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Chapter 1 Financial Accounting and Business Decisions Learning Objectives – Coverage by question True / False LO1 – Explain business organization and its three forms.

Multiple Choice

Exercises

1-3

LO2 – Describe business activities.

6-8

4-10

LO3 – Indicate who uses accounting information.

1-5

11-17

1, 2

LO4 – Explain the accounting process and generally accepted accounting principles.

9-12

18-23

LO5 – Describe the accounting equation and each financial statement.

13-24

24-105

4-17

106-110

111-125

19, 20

LO6 – Explain additional disclosures that accompany financial statements.

Problems

1-3

LO7 – Describe careers in accounting. LO8 – Appendix 1A: Discuss FASB’s conceptual framework.

25-30

©Cambridge Business Publishers, 2020 Test Bank, Chapter 1

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Chapter 1: Financial Accounting and Business Decisions

True / False Topic: Managerial Accounting LO: 3 1. A major function of managerial accounting is to provide general purpose financial statements for parties outside the organization. Answer: False Rationale: A major function of managerial accounting is to provide management with accounting data for decisions related to a firm’s operations. Providing general purpose financial statements for parties outside an organization is a function of financial accounting. Topic: Ethics LO: 3 2. It is unusual for U.S. businesses to develop written codes of ethics to guide their employees. Answer: False Rationale: It is now commonplace for businesses to develop written codes of ethics to help guide the behavior of their employees. Topic: Ethics LO: 3 3. An emphasis on short-term profits may contribute to ethical breakdowns within a business. Answer: True Rationale: A criticism of U.S. business practices is that they are too “bottom-line” (that is, short-term profit) oriented. This orientation can lead to unethical actions by management to increase reported short-term profits. Topic: Accounting Information Users LO: 3 4. Financial accounting is designed primarily for decision makers within a company. Answer: False Rationale: Financial accounting is designed primarily to provide information to decision makers outside of a company, while managerial accounting is designed primarily to provide accounting information for decision makers within a company. Topic: Ethics and Accounting LO: 3 5. The goal of the Sarbanes-Oxley Act of 2002 was to increase the level of confidence that external users have in a company’s financial statements. Answer: True Rationale: In the wake of various business scandals, like that involving Enron Corporation, the U.S. Congress passed the Sarbanes-Oxley Act to improve external user confidence in financial statement reporting. ©Cambridge Business Publishers, 2020 1-2

Financial Accounting for Undergraduates, 4th Edition

Topic: Investing Activities LO: 2 6. Investing activities involve the acquiring and disposing of liabilities that a company needs in order to finance its operating activities. Answer: False Rationale: Investing activities are the acquiring and disposing of assets that a company needs for the production and sale of a company’s products and services. Topic: Financing Activities LO: 2 7. Other than operating profit, there are three main sources of external financing. Answer: False Rationale: There are two main sources of financing: equity (also called shareholder or owner) financing and debt (also called creditor or lender) financing. Topic: Financing and Investing Activities LO: 2 8. Financing activities are defined as the acquiring and disposing of resources for the purpose of selling products and services. Answer: False Rationale: Financing activities are defined as methods a company uses to raise funds to pay for resources. Investing activities are defined as the acquiring and disposing of resources for the purpose of selling products and services. Topic: Purpose of Accounting LO: 4 9. The basic purpose of accounting is to provide useful financial information. Answer: True Rationale: The purpose of accounting is to provide useful financial information. Accordingly, the accounting process (1) prepared financial reports to meet the needs of the user and (2) helps interpret the financial results for the user. Topic: GAAP LO: 4 10. Generally accepted accounting principles apply to the general-purpose financial statements prepared primarily for parties outside of an organization. Answer: True Rationale: Financial statement users who rely on accounting data expect that all companies will follow the same standards and procedures when preparing their statements. These standards and procedures are called generally accepted accounting principles.

©Cambridge Business Publishers, 2020 Test Bank, Chapter 1

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Topic: Sources of GAAP LO: 4 11. Federal income tax regulations constitute a primary source of generally accepted accounting principles. Answer: False Rationale: FASB, AICPA, and SEC have been instrumental in the development of GAAP in the United States. Topic: Sources of GAAP LO: 4 12. Currently, the organization in the private sector with the primary responsibility for formulating accounting principles is the Financial Accounting Standards Board. Answer: True Rationale: The Financial Accounting Standards Board has been instrumental in the development of generally accepted accounting principles in the United States. Topic: Accounting Equation LO: 5 13. Assets must always equal the sum of liabilities plus stockholders’ equity. Answer: True Rationale: The accounting equation is Assets = Liabilities + Stockholders’ Equity. This relation must always exist. Topic: Balance Sheet LO: 5 14. If a company reports retained earnings of $22.4 million on its balance sheet, it will also report $22.4 million in cash. Answer: False Rationale: The accounting equation requires total assets to equal the sum of total liabilities plus stockholders’ equity. That does not imply, however, that liability and stockholders’ equity accounts relate directly to specific assets. Topic: Accounting Equation LO: 5 15. The accounting equation states that the economic resources of an entity are equal to the claims on those resources. Answer: True Rationale: The accounting equation: Assets = Liabilities + Stockholder’s equity, states that a firm’s assets equal the sum of its liabilities plus its stockholders’ equity. Throughout the accounting process, the accounting equation must always remain in balance.

©Cambridge Business Publishers, 2020 1-4

Financial Accounting for Undergraduates, 4th Edition

Topic: Assets LO: 5 16. The key characteristic of an asset is that it represents a probable future economic benefit owned or controlled by an entity. Answer: True Rationale: Assets are the economic resources of a business that can be expressed in monetary form. Assets take many forms, but the key characteristic is that an asset represents a probable future economic benefit owned or controlled by an entity. Topic: Net Assets LO: 5 17. The net assets of an entity are equal to the assets minus the stockholders’ equity. Answer: False Rationale: The net assets of an entity are equal to its stockholders’ equity. Topic: Statement of Cash Flows LO: 5 18. A statement of cash flows reports on the cash flows for operating, investing and financing activities at a point in time. Answer: False Rationale: A statement of cash flows reports on the cash flows for operating, investing, and financing activities over a period of time. Topic: Retained Earnings LO: 5 19. Retained earnings are reported on both the income statement and the statement of stockholders’ equity. Answer: False Rationale: Retained earnings are reported on the statement of retained earnings and the balance sheet. The income statement represents current period earnings. Topic: Income Statement LO: 5 20. The income statement is also called the earnings statement. Answer: True Rationale: The income statement reports the results of operations for a business for a given time period usually a quarter or a year. The income statement lists the revenues and expenses of the business. The income statement is also called the statement of operations, the statement of income, and the earnings statement.

