Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter dollar amounts. (Note that "Not Affected" means that the event does not affect that element of the financial statements or the event causes an increase in that element that is offset by a decrease in the same element.)
Increase = I Decrease = D Not Affected = NA
1) Walker Co. issued common stock for $150,000 cash.
Assets | = | Liabilities | + | Common Stock | + | Retained Earnings |
| | | | | | |
Answer: (I) (NA) (I) (NA)
Issuing common stock is an asset source transaction that increases the business's assets (cash) and its stockholders' equity (common stock). It does not affect the income statement, but is reported as a cash inflow from financing activities in the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
2) Nguyen Co. borrowed $50,000 cash from Metropolitan Bank.
Assets | = | Liabilities | + | Common Stock | + | Retained Earnings |
| | | | | | |
Answer: (I) (I) (NA) (NA)
Borrowing cash is an asset source transaction that increases a business's assets (cash) and its liabilities (notes payable). It does not affect the income statement, but is reported as a cash inflow from financing activities in the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement
3) Bell Co. provided consulting services for $20,000 cash.
Assets | = | Liabilities | + | Common Stock | + | Retained Earnings |
| | | | | | |
Answer: (I) (NA) (NA) (I)
This is an asset source transaction that increases the business's assets (cash). When a business provides services, it earns revenue. Revenue increases net income, which will increase stockholders' equity (retained earnings). This event is reported as a cash inflow from operating activities in the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement
4) Pierce Co. paid $40,000 cash to purchase land.
Assets | = | Liabilities | + | Common Stock | + | Retained Earnings |
| | | | | | |
Answer: (NA) (NA) (NA) (NA)
Purchasing land for cash is an asset exchange transaction that increases one asset (land) and decreases another asset (cash). It does not affect the income statement, and is reported as an investing activity in the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement
5) Perez Co. paid $220,000 cash for salaries expense.
Assets | = | Liabilities | + | Common Stock | + | Retained Earnings |
| | | | | | |
Answer: (D) (NA) (NA) (D)
Paying expenses is an asset use transaction that decreases the business's assets (cash) and decreases its stockholders' equity (retained earnings). It is reported as a cash outflow for operating activities in the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement
6) Epstein Co. paid $20,000 in cash dividends to its owners.
Assets | = | Liabilities | + | Common Stock | + | Retained Earnings |
| | | | | | |
Answer: (D) (NA) (NA) (D)
Paying a cash dividend is an asset use transaction that decreases a business's assets (cash) and its stockholders' equity (retained earnings). It does not affect net income, and is reported as a cash outflow for financing activities in the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement
7) North Co. issued a note to purchase a building.
Assets | = | Liabilities | + | Common Stock | + | Retained Earnings |
| | | | | | |
Answer: (I) (I) (NA) (NA)
Issuing a note to purchase a building is an asset source transaction that increases a business's assets (building) and increases its liabilities (notes payable). It does not affect net income or the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
8) Name the group that has the primary authority for establishing U.S. GAAP.
Answer: The Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board (FASB) is a privately funded organization with the primary authority for establishing accounting standards in the United States.
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
9) Who are the three distinct types of participants in the market for business resources? Briefly describe the role of each group of participants.
Answer: Markets include consumers, conversion agents, and resource owners. Consumers use resources. Conversion agents are businesses that convert resources to the form that consumers want. Resource owners control the distribution of resources to conversion agents.
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 Industry
10) What is meant by the term "stakeholders"?
Answer: Stakeholders are the parties that are interested in operations of an organization. Stakeholders often are users or potential users of accounting information. Stakeholders include resource providers, financial analysts, brokers, attorneys, government regulators and news reporters.
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 Industry; FN Measurement
11) What is meant by the term "global GAAP"? How does it impact U.S. companies? What body is responsible for setting global standards?
Answer: International Financial Reporting Standards (IFRS) have been adopted by most countries outside of the United States, and are becoming "global GAAP." Many believe that U.S. companies will be allowed to use either IFRS or U.S. GAAP in the future, and there is an ongoing process to reduce the differences between IFRS and GAAP. The International Accounting Standards Board (IASB), headquartered in London, is responsible for forming these standards.
Difficulty: 2 Medium
Topic: Reporting Entities
Learning Objective: 01-02 Identify reporting entities.
Bloom's: Understand
AACSB: Diversity
AICPA: BB Global; FN Measurement
12) Briefly distinguish between financial accounting and managerial accounting.
Answer: Financial accounting is designed to satisfy the needs of external resource providers (external users), and must adhere to Generally Accepted Accounting Principles. Managerial accounting, however, provides information that is useful to managers within a business (internal users), and does not have to follow GAAP.
Difficulty: 2 Medium
Topic: Role of Accounting in Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Understand
AACSB: Communication; Reflective Thinking
AICPA: BB Industry; FN Measurement
13) Explain some of the similarities and differences between not-for-profit organizations and other types of businesses.
Answer: Similarities: Both types of organizations commonly use specific resources to satisfy consumer demand. These resources are financial resources, physical resources, and labor resources. Accounting systems are used by both types of organizations to measure the cost of the goods and services that are provided, the efficiency and effectiveness of the organizations' operations, and the ability of the organizations to continue to provide goods and services.
