Deck 2: Basic Financial Statements

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

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.

Question 6

The purchase of an asset,such as office equipment,for cash will cause owners' equity to decrease.

Question 7

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.

Question 8

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

Question 9

If a company purchases equipment by issuing a note payable,its total assets will not change.

Question 10

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

Question 11

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

Question 12

Notes payable and accounts payable both require a company to pay an amount owed by a certain date.Notes payable generally have interest,while accounts payable generally do not.

Question 13

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.

Question 14

Liabilities are usually listed in order of magnitude,from smallest dollar amount to largest dollar amount.

Question 15

If a company purchases equipment with cash,its total assets will increase.

Question 16

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.

Question 17

When a business borrows money from a bank,the immediate effect is an increase in total assets and a decrease in liabilities or owners' equity.

Question 18

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

Question 19

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

Question 20

A net profit results from having more revenues than liabilities.

Question 21

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

Question 22

The owner of a sole proprietorship is personally liable for the debts of the business,whereas the stockholders of a corporation are not personally liable for the debts of the business.

Question 23

From an accounting viewpoint,when is a business considered as an entity separate from its owner(s)?

A)Only when organized as a sole proprietorship.
B)Only when organized as a partnership.
C)Only when organized as a corporation.
D)A business is always considered as an accounting entity separate from the activities of the owner(s).

Question 24

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

Question 25

Blue Wholesale Shirt Co.sold shirts to Pink Retail Shoppe.The owner of Pink Retail said she would pay Blue at a later date,which Blue Wholesale agreed to.Blue Wholesale Shirt Co.is considered to be a:

A)borrower.
B)liability.
C)creditor.
D)debtor.

Question 26

Which of the following best defines an asset?

A)Something with physical form that is valued at cost in the accounting records.
B)An economic resource owned by a business and expected to benefit future operations.
C)An economic resource representing cash or the right to receive cash in the near future.
D)Something owned by a business that has a ready market value.

Question 27

Which of the following is the primary objective of an income statement?

A)Providing managers with detailed information about where the enterprise stands at a specific date.
B)Providing users outside the business organization with information about the company's financial position and operating results.
C)Reporting to the Internal Revenue Service the company's taxable income.
D)Indicating to investors in a particular company the current market values of their investments.

Question 28

Window dressing occurs when management attempts to make a company look financially stronger than it actually is.

Question 29

It is not unusual for an entity to report a significant increase in cash from operating activities,but a decrease in the total amount of cash.

Question 30

The statement of cash flows provides a link between two balance sheets by showing how net income (or loss)has changed owners' equity from one balance sheet date to the next.

Question 31

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

Question 32

A balance sheet is designed to show:

A)How much a business is worth.
B)The profitability of the business during the current year.
C)The assets,liabilities,and owners' equity of a business as of a particular date.
D)The cost of replacing the assets and of paying off the liabilities at December 31.

Question 33

Each year,the accountant for Southern Real Estate Company adjusts the recorded value of each asset to its market value.Using these market value figures on the balance sheet violates:

A)The accounting equation.
B)The stable-dollar assumption.
C)The business entity concept.
D)The cost principle.

Question 34

The valuation of assets in the balance sheet is based primarily upon:

A)What it would cost to replace the assets.
B)Cost,because cost is usually factual and verifiable.
C)Current fair market value as established by independent appraisers.
D)Cost,because in the event of liquidation,the assets would be sold at an amount equal to their original cost.

Question 35

Decision makers outside the organization base their credit decisions on weekly,or even daily,financial statements.

Question 36

Which of the following is not a generally accepted accounting principle relating to the valuation of assets?

A)The cost principle - in general,assets are valued at cost,rather than at estimated market values.
B)The objectivity principle - accountants prefer to use objective,rather than subjective,information as the basis for accounting information.
C)The safety principle - assets are valued at no more than the value for which they are insured.
D)The going-concern assumption - one reason for valuing assets such as buildings and equipment at cost rather than at their current market values is the assumption that the business will use these assets rather than sell them.

Question 37

The major outgrowth from business failures and allegations of fraudulent financial reporting during the 1990's was the passage of the Securities and Exchange Act.

Question 38

Articulation between the financial statements means that they relate closely to each other on the basis of the same underlying transaction information.

Question 39

Which of the following describes the proper form of a balance sheet?

A)The heading sets forth the period of time covered.
B)Cash is always the first asset listed,followed by permanent assets (such as land and buildings),and finally by assets such as receivables and supplies.
C)Liabilities are listed before owners' equity.
D)A subtotal for total assets plus total liabilities is shown.

Question 40

The accounting principle that assumes that a company will operate in the foreseeable future is:

A)Going concern.
B)Objectivity.
C)Liquidity.
D)Disclosure.

Question 41

Decreases in owners' equity are caused by:

A)Purchases of assets and payment of liabilities.
B)Purchases of assets and incurrence of liabilities.
C)Payment of liabilities and unprofitable operations.
D)Distributions of assets to the owners and unprofitable operations.

