1) Which of the following groups has the primary responsibility for establishing generally accepted accounting principles for business entities in the United States?
A) Securities and Exchange Commission
B) U.S. Congress
C) International Accounting Standards Board
D) Financial Accounting Standards Board
Answer: D
Explanation: The Financial Accounting Standards Board is a privately funded group charged with establishing accounting standards for the U.S. It is not a branch of the U.S. government.
Difficulty: 1 Easy
Topic: Role of Accounting In Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Legal
2) The Heritage Company is a manufacturer of office furniture. Which term best describes Heritage's role in society?
A) Conversion agent
B) Regulatory agency
C) Consumer
D) Resource owner
Answer: A
Explanation: Businesses serve as conversion agents in the marketplace, transforming basic resources provided by resource owners into goods and services that consumers demand. Regulatory agencies set policies that affect the way that businesses operate.
Difficulty: 2 Medium
Topic: Role of Accounting In Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Industry
3) Which resource providers lend financial resources to a business with the expectation of repayment with interest?
A) Consumers
B) Creditors
C) Investors
D) Owners
Answer: B
Explanation: Businesses borrow money from creditors, and repay the amount borrowed, plus an additional fee known as interest. Investors, in contrast, provide financial resources in exchange for ownership interest in the business. Consumers demand goods and services from businesses.
Difficulty: 1 Easy
Topic: Role of Accounting In Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
4) Which type of accounting information is intended to satisfy the needs of external users of accounting information?
A) Cost accounting
B) Managerial accounting
C) Tax accounting
D) Financial accounting
Answer: D
Explanation: Financial accounting is intended to satisfy the needs of external users of accounting information. Managerial accounting, including cost accounting, is intended for the needs of internal users, or managers, of a business. Tax accounting is specifically intended for tax regulatory agencies.
Difficulty: 1 Easy
Topic: Role of Accounting In Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
5) Which of the following statements is false regarding managerial accounting information?
A) It is often used by investors.
B) It is more detailed than financial accounting information.
C) It can include nonfinancial information.
D) It focuses on divisional rather than overall profitability.
Answer: A
Explanation: Managerial accounting provides information primarily for internal users, or managers, of businesses. Managers require more detailed information about a business than do external users, and sometimes that information is nonfinancial in nature. Managerial accounting information focuses on divisional rather than overall profitability and is not typically made available to external users, such as investors.
Difficulty: 2 Medium
Topic: Role of Accounting In Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Industry
6) Financial accounting standards are known collectively as GAAP. What does that acronym stand for?
A) Generally Accepted Accounting Principles
B) Generally Applied Accounting Procedures
C) Governmentally Approved Accounting Practices
D) Generally Authorized Auditing Principles
Answer: A
Explanation: Generally Accepted Accounting Principles are established by the Financial Accounting Standards Board.
Difficulty: 1 Easy
Topic: Role of Accounting In Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
7) International accounting standards are formulated by the IASB. What does that acronym stand for?
A) Internationally Accepted Standards Board
B) International Accounting Standards Board
C) International Accountability Standards Bureau
D) International Accounting and Sustainability Board
Answer: B
Explanation: The International Accounting Standards Board establishes accounting standards for most countries outside of the U.S.
Difficulty: 1 Easy
Topic: Role of Accounting In Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement; BB Global
8) Which of the following is an example of revenue?
A) Cash received as a result of a bank loan
B) Cash received from investors from the sale of common stock
C) Cash received from customers at the time services were provided
D) Cash received from the sale of land for its original selling price
Answer: C
Explanation: Cash received from providing services to customers is an example of revenue, and is an asset source transaction. Cash received from the result of a bank loan results in a liability, notes payable. Cash investments made by owners increase the stockholders' equity account common stock. Cash received from the sale of land for its original selling price is an asset exchange transaction that decreases one asset, land, and increases another asset, cash.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
9) Which of the following is not an element of the financial statements?
A) Net income
B) Revenue
C) Assets
D) Cash
Answer: D
Explanation: Cash is not an element of the financial statements. It is an account that is part of the element assets.
Difficulty: 2 Medium
Topic: Elements of Financial Statements
Learning Objective: 01-03 Identify the components of the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
10) Algonquin Company reported assets of $50,000, liabilities of $22,000 and common stock of $15,000. Based on this information only, what is the amount of the company's retained earnings?
A) $7,000.
B) $57,000.
C) $13,000.
D) $87,000.
Answer: C
Explanation: Assets = Liabilities + Equity; Equity includes common stock and retained earnings. $50,000 = $22,000 + $15,000 + Retained earnings; Retained earnings = $13,000
Difficulty: 3 Hard
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
11) Stosch Company's balance sheet reported assets of $40,000, liabilities of $15,000 and common stock of $12,000 as of December 31, Year 1. Retained earnings on the December 31, Year 2 balance sheet is $18,000 and Stosch paid a $14,000 dividend during Year 2. What is the amount of net income for Year 2?
A) $17,000
B) $19,000
C) $13,000
D) $21,000
Answer: B
Explanation: If assets on December 31, Year 1 totaled $40,000, total claims (including liabilities, common stock, and retained earnings) on that date must have also been $40,000. If liabilities were $15,000 and common stock was $12,000, retained earnings on December 31, Year 1 must have been $13,000. At the end of Year 2, the company reported $18,000 in retained earnings, a $5,000 increase. During Year 2, Stosch paid a $14,000 cash dividend, which reduced retained earnings. Therefore, Year 2 net income must have been $5,000 greater than the dividend paid. $14,000 + $5,000 = $19,000.
Difficulty: 3 Hard
Topic: Role of Accounting In Society
Learning Objective: 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
12) Hazeltine Company issued common stock for $200,000 cash. What happened as a result of this event?
A) Assets increased.
B) Equity increased.
C) Claims increased.
D) Assets, claims, and equity all increased.
Answer: D
Explanation: Issuing common stock increases both assets (cash) and equity (common stock). Equity and liabilities collectively make up claims in the accounting equation.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
13) Ballard Company reported assets of $500 and liabilities of $200. What amount will Ballard's report for stockholders' equity?
A) $300
B) $500
C) $700
D) Cannot be determined
Answer: A
Explanation: In the accounting equation, assets equal claims (liabilities + equity). If assets are $500, total claims must also be $500. Therefore, stockholders' equity must be $500 − $200, or $300.