Differences: Not-for-profit organizations are established primarily for motives other than making a profit, while most other businesses are motivated by profit. As a result, factors other than profitability influence the resource allocation priorities of not-for-profit organizations.
Difficulty: 2 Medium
Topic: Role of Accounting in Society
Learning Objective: 01-01 Identify the ways accounting benefits society.
Bloom's: Understand
AACSB: Communication; Reflective Thinking
AICPA: BB Industry
14) What financial statement elements are reported on a balance sheet?
Answer: A business's balance sheet shows the elements: assets, liabilities, and stockholders' equity.
Difficulty: 1 Easy
Topic: Preparing a Balance Sheet
Learning Objective: 01-06 Prepare and interpret balance sheets for multiple accounting cycles.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
15) From what three sources does a business obtain its assets?
Answer: A business obtains its assets from creditors, from investors, and from operations.
Difficulty: 2 Medium
Topic: Elements of Financial Statements
Learning Objective: 01-03 Identify the components of the accounting equation.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Risk Analysis
16) How does providing services for cash affect the accounting equation? Is it considered an asset source, asset use, or asset exchange transaction?
Answer: Providing services for cash increases assets and increases equity. It is considered an asset source transaction.
Providing services for cash increases cash, an asset, and revenue increases equity (retained earnings).
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Classify business events as asset source, asset use, asset exchange, or claims exchange transactions.
Bloom's: Understand
AACSB: Reflective Thinking; Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
17) How does the payment of cash dividends to stockholders affect the accounting equation? Is it considered an asset source, asset use, or asset exchange transaction?
Answer: Payment of cash dividends decreases assets and decreases equity. It is considered an asset use transaction.
Paying dividends decreases assets (cash) and decreases stockholders' equity (retained earnings).
Difficulty: 2 Medium
Topic: Types of Transactions; Recording Business Events Under the Accounting Equation
Learning Objective: 01-04 Classify business events as asset source, asset use, asset exchange, or claims exchange transactions.; 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
18) If total stockholder's equity is $150,000 and liabilities are $75,000, what are total assets?
Answer: $225,000
Assets = Liabilities $75,000 + Equity $150,000; Assets = $225,000
Difficulty: 2 Medium
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
19) What is meant by the term stockholders' equity?
Answer: When a business acquires assets from investors, it commits to keep the assets safe and to use the assets in a manner that benefits the investors. The business also grants the investor an ownership interest in the business, thereby allowing the investor (owner) to share in the profits generated by the business. In accounting terms investors are called stockholders. A business's commitment to its stockholders is called stockholders' equity.
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
20) Give three examples of asset use transactions.
Answer: Paid loan, paid expense, and paid dividends to stockholders.
Asset use transactions involve a decrease in assets (for example, cash) and will also result in a decrease in either liabilities (paid loan) or stockholders' equity (paid expense or dividends).
Difficulty: 2 Medium
Topic: Types of Transactions
Learning Objective: 01-04 Classify business events as asset source, asset use, asset exchange, or claims exchange transactions.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Resource Management; FN Measurement
21) What does a company's statement of cash flows tell you about the company?
Answer: The statement of cash flows tells how a company obtained and used cash during the accounting period.
The statement of cash flows explains the change in cash from the beginning to the end of the period.
Difficulty: 1 Easy
Topic: Preparing a Statement of Cash Flows
Learning Objective: 01-09 Prepare and interpret a statement of cash flows.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
22) If a corporation issues common stock for $50,000 cash, in which section of the statement of cash flows will this transaction be reported?
Answer: Issuing stock is reported in the financing activities section.
All cash exchanged between a company and its stockholders is considered a financing activity.
Difficulty: 1 Easy
Topic: Preparing a Statement of Cash Flows
Learning Objective: 01-09 Prepare and interpret a statement of cash flows.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
23) Which financial statement reports revenue and expenses?
Answer: The Income Statement
The income statement reports on how a business performed during a specific accounting period. Business performance is defined as the benefits earned from customers (revenue) minus the sacrifices that were incurred (expenses) to earn those benefits (revenues).
Difficulty: 1 Easy
Topic: Preparing an Income Statement
Learning Objective: 01-07 Prepare and interpret information shown in an income statement.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
24) Name and briefly describe each of the four financial statements.
Answer: The balance sheet lists the assets of a business and corresponding claims (liabilities and stockholders' equity) on those assets. It draws its name from the accounting equation.
The income statement matches revenue (benefits) with the expenses (sacrifices) that were incurred to generate the revenue.
The statement of changes in stockholders' equity is used to explain the effects of transactions on stockholders' equity during an accounting period.
The statement of cash flows explains how a company obtained and used cash during the accounting period. The statement of cash flows classifies cash receipts (inflows) and payments (outflows) into three categories: financing activities, investing activities, and operating activities.
