Question 1

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

Accepted Answer

This is a fundamental accounting equation known as the balance sheet equation. It states that the total assets of a company must always equal the sum of its total liabilities and total owners' equity. This principle is important for ensuring accurate financial statements and understanding a company's financial health.

Question 2

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

Accepted Answer

Liabilities are usually listed in order of maturity, not magnitude. The most immediate liabilities are listed first, followed by those that are due later.

Question 3

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

Accepted Answer

The accounting equation is commonly expressed as Assets = Liabilities + Equity or Assets - Liabilities = Equity.

Question 4

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

Accepted Answer

When a company purchases equipment by issuing a note payable, its total assets will increase by the value of the equipment, but its liabilities will also increase by the value of the note payable. Therefore, there is a net increase in total assets and liabilities, and the company's balance sheet will change.

Question 5

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

Accepted Answer

The purchase of an asset with cash affects the asset side of the balance sheet by decreasing cash and increasing another asset (office equipment), but it does not directly affect the owners' equity.

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.

Accepted Answer

This statement is true. The use of cost on the balance sheet provides more objective evidence for the value of assets, as it can be supported by invoices and other documentation. Market value can fluctuate based on multiple factors and may not provide a reliable indication of an asset's true value.

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.

Accepted Answer

The entity principle, also known as the business entity concept, is a fundamental accounting principle that separates the financial affairs of a business from those of its owners. This means that the personal transactions of the owners should be kept separate from the financial transactions of the business entity.

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.

Accepted Answer

Notes payable do have interest, while accounts payable do not.

Question 9

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

Accepted Answer

Purchasing equipment with cash decreases the cash account while increasing the equipment account, leaving total assets unchanged.

Question 10

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 11

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

Accepted Answer

The accounting equation is Assets = Liabilities + Equity, and the balance sheet is a financial statement that reflects this equation by showing a company's assets, liabilities, and equity at a specific point in time. Therefore, the statement is 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.

Accepted Answer

This is true as every transaction in accounting must follow the double-entry system where one account is debited and another account is credited. Therefore, an increase in one asset account may require a corresponding decrease in another asset account, an increase in a liability account, 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.

Accepted Answer

This is known as the principle of separate legal entity, which means that a business has a legal existence and liability that is distinct from its owners.

Question 14

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

Accepted Answer

The payment of a liability does not increase owners' equity. Owners' equity is only increased by contributions by the owner or by earning profits through business operations.

Question 15

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

Accepted Answer

The sale of additional shares of capital stock does not affect retained earnings. Retained earnings are the accumulated profits of a company that are not distributed as dividends. When new shares of stock are sold, the company receives additional funds that can be used to reinvest in the business or pay off debt, but this does not impact the amount of earnings that have already been retained by the company.

Question 16

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

Accepted Answer

Assets can also include intangible things such as patents, trademarks, copyrights, or goodwill.

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.

Accepted Answer

When a business borrows money from a bank, the immediate effect is an increase in total assets (cash or loan receivable) and an increase in liabilities (loan payable), with no initial change to owners' equity.

Question 18

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

Accepted Answer

The going concern principle is the assumption that a business will continue its operations indefinitely and will not be forced to halt operations due to bankruptcy or other reasons.

Question 19

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 20

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

Accepted Answer

Any significant 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, while the income statement reports a company's revenues, expenses, and net income over a period of time.

Quiz 2: Basic Financial Statements