©Cambridge Business Publishers, 2020 Test Bank, Chapter 1

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Topic: Preparing Financial Statements LO: 5 21. The income statement, statement of stockholders’ equity, and statement of cash flows are referred to as period-in-time statements. Answer: True Rationale: Specific periods of time are reported on all financial statements, except the balance sheet. The balance sheet is referred to as a point-in-time statement. Topic: Income Statement LO: 5 22. The income statement is also known as the statement of financial position. Answer: False Rationale: The income statement is also known as the statement of operations, the statement of income, and the earnings statement. The balance sheet is sometimes referred to as the statement of financial position. Topic: Statement of Cash Flows LO: 5 23. The statement of cash flows reports information about cash flows in two categories: cash received and cash disbursed. Answer: False Rationale: The cash flows are grouped into the three business activities of operating, investing, and financing. Topic: Relations Among the Financial Statements LO: 5 24. When financial statements are prepared, the balance sheet is usually prepared first. Answer: False Rationale: The income statement is prepared first, followed by the statement of stockholders’ equity, the balance sheet, and finally the statement of cash flows. Topic: Conceptual Framework for Financial Reporting LO: 8 25. The conceptual framework developed by the FASB includes a statement of the objectives of financial reporting and a discussion about the qualitative characteristics of accounting information. Answer: True Rationale: The conceptual framework includes, among other things, a statement of the objectives of financial reporting along with a discussion about the qualitative characteristics of accounting information that are important to users.

©Cambridge Business Publishers, 2020 1-6

Financial Accounting for Undergraduates, 4th Edition

Topic: Accrual Accounting LO: 8 26. Accrual accounting recognizes revenues only when cash is received and expenses only when cash is paid. Answer: False Rationale: Accrual accounting refers to the recognition of revenue when earned and the matching of expenses when incurred. The recognition of revenues and expenses does not always relate to the receipt or payment of cash. Topic: Comparability and Consistency LO: 8 27. The qualitative characteristic of accounting information known as comparability means that the same accounting methods should be used from one period to the next, whenever possible. Answer: False Rationale: The statement describes consistency. Comparability speaks to firms in the same industry using similar reporting techniques. Topic: Cost Principle LO: 8 28. The cost principle states that assets are initially recorded at the amounts paid or obligated to pay to acquire the assets. Answer: True Rationale: The cost principle means that assets and liabilities are initially recorded at the amount paid or obligated to pay. Historically, acquisition cost is considered the proper initial measurement because, at the time the asset is acquired, it represents the fair value of the asset as agreed by both the buyer and the seller. Topic: Going Concern Concept LO: 8 29. The going concern concept assumes that an entity will be going out of business within the next several years. Answer: False Rationale: The going concern concept presumes that an entity will continue to operate indefinitely and will not be sold or otherwise liquidated. Topic: Accrual Basis of Accounting LO: 8 30. Under the accrual basis of accounting, revenue may be recorded even though cash has not yet been received from a customer or client. Answer: True Rationale: Under the accrual basis of accounting, sales revenue is recognized when it is both earned and realized (revenue recognition principle) and expenses are recorded tin the period in which they generate the earned revenue (expense recognition principle). Recording revenues and expenses does not depend upon the receipt or payment of cash.

©Cambridge Business Publishers, 2020 Test Bank, Chapter 1

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Multiple Choice Topic: Business Organizations LO: 1 Level of Difficulty: EASY 1. Which of the following forms of business organizations exists as a legal entity for tax purposes? A) A sole proprietorship B) A partnership C) A corporation D) A labor union Answer: C Rationale: A corporation is a form of business organization that exists as a legal entity, subject to taxes, that issues shares of stock to its owners or shareholders in exchange for cash or other resources. Topic: Business Organizations LO: 1 Level of Difficulty: EASY 2. The three principal forms of business organization are: A) A sole proprietorship, a stockholder, and a corporation B) A partnership, a sub-S corporation, and a labor union C) A corporation, a partnership, and a sole proprietorship D) A labor union, a stockholder, and a partnership Answer: C Rationale: The three principal forms of business organization are the sole proprietorship, the partnership, and the corporation. Topic: Business Organizations LO: 1 Level of Difficulty: EASY 3. Which of the following is not an advantage of the corporate form of business organization? A) The ease with which capital can be raised B) The protection afforded stockholders against personal liability C) Both the business and the owners are taxed D) The relative ease of selling ownership shares Answer: C Rationale: The advantage of the corporate form of business organization include the ease of raising capital, stockholder protection against personal liability, and the ease of selling ownership shares.

©Cambridge Business Publishers, 2020 1-8

Financial Accounting for Undergraduates, 4th Edition

Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 4. The three types of business activities in which every business, regardless of organizational form, its industry or its size, is involved are: A) Financing activities, banking activities, financial accounting activities B) Operating activities, banking activities, financing activities C) Financing activities, investing activities, financial accounting activities D) Financing activities, operating activities, investing activities Answer: D Rationale: The three types of business activities are financing activities, operating activities, and investing activities. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 5. Financing activities are generally categorized as: A) Debt financing B) Bond financing C) Equity financing D) Either debt or equity financing Answer: D Rationale: Financing activities are generally categorized as either debt or equity financing. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 6. Equity financing involves: A) Selling shares of stock to investors B) Borrowing money from a bank C) Issuing bonds payable D) Repayment of principal and interest to a creditor Answer: A Rationale: Equity financing involves selling shares of stock to investors. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 7. Which of the following statements about operating activities is not correct? A) Operating activities refers to the day-to-day activities of producing and selling a product or providing a service. B) Creditors and stockholders beliefs about a company’s ability to generate a profit are unimportant. C) Operating activities are critical for a business. D) If a company is unable to generate income from its operations it is very likely that it will fail. Answer: B Rationale: If creditors and stockholders do not believe that a company will be able to generate a profit, they are unlikely to provide the financing needed to start, or maintain its operations.

©Cambridge Business Publishers, 2020 Test Bank, Chapter 1

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Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 8. Which of the following activities is an example of an operating activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Issuing shares of stock in exchange for cash Answer: B Rationale: Selling merchandise online is an example of an operating activity. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 9. Which of the following activities is an example of an investing activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Issuing shares of stock in exchange for cash Answer: C Rationale: Purchasing a delivery truck is an example of an investing activity. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 10. Which of the following activities is an example of a financing activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Paying employee salaries Answer: A Rationale: Receiving a loan from a bank is an example of a financing activity. Topic: Financial Accounting Information Users LO: 3 Level of Difficulty: EASY 11. Which one of the following is not an external user of financial information? A) Stockholders B) Creditors C) Internal Revenue Service D) Senior company management Answer: D Rationale: Decision makers outside the company include stockholders, creditors, and tax agencies such as the Internal Revenue Service.