Question 42

The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurant's balance sheet.The reporting of this item in this manner violated the:

A)Cost principle.
B)Business entity concept.
C)Objectivity principle.
D)Going-concern assumption.

Question 43

Owners' equity in a business increases as a result of which of the following?

A)Payments of cash to the owners.
B)Losses from unprofitable operation of the business.
C)Earnings from profitable operation of the business.
D)Borrowing from a commercial bank.

Question 44

Which of the following liabilities would most likely be listed last on a statement of financial position?

A)Bonds payable,due in 20 years.
B)Accounts payable.
C)Note payable,due in 3 years.
D)Income taxes payable.

Question 45

On the statement of financial position,assets are normally presented in and liabilities are usually presented in:

A)Their order of permanence; the order in which they become due.
B)The order in which they become due; their order of permanence.
C)Order of profitability; order of liquidity.
D)Order of liquidity; order of profitability.

Question 46

Which of the following will not cause a change in the owners' equity of a business?

A)Purchase of land with cash.
B)Withdrawal of cash by the owner.
C)Sale of land at a profit.
D)Losses from unprofitable operations.

Question 47

A payment of a business debt not including interest:

A)Decreases total assets.
B)Increases total liabilities.
C)Increases the owners' equity in the business.
D)Decreases the owners' equity in the business.

Question 48

Which of the following transactions would cause an increase in both assets and owners' equity?

A)Investment of cash in the business by the owner.
B)Sale of land for a price less than its cost.
C)Borrowing money from a bank.
D)Sale of land for cash at a price equal to its cost.

Question 49

A transaction caused an increase in both assets and owners' equity.This transaction could have been resulted from the:

A)Sale of services to a customer.
B)Sale of land for a price less than its cost.
C)Borrowing money from a bank.
D)Sale of land for cash at a price equal to its cost.

Question 50

Which of the following assets would most likely be listed last on a statement of financial position?

A)Land.
B)Cash.
C)Accounts receivable.
D)Equipment.

Question 51

Which of the following is correct when a corporation uses cash to pay for an expense?

A)Total assets will decrease.
B)Retained earnings will increase.
C)Owners' equity will increase.
D)Liabilities will increase.

Question 52

Eton Corporation purchased land in 1998 for $190,000.In 2014,it purchased a nearly identical parcel of land for $430,000.In its 2014 balance sheet,Eton valued these two parcels of land at a combined value of $860,000.Reporting the land in this manner violated the:

A)Cost principle.
B)Principle of the business entity.
C)Objectivity principle.
D)Going-concern assumption.

Question 53

Bob Bertolucci,owner of Bob's Bazaar,also owns a personal residence that costs $575,000.The market value of his residence is $725,000.During preparation of the financial statements for Bob's Bazaar,the accounting principle most relevant to the presentation of Bob's home is:

A)The concept of the business entity.
B)The cost principle.
C)The going-concern assumption.
D)The objectivity principle.

Question 54

If a transaction causes an asset account to decrease,which of the following related effects may occur?

A)An increase of equal amount in an owners' equity account.
B)An increase in a liability account.
C)An increase of equal amount in another asset account.
D)An increase in the combined total of liabilities and owners' equity.

Question 55

If total assets equal $345,000 and total owners' equity equal $120,000,then total liabilities must equal:

A)$465,000.
B)$225,000.
C)$120,000.
D)Cannot be determined from the information given.

Question 56

The amount of owners' equity in a business is not affected by:

A)The percentage of total assets held in cash.
B)The investments made in the business by the owner.
C)The profitability of the business.
D)The amount of dividends paid to stockholders.

Question 57

Which of the following transactions would cause a change in owners' equity?

A)Repayment of the principal on a bank loan.
B)Purchase of a delivery truck on credit.
C)Sale of land on credit for a price above cost.
D)Borrowing money from a bank.

Question 58

If total assets equal $270,000 and total liabilities equal $202,500,the total owners' equity must equal:

A)$472,500.
B)$67,500.
C)$270,000.
D)Cannot be determined from the information given.

Question 59

Owners' equity in a business decreases as a result of which of the following?

A)Investments of cash by the owners.
B)Profits from operating the business.
C)Losses from unprofitable operation of the business.
D)Repaying a loan to a commercial bank.

Question 60

Deerpark Corporation recently borrowed $70,000 cash from its bank.Which of the following was unaffected by this transaction?

A)Assets.
B)Liabilities.
C)Owners' equity.
D)Cash.

Question 61

To appear in a balance sheet of a business entity,an asset need not:

A)Be an economic resource.
B)Have a ready market value.
C)Be expected to benefit future operations.
D)Be owned by the business.

Question 62

Which of the following is correct if at the end of Crystal Imports' first year of operations,Assets are $800,000 and Owners' Equity is $720,000?

A)The owner(s)must have invested $800,000 to start the business.
B)The business must be operating profitably.
C)Liabilities are $80,000.
D)Liabilities are $1,520,000.

