Question 1

Shareholders' equity

Accepted Answer

Shareholders' equity includes both retained earnings (which is an accumulation of past profits that were not paid out as dividends) and contributed capital (which is the money that shareholders have invested in the company). It is not equal to liabilities, cash on hand, or shown on the income statement.

Question 2

Collection of a $600 accounts receivable

Accepted Answer

Collecting accounts receivable increases cash (an asset) and decreases accounts receivable (another asset) by the same amount, resulting in no net effect on total assets.

Question 3

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

Accepted Answer

Acquiring financing is the first step in starting a new business, as it provides the necessary funds to acquire assets and generate positive cash flow.

Question 4

A T account is

Accepted Answer

A T account is a way of depicting the basic form of an account where the left-hand side is the debit side and the right-hand side is the credit side. It is not an actual account form used in real accounting systems or a special account used instead of a trial balance or journal.

Question 5

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

Accepted Answer

The separate-entity assumption holds that the business activities of a corporation are separate from the activities of its owners and other businesses. Imperial Oil Limited and Petro Canada Corporation are two separate entities, and this assumption allows for the distinction between their activities.

Question 6

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?

Accepted Answer

The net use of cash for investing activities ($1.2 million) exceeds the net source of cash from financing activities ($0.8 million) by $0.4 million, resulting in a decrease in the cash balance by $0.4 million.

Question 7

The continuity assumption is inappropriate when

Accepted Answer

The continuity assumption assumes that the business will continue to operate in the foreseeable future. If liquidation appears likely, then the continuity assumption is no longer appropriate.

Question 8

In the first month of operations, the total of the debit entries to the cash account amounted to $1,900 and the total of the credit entries to the cash account amounted to $1,500. The cash account has a

Accepted Answer

The cash account balance is calculated by subtracting the total credits from the total debits: $1,900 (debits) - $1,500 (credits) = $400 debit balance.

Question 9

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

Accepted Answer

The answer of Which of the following transactions will cause...

Question 10

Which of the following defines shareholders' equity?

Accepted Answer

Shareholders' equity is the portion of a company's assets that is attributable to its owners, either through direct investment or retained earnings. It represents the financing provided by the owners of the business as well as the earnings generated by the operations of the business. Options A, B, and D do not accurately describe shareholders' equity.

Question 11

On a classified balance sheet, prepaid expenses are classified as

Accepted Answer

Prepaid expenses are payments made in advance for goods or services that will be received in the future. Since they will be used or consumed within a year, they are classified as a current asset on the balance sheet.

Question 12

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.

Accepted Answer

The answer of Salida Company paid a note payable of...

Question 13

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?

Accepted Answer

According to the accounting equation, Assets = Liabilities + Shareholders' Equity. If liabilities increase by $25,000 and equity increases by $5,000, then assets must increase by $30,000 to keep the equation balanced.

Question 14

Which of the following defines liabilities?

Accepted Answer

Liabilities are defined as probable debts or obligations of an entity that arise from past transactions or events, which will be settled through the transfer of assets or services.

Question 15

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?

Accepted Answer

The separate-entity assumption states that the business is separate from its owner(s), and therefore assets and liabilities should be recorded separately. Since the new automobile was purchased for personal use, it is not considered an asset of the business and should not be recorded as such.

Question 16

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

Accepted Answer

A retailer is least likely to have deferred revenue because they typically recognize revenue at the point of sale, rather than receiving payment in advance for future services or goods.

Question 17

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

Accepted Answer

Collecting a trade receivable from a customer increases cash and decreases accounts receivable, both of which are asset accounts, and does not affect liabilities.

Question 18

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

Accepted Answer

Unearned revenues are liabilities that represent advance payments received from customers for goods or services yet to be provided. These liabilities are satisfied by the delivery of goods or services rather than by payment of cash. Taxes payable, trade payables, and short-term borrowings are liabilities that are usually satisfied by payment of cash.

Question 19

The main objective of financial reporting is to:

Accepted Answer

The main objective of financial reporting is to provide information that is useful to individuals making investment and credit decisions. While financial information may also be used by a company's managers and for comparing performance with competitors, the primary purpose of financial reporting is to assist users in making informed decisions regarding investments and credit. It is not possible to meet the needs of all potential users, as different users may have different information needs.

Question 20

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

Accepted Answer

Changes in shareholders' equity caused by operating activities are reported in the retained earnings account. This account shows the cumulative profits and losses of a company that have not been distributed to shareholders in the form of dividends.

Quiz 2: Investing and Financing Decisions and the Accounting System