©Cambridge Business Publishers, 2020 1-10

Financial Accounting for Undergraduates, 4th Edition

Topic: Financial Accounting Information Users LO: 3 Level of Difficulty: EASY 12. Which one of the following is not an internal user of financial information? A) The Marketing Department B) Creditors C) The Finance Department D) Senior company management Answer: B Rationale: Decision makers inside the company include various departments, such as marketing or finance, and members of the company’s senior management team. Topic: Managerial Accounting LO: 3 Level of Difficulty: EASY 13. The accounting activities carried out by a firm’s accounting staff primarily to provide management with accounting data for decisions related to a firm’s operations is referred to as: A) Financial accounting B) Managerial accounting C) Tax accounting D) Regulatory accounting E) None of the above Answer: B Rationale: The process of generating and analyzing data needed by the internal management of a company for decision making and the efficient management of the business is referred to as managerial accounting. Financial Accounting LO: 3 Level of Difficulty: EASY 14. The area of accounting dealing with the preparation of financial statements showing a business’s results of operations, financial position, and cash flow is referred to as: A) Financial accounting B) Managerial accounting C) Tax accounting D) Regulatory accounting E) None of the above Answer: A Rationale: The process of accumulating and reporting accounting information that details a business’s results of operations, cash flows, and financial position is referred to as financial accounting.

©Cambridge Business Publishers, 2020 Test Bank, Chapter 1

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Topic: Ethics LO: 3 Level of Difficulty: MEDIUM 15. Which of the following represents an aspect of the accounting environment that may create ethical pressures on an accountant? A) Accountants have access to confidential and sensitive information. B) The output produced by accountants may have significant financial implications for one or more persons. C) Management may emphasize short-run profits. D) All of the above E) None of the above Answer: D Rationale: Accountants face several unique ethical dimensions as a result of their work, These include: access to confidential and sensitive information, output produced by accountants may have significant financial implications for individuals as well as businesses, and that management may emphasize short-run (“bottom line”) profits. Topic: Ethics LO: 3 Level of Difficulty: MEDIUM 16. Which of the following situations has the potential to create ethical pressure on an accountant? A) Preparing an individual’s income tax return when much of the supporting documentation is missing. B) Informing a sales manager that the travel and entertainment expenses turned in by the top performing sales representative exceed company allowances. C) Discovering that the company has made a mistake in computing refunds granted to customers, causing the refunds to be too small. D) All of the above E) None of the above Answer: D Rationale: Accountants face several unique ethical dimensions as a result of their work. All of the situations noted would present the accountant with ethical pressure when deciding the correct action to take when dealing with each situation. Topic: Ethics LO: 3 Level of Difficulty: EASY 17. The branch of accounting which is involved in criminal investigations related to areas such as financial statement fraud, money laundering, or investment fraud is called: A) Internal auditing B) Cost accounting. C) Forensic accounting. D) All of the above E) None of the above Answer: C Rationale: Forensic accounting is the branch of accounting which is involved in criminal investigations related to areas such as financial statement fraud, money laundering, or investment fraud. Forensic accountants are involved both before and after the commission of a crime.

©Cambridge Business Publishers, 2020 1-12

Financial Accounting for Undergraduates, 4th Edition

Topic: The Accounting Process LO: 4 Level of Difficulty: MEDIUM 18. The measurement activity of the accounting process must do all of the following except: A) Identify the relevant economic activities of a business B) Prepare financial reports to meet the needs of the user C) Quantify the economic activities of a business D) Record the resulting measures in a systematic manner Answer: B Rationale: The measurement process identifies, measures, and records the economic activity of an entity. Preparation of the financial reports is part of the communication activity of the accounting process. Topic: The Accounting Process LO: 4 Level of Difficulty: MEDIUM 19. The communication activity of the accounting process must: A) Identify the relevant economic activities of a business B) Record the resulting measures in a systematic manner C) Quantify the economic activities of a business D) Prepare financial reports and help interpret financial results to meet users’ needs Answer: D Rationale: The communication activity of the accounting process provides useful financial reports to users and provides various techniques, such as formatting of reports, charts and graphs, and ratios, to users to help them interpret the content of the reports. Topic: Generally Accepted Accounting Principles LO: 4 Level of Difficulty: MEDIUM 20. Which of the following statements is true regarding generally accepted accounting principles (GAAP)? A) GAAP is a set of laws. B) GAAP is subject to change as conditions warrant. C) Under GAAP, if two companies engage in the same transactions, they must choose the same accounting methods. D) U.S. GAAP is the same as GAAP in other countries. Answer: B Rationale: Specific rules under GAAP are altered or new practices are formulated to fit changes in underlying economic circumstances of business transactions.

©Cambridge Business Publishers, 2020 Test Bank, Chapter 1

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Topic: GAAP LO: 4 Level of Difficulty: EASY 21. Currently, the organization with the primary responsibility for formulating U.S. generally accepted accounting principles is the: A) American Institute of Certified Public Accountants B) Securities and Exchange Commission C) Financial Accounting Standards Board D) Internal Revenue Service E) None of the above Answer: C Rationale: Currently, the organization in the private sector with the primary responsibility for formulating accounting principles is the Financial Accounting Standards Board. The Financial Accounting Standards Board has been instrumental in the development of generally accepted accounting principles in the United States. Topic: GAAP LO: 4 Level of Difficulty: EASY 22. Generally accepted accounting principles are: A) Guides to action that apply primarily to the process of managerial accounting. B) Accounting standards enforced by the Internal Revenue Service. C) Accounting standards that never change. D) Guides to action that apply primarily to the process of financial accounting. E) None of the above Answer: D Rationale: Financial statement users who rely on accounting data expect that all companies will follow the same standards and procedures when preparing their statements. These standards and procedures are called generally accepted accounting principles. Generally accepted accounting principles apply to the general-purpose financial statements prepared primarily for parties outside of an organization. Topic: Financial Accounting Oversight LO: 4 Level of Difficulty: MEDIUM 23. Financial accounting oversight in the United States is provided by all of the following organizations except the: A) International Accounting Standards Board (IASB) B) Financial Accounting Standards Board (FASB) C) Public Company Accounting Oversight Board (PCAOB) D) U.S. Securities Exchange Commission (SEC) Answer: A Rationale: While the United States is working to converge national standards with those standards set by the IASB, no final decision requiring the adoption of the IASB’s standards has been made.

