Deck 2: Investing and Financing Decisions and the Accounting System

Question 1

What is the primary difference between revenues and gains?

A)Gains are increases in net assets from peripheral activities while revenues are increases from ongoing central activities.
B)International financial reporting standards makes no distinction between them since they both increase income.
C)Revenues cause increases in net assets as a result of peripheral activities and gains cause increases through ongoing central activities.
D)Both revenues and gains cause a decrease in net assets from ongoing central and peripheral transactions respectively.

Answer 1

A

Question 2

To what does the element "TradePayables" refer?

A)An amount owed to our business.
B)An amount a business owes to a third party.
C)The bottom line on the income statement.
D)The total cash paid by a business during the year.

Answer 2

B

Question 3

Which of the following is the principle that requires us to record assets at the historical cash-equivalent cost?

A)Cost-benefit.
B)Cost principle.
C)Full disclosure.
D)Revenue recognition.

Answer 3

B

Question 4

Which of the following liability accounts is usually not satisfied by payment of cash?

A)Trade payables.
B)Unearned revenues.
C)Taxes payable.
D)All of the mentioned are satisfied by paying cash.

Question 5

Which of the following defines shareholders' equity?

A)Probable debts or obligations of an entity as a result of past transactions which will be paid with assets or services.
B)Assets plus liabilities.
C)Probable future economic benefits owned by an entity as a result of past transactions.
D)The financing provided by the owners and the operations of a business.

Question 6

Everest Acres Development Corporation recently sold a parcel of land for $50,000 more than its cost.This transaction:

A)Increased assets and liabilities.
B)Increased shareholders' equity and assets.
C)Reduced assets and shareholder's equity.
D)Increased assets and left liabilities and shareholder's equity unchanged.

Question 7

Which of the following direct effects on the fundamental accounting model is not possible as a result of transaction analysis?

A)Increase a liability and increase an asset.
B)Decrease shareholders' equity and increase an asset.
C)Increase an asset and decrease an asset.
D)Decrease shareholders' equity and decrease an asset.

Question 8

Which of the following events will cause retained earnings to decrease?

A)Dividends declared by the Board of Directors.
B)A profitreported for the period.
C)Aloss reported for the period.
D)Both dividends declared by the Board and loss reported for the period decrease retained earnings.

Question 9

Which of the following is least likely to have a liability called Deferred Revenue?

A)an insurance company
B)a retailer
C)a magazine subscription company
D)a university or college.

Question 10

Shareholders' equity

A)is equal to liabilities and retained earnings.
B)includes retained earnings and common shares.
C)is shown on the income statement o.
D)is usually equal to cash on hand.

Question 11

If Golden Company owed Eye Company $500,where would Golden Company reflect this?

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

Question 12

It is assumed that the activities of PetroCanada Corporation can be distinguished from those of Imperial Oil Limited because of the

A)Continuity assumption.
B)Separate-entity assumption.
C)Unit-of-measure assumption.
D)Time period assumption.

Question 13

Which of the following defines liabilities?

A)Possible debts or obligations of an entity as a result of future transactions which will be paid with assets or services.
B)Possible debts or obligations of an entity as a result of past transactions which will be paid with assets or services.
C)Probable debts or obligations of an entity as a result of future transactions which will be paid with assets or services.
D)Probable debts or obligations of an entity as a result of past transactions which will be paid with assets or services.

Question 14

If total liabilities decreased by $14,000 during a period of time and shareholders' equity increased by $6,000 during the same period,then the amount and direction (increase or decrease)of the period's change in total assets is a(n)

A)$20,000 increase.
B)$8,000 decrease.
C)$8,000 increase.
D)$14,000 increase.

Question 15

Which of the following is not classified properly as a current asset?

A)Supplies.
B)Short-term investments.
C)A fund to be used to purchase a building within the next year.
D)Equipment with an estimated useful life of five years.

Question 16

Which of the following is an example of an external exchange?

A)The purchase of inventory on credit from a supplier.
B)Cash received from a credit customer.
C)Cash dividend paid to shareholders.
D)A,B and C are external exchanges.