Difficulty: 1 Easy
Topic: Elements of Financial Statements
Learning Objective: 01-03 Identify the components of the accounting equation.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
14) A company's total assets increased during the period while its liabilities and common stock were unchanged. No dividends were declared or paid during the period. Which of the following would explain this situation?
A) Revenues were greater than expenses during the period.
B) Retained earnings were less than net income during the period.
C) No dividends were paid during the period.
D) The company must have purchased assets with cash during the period.
Answer: A
Explanation: Assets = Liabilities + Stockholders' equity
Assets = Liabilities + Common stock + Retained earnings
If a company's total assets increased while liabilities and common stock were unchanged, retained earnings must have increased. In order for retained earnings to increase, the company must have reported net income. In other words, its revenues must have been greater than its expenses.
Difficulty: 3 Hard
Topic: Elements of Financial Statements
Learning Objective: 01-03 Identify the components of the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
15) Li Company paid cash to purchase land. What happened as a result of this business event?
A) Total assets decreased.
B) Total assets were unaffected.
C) Total equity decreased.
D) Both assets and total equity decreased.
Answer: B
Explanation: Paying cash for land is an asset exchange transaction that increases one asset (land) and decreases another asset (cash). The result is no overall change in total assets.
Difficulty: 1 Easy
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
16) Turner Company reported assets of $20,000 (including cash of $9,000), liabilities of $8,000, common stock of $7,000, and retained earnings of $5,000. Based on this information, what can be concluded?
A) 25% of Turner's assets are the result of prior earnings.
B) $5,000 is the maximum dividend that can be paid to shareholders.
C) 40% of Turner's assets are the result of borrowing from creditors.
D) 25% of Turner's assets are from prior earnings, $5,000 is the maximum possible dividend, and 40% of assets are the result of borrowed resources.
Answer: D
Explanation: Retained earnings of $5,000 is equal to 25% of the company's assets, indicating that 25% of Turner's assets are from prior earnings. $8,000, or 40%, of Turner's assets are liabilities, indicating that those assets are the result of borrowed resources. A company can pay out no more in dividends than it has in its Retained Earnings account.
Difficulty: 3 Hard
Topic: Interpreting Information Shown in the Accounting Equation
Learning Objective: 01-05 Interpret information shown in an accounting equation.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
17) At the time of liquidation, Fairchild Company reported assets of $200,000, liabilities of $120,000, common stock of $70,000 and retained earnings of $10,000). What is the maximum amount of Fairchild's assets that the shareholders are entitled to receive?
A) $200,000
B) $80,000
C) $90,000
D) $100,000
Answer: B
Explanation: Creditors receive first priority in asset distribution during a business liquidation. Therefore, creditors would collect the $120,000 owed to them, leaving the shareholders with the remaining $80,000 ($70,000 common stock + $10,000 retained earnings).
Difficulty: 2 Medium
Topic: Interpreting Information Shown in the Accounting Equation
Learning Objective: 01-05 Interpret information shown in an accounting equation.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
18) As of December 31, Year 2, Bristol Company had $100,000 of assets, $40,000 of liabilities and $25,000 of retained earnings. What percentage of Bristol's assets were obtained through investors?
A) 60%
B) 25%
C) 40%
D) 35%
Answer: D
Explanation: If assets total $100,000, claims must also total $100,000. Claims include liabilities, common stock and retained earnings. Because liabilities and retained earnings equal $65,000, common stock must be $35,000. The common stock account represents the assets that were obtained through investors. $35,000 is 35% of $100,000.
Difficulty: 2 Medium
Topic: Interpreting Information Shown in the Accounting Equation
Learning Objective: 01-05 Interpret information shown in an accounting equation.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
19) On January 1, Year 2, Chavez Company had beginning balances as follows: total assets of $12,500, total liabilities of $4,500, and common stock of $3,000. During Year 2, Chavez paid dividends to its stockholders of $2,000. Given that retained earnings amounted to $6,000 at the end of Year 2, what was Chavez's net income for Year 2?
A) $3,000
B) $5,000
C) $7,000
D) $2,000
Answer: A
Explanation: On January 1, Year 2:
Assets = Liabilities + Common Stock + Retained Earnings
$12,500 = $4,500 + $3,000 + Retained Earnings
Retained Earnings = $5,000
During Year 2:
Beginning retained earnings + Net income − Dividends = Ending retained earnings
$5,000 + Net Income − $2,000 = $6,000
Net Income = $3,000
Difficulty: 3 Hard
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
20) When a business provides services for cash, which elements of the accounting equation are affected?
A) Revenue and Expense
B) Cash and Revenue
C) Cash and Expense
D) Cash and Dividends
Answer: B
Explanation: Providing services for cash increases a company's assets (cash) and equity (revenue, which closes to retained earnings).
Difficulty: 1 Easy
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
21) During Year 2, Millstone Company provided $6,500 of services for cash, paid cash dividends of $1,000 to owners, and paid $4,000 cash for expenses. Liabilities were unchanged. Which of the following statements accurately describes the effect of these events on the elements of the company's financial statements?
A) Assets increased by $6,500.
B) Assets increased by $1,500.
C) Equity increased by $2,500.
D) Assets increased by $5,500.
Answer: B
Explanation: Cash, an asset, increased by $1,500 (calculated as receipts of $6,500 − payment of $1,000 − payment of $4,000). Equity also increased by $1,500 (calculated as revenue of $6,500 − dividends of $1,000 − expenses of $4,000).
Difficulty: 3 Hard
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
22) At the end of Year 2, retained earnings for the Baker Company was $3,500. Revenue earned by the company in Year 2 was $1,500, expenses paid during the period were $800, and dividends paid during the period were $500. Based on this information alone, what was the amount of retained earnings at the beginning of Year 2?
A) $3,300
B) $3,700
C) $2,800
D) $3,800
Answer: A
Explanation: Beginning Retained Earnings + Revenue - Expenses - Dividends = Ending Retained Earnings
Beginning Retained Earnings + $1,500 - $800 - $500 = $3,500
Beginning Retained Earnings = $3,300
Difficulty: 3 Hard
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
23) Which of the following is not an example of an asset use transaction?
A) Paying cash dividends
B) Paying cash expenses
C) Paying off the principal of a loan
D) Paying cash to purchase land
Answer: D
Explanation: Paying cash to purchase land is an asset exchange transaction.
Difficulty: 1 Easy
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
24) Borrowing cash from the bank is an example of which type of transaction?
