performance.

Question 12

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

Accepted Answer

In a corporation, the equity of each stockholder is not directly listed on the balance sheet. Instead, the total equity for all stockholders is listed as "Stockholders' Equity" or "Shareholders' Equity". However, individual stockholders can determine their share of equity by dividing the total equity by the number of outstanding shares they own.

Question 13

Total assets plus total liabilities must equal total owners' equity.

Accepted Answer

Total assets equal total liabilities plus total owners' equity, not the sum of assets and liabilities equaling equity.

Question 14

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

Accepted Answer

A cash flow statement reports the inflows and outflows of cash, not revenue and expenses, for a specific period.

Question 15

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

Accepted Answer

Notes payable and accounts payable are different types of liabilities. Notes payable involve interest payments, while accounts payable do not.

Question 16

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

Accepted Answer

Any business event that might affect the future profitability of a business should be reported in its income statement, not its balance sheet. The balance sheet reports a company's assets, liabilities, and equity at a specific point in time.

Question 17

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 owners' equity.

Accepted Answer

This statement is true. Every transaction in accounting follows the double-entry system, which means that every transaction affects at least two accounts. When an asset is increased, another asset may decrease if it is used to acquire the new asset. Alternatively, an increase in an asset may also cause an increase in a liability (e.g. taking out a loan to purchase the asset) or an increase in owners' equity (e.g. investment in the business).

Question 18

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

Accepted Answer

The going concern principle is based on the assumption that a business will continue operating for an indefinite period of time, and therefore its financial statements should reflect this assumption.

Question 19

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

Accepted Answer

This is the correct statement of the accounting equation.

Question 20

Total assets must always equal total liabilities plus total owners' equity.

Accepted Answer

This is the fundamental accounting equation and must be true at all times in order for the balance sheet to be in balance.

Quiz 2: Basic Financial Statements