Question 17

Which of the following statements about shareholders' equity is not correct?

A)Shareholders' equity is the shareholders' residual interest in the company resulting from the difference in assets and liabilities.
B)Shareholders' equity results only from contributions of the owners.
C)Shareholders' equity accounts are increased with credits.
D)The purchase of equipment for cash has no effect on shareholders' equity.

Question 18

Which of the following defines assets?

A)Probable future economic benefits owned by an entity as a result of past transactions.
B)Possible future economic benefits owed by an entity as a result of past transactions.
C)Probable future economic benefits owned by an entity as a result of future transactions.
D)Possible future economic benefits owed by an entity as a result of future transactions.

Question 19

Where would we report changes in shareholders' equity caused by operating activities?

A)In the retained earnings account.
B)In a share capital account.
C)In a liability account.
D)In an asset account.

Question 20

Abe Cox is the sole owner and manager of Cox Auto Repair Shop.In 20A,Cox purchased a new automobile for personal use and continued to use an old truck in the business.Which of the following fundamentals prevents Cox from recording the cost of the new automobile as an asset to the business?

A)Separate-entity assumption.
B)Revenue principle.
C)Full disclosure.
D)Cost principle.

Question 21

Winsome Inc.reports total assets and total liabilities of $225,000 and $100,000,respectively,at the conclusion of its first year of business.The company earned $75,000 during the first year and distributed $30,000 in dividends.What was the corporation's share capital?

A)$125,000
B)$95,000
C)$80,000
D)$50,000

Question 22

When recording transactions in T-account format,we must add an additionalstep to the transactional analysis process.Which of the following is the additional step?

A)Determine what accounts and elements in the equation are affected by the transaction.
B)Determine if the affected accounts are increased or decreased by the transaction.
C)We must have equal debits and credits once the entry is recorded in the accounts.
D)The accounting equation must remain in balance after each transaction.

Question 23

The effect on total assets of the purchase of supplies for cash is which of the following?

A)An increase in total assets.
B)A decrease in total assets.
C)Total assets remain unchanged.
D)An increase in total assets and total liabilities.

Question 24

The collection of a trade receivable from a customer would do which of the following?

A)Increase liabilities.
B)Decrease liabilities.
C)Not affect liabilities.
D)Decrease shareholders' equity.

Question 25

The equality of debits and credits is the basis for

A)the double-entry accounting system.
B)the single-entry accounting system.
C)the T account.
D)all accounting systems.

Question 26

The trade payables account has a beginning balance of $1,000 and we purchased $3,000 of inventory on credit during the month.The ending balance was $800.How much did we pay our creditors during the month?

A)$2,800
B)$3,000
C)$3,200
D)$4,800

Question 27

Jet Corporation was organized on March 1,20B.Jet Corporation issued shares to each of the six owners who paid in a total of $3,000 cash.On the basis of transaction analysis,the following entry should be recorded in the accounts (dr = debit and cr = credit)

A)Cash (dr),$3,000; Revenue (cr),$3,000.
B)Cash (cr),$3,000; Shareholders' equity (dr),$3,000.
C)Cash (dr),$3,000; Share Capital (cr),$3,000.
D)Cash (cr),$3,000; Share Capital (dr),$3,000.

Question 28

When a company buys equipment for $60,000 and pays for one third in cash and the other two thirds is financed by a note payable,which of the following are the effects on the accounting equation?

A)Cash decreases by $60,000.
B)Equipment increases by $20,000.
C)Liabilities increase by $40,000.
D)Total assets increase by $60,000.

Question 29

Borrowing $100,000 of cash from First National Bank would do which of the following?

A)Increase cash by a credit.
B)Increase notes payable by a debit.
C)Increase notes payable by a credit.
D)Decrease cash by a debit.

Question 30

Assume a company's January 1,20A,financial position was: Assets,$40,000 and Liabilities,$15,000.During January 20A,the company completed the following transactions: (a)paid on a note payable,$4,000 (no interest); (b)collected tradereceivables,$4,000; (c)paid trade payables,$2,000; and (d)purchased a truck,$1,000 cash,and $8,000 notes payable.What is the company's January 31,20A,financial position?