A) Asset source
B) Claims exchange
C) Asset use
D) Asset exchange
Answer: A
Explanation: Borrowing cash is an asset source transaction that increases a business's assets (cash) and increases its liabilities (notes payable).
Difficulty: 1 Easy
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
25) Which of the following could describe the effects of an asset exchange transaction on the elements of a company's financial statements?
| Assets | = | Liab. | + | Equity | Rev. | - | Exp. | = | Net Inc. | Stmt of
Cash Flows |
A. | NA | = | NA | + | NA | NA | - | NA | = | NA | +OA |
B. | + | = | NA | + | + | NA | - | NA | = | NA | +FA |
C. | - | = | NA | + | - | NA | - | NA | = | NA | NA |
D. | + | = | + | + | NA | NA | - | NA | = | NA | +FA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: A
Explanation: An asset exchange transaction is one that increases one asset account and decreases another, resulting in no net change in assets. There are no changes to the company's liabilities and equity either. If one of the asset accounts affected is cash, there will be an effect on cash flows.
Difficulty: 1 Easy
Topic: The Horizontal Financial Statements Model; Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.; 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
26) Which of the following does not describe the effects of an asset use transaction on the elements of a company's financial statements?
| Assets | = | Liab. | + | Equity | Rev. | - | Exp. | = | Net Inc. | Stmt of
Cash Flows |
A. | - | = | - | + | NA | NA | - | NA | = | NA | -OA |
B. | - | = | - | + | NA | NA | - | NA | = | NA | -FA |
C. | - | = | NA | + | - | NA | - | + | = | - | -OA |
D. | NA | = | + | + | NA | + | - | + | = | - | NA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: D
Explanation: Asset use transactions decrease the total amount of assets and the total amount of claims.
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model; Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.; 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
27) Which of the following cash transactions would not affect total assets?
A) Borrowing cash from a bank
B) Issuing common stock for cash
C) Purchasing land for cash
D) Providing services for cash
Answer: C
Explanation: Purchasing land for cash is an asset exchange transaction that does not affect total assets. Issuing stock to owners is an asset source transaction that increases assets. Borrowing cash from a bank is an asset source transaction that increases assets. Expense transactions do not increase assets.
Difficulty: 1 Easy
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
28) Which of the following appears in the investing activities section of the statement of cash flows?
A) Cash inflow from interest revenue
B) Cash inflow from the issuance of common stock
C) Cash outflow for the payment of dividends
D) Cash outflow for the purchase of land
Answer: D
Explanation: Purchasing land (a long-lived asset) for cash is an investing activity. Issuing common stock and paying dividends are both financing activities. Cash inflow from interest revenue is an operating activity.
Difficulty: 2 Medium
Topic: Preparing a Statement of Cash Flows
Learning Objective: 01-08 Prepare a statement of cash flows.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
29) Jackson Company had a net increase in cash from operating activities of $10,000 and a net decrease in cash from financing activities of $2,000. If the beginning and ending cash balances for the company were $4,000 and $11,000, what was the net cash change from investing activities?
A) An outflow or decrease of $1,000
B) An inflow or increase of $2,000
C) An inflow or increase of $1,000
D) Zero
Answer: A
Explanation: Beginning cash balance + Increase from operating activities − Decrease from financing activities +/− Increase or decrease from investing activities = Ending cash balance
$4,000 + $10,000 − $2,000 +/− Increase or decrease from investing activities = $11,000
$1,000 = Decrease from investing activities
Difficulty: 3 Hard
Topic: Preparing a Statement of Cash Flows
Learning Objective: 01-08 Prepare a statement of cash flows.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
[The following information applies to the questions displayed below.]
The financial statements of Calloway Company prepared at the end of the current year contained the following elements and corresponding amounts: Assets = $50,000; Liabilities = ?; Common Stock = $15,000; Revenue = $22,000; Dividends = $1,500; Beginning Retained Earnings = $3,500; Ending Retained Earnings = $7,500.
30) Based on this information, what was the amount of expenses reported on Calloway's income statement for the current year?
A) $18,500
B) $13,000
C) $16,500
D) $10,000
Answer: C
Explanation: Beginning retained earnings + Revenue − Expenses − Dividends = Ending retained earnings
$3,500 + $22,000 − Expenses − $1,500 = $7,500
Expenses = $16,500
Difficulty: 3 Hard
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
31) What was the amount of total liabilities reported on the balance sheet as of the end of the current year?
A) $27,500
B) $31,500
C) $35,000
D) $42,500
Answer: A
Explanation: Assets = Liabilities + Common Stock + Ending Retained Earnings
$50,000 = Liabilities + $15,000 + $7,500
Liabilities = $27,500
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
32) Which of the following financial statements provides information about a company as of a specific point in time?
A) Income statement
B) Balance sheet
C) Statement of cash flows
D) Statement of changes in stockholders' equity
Answer: B
Explanation: The balance sheet provides information about a company as of a specific point in time, the other three statements provide information about a period of time such as a month, a quarter, or a year.
Difficulty: 1 Easy
Topic: Preparing an Income Statement, a Statement of Changes in Stockholders' Equity and a Balance Sheet
Learning Objective: 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
33) Which of the following is a (are) permanent account(s)?
A) The Retained Earnings account
B) All income statement accounts
C) The Dividend account
D) All balance sheet accounts and the Dividends account
Answer: A
Explanation: The balance sheet accounts are permanent accounts; they contain information carried forward from one accounting period to the next (that is, the ending account balance of one period becomes the beginning account balance of the next period). Temporary accounts are used to collect retained earnings data applicable to only the current accounting period (that is, revenue, expenses, and distributions). The Dividend account is a temporary account; it collects distributions during the current account period only.
Difficulty: 2 Medium
Topic: The Closing Process
Learning Objective: 01-09 Close revenue, expense, and dividend accounts.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
34) In which section of a statement of cash flows would the payment of cash dividends be reported?
A) Investing activities.
B) Operating activities.
C) Financing activities.
D) Dividends are not reported on the statement of cash flows.
Answer: C
Explanation: Paying cash dividends, and any cash exchanged between a company and its stockholders, is a financing activity.
Difficulty: 1 Easy
Topic: Preparing a Statement of Cash Flows
Learning Objective: 01-08 Prepare a statement of cash flows.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
35) Which financial statement matches asset increases from operating a business with asset decreases from operating the business?
A) Balance sheet
B) Statement of changes in equity
C) Income statement
D) Statement of cash flows
Answer: C
Explanation: The income statement matches asset increases from operations (revenues) with asset decreases from operations (expenses).