©Cambridge Business Publishers, 2020 1-14

Financial Accounting for Undergraduates, 4th Edition

Topic: Accounting Equation LO: 5 Level of Difficulty: EASY 24. Which of the following is a correct statement of the accounting equation in economic terms? A) Economic resources = operating assets + financial assets B) Economic resources = creditor financing + owner financing C) Economic resources = creditor financing – owner financing D) Creditor financing = investing + operating Answer: B Rationale: The accounting equation is assets = liabilities + stockholders’ equity. Another way of viewing this equation is Economic resources = Creditor Financing + Owner Financing Topic: Liabilities LO: 5 Level of Difficulty: MEDIUM 25. What are the obligations or debts that a business must pay in cash or in goods and services at some future time because of past transactions or events called and how are they reported? A) Assets on the balance sheet B) Stockholders’ equity on the balance sheet C) Dividends on the statement of retained earnings D) Liabilities on the balance sheet Answer: D Rationale: Liabilities are probable future economic sacrifices resulting from a current or past event. They are obligations that must be satisfied with a future cash payment or delivery of goods or services. Topic: Assets LO: 5 Level of Difficulty: MEDIUM 26. What are the economics resources of a business that can be expressed in monetary and how are they reported? A) Assets on the balance sheet B) Stockholders’ equity on the balance sheet C) Dividends on the statement of retained earnings D) Liabilities on the balance sheet Answer: A Rationale: Assets are economic resources of a business that can be represented in monetary terms and that represent a probable future economic benefit to a business.

©Cambridge Business Publishers, 2020 Test Bank, Chapter 1

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Topic: Accounting Equation LO: 5 Level of Difficulty: EASY 27. The accounting equation states: A) Assets + Liabilities = Stockholders’ Equity B) Assets = Liabilities - Stockholders’ Equity C) Assets = Liabilities + Stockholders’ Equity D) Assets + Stockholders’ Equity = Liabilities E) None of the above Answer: C Rationale: The accounting equation: Assets = Liabilities + Stockholder’s equity, states that a firm’s assets equal the sum of its liabilities plus its stockholders’ equity. Assets refer to a company’s resources, liabilities refer to creditor claims on those resources, and stockholders’ equity refers to claims on those resources. Throughout the accounting process, the accounting equation must always remain in balance. Topic: Assets LO: 5 Level of Difficulty: EASY 28. The economic resources of an entity that can be usually expressed in monetary terms are called? A) Stockholders’ equity B) Revenues C) Liabilities D) Assets E) None of the above Answer: D Rationale: Assets refer to the economic resources of a business that can be expressed in monetary terms. Assets take many forms. The key characteristic of any asset is that it represents a probable future economic benefit to a business. Topic: Assets LO: 5 Level of Difficulty: EASY 29. Which of the following is correct? A) Ownership is an essential test for an asset. B) An example of an asset is notes payable. C) The key characteristic of an asset is that it represents a probable future economic benefit owned or controlled by the entity. D) Liabilities represent the interest of the owners in the assets of an entity. E) None of the above Answer: C Rationale: Assets refer to the economic resources of a business that can be expressed in monetary terms. Assets take many forms. The key characteristic of any asset is that it represents a probable future economic benefit to a business.

©Cambridge Business Publishers, 2020 1-16

Financial Accounting for Undergraduates, 4th Edition

Topic: Liabilities LO: 5 Level of Difficulty: EASY 30. The obligations that an entity must pay in money or services at some time in the future because of past transactions or events are called? A) Liabilities B) Expenses C) Stockholders’ equity D) Cost principle E) None of the above Answer: A Rationale: Liabilities are the obligations or debts that a business must pay in cash or goods and services at some future time as a consequence of past transactions or events. Topic: Liabilities LO: 5 Level of Difficulty: EASY 31. Which of the following is an example of a liability? A) Supplies B) Accounts receivable C) Wages owed to employees for work already performed D) Prepaid advertising E) None of the above Answer: C Rationale: Liabilities are the obligations or debts that a business must pay in cash or goods and services at some future time as a consequence of past transactions or events. Since employees have already performed the work, there is an obligation on the part of the business to pay the employees. This obligation (liability) is called wages payable. The business reports this obligation on the balance sheet. Supplies, accounts receivable, and prepaid advertising are all examples of assets. Topic: Accounting Equation LO: 5 Level of Difficulty: EASY 32. Which of the following is not a component of the accounting equation? A) Stockholders’ equity B) Income statement C) Liabilities D) Assets E) None of the above Answer: B Rationale: The accounting equation: Assets = Liabilities + Stockholder’s equity, states that a firm’s assets equal the sum of its liabilities plus its stockholders’ equity. Assets refer to a company’s resources, liabilities refer to creditor claims on those resources, and stockholders’ equity refers to owner claims on those resources.

©Cambridge Business Publishers, 2020 Test Bank, Chapter 1

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Topic: Liabilities LO: 5 Level of Difficulty: MEDIUM 33. Which of the following is incorrect? A) To qualify as a liability, an obligation must be payable in cash or in goods and services. B) A copyright is an example of a liability. C) To qualify as a liability, an obligation must be scheduled for settlement at some future time. D) All of the above E) None of the above Answer: B Rationale: Liabilities are the obligations or debts that a business must pay in cash or goods and services at some future time as a consequence of past transactions or events. A copyright is an exclusive right that protects an owner against the unauthorized reproduction of a specific written work or artwork. A copyright is an example of an asset, not a liability. Topic: Stockholders’ Equity LO: 5 Level of Difficulty: EASY 34. Stockholders’ equity: A) Is equal to assets minus liabilities B) Represents the interest of the owners in the assets of an entity C) Is equal to the net assets of an entity D) All of the above E) None of the above Answer: D Rationale: Stockholders’ equity refers to the ownership (stockholder) claims on the assets of the business. Stockholders’ equity represents a residual claim on the business’s assets, that is, it is a claim on the assets of a business that remain after all the liabilities to creditors have been satisfied (net assets). Topic: Liabilities LO: 5 Level of Difficulty: MEDIUM 35. Which of the following is correct? A) Some liabilities may involve the performance of services. B) Liabilities are claims on an entity’s assets that remain after the claims of owners have been settled. C) To qualify as an asset, a resource must have a physical existence. D) Accounts receivable and Wages payable are examples of liabilities. E) None of the above Answer: A Rationale: Liabilities are the obligations or debts that a business must pay in cash or goods and services at some future time as a consequence of past transactions or events. Liabilities refer to creditor claims on a business’s resources (assets). An asset take many forms, it must not have a physical existence. The key characteristic of any asset is that it represents a probably future economic benefit to a business. Wages payable is an example of a liability, but accounts receivable is an example of an asset.