Question 63

A transaction caused a $60,000 increase in both assets and total liabilities.This transaction could have been which of the following?

A)Purchase for office equipment for $60,000 cash.
B)Purchase of office equipment for $120,000,paying $60,000 cash and issuing a note payable for the balance.
C)Repayment of a $60,000 bank loan.
D)Investment of $60,000 cash in the business by the owner.

Question 64

A revenue transaction will result in all of the following except:

A)An increase in assets.
B)An increase in owners' equity.
C)A positive cash flow in either the past,present,or future.
D)An increase in liabilities.

Question 65

A balance sheet:

A)Provides owners,investors,and other interested parties with all the financial information they need to evaluate the financial strength,profitability,and future prospects of a given business entity.
B)Shows the current market value of the owners' equity in the business at the balance sheet date.
C)Assists creditors in evaluating the debt-paying ability of a business by showing the assets and liabilities of the business combined with those of its owner (or owners).
D)Shows the assets,liabilities,and owners' equity of a business entity,valued in conformity with generally accepted accounting principles.

Question 66

Capital stock represents:

A)The amount invested in the business by stockholders when shares of stock were initially issued by a corporation.
B)The owners' equity for a business organized as a corporation.
C)The owners' equity accumulated through profitable operations that have not been paid out as dividends.
D)The price paid by the current owners to acquire shares of stock in the corporation,regardless of whether they bought the shares directly from the corporation or from another stockholder.

Question 67

If during the current year,liabilities of Corbett's Store increased by $220,000 and owners' equity increased by $160,000,then:

A)Assets at the end of the year total $380,000.
B)Assets at the end of the year total $60,000.
C)Assets increased during the year by $380,000.
D)Assets decreased during the year by $60,000.

Question 68

During the current year,the assets of Wheatley's increased by $362,000,and the liabilities increased by $260,000.The owners' equity in the business must have:

A)Decreased by $102,000.
B)Decreased by $622,000.
C)Increased by $102,000.
D)Increased by $622,000.

Question 69

During the current year,the assets of Quality Stairs increased by $175,000 and the liabilities decreased by $15,000.If the owners' equity in the business is $475,000 at the end of the year,the owners' equity at the beginning of the year must have been:

A)$335,000.
B)$285,000.
C)$665,000.
D)$615,000.

Question 70

At the end of the current year,the owners' equity in Durante Co.is $360,000.During the year,the assets of the business had increased by $68,000 and the liabilities had increased by $118,000.Owners' equity at the beginning of the year must have been:

A)$410,000.
B)$310,000.
C)$546,000.
D)$174,000.

Question 71

An expense is best defined as:

A)Any payment of cash for the benefit of the company.
B)Past,present,or future payments of cash required to generate revenues.
C)Past payments of cash required to generate revenues.
D)Future payments of cash required to generate revenues.

Question 72

If a company has a profit:

A)Assets will be equal to liabilities plus owners' equity.
B)Assets will be less than liabilities plus owners' equity.
C)Assets will be greater than liabilities plus owners' equity.
D)Owners' equity will be greater than its assets.

Question 73

If a company purchases equipment for $65,000 by issuing a note payable:

A)Total assets will increase by $65,000.
B)Total assets will decrease by $65,000.
C)Total assets will remain the same.
D)The company's total owners' equity will decrease.

Question 74

The total liabilities of Hogan's Company on the balance sheet are $270,000; this amount is equal to three-fourths of the total assets.What is the amount of owners' equity?

A)$202,500.
B)$90,000.
C)$360,000.
D)$630,000.

Question 75

If during the current year,liabilities of Hayden Travel decreased by $50,000 and owners' equity increased by $75,000,then:

A)Assets at the end of the year total $125,000.
B)Assets at the end of the year total $25,000.
C)Assets increased during the year by $25,000.
D)Assets decreased during the year by $125,000.

Question 76

Thirty percent of the total assets of Shanahan Corporation have been financed through borrowing.The total liabilities of the company are $600,000.What is the amount of owners' equity?

A)$180,000.
B)$2,000,000.
C)$1,400,000.
D)$2,600,000.

Question 77

If $9,600 cash and a $31,000 note payable are given in exchange for some office machines to be used in a business:

A)Total assets are increased.
B)Total liabilities are decreased.
C)Total assets are decreased.
D)The owners' equity is increased.

Question 78

The balance sheet item that represents the portion of owners' equity resulting from profitable operations of the business is:

A)Accounts receivable.
B)Cash.
C)Capital stock.
D)Retained earnings.

Question 79

Which of the following is correct if a company purchases equipment for $70,000 cash?

A)Total assets will increase by $70,000.
B)Total assets will decrease by $70,000.
C)Total assets will remain the same.
D)The company's total owners' equity will decrease.

Question 80

At the end of the current year,the owners' equity in Barclay Bakery is $246,000.During the year,the assets of the business had increased by $120,000 and the liabilities had increased by $72,000.Owners' equity at the beginning of the year must have been:

A)$198,000.
B)$174,000.
C)$284,000.
D)$438,000.