Difficulty: 2 Medium
Topic: Preparing an Income Statement, a Statement of Changes in Stockholders' Equity and a Balance Sheet
Learning Objective: 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
36) Chow Company earned $1,500 of cash revenue, paid $1,200 for cash expenses, and paid a $200 cash dividend to its owners. Which of the following statements is true?
A) The net cash inflow from operating activities was $100.
B) The net cash outflow for investing activities was $200.
C) The net cash inflow from operating activities was $300.
D) The net cash outflow for investing activities was $100.
Answer: C
Explanation: Cash revenue and cash expenses are operating activities. Paying dividends is a financing activity. $1,500 revenue − $1,200 expense = $300 cash inflow from operating activities.
Difficulty: 2 Medium
Topic: Preparing a Statement of Cash Flows
Learning Objective: 01-08 Prepare a statement of cash flows.
Bloom's: Understand
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
37) Yi Company provided services to a customer for $5,500 cash. Based on this information alone, which of the following statements is true?
A) Total assets increased and total equity decreased.
B) Total assets were unchanged.
C) Liabilities decreased and net income increased.
D) Total assets increased and net income increased.
Answer: D
Explanation: Providing services to a customer for cash increases assets and equity on the balance sheet. It also increases revenue, and therefore, net income on the income statement.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
38) During Year 2, Chico Company earned $1,950 of cash revenue, paid $1,600 of cash expenses, and paid a $150 cash dividend to its owners. Based on this information alone, which of the following statements is not true?
A) Net income amounted to $350.
B) Total assets increased by $200.
C) Cash inflow from operating activities was $350.
D) Cash inflow from operating activities was $200.
Answer: D
Explanation: Revenue minus expenses equal net income of $350 (calculated as $1,950 − $1,600). Total assets increased by $200 (calculated as $1,950 − $1,600 − $150). Cash from operating activities increased by $350 (calculated as $1,950 − $1,600).
Difficulty: 3 Hard
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
39) Glavine Company repaid a bank loan with cash. How should the cash flow from this event be shown on the horizontal statements model?
A) An operating activity that decreases cash, decreases equity, and decreases net income
B) A financing activity that decreases cash and decreases liabilities
C) A financing activity that decreases cash, decreases equity, and decreases net income
D) An investing activity that decreases cash and decreases liabilities
Answer: B
Explanation: Repaying a bank loan is a cash outflow for financing activities that decreases assets (cash) and decreases liabilities (notes payable).
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
40) Retained earnings at the beginning and ending of the accounting period were $300 and $800, respectively. Revenues of $1,100 and dividends paid to stockholders of $200 were reported during the period. What was the amount of expenses reported for the period?
A) $500
B) $400
C) $900
D) $700
Answer: B
Explanation: Beginning retained earnings + Revenues − Expenses − Dividends = Ending retained earnings
$300 + $1,100 − Expenses − $200 = $800
Expenses = $400
Difficulty: 3 Hard
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
[The following information applies to the questions displayed below.]
Yowell Company began operations on January 1, Year 1. During Year 1, the company engaged in the following cash transactions:
1) issued stock for $40,000
2) borrowed $25,000 from its bank
3) provided consulting services for $39,000
4) paid back $15,000 of the bank loan
5) paid rent expense for $9,000
6) purchased equipment costing $12,000
7) paid $3,000 dividends to stockholders
8) paid employees' salaries, $21,000
41) What is Yowell's net cash flow from operating activities?
A) Inflow of $6,000
B) Inflow of $9,000
C) Inflow of $18,000
D) Inflow of $30,000
Answer: B
Explanation: $39,000 inflow from consulting services − $9,000 outflow for rent expense − $21,000 outflow for salaries expense = $9,000 inflow
Difficulty: 2 Medium
Topic: Preparing a Statement of Cash Flows
Learning Objective: 01-08 Prepare a statement of cash flows.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
42) What is Yowell's ending notes payable balance?
A) $0
B) $25,000
C) ($15,000)
D) $10,000
Answer: D
Explanation: Beginning notes payable balance $0 + $25,000 loan − $15,000 repayment = $10,000 ending balance
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
43) What is Yowell's net income?
A) $9,000
B) $30,000
C) $18,000
D) $6,000
Answer: A
Explanation: $39,000 revenue − $9,000 rent expense − $21,000 salaries expense = $9,000 net income
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
[The following information applies to the questions displayed below.]
Packard Company engaged in the following transactions during Year 1, its first year of operations: (Assume all transactions are cash transactions.)
1) Acquired $950 cash from the issue of common stock.
2) Borrowed $420 from a bank.
3) Earned $650 of revenues.
4) Paid expenses of $250.
5) Paid a $50 dividend.
During Year 2, Packard engaged in the following transactions: (Assume all transactions are cash transactions.)
1) Issued an additional $325 of common stock.
2) Repaid $220 of its debt to the bank.
3) Earned revenues of $750.
4) Incurred expenses of $360.
5) Paid dividends of $100.
44) What is Packard Company's net cash flow from financing activities for Year 2?
A) $220 outflow
B) $320 outflow
C) $5 inflow
D) $225 inflow
Answer: C
Explanation: Net cash flow from financing activities = $325 inflow from stock − $220 outflow for loan repayment − $100 outflow for dividends = $5
Difficulty: 3 Hard
Topic: Preparing a Statement of Cash Flows
Learning Objective: 01-08 Prepare a statement of cash flows.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
45) What was the balance of Packard's Retained Earnings account before closing in Year 1?
A) $400
B) $0
C) $350
D) $450
Answer: B
Explanation: Retained Earnings in the first year of operations is zero until revenues, expenses and dividends are closed to retained earnings.
Difficulty: 2 Medium
Topic: The Closing Process
Learning Objective: 01-09 Close revenue, expense, and dividend accounts.
Bloom's: Understand
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
46) What is the amount of total stockholders' equity that will be reported on Packard's balance sheet at the end of Year 1?
A) $1,350
B) $900
C) $250
D) $1,300
Answer: D
Explanation: Stockholders' equity = Common stock + Retained earnings
At end of Year 1:
Stockholders' equity = $950 common stock issued + ($0 beg. balance + $650 revenue − $250 expenses − $50 dividend) = $1,300
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
47) What is the after-closing amount of retained earnings that will be reported on Packard's balance sheet at the end of Year 2? (Assume that closing entries have been passed).