A)Choice A
B)Choice B
C)Choice C
D)Choice D

Question 31

Salida Company paid a note payable of $10,000 (interest had previously been paid).This transaction should be recorded as follows on the payment date.

A)Choice A
B)Choice B
C)Choice C
D)Choice D

Question 32

Which of the following will not result in recording a transaction?

A)Signing a contract to have an outside cleaning service clean offices nightly.
B)Paying our employees their wages.
C)Selling shares to investors.
D)Buying equipment and agreeing to pay a note payable and interest at the end of a year.

Question 33

A T account consists of

A)a title,a debit balance,and a credit balance.
B)a title,a left side,and a debit balance.
C)a title,a debit side,and a credit side.
D)a title,a right side,and a debit balance.

Question 34

The best interpretation of the word credit is the

A)offset side of an account.
B)increase side of an account.
C)right side of an account.
D)decrease side of an account.

Question 35

Which of the following transactions will cause both the left and right side of the equation to increase?

A)We collect cash from a customer who owed us money
B)We pay a supplier for inventory we previously bought on account
C)We borrow money from the bank
D)We purchase equipment for cash

Question 36

Which of the following will NOT cause a change in the shareholder's equity of a business?

A)Payment of a business debt.
B)Payment of dividends.
C)Sale of land at a profit.
D)Losses from unprofitable operations.

Question 37

Payment of a liability would do which of the following?

A)Decrease shareholders' equity.
B)Decrease assets.
C)Not affect assets.
D)Increase shareholders' equity.

Question 38

An accountant has debited an asset account for $500 and credited a revenue account for $1,000.What can be done to complete the recording of the transaction?

A)Nothing further must be done.
B)Debit a shareholders' equity account for $500.
C)Debit another asset account for $500.
D)Credit a different asset account for $500.

Question 39

If total liabilities increased by $25,000 and shareholders' equity increased by $5,000 during a period of time,then total assets must change by what amount and direction during that same period?

A)$20,000 decrease
B)$25,000 increase
C)$30,000 increase
D)$20,000 increase

Question 40

The following amounts are reported in the ledger of Bowers Company: What is the balance in the share capital account?

A)$7,000 credit.
B)$8,000 debit.
C)$12,000 credit.
D)$12,000 debit.

Question 41

The primary objective of external financial reporting is to provide useful economic information about a business to help external parties,primarily investors and creditors,make sound financial decisions.

Question 42

Three of the four basic assumptions that underlie accounting measurement and reporting relate to the statement of financial position.

Question 43

Liabilities are generally classified on a statement of financial position as

A)small liabilities and large liabilities.
B)present liabilities and future liabilities.
C)tangible liabilities and intangible liabilities.
D)current liabilities and non-current liabilities.

Question 44

When a company has a debt-to-equity ratio close to 1 to 1,which of the following is true?

A)The company is primarily using debt financing for acquisition of its assets.
B)The creditors of the company would most likely be willing to give a loan to the company since debt is high.
C)The return to shareholders is higher than it would be if the ratio was higher.
D)The company's assets are financed almost equally by owners and creditors.

Question 45

Dow Construction Company reports a net use of cash for investing activities of $1.2 million and a net source of cash provided by financing of $.8 million.What was the effect on the cash balance?

A)To cause the balance to increase by $.8 million.
B)To cause the balance to decrease by $.4 million.
C)To cause the balance to increase by $.4 million.
D)Undeterminable because the beginning cash balance was not given.

Question 46

Liability accounts are reported on the statement of financial position..

Question 47

Liabilities are categorized as current liabilities and non-current liabilities.

Question 48

Loans made to outside parties would be classified into which of the following categories for the purpose of disclosure in the statement of cash flows?

A)Operating cash flow.
B)Investing cash flow.
C)Financing cash flow.
D)Item reconciling earnings and operating cash flow.