©Cambridge Business Publishers, 2020 1-18

Financial Accounting for Undergraduates, 4th Edition

Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 36. On which statement are assets, liabilities and stockholders’ equity reported? A) Balance sheet B) Income statement C) Statement of retained earnings D) Statement of cash flows Answer: A Rationale: A balance sheet lists amounts for assets, liabilities, and stockholders’ equity at a point in time. Topic: Balance Sheet and Income Statement LO: 5 Level of Difficulty: MEDIUM 37. Which of the following items are disclosed on the balance sheet? A) Inventory, accounts receivable, equipment B) Operating expenses, equipment C) Account receivable, cash payments D) Equipment, cash payment, inventory E) Cash payments Answer: A Rationale: Operating expenses are found in the income statement, not the balance sheet. Cash payments are found on the statement of cash flows, not the balance sheet. Inventory, accounts receivable and equipment are all assets which are found on the balance sheet. Topic Financial Statement Format LO: 5 Level of Difficulty: MEDIUM 38. Which of the following is not part of the standard heading of a financial statement? A) The company name B) The statement title C) The date or time period of the statement D) The company’s industry Answer: D Rationale: Each financial statement identifies the company, the statement title, and the date or time period of the statement. Topic: Expenses LO: 5 Level of Difficulty: EASY 39. Which of the four basic financial statements would contain a line item for expenses? A) Balance sheet B) Income statement C) Statement of retained earnings D) Statement of cash flows Answer: B Rationale: The income statement reports on the revenues less the expenses over a reporting period. Expenses only appear on the income statement. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1

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Topic: Account Classification LO: 5 Level of Difficulty: MEDIUM 40. Which of the following would be reported on a statement of retained earnings? A) Cash B) Total expenses C) Dividends D) Financing cash flow Answer: C Rationale: Dividends are a return of capital to stockholders and are reported on the statement of retained earnings. Cash is disclosed on the balance sheet. Total expenses is an income statement amount. Financing cash flow is found on the statement of cash flows. Topic: Articulation of Financial Statements LO: 5 Level of Difficulty: MEDIUM 41. How are the balance sheet and the statement of cash flows linked? A) By the cash balance B) By the amount of total retained earnings C) By the total shareholder equity D) By the amount of net income Answer: A Rationale: The balance sheet and the statement of cash flows are linked by the cash balance. The statement of cash flows shows the inflows and outflows of cash during the period. The ending cash balance is disclosed on the balance sheet. Topic: Financial Statement Linkages LO: 5 Level of Difficulty: MEDIUM 42. Which one of the following is not a key linkage among the four primary financial statements? A) The expenses in the income statement link to the total liability balance. B) The statement of cash flows links to ending cash balance reported on the balance sheet. C) The income statement links to the ending retained earnings in the statement of retained earnings. D) The statement of retained earnings links to ending retained earnings on the balance sheet. Answer: A Rationale: The expenses in the income statement are not linked to the total liability balance. An unpaid expense might at one point in time be listed as a liability; however, the total of liabilities and expenses is rarely the same.

©Cambridge Business Publishers, 2020 1-20

Financial Accounting for Undergraduates, 4th Edition

Topic: Sales Revenue LO: 5 Level of Difficulty: MEDIUM 43. The increases to a company’s resources that result when goods or services are provided to customers are called? A) Assets B) Liabilities C) Expenses D) Revenues E) None of the above Answer: D Rationale: Sales revenues are increases to a company’s resources that result when goods or services are provided to customers. The amount of sales revenue earned is measured by the value of the assets received in exchange for good and services delivered. Topic: Sales Revenue LO: 5 Level of Difficulty: EASY 44. What is the definition of sales revenue? A) Increases to a company’s resources that result when goods or services are provided to customers B) The obligations that an entity must pay at some time in the future because of past transactions or events C) Decreases in stockholders’ equity that a firm incurs in the process of earning revenues D) The economic resources of an entity that can be usefully expressed in monetary terms E) None of the above Answer: A Rationale: Sales revenues are increases to a company’s resources that result when goods or services are provided to customers. The amount of sales revenue earned is measured by the value of the assets received in exchange for good and services delivered. Topic: Expenses LO: 5 Level of Difficulty: EASY 45. What is the definition of expenses? A) Increases in stockholders’ equity that a firm earns by providing goods or services for its customers B) The obligations that an entity must pay at some time in the future because of past transactions or events C) Decreases in a company’s resources that a firm incurs in the process of earning revenues D) The economic resources of an entity that can be usefully expressed in money terms E) None of the above Answer: C Rationale: Expenses are decreases in a company’s resources that a firm incurs from generating revenues. Expenses are usually measured by the value of assets used up or exchanged as a result of a business’s operating activities. Increases in stockholders’ equity that a firm earns by providing goods or services for its customers are sales revenues. The obligations that an entity must pay at some time in the future because of past transactions or events are liabilities.

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Topic: Financial Statements LO: 5 Level of Difficulty: EASY 46. Which of the following is not a basic financial statement? A) Income statement B) Statement of cash flows C) Statement of common stock D) Balance sheet E) None of the above Answer: C Rationale: There are four basic financial statements: the balance sheet, the income statement, the statement of stockholders’ equity, and the statement of cash flows. A statement of common stock does not exist. Topic: Income Statement LO: 5 Level of Difficulty: EASY 47. An income statement: A) Reports the results of operations for a period B) Reports on the events causing a change in stockholders’ equity during a period C) Presents a firm’s assets, liabilities, and stockholders’ equity on a given date D) Reports cash inflows and outflows during a period E) None of the above Answer: A Rationale: The income statement reports the results of operations for a business of a given time period, usually a quarter or a year. The income statement lists the revenues and expenses of the business. A statement of stockholders’ equity reports on the events causing a change in stockholders’ equity during a period. A balance sheet presents a firm’s assets, liabilities, and stockholders’ equity on a given date. A statement of cash flows reports cash inflows and outflows during a period. Topic: Balance Sheet LO: 5 Level of Difficulty: EASY 48. A balance sheet: A) Reports the results of operations for a period B) Reports on the events causing a change in stockholders’ equity during a period C) Presents a firm’s assets, liabilities, and stockholders’ equity as of a given date D) Reports cash inflows and outflows during a period E) None of the above Answer: C Rationale: A balance sheet presents a firm’s assets, liabilities, and stockholders’ equity on a given date. The income statement reports the results of operations for a business of a given time period, usually a quarter or a year. The income statement lists the revenues and expenses of the business. A statement of stockholders’ equity reports on the events causing a change in stockholders’ equity during a period. A statement of cash flows reports cash inflows and outflows during a period.