A) $640
B) $800
C) $290
D) $740
Answer: A
Explanation: $350 beg. balance + $750 revenue − $360 expenses − $100 dividends = $640
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
48) What is the amount of assets that will be reported on Packard's balance sheet at the end of Year 2?
A) $2,115
B) $440
C) $2,215
D) $395
Answer: A
Explanation: $1,720 beg. balance + $325 − $220 + $750 − $360 − $100 = $2,115
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
49) What is the net cash inflow from operating activities that will be reported on Packard's statement of cash flows for Year 1?
A) $400
B) $650
C) $350
D) $820
Answer: A
Explanation: $650 inflow from revenue − $250 outflow for expenses = $400 inflow
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
50) Which of the following would be reported in the cash flow from financing activities section of a statement of cash flows?
A) Paid cash for dividends
B) Received cash for common stock
C) Sold land for cash
D) Paying cash for dividends and receiving cash from common stock
Answer: D
Explanation: Paying cash for dividends and receiving cash for common stock are financing activities. Selling land for cash is an investing activity.
Difficulty: 2 Medium
Topic: Preparing a Statement of Cash Flows
Learning Objective: 01-08 Prepare a statement of cash flows.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
51) Santa Fe Company was started on January 1, Year 1, when it acquired $9,000 cash by issuing common stock. During Year 1, the company earned cash revenues of $4,500, paid cash expenses of $3,750, and paid a cash dividend of $250. Which of the following is true based on this information?
A) The December 31, Year 1 balance sheet would show total equity of $8,750.
B) The Year 1 income statement would show net income of $500.
C) The Year 1 statement of cash flows would show net cash inflow from operating activities of $4,500.
D) The Year 1 statement of cash flows would show a net cash inflow from financing activities of $8,750.
Answer: D
Explanation: $9,000 cash inflow from issuing stock − $250 cash outflow for dividends = $8,750 net cash inflow from financing activities
Difficulty: 2 Medium
Topic: Preparing a Statement of Cash Flows
Learning Objective: 01-08 Prepare a statement of cash flows.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
52) Robertson Company paid $1,850 cash for rent expense. What happened as a result of this business event?
A) Total equity decreased.
B) Liabilities decreased.
C) The net cash flow from operating activities decreased.
D) Both total equity and net cash flow for operating activities decreased.
Answer: D
Explanation: Paying cash for rent expense decreases assets (cash) and decreases equity (expense decreases retained earnings). Liabilities are not affected. It is reported as a cash outflow for operating activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-08 Prepare a statement of cash flows.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
53) Mayberry Company paid $30,000 cash to purchase land. What happened as a result of this business event?
A) Total equity was not affected.
B) The net cash flow from investing activities decreased.
C) Total assets were not affected.
D) Total assets and total equity were not affected, and net cash flow from investing activities decreased.
Answer: D
Explanation: Paying cash to purchase land is an asset exchange transaction that decreases one asset (cash) and increases another asset (land); therefore, there is no overall effect on total assets, total liabilities, or total equity. It is reported as a cash outflow for investing activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation; Preparing a Statement of Cash Flows
Learning Objective: 01-08 Prepare a statement of cash flows.; 01-04 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
[The following information applies to the questions displayed below.]
Lexington Company engaged in the following transactions during Year 1, its first year in operation: (Assume all transactions are cash transactions)
Acquired $6,000 cash from issuing common stock.
Borrowed $4,400 from a bank.
Earned $6,200 of revenues.
Incurred $4,800 in expenses.
Paid dividends of $800.
Lexington Company engaged in the following transactions during Year 2: (Assume all transactions are cash transactions)
Acquired an additional $1,000 cash from the issue of common stock.
Repaid $2,600 of its debt to the bank.
Earned revenues, $9,000.
Incurred expenses of $5,500.
Paid dividends of $1,280.
54) What was the net cash flow from financing activities reported on Lexington's statement of cash flows for Year 2?
A) $2,880 outflow
B) $2,880 inflow
C) $1,000 outflow
D) $1,000 inflow
Answer: A
Explanation: $1,000 cash inflow from issuing stock − $2,600 cash outflow for loan repayment − $1,280 cash outflow for dividends = $2,880 cash outflow for financing activities
Difficulty: 3 Hard
Topic: Preparing a Statement of Cash Flows
Learning Objective: 01-08 Prepare a statement of cash flows.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
55) What is the amount of total assets that will be reported on Lexington's balance sheet at the end of Year 1?
A) $11,000
B) $12,000
C) $1,600
D) $7,600
Answer: A
Explanation: $0 beginning balance + $6,000 (cash) + $4,400 (cash) + $6,200 (cash) − $4,800 (cash) − $800 (cash) = $11,000
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation; Preparing an Income Statement, a Statement of Changes in Stockholders' Equity and a Balance Sheet
Learning Objective: 01-04 Show how business events affect the accounting equation.; 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
56) What was the amount of retained earnings that will be reported on Lexington's balance sheet at the end of Year 1?
A) $6,200
B) $5,400
C) $1,400
D) $600
Answer: D
Explanation: $0 beginning balance + $6,200 revenue − $4,800 expense − $800 dividends = $600
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation; Preparing an Income Statement, a Statement of Changes in Stockholders' Equity and a Balance Sheet
Learning Objective: 01-04 Show how business events affect the accounting equation.; 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
57) What was the amount of liabilities on Lexington's balance sheet at the end of Year 2?
A) $1,000.
B) $1,800.
C) ($2,600).
D) $480.
Answer: B
Explanation: $4,400 beginning balance − $2,600 loan repayment = $1,800
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation; Preparing an Income Statement, a Statement of Changes in Stockholders' Equity and a Balance Sheet
Learning Objective: 01-04 Show how business events affect the accounting equation.; 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
58) As of December 31, Year 1, Mason Company had $500 cash. During Year 2, Mason earned $1,200 of cash revenue and paid $800 of cash expenses. What is the amount of cash that will be reported on the balance sheet at the end of Year 2?
A) $900
B) $400
C) $1,700
D) $2,500
Answer: A
Explanation: $500 beginning balance + $1,200 revenue − $800 expenses = $900
Difficulty: 1 Easy
Topic: Recording Business Events Under the Accounting Equation; Preparing an Income Statement, a Statement of Changes in Stockholders' Equity and a Balance Sheet
Learning Objective: 01-04 Show how business events affect the accounting equation.; 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
59) Expenses are reported on which of the following financial statement(s)?
