Deck 2: Basic Financial Statements

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

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 8

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 9

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

Question 10

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

Question 11

The balance sheet shows assets,liabilities,and equity,as an extension of the accounting equation.

Question 12

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 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

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

Question 15

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

Question 16

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

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

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

Question 19

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

Question 20

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

Question 21

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 22

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 23

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

Question 24

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 25

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

A)Owners' equity is always the first section listed because it is the most important to external users.
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 26

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

Question 27

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

Question 28

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 29

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 30

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 operating results for a period of time.
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 31

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 32

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

Question 33

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

Question 34

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

Question 35

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 36

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 37

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 38

A net profit results from having more revenues than liabilities.

Question 39

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 40

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 41

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 42

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 43

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 44

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 45

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 46

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 47

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 48

Eton Corporation purchased land in 1998 for $190,000.In 2018,it purchased a nearly identical parcel of land for $430,000.In its 2018 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 49

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 50

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 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

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 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

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 55

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 56

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 57

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 58

On the statement of financial position,how are assets and liabilities normally presented?

A)Assets are presented in their order of permanence;liabilities are presented in the order in which they become due.
B)Assets are presented in the order in which they become due;liabilities are presented in their order of permanence.
C)Assets are presented in order of profitability;liabilities are presented in order of liquidity.
D)Assets are presented in order of liquidity;liabilities are presented in order of profitability.

Question 59

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 60

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 61

If Cash at December 31,2018,is $86,000,Capital Stock is:

A)$260,000.
B)$300,000.
C)$620,000.
D)$168,000.

Question 62

If Cash at December 31,2018,is $66,000,total assets amounts to:

A)$606,000.
B)$806,000.
C)$662,000.
D)$646,000.

Question 63

If Retained Earnings at December 31,2018,is $140,000,total assets amounts to:

A)$ 98,000.
B)$377,000.
C)$475,000.
D)$188,000.

Question 64

Retained earnings appears on:

A)The income statement.
B)The balance sheet.
C)The statement of cash flows.
D)All three of the financial statements.

Question 65

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 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 Retained Earnings at December 31,2018,is $100,000,Equipment is carried in Hercules Manufacturing,Inc.accounting records at:

A)$ 42,000.
B)$ 58,000.
C)$ 43,500.
D)$345,000.

Question 68

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)Total owners' equity will decrease.

Question 69

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 70

If the Notes Payable is $10,000,the December 31,2018 cash balance is:

A)$ 60,000.
B)$160,000.
C)$ 30,000.
D)$ 20,000.

Question 71

Assume that the Equipment shown above was acquired by the business five years ago and has a book value of $156,000,but has a current appraised value of $200,000.Hercules Manufacturing's Retained Earnings at December 31,2018,amounts to:

A)$533,000.
B)$345,000.
C)$198,000.
D)$356,000.

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 total assets of Hercules Manufacturing,Inc.are $556,000,Retained Earnings at December 31,2018,must be:

A)$811,000.
B)$180,000.
C)$221,000.
D)$335,000.

Question 74

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)Total owners' equity will decrease.

Question 75

If total assets of Hercules Manufacturing,Inc.are $556,000,Equipment is carried in Hercules Manufacturing accounting records at:

A)$377,000.
B)$179,000.
C)$150,000.
D)$ 90,000.

Question 76

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 77

If Capital Stock is $260,000,what is the December 31,2018 cash balance?

A)$86,000.
B)$94,000.
C)$46,000.
D)$686,000.

Question 78

If Cash at December 31,2018,is $26,000,total owners' equity is:

A)$160,000.
B)$366,000.
C)$606,000.
D)$400,000.

Question 79

If Capital Stock is $320,000,total assets of Braun Corporation at December 31,2018,amounts to:

A)$686,000.
B)$926,000.
C)$726,000.
D)$106,000.

Question 80

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,plus the assets and liabilities 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.