©Cambridge Business Publishers, 2020 1-22

Financial Accounting for Undergraduates, 4th Edition

Topic: Statement of Cash Flows LO: 5 Level of Difficulty: MEDIUM 49. What categories of cash flows are presented in a statement of cash flows? A) Operating and non-operating B) Receipts and disbursements C) Financial and non-financial D) Operating, investing, and financing E) None of the above Answer: D Rationale: The statement of cash flows groups cash flows into the three business activities of operating, investing, and financing. Topic: Balance Sheet LO: 5 Level of Difficulty: MEDIUM 50. Which of the following financial statements is a position statement? A) Income statement B) Statement of retained earnings C) Balance sheet D) Statement of cash flows E) None of the above Answer: C Rationale: The balance sheet presents a firm’s assets, liabilities, and stockholders’ equity on a given date. The balance sheet is also referred to as the statement of financial position. Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 51. Which of the following financial statements is a period statement? A) Income statement B) Statement of retained earnings C) Statement of cash flows D) All of the above E) None of the above Answer: D Rationale: The income statement, the statement of retained earnings, and the statement of cash flows all report financial information for a given period of time.

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Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 52. A financial statement either presents information covering a period of time (for example, a month, a quarter, or a year) or it presents information as of a particular date (for example, as of December 31, 2016). Which of the following financial statements presents information as of a particular date? A) Balance sheet B) Income statement C) Statement of retained earnings D) Both the balance sheet and the income statement E) None of the above Answer: A Rationale: The balance sheet presents a firm’s assets, liabilities, and stockholders’ equity on a given date. Topic: Balance Sheet LO: 5 Level of Difficulty: MEDIUM 53. Which of the following is not contained in the heading for a balance sheet? A) The name of the company B) The time period (for example, a month, quarter, or year) covered by the balance sheet C) The title of the financial statement (that is, balance sheet) D) The date (a single day) of the balance sheet E) None of the above Answer: B Rationale: The heading for a balance sheet contains the name of the company, the title of the financial statement (that is, balance sheet), and the date (a single day) of the balance sheet. It does not contain the time period (for example, a month, quarter, or year) covered by the balance sheet. Topic: Income Statement LO: 5 Level of Difficulty: MEDIUM 54. Which of the following is not contained in the heading for an income statement? A) The name of the company B) The time period (for example, a month, quarter, or year) covered by the income statement C) The title of the financial statement (that is, income statement) D) The date (a single day) of the income statement E) None of the above Answer: D Rationale: The heading for an income statement contains the name of the company, the title of the financial statement (that is, income statement), and the time period (for example, a month, quarter, or year) covered by the income statement. It does not contain the date (a single day) of the income statement.

©Cambridge Business Publishers, 2020 1-24

Financial Accounting for Undergraduates, 4th Edition

Topic: Statement of Stockholders’ Equity LO: 5 Level of Difficulty: MEDIUM 55. Which of the following is not contained in the heading for a statement of stockholders’ equity? A) The name of the company B) The time period (for example, a month, quarter, or year) covered by the statement of stockholders’ equity C) The title of the financial statement (that is, statement of stockholders’ equity) D) The date (a single day) of the statement of stockholders’ equity E) None of the above Answer: D Rationale: The heading for the statement of stockholders’ equity contains the name of the company, the title of the financial statement (that is, statement of stockholders’ equity), and the time period (for example, a month, quarter, or year) covered by the statement of stockholders’ equity. It does not contain the date (a single day) of the statement of stockholders’ equity. Topic: Statement of Stockholders’ Equity LO: 5 Level of Difficulty: EASY 56. Which of the following is presented in a statement of stockholders’ equity? A) Revenues B) Expenses C) Net income D) Assets E) None of the above Answer: C Rationale: The statement of stockholders’ equity reports the events causing an increase or decrease in a business’s stockholders’ equity during a given time period, including both changes in a company’s common stock and changes in retained earnings. Retained earnings is increased when operations produce net income and reduced when operations produce a net loss. Net income is reported on the statement, but not revenues, expenses, or assets. Topic: Statement of Stockholders’ Equity LO: 5 Level of Difficulty: EASY 57. Which of the following is not presented in a statement of stockholders’ equity? A) Stockholders’ equity at the beginning of the year B) Revenues C) Net income D) Dividends E) None of the above Answer: B Rationale: The statement of stockholders’ equity reports the events causing an increase or decrease in a business’s stockholders’ equity during a given time period, including both changes in a company’s common stock and changes in retained earnings. Retained earnings is increased when operations produce net income and reduced when operations produce a net loss or dividends are paid. Net income, dividends, and stockholders’ equity at the beginning of the year are reported on the statement, but not revenues.

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Topic: Income Statement LO: 5 Level of Difficulty: MEDIUM 58. An income statement does not include which of the following? A) Operating expenses B) Cost of goods sold C) Retained earnings D) Sales Answer: C Rationale: Retained earnings represent accumulated earnings from previous accounting periods that has not been distributed to stockholders as dividends. USE THE FOLLOWING INFORMATION FOR QUESTIONS 59-62: Marvin’s Mechanical Repair Shop started the year with total assets of $60,000, total liabilities of $40,000, and retained earnings of $18,000. During the year, the business recorded $100,000 in auto repair revenues, $70,000 in expenses, and the company paid dividends of $15,000. Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 59. The net income reported by Marvin’s Mechanical Repair Shop for the year was: A) $180,000 B) $ 40,000 C) $ 50,000 D) $ 30,000 E) None of the above Answer: D Rationale: $100,000 - $70,000 = $30,000 Topic: Financial Statements LO: 5 Level of Difficulty: EASY 60. Marvin’s balance of stockholders’ equity at the start of the year was: A) $ 2,000 B) $ 20,000 C) $100,000 D) $ 15,000 E) None of the above Answer: B Rationale: $60,000 - $40,000 = $20,000