A) Income statement
B) Balance sheet
C) Statement of changes in stockholders' equity
D) Income statement and statement of changes in stockholders' equity
Answer: A
Explanation: Expenses and revenues are reported on the income statement. Only permanent accounts are reported on the balance sheet. Net income is reported on the statement of stockholders' equity, but expenses are not.
Difficulty: 1 Easy
Topic: Preparing an Income Statement, a Statement of Changes in Stockholders' Equity and a Balance Sheet
Learning Objective: 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
60) Dividends paid by a company are reported on which of the following financial statement(s)?
A) Income statement
B) Statement of changes in stockholders' equity
C) Statement of cash flows
D) Statement of changes in stockholders' equity and statement of cash flows
Answer: D
Explanation: Although the dividends account is a temporary account, dividends are not included on the income statement. They are, however, reported as a deduction from retained earnings on the statement of changes in stockholders' equity and as a cash outflow for financing activities on the statement of cash flows.
Difficulty: 1 Easy
Topic: Preparing a Statement of Cash Flows; Preparing an Income Statement, a Statement of Changes in Stockholders' Equity and a Balance Sheet
Learning Objective: 01-08 Prepare a statement of cash flows.; 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
61) Liabilities are reported on which of the following financial statement(s)?
A) Income statement
B) Balance sheet
C) Statement of cash flows
D) Statement of changes in stockholders' equity
Answer: B
Explanation: Liabilities is an element on the balance sheet. As such, liabilities do not appear on the income statement, statement of cash flows, or the statement of changes in stockholders' equity.
Difficulty: 1 Easy
Topic: Preparing an Income Statement, a Statement of Changes in Stockholders' Equity and a Balance Sheet
Learning Objective: 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
62) Frank Company earned $15,000 of cash revenue. Which of the following accurately reflects how this event affects the company's financial statements?
| Assets | = | Liab. | + | Equity | Rev. | − | Exp. | = | Net Inc. | Stmt of
Cash Flows |
A. | 15,000 | = | NA | + | 15,000 | NA | − | NA | = | NA | 15,000 OA |
B. | 15,000 | = | NA | + | 15,000 | 15,000 | − | NA | = | 15,000 | NA |
C. | 15,000 | = | NA | + | 15,000 | 15,000 | − | NA | = | 15,000 | 15,000 OA |
D. | 15,000 | = | 15,000 | + | NA | 15,000 | − | NA | = | 15,000 | 15,000 OA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: C
Explanation: Earning cash revenue increases assets (cash) and equity (retained earnings) on the balance sheet. It increases both revenue and net income on the income statement and is reported as a cash inflow for operating activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
63) Jackson Company paid $500 cash for salary expenses. Which of the following accurately reflects how this event affects the company's financial statements?
| Assets | = | Liab. | + | Equity | Rev. | − | Exp. | = | Net Inc. | Stmt of
Cash Flows |
A. | NA | = | 500 | + | (500) | NA | − | 500 | = | (500) | NA |
B. | (500) | = | NA | + | (500) | NA | − | 500 | = | (500) | (500) OA |
C. | (500) | = | NA | + | (500) | NA | − | NA | = | NA | (500) OA |
D. | (500) | = | NA | + | (500) | NA | − | 500 | = | (500) | (500) IA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: B
Explanation: Paying cash for expenses decreases assets (cash) and decreases equity (retained earnings) on the balance sheet. It increases expenses which decreases net income on the income statement, and is reported as a cash outflow for operating activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
64) Perez Company paid a $300 cash dividend. Which of the following accurately reflects how this event affects the company's financial statements?
| Assets | = | Liab. | + | Equity | Rev. | − | Exp. | = | Net Inc. | Stmt of
Cash Flows |
A. | NA | = | 300 | + | (300) | NA | − | 300 | = | (300) | NA |
B. | (300) | = | NA | + | (300) | NA | − | 300 | = | (300) | (300) FA |
C. | (300) | = | NA | + | (300) | NA | − | NA | = | NA | (300) FA |
D. | (300) | = | NA | + | (300) | NA | − | NA | = | NA | (300) OA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: C
Explanation: Paying cash dividends decreases assets (cash) and decreases equity (retained earnings) on the balance sheet. It does not affect the income statement, but is reported as a cash outflow for financing activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
65) Garrison Company acquired $23,000 by issuing common stock. Which of the following accurately reflects how this event affects the company's financial statements?
| Assets | = | Liab. | + | Equity | Rev. | − | Exp. | = | Net Inc. | Stmt of
Cash Flows |
A. | 23,000 | = | NA | + | 23,000 | NA | − | NA | = | NA | 23,000 FA |
B. | 23,000 | = | NA | + | 23,000 | 23,000 | − | NA | = | 23,000 | 23,000 FA |
C. | 23,000 | = | 23,000 | + | NA | 23,000 | − | NA | = | NA | 23,000 FA |
D. | 23,000 | = | 23,000 | + | NA | 23,000 | − | NA | = | 23,000 | 23,000 OA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: A
Explanation: Issuing common stock increases assets (cash) and equity (common stock). It does not affect the income statement, but is reported as a cash inflow for financing activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
66) Tandem Company borrowed $32,000 of cash from a local bank. Which of the following accurately reflects how this event affects the company's financial statements?
| Assets | = | Liab. | + | Equity | Rev. | − | Exp. | = | Net Inc. | Stmt of
Cash Flows |
A. | 32,000 | = | 32,000 | + | NA | 32,000 | − | NA | = | 32,000 | 32,000 FA |
B. | 32,000 | = | NA | + | 32,000 | NA | − | NA | = | NA | 32,000 FA |
C. | 32,000 | = | NA | + | 32,000 | 32,000 | − | NA | = | 32,000 | 32,000 FA |
D. | 32,000 | = | 32,000 | + | NA | NA | − | NA | = | NA | 32,000 FA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: D
Explanation: Borrowing cash increases assets (cash) and increases liabilities (notes payable). It does not affect the income statement, but is reported as a cash inflow for financing activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
67) Zimmerman Company sold land for $25,000 cash. The original cost of the land was $25,000. Which of the following accurately reflects how this event affects the company's financial statements?