Question 49

When a new business is just starting up,which of the following must be done first?

A)Generate positive cash flow through successful operations.
B)Acquire the assets both long-lived and short-lived so they can operate.
C)Acquire financing from issuance of shares and borrowing from creditors.
D)These activities all occur simultaneously not sequentially.

Question 50

The debt-to-equity ratio is computed by taking which of the following?

A)Total assets divided by total liabilities.
B)Average total assets divided by average total liabilities.
C)Total liabilities divided by total shareholders' equity.
D)Total assets divided by total shareholders' equity.

Question 51

The unit-of-measure assumption states that financial information is reported in the national monetary unit.

Question 52

Which of the following would be an example of a financing transaction?

A)Purchasing equipment for cash.
B)Buying inventory from a supplier on credit.
C)Selling shares to investors for cash.
D)Buying inventory from a supplier for cash.

Question 53

The usefulness of the debt-to-equity ratio is that it allows interested parties to assess all of the following except?

A)How the company finances its assets.
B)The relative risk assumed by the company caused by the use of debt financing.
C)Whether the company should expand its use of debt to finance assets.
D)How many shares the company has issued in the past year.

Question 54

Assets are economic resources controlled by an entity as a result of past transactions or events and for which future economic benefits may be obtained.

Question 55

A primary objective of accounting is to provide the fair market value of assets on the statement of financial position..

Question 56

Which of the following would cause an inflow of cash?

A)Payment of a long-term mortgage.
B)Sale of an asset for cash at less than its book value.
C)Payment of accounts payable.
D)Purchase of inventory for debt.

Question 57

On the income statement,assets should always equal liabilities plus shareholders' equity.

Question 58

To determine the economic effect of a transaction on the entity in terms of its accounting equation,each transaction is analyzed as to the accounts (at least two)that are affected.

Question 59

If a company has assets of $60,000 and shareholders' equity of $30,000,then its liabilities must be $90,000.

Question 60

The separate-entity assumption assumes a stable monetary unit (not affected by inflation or deflation).

Question 61

If the correct accounts have been identified and the appropriate direction of the effect on each account has been determined,then the equation should remain in balance most of the time.

Question 62

When a business pays a previously recorded bill,the liabilities of the business decrease.

Question 63

Debits always increase and credits always decrease the accounts.

Question 64

The payment of a liability in cash will decrease shareholders'' equity.

Question 65

The amount shown on the statement of financial position as shareholders' equity represents the current market value of the owners' residual claim against the company.

Question 66

When a business owner invests cash in the business,the investment causes a liability to increase.

Question 67

Normally,asset accounts will have credit balances and liability accounts will have debit balances.

Question 68

Recording the borrowing of cash with a note payable increases shareholders' equity.

Question 69

If you trade your computer plus cash for a new car,the cost of the new car is equal to the cash paid plus the market value of the computer.

Question 70

The purchase of a delivery truck for cash increases assets and shareholders' equity.

Question 71

Prepayments (e.g.,insurance premiums and rent paid in advance of use of a building)reflect available benefits (e.g.,monthly insurance protection,office space)that the company will use within one year.

Question 72

Transactions have a dual economic effect on the fundamental accounting model.

Question 73

Some legal contracts,such as the signing of a contract to hire a new employee,are not reflected in the financial statements.

Question 74

In a journal entry,the debits must equal the credits and at least two accounts are affected by the transaction.

Question 75

The adoption of International Financial Reporting Standards by many countries has made it easier to read foreign companies' financial statements.

Question 76

The basic system of recording transactions has withstood the test of time,and has been in use for more than 500 years.

Question 77

"Debit" is the designation for the left side of an account,and "credit" is the designation for the right side of an account.

Question 78

A T-account is an accounting method of expressing the effects of a single transaction in a debits-equal-credits format.

Question 79

The objective of transaction analysis is to determine the economic effects of each transaction in terms of the accounting model.

Question 80

A T-account shows total debits of $25,000 and total credits of $22,000; therefore,it has a $3,000 credit balance.