©Cambridge Business Publishers, 2020 1-26

Financial Accounting for Undergraduates, 4th Edition

Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 61. Marvin’s balance of retained earnings at the end of the year was: A) $50,000 B) $42,000 C) $33,000 D) $70,000 E) None of the above Answer: C Rationale: $18,000 + ($100,000 - $70,000) - $15,000 = $33,000 Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 62. If Marvin’s Mechanical Repair Shop ends the year with total assets of $80,000, and total liabilities of $35,000, what must be the amount of common stock issued during the year? A) $ 10,000 B) $ 14,000 C) $ 5,000 D) $ 3,000 E) None of the above Answer: A Rationale: End of year stockholders’ equity = Total assets – Total liabilities = ($80,000 - $35,000 = $45,000) End of year retained earnings = Start of year retained earnings + Net income – Dividends = ($18,000 + ($100,000 - $70,000) – $15,000 = $33,000.) End of the year common stock = Year-end stockholders’ equity – Year-end retained earnings = ($45,000 – $33,000 = $12,000) Start of year common stock = Start of year stockholders’ equity – Start of year retained earnings = (($60,000 - $40,000) – $18,000 = $2,000). Common stock issued during the year = End of year common stock – Start of year common stock = ($12,000 – $2,000 = $10,000)

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USE THE FOLLOWING INFORMATION FOR QUESTIONS 63-66 The Williams Model Aircraft Repair Shop started the year with total assets of $180,000, total liabilities of $120,000, and retained earnings of $54,000. During the year, the business recorded $300,000 in repair revenues, $210,000 in expenses, and the company paid dividends of $45,000. Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 63. The net income reported by The Williams Model Aircraft Repair Shop for the year was: A) $ 90,000 B) $ 540,000 C) $ 120,000 D) $ 150,000 E) None of the above Answer: A Rationale: $300,000 - $210,000 = $90,000 Topic: Financial Statements LO: 5 Level of Difficulty: EASY 64. The Williams’ balance of stockholders’ equity at the start of the year was: A) $ 45,000 B) $ 6,000 C) $ 60,000 D) $300,000 E) None of the above Answer: C Rationale: $180,000 - $120,000 = $60,000 Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 65. The Williams’ balance of retained earnings at the end of the year was: A) $210,000 B) $150,000 C) $126,000 D) $ 99,000 E) None of the above Answer: D Rationale: $54,000 + ($300,000 - $210,000) - $45,000 = $99,000

©Cambridge Business Publishers, 2020 1-28

Financial Accounting for Undergraduates, 4th Edition

Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 66. If The Williams Model Aircraft Repair Shop ends the year with total assets of $240,000, and total liabilities of $105,000, what must be the amount of common stock issued during the year? A) $ 9,000 B) $30,000 C) $42,000 D) $15,000 E) None of the above Answer: B Rationale: End of year stockholders’ equity = Total assets – Total liabilities = ($240,000 - $105,000 = $135,000) End of year retained earnings = Start of year retained earnings + Net income – Dividends = ($54,000 + ($300,000 - $210,000) - $45,000 = $99,000.) End of the year common stock = Year-end stockholders’ equity – Year-end retained earnings = ($135,000 - $99,000 = $36,000) Start of year common stock = Start of year stockholders’ equity – Start of year retained earnings = (($180,000 - $120,000) - $54,000 = $6,000). Common stock issued during the year = End of year common stock – Start of year common stock = ($36,000 - $6,000 = $30,000) Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 67. The transactions carried out by Melon Corporation during the year caused an increase in total assets of $50,000 and a decrease in total liabilities of $20,000. If no additional investment was made by the investors during the year and dividends of $14,000 were paid, what was the net income for the year? A) $106,000 B) $ 42,000 C) $ 84,000 D) $ 60,000 E) None of the above Answer: C Rationale: Change in assets = change in liabilities + change in stockholders’ equity. (Stockholders’ equity includes the change in retained earnings resulting from net income for the year and the payment of dividends.) [$50,000 = (-$20,000) + (X - $14,000)]. X = $84,000

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Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 68. The transactions carried out by Papaya Corporation during the year caused an increase in total assets of $150,000 and a decrease in total liabilities of $60,000. If no additional investment was made by the investors during the year and dividends of $42,000 were paid, what was the net income for the year? A) $180,000 B) $318,000 C) $126,000 D) $252,000 E) None of the above Answer: D Rationale: Change in assets = change in liabilities + change in stockholders’ equity. (Stockholders’ equity includes the change in retained earnings resulting from net income for the year and the payment of dividends.) [$150,000 = (-$60,000) + (X - $42,000)] X = $252,000 USE THE FOLLOWING INFORMATION FOR QUESTIONS 69-70: The following information was taken from the records of Easter Corporation for the year ended December 31, 2019. Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (Jan 1, 2016) Consulting fees revenue Rent expense Supplies expense

$40,000 26,000 26,900 30,000 115,720 200,000 23,400 33,800

Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 69. The retained earnings reported by Easter Corporation as of December 31, 2019 is: A) $158,490 B) $158,090 C) $111,590 D) $162,520 Answer: D Rationale: Year-end retained earnings = Beginning retained earnings + Net income (loss) – dividends. Net income = Revenue – Expenses ($200,000 – ($40,000 + $26,000 + $23,400 +$33,800) = $76,800) Year-end retained earnings = $115,720 + $76,800 - $30,000 = $162,520

©Cambridge Business Publishers, 2020 1-30

Financial Accounting for Undergraduates, 4th Edition

Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 70. The net income reported by Easter Corporation for the year ended December 31, 2019 was: A) $ 76,800 B) $102,800 C) $ 72,800 D) $ 49,900 Answer: A Rationale: Net income = Revenue – Expenses ($200,000 – ($40,000 + $26,000 + $23,400 +$33,800) = $76,800) USE THE FOLLOWING INFORMATION FOR QUESTIONS 71-72 The following information was taken from the records of Rectangle Corporation for the year ended December 31, 2019. Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (Jan 1, 2016) Consulting fees revenue Rent expense Supplies expense

$120,000 78,000 80,700 90,000 347,160 600,000 70,200 101,400

Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 71. The retained earnings reported by Rectangle Corporation as of December 31, 2019 is: A) $487,560 B) $457,470 C) $474,270 D) $324,770 Answer: A Rationale: Year-end retained earnings = Beginning retained earnings + Net income (loss) – Dividends. Net income = Revenue – Expenses ($600,000 – ($120,000 + $78,000 + $70,200 + $101,400) = $230,400) Year-end retained earnings = $347,160 + $230,400 - $90,000 = $487,560

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Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 72. The net income reported by Rectangle Corporation for the year ended December 31, 2019 was: A) $149,700 B) $230,400 C) $308,400 D) $218,400 Answer: B Rationale: Net income = Revenue – Expenses ($600,000 – ($120,000 + $78,000 + $70,200 +$101,400) = $230,400) Topic: Financial statements LO: 5 Level of Difficulty: MEDIUM 73. The following information was taken from the records of J. Weasley Corporation for the month ended December 31, 2019. Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (January 1, 2016) Consulting fees revenue Rent expense Supplies expense