Difficulty: 3 Hard
Topic: Preparing a Balance Sheet; Preparing an Income Statement; Statement of Changes in Stockholders' Equity; Preparing a Statement of Cash Flows
Learning Objective: 01-06 Prepare and interpret balance sheets for multiple accounting cycles.; 01-07 Prepare and interpret information shown in an income statement.; 01-08 Prepare and interpret a statement of changes in stockholders' equity.; 01-09 Prepare and interpret a statement of cash flows.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
25) Define the term "accounting period." How does this term relate to the "matching concept" as it pertains to the income statement?
Answer: An accounting period is the span of time covered by the financial statements, normally one year; the span of time for which income is measured. The practice of pairing together on the income statement revenues and expenses that were incurred in the same accounting period is known as the matching concept.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
26) 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
27) 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
28) 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
29) 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
30) 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
31) 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
32) 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: Reporting Entities
Learning Objective: 01-02 Identify reporting entities.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement; BB Global
33) 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; Preparing an Income Statement
Learning Objective: 01-05 Show how business events affect the accounting equation.; 01-07 Prepare and interpret information shown in an income statement.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
34) 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
35) 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: 01-05 Show how business events affect the accounting equation.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
36) 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: Preparing an Income Statement
Learning Objective: 01-07 Prepare and interpret information shown in an income statement.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
37) 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 stockholders' equity (common stock). stockholders' equity and liabilities collectively make up claims in the accounting equation.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; FN Measurement
38) 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 + stockholders' 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
39) 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: Recording Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
40) 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: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
41) 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: Recording Business Events Under the Accounting Equation; Preparing a Balance Sheet
Learning Objective: 01-05 Show how business events affect the accounting equation.; 01-06 Prepare and interpret balance sheets for multiple accounting cycles.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
42) 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: Business Liquidations
Learning Objective: 01-11 Use financial statements to analyze the impact of business liquidations on creditors and owners.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
43) 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: Preparing a Balance Sheet
Learning Objective: 01-06 Prepare and interpret balance sheets for multiple accounting cycles.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
44) 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: Preparing an Income Statement
Learning Objective: 01-07 Prepare and interpret information shown in an income statement.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking; FN Measurement
45) 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 stockholders' equity (retained earnings). Revenue increases on the income statement.
Difficulty: 1 Easy
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
46) 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) stockholders' 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). stockholders' 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: 01-05 Show how business events affect the accounting equation.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
47) 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: Preparing a Balance Sheet; Financial Statement Articulation
Learning Objective: 01-06 Prepare and interpret balance sheets for multiple accounting cycles.; 01-10 Identify the ways financial statements interrelate.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
48) 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. The asset account, cash, decreases and the asset account, land, increases. Total assets are not affected.
Difficulty: 1 Easy
Topic: Types of Transactions
Learning Objective: 01-04 Classify business events as asset source, asset use, asset exchange, or claims exchange transactions.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
49) 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: Types of Transactions
Learning Objective: 01-04 Classify business events as asset source, asset use, asset exchange, or claims exchange transactions.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
50) Tandem Company borrowed $32,000 of cash from a local bank. Which of the following choices accurately reflects how this event affects the accounting equation?
| Assets | = | Liabilities | + | Common
Stock | + | Retained
Earnings |
A. | NA | = | 32,000 | + | NA | + | 32,000 |
B. | 32,000 | = | NA | + | 32,000 | + | NA |
C. | 32,000 | = | NA | + | NA | + | 32,000 |
D. | 32,000 | = | 32,000 | + | NA | + | NA |
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 it is reported as a cash inflow for financing activities on the statement of cash flows.
Difficulty: 1 Easy
Topic: Recording Business Events Under the Accounting Equation; Elements of Financial Statements
Learning Objective: 01-03 Identify the components of the accounting equation.; 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
51) Which of the following could describe the effects of an asset exchange transaction on a company's total assets, total liabilities and total equity?
| Assets | = | Liab. | + | Equity |
A. | NA | = | NA | + | NA |
B. | + | = | NA | + | + |
C. | − | = | NA | + | − |
D. | NA | = | NA | + | + − |
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 stockholders' equity either.
Difficulty: 1 Easy
Topic: Types of Transactions
Learning Objective: 01-04 Classify business events as asset source, asset use, asset exchange, or claims exchange transactions.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
52) Which of the following describes the effects of an asset use transaction on the accounting equation?
| Assets | = | Liab. | + | Equity |
A. | + | = | + | + | NA |
B. | − | = | NA | + | − |
C. | + − | = | NA | + | NA |
D. | NA | = | + | + | NA |
A) Option A
B) Option B
C) Option C
D) Option D
Answer: B
Explanation: An asset use transaction is one that decreases a business's assets and decreases either liabilities or equity. In this asset use transaction, assets and equity decreased. An example of an asset use transaction with this effect would be paying cash for salary expense.
Difficulty: 2 Medium
Topic: Types of Transactions
Learning Objective: 01-04 Classify business events as asset source, asset use, asset exchange, or claims exchange transactions.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
53) 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: 01-05 Show how business events affect the accounting equation.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
54) 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: 01-09 Prepare and interpret a statement of cash flows.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Resource Management
55) 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: 01-09 Prepare and interpret a statement of cash flows.
Bloom's: Apply
AACSB: Knowledge Application
AICPA: FN Measurement; BB Resource Management