| Assets | = | Liab. | + | Equity | Rev. | − | Exp. | = | Net Inc. | Stmt of
Cash Flows |
A. | NA | = | NA | + | NA | NA | − | NA | = | NA | 25,000 IA |
B. | (25,000) | = | NA | + | (25,000) | NA | − | NA | = | NA | (25,000) IA |
C. | 25,000 | = | 25,000 | + | NA | NA | − | NA | = | NA | 25,000 FA |
D. | None of these. |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: A
Explanation: Selling land for cash increases one asset (cash) and decreases another asset (land), so it does not affect overall assets, liabilities or equity. It does not affect the income statement, but is reported as a cash inflow for investing activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
68) Which of the following could represent the effects of an asset source transaction on a company's financial statements?
| Assets | = | Liab. | + | Equity | Rev. | − | Exp. | = | Net Inc. | Stmt of
Cash Flows | |
A. | + | = | NA | + | + | NA | − | NA | = | NA | +OA | |
B. | + | = | + | + | NA | NA | − | + | = | − | +IA | |
C. | + | = | NA | + | + | + | − | NA | = | + | +OA | |
D. | None of these could represent the effects of an asset source transaction. |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: C
Explanation: An asset source transaction increases assets and can either increase liabilities (in the case of borrowing cash) or equity (in the case of issuing stock or earning revenue). It may or may not affect revenue and net income. If the asset that increases is cash, it is reported as a cash inflow on the statement of cash flows, and can be either an operating or a financing activity.
Difficulty: 3 Hard
Topic: The Horizontal Financial Statements Model; Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.; 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
69) Which of the following could represent the effects of an asset exchange transaction on a company's financial statements?
| Assets | = | Liab. | + | Equity | Rev. | − | Exp. | = | Net Inc. | Stmt of
Cash Flows | |
A. | NA | = | NA | + | NA | NA | − | NA | = | NA | −IA | |
B. | NA | = | + | + | NA | NA | − | + | = | + | NA | |
C. | − | = | NA | + | − | NA | − | NA | = | NA | −OA | |
D. | None of these could represent the effects of an asset exchange transaction. |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: A
Explanation: An asset exchange transaction increases one asset and decreases another, so it does not affect total assets, liabilities or equity. It does not affect the income statement, and can be reported as a cash inflow or outflow on the statement of cash flow as either an operating or an investing activity.
Difficulty: 3 Hard
Topic: The Horizontal Financial Statements Model; Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.; 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
70) Which of the following describes the effects of an asset use transaction on the elements of a company's financial statements?
| Assets | = | Liab. | + | Equity | Rev. | − | Exp. | = | Net Inc. | Stmt of
Cash Flows | |
A. | − | = | NA | + | − | NA | − | NA | = | NA | −FA | |
B. | − | = | − | + | NA | NA | − | + | = | − | −IA | |
C. | − | = | NA | + | − | - | − | NA | = | − | −OA | |
D. | None of these could represent the effects of an asset source transaction. |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: A
Explanation: An asset use transaction decreases assets and decreases either liabilities (in the case of repaying debt) or equity (in the case of paying dividends or expenses). It may or may not increase expenses and decrease net income. If the asset that decreased is cash, it will be reported as an outflow for financing or operating activities on the statement of cash flows.
Difficulty: 3 Hard
Topic: Recap: Types of Transactions; The Horizontal Financial Statements Model
Learning Objective: 01-04 Show how business events affect the accounting equation.; 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
71) Reynolds Company experienced an accounting event that affected its financial statements as indicated below:
Assets | = | Liab. | + | Equity | Rev. | − | Exp. | = | Net Inc. | Stmt of
Cash Flows |
+ | | NA | | + | + | | NA | | + | +OA |
Which of the following accounting events could have caused these effects on the elements of Reynolds' statements?
A) Paid a cash dividend.
B) Earned cash revenue.
C) Borrowed money from a bank.
D) The information provided does not represent a completed event.
Answer: B
Explanation: Earning cash revenue must have been the event that affected the financial statements as indicated because it increased revenue and net income on the income statement and was reported as a cash inflow for operating activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
72) Chico Company experienced an accounting event that affected its financial statements as indicated below:
Assets | = | Liab. | + | Equity | Rev. | − | Exp. | = | Net Inc. | Stmt of
Cash Flow |
+ | | NA | | + | NA | | NA | | NA | +FA |
Which of the following accounting events could have caused these effects on the elements of Chico's financial statements?
A) Issued common stock
B) Earned cash revenue
C) Borrowed money from a bank
D) Paid a cash dividend
Answer: A
Explanation: Issuing common stock would increase assets (cash) and increase equity (common stock). It would not affect net income, but would be reported as a cash inflow from financing activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
73) Delta Company experienced an accounting event that affected its financial statements as indicated below:
Asset | = | Liab. | + | Equity | Rev. | − | Exp | = | Net Inc. | Stmt of
Cash Flow |
− | | NA | | − | NA | | + | | − | +OA |
Which of the following accounting events could have caused these effects on the elements of Delta's statements?
A) Paid a cash dividend
B) Incurred a cash expense
C) Borrowed money from a bank
D) Earned cash revenue
Answer: B
Explanation: Incurring a cash expense would decrease assets (cash) and decrease equity (retained earnings). It would increase expenses and decrease net income, and would be reported as a cash outflow for operating activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
[The following information applies to the questions displayed below.]
Northern Corporation invested $800 cash in South Company stock.
74) Which of the following describes the effects of this transaction on the elements of Northern Corporation's books?
| Assets | = | Liab. | + | Equity | Rev. | − | Exp. | = | Net Inc. | Stmt of
Cash Flows |
A. | − | = | + | + | NA | NA | − | - | = | − | −IA |
B. | + | = | NA | + | + | NA | − | NA | = | NA | +FA |
C. | NA | = | NA | + | NA | + | − | NA | = | + | −FA |
D. | +/− | = | NA | + | NA | NA | − | NA | = | NA | −IA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: D
Explanation: Investing in another company's stock would be an asset exchange transaction that would increase one asset (investments) and decrease another asset (cash). Therefore, it would have no net impact on assets. It would not affect the income statement, but would be reported as a cash outflow for investing activities on the statement of cash flows.
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
75) What happened as a result of this transaction?
A) The balance in the Cash account on Northern's books decreased, while the balance in the Cash account on South Company's books increased.
B) South Company has a cash inflow from investing activities.
C) Northern Corporation has a cash outflow from financing activities.
D) All of these statements are true.
Answer: A
Explanation: When Northern Corporation purchases stock in South Company, Northern's cash balance will decrease and South's cash balance will increase. North will report it as a cash outflow for investing activities, and South will report it as a cash inflow from financing activities.
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model
Learning Objective: 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
76) Which of the following would not describe the effects of an asset source transaction on the elements of a company's financial statements?
| Assets | = | Liab. | + | Equity | Rev. | − | Exp. | = | Net Inc. | Stmt of
Cash Flows |
A. | + | = | + | + | NA | NA | − | NA | = | NA | +FA |
B. | + | = | NA | + | + | NA | − | NA | = | NA | +FA |
C. | + | = | NA | + | + | + | − | NA | = | + | +OA |
D. | NA | = | NA | + | NA | NA | − | NA | = | NA | −IA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: D
Explanation: An asset source transaction is any transaction that results in a net increase in assets. It could be accompanied by an increase in liabilities (as in the case of borrowing cash), an increase in equity with no effect on the income statement (as in the case of issuing common stock), or an increase in equity that does increase net income (as in the case of earning revenue). It could be reported as either a financing activity or an operating activity on the statement of cash flows.
Difficulty: 2 Medium
Topic: The Horizontal Financial Statements Model; Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.; 01-10 Record business events using a horizontal financial statements model.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
77) In a market, creditors are resource providers.
Answer: TRUE
Explanation: This is true. Resource providers include creditors and investors.
Difficulty: 1 Easy
Topic: Role of Accounting In Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
78) In a market, a company that manufactures cars would be referred to as a conversion agent.
Answer: TRUE
Explanation: This is true. Conversion agents transform resources into goods and services, such as cars, that are desirable to consumers.
Difficulty: 1 Easy
Topic: Role of Accounting In Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Industry
79) The value created by a business is created by its assets.
Answer: FALSE
Explanation: This is false. A business creates value by earning income, so earnings or income describe that value, not assets.
Difficulty: 2 Medium
Topic: Role of Accounting In Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
80) The stockholders of a business have a priority claim to its assets in the event of liquidation.
Answer: FALSE
Explanation: This is false. Creditors have priority in business liquidations. This means the business uses its assets first to settle the obligations to the creditors. Any assets remaining after the creditors have been paid are then distributed to the investors.
Difficulty: 1 Easy
Topic: Interpreting Information Shown in the Accounting Equation
Learning Objective: 01-05 Interpret information shown in an accounting equation.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
81) The types of resources needed by a business are financial, physical, and labor resources.
Answer: TRUE
Explanation: This is true. The types of resources needed by a business are financial, physical, and labor resources.
Difficulty: 1 Easy
Topic: Role of Accounting In Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
82) Financial accounting information is usually less detailed than managerial accounting information.
Answer: TRUE
Explanation: This is true. Financial accounting information is usually less detailed than managerial accounting information.
Difficulty: 2 Medium
Topic: Role of Accounting In Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Industry
83) The Financial Accounting Standards Board is a privately funded organization with authority for establishing accounting standards for businesses in the US.
Answer: TRUE
Explanation: This is true. The Financial Accounting Standards Board is charged with establishing accounting standards for US businesses. It is not an agency of the US government, but rather a privately funded organization.
Difficulty: 2 Medium
Topic: Role of Accounting In Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
84) A business and the person who owns the business are separate reporting entities.
Answer: TRUE
Explanation: This is true. A business must report its income, assets, liabilities and equity separate from the owner of that business.
Difficulty: 1 Easy
Topic: Reporting Entities
Learning Objective: 01-02 Identify reporting entities.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
85) The information reported in financial statements is organized into ten categories known as accounts.
Answer: FALSE
Explanation: This is false. The information reported in financial statements is organized into ten categories known as elements. Detailed information about the elements is maintained in records commonly called accounts.
Difficulty: 1 Easy
Topic: Elements of Financial Statements
Learning Objective: 01-03 Identify the components of the accounting equation.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
86) Liabilities are obligations of a business to relinquish assets, provide services, or accept other obligations.
Answer: TRUE
Explanation: This is true. Liabilities represent the future obligations of a business entity.
Difficulty: 2 Medium
Topic: Elements of Financial Statements
Learning Objective: 01-03 Identify the components of the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
87) Liabilities are not a source of assets for a business.
Answer: FALSE
Explanation: This is false. There are three sources of assets. First, a business can borrow assets from creditors. The second source of assets is investors. The third source of assets is operations.
Difficulty: 2 Medium
Topic: Elements of Financial Statements
Learning Objective: 01-03 Identify the components of the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
88) Retained earnings reduces a company's commitment to use its assets for the benefit of its stockholders.
Answer: FALSE
Explanation: This is false. If a business retains the assets, it commits to use those assets for the benefit of the stockholders. This increase in the business's commitments to its stockholders is normally called retained earnings.
Difficulty: 2 Medium
Topic: Elements of Financial Statements
Learning Objective: 01-03 Identify the components of the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
89) The historical cost concept requires that most assets be recorded at the amount paid for them, regardless of increases in market value.
Answer: TRUE
Explanation: This is true. Once an asset is recorded, it is not adjusted for increases in market value.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
90) An asset source transaction increases a business's assets and the claims to assets.
Answer: TRUE
Explanation: This is true. An asset source transaction increases a business's assets and either liabilities or equity, which make up claims to assets.
Difficulty: 1 Easy
Topic: Recap: Types of Transactions
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
91) Borrowing money from the bank is an example of an asset source transaction.
Answer: TRUE
Explanation: This is true. Borrowing money from the bank is an example of an asset source transaction because the asset cash increases as well as the liability notes payable.
Difficulty: 1 Easy
Topic: Recap: Types of Transactions
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
92) An asset use transaction does not affect the total amount of claims to a company's assets.
Answer: FALSE
Explanation: This is false. Because asset use transactions result in a decrease in total assets, total claims must decrease as well.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
93) The four financial statements prepared by a business bear no relationship to each other.
Answer: FALSE
Explanation: This is false. All four financial statements are interconnected.
Difficulty: 1 Easy
Topic: Preparing a Statement of Cash Flows; Preparing an Income Statement, a Statement of Changes in Stockholders' Equity and a Balance Sheet
Learning Objective: 01-08 Prepare a statement of cash flows.; 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
94) All of a business's temporary accounts appear on the income statement.
Answer: FALSE
Explanation: This is false. A business's temporary accounts include revenues, expenses, and dividends. Dividends do not appear on the income statement.
Difficulty: 2 Medium
Topic: The Closing Process
Learning Objective: 01-09 Close revenue, expense, and dividend accounts.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