$39,200 28,000 24,800 28,250 114,820 200,000 22,500 34,700

Given the above information, net income for the year is: A) $75,600 B) $34,120 C) $88,560 D) $70,620 Answer: A Rationale: Net income = Revenue – Expenses ($200,000 – ($39,200 + $28,000 + $22,500 + $34,700) = $75,600)

©Cambridge Business Publishers, 2020 1-32

Financial Accounting for Undergraduates, 4th Edition

Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 74. The following information was taken from the records of H. Granger Corporation for the month ended December 31, 2019. Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (January 1, 2019) Consulting fees revenue Rent expense Supplies expense

$124,500 76,500 81,900 84,750 482,325 600,000 71,700 100,500

Given the above information, net income for the year is: A) $211,860 B) $226,800 C) $102,360 D) $265,680 Answer: B Rationale: Net income = Revenue – Expenses ($600,000 – ($124,500 + $76,500 + $71,700 + $100,500) = $226,800) USE THE FOLLOWING INFORMATION FOR QUESTIONS 75-79: Competitive Landscaping Company has compiled the following list of account balances of various assets, liabilities, revenues and expenses on December 31, 2019, the end of its first year of operations. Common stock Accounts payable Salary expense Repairs expense Dividends Truck Equipment Notes payable Cash Supplies expense Service revenue Gasoline expense

$25,200 5,000 9,000 1,600 10,000 17,000 12,600 16,400 35,200 3,200 43,600 1,600

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Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 75. The net income for Competitive Landscaping for the year was: A) $11,400 B) $11,800 C) $28,200 D) $25,600 Answer: C Rationale: Net income = Revenue – Expenses ($43,600 – ($9,000 + $1,600 + $3,200 +$1,600) = $28,200) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 76. The total liabilities for Competitive Landscaping on December 31, 2019 are: A) $37,800 B) $23,400 C) $21,400 D) $73,000 Answer: C Rationale: Total liabilities = Accounts payable + Notes payable ($5,000 + $16,400 = $21,400) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 77. The total assets for Competitive Landscaping on December 31, 2019 are: A) $56,200 B) $63,200 C) $43,200 D) $64,800 Answer: D Rationale: Total assets = Tash + truck + Equipment ($35,200 + $17,000 + $12,600 = $64,800) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 78. The retained earnings for Competitive Landscaping on December 31, 2019 are: A) $1,400 B) $18,200 C) $28,200 D) $6,300 Answer: B Rationale: Retained earnings = Net income – Dividends [($43,600 – ($9,000 + $1,600 + $3,200 +$1,600)) - $10,000] = ($28,200 - $10,000 = $18,200)

©Cambridge Business Publishers, 2020 1-34

Financial Accounting for Undergraduates, 4th Edition

Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 79. The stockholders’ equity for Competitive Landscaping on December 31, 2019 is: A) $55,400 B) $43,400 C) $45,200 D) $45,000 Answer: B Rationale: Stockholder’s equity = Assets – Liabilities [($35,200 + $17,000 + $12,600) - ($5,000 + $16,400)] = ($64,800 - $21,400 = $43,400)

USE THE FOLLOWING INFORMATION FOR QUESTIONS 80-84 Susie Lane’s Landscaping Company has compiled the following list of account balances of various assets, liabilities, revenues and expenses on December 31, 2019, the end of its first year of operations. Common stock Accounts payable Salary expense Repairs expense Dividends Truck Equipment Notes payable Cash Supplies expense Service revenue Gasoline expense

75,600 15,000 27,000 4,800 30,000 51,000 37,800 49,200 105,600 9,600 130,800 4,800

Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 80. The net income for Susie Lane’s Landscaping for the year was: A) $76,800 B) $34,200 C) $34,400 D) $84,600 Answer: D Rationale: Net income = Revenue – Expenses ($130,800 – ($27,000 + $4,800 + $9,600 + $4,800) = $84,600)

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Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 81. The total liabilities for Susie Lane’s Landscaping on December 31, 2019 are: A) $219,000 B) $113,400 C) $ 70,200 D) $ 64,200 Answer: D Rationale: Total liabilities = Accounts payable + Notes payable ($15,000 + $49,200 = $64,200) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 82. The total assets for Susie Lane’s Landscaping on December 31, 2019 are: A) $194,400 B) $168,600 C) $189,600 D) $129,600 Answer: A Rationale: Total assets = Cash + Truck + Equipment ($105,600 + $51,000 + $37,800 = $194,400) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 83. The retained earnings for Susie Lane’s Landscaping on December 31, 2019 are: A) $18,900 B) $ 4,200 C) $54,600 D) $84,600 Answer: C Rationale: Retained earnings = Net income – Dividends [($130,800 – ($27,000 + $4,800 + $9,600 + $4,800) - $30,000] = [$84,600 - $30,000 = $54,600] Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 84. The stockholders’ equity for Susie Lane’s Landscaping on December 31, 2019 is: A) $135,000 B) $166,200 C) $130,200 D) $135,600 Answer: C Rationale: Stockholder’s equity = Assets – Liabilities [($105,600 + $51,000 + $37,800) - ($15,000 + $49,200)] = ($194,400 - $64,200 = $130,200)

Financial Accounting for Undergraduates, 4th Edition

Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 85. Stockholders’ equity and total assets were $64,000 and $158,000 respectively at the beginning of the period. Assets increased 50% and liabilities decreased 60% during the period. What is stockholders’ equity at the end of the period? A) $ 90,000 B) $ 94,000 C) $199,400 D) $223,400 Answer: C Rationale: Liabilities = Assets – Stockholders equity ($158,000 - $64,000 = $94,000) Stockholders’ equity = Assets – Liabilities X = [($158,000 x 150%) – ($94,000 – ($94,000 x 60%))] X = $199,400 Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 86. Stockholders’ equity and total assets were $192,000 and $474,000 respectively at the beginning of the period. Assets increased 50% and liabilities decreased 60% during the period. What is stockholders’ equity at the end of the period? A) $670,200 B) $270,000 C) $282,000 D) $598,200 Answer: D Rationale: Liabilities = Assets – Stockholders equity ($474,000 - $192,000 = $282,000) Stockholders’ equity = Assets – Liabilities X = [($474,000 x 150%) – ($282,000 – ($282,000 x 60%))] X = $598,200

1-37

USE THE FOLLOWING INFORMATION FOR QUESTIONS 87-88. TOTALS Current assets All other assets Liabilities Common stock Retained earnings

January 1, 2019 $ 10,000 300,000 50,000 100,000 160,000

December 31, 2019 $ 20,000 300,000 60,000 130,000 ?

Additional data: Total expenses for the year were $70,000; Dividends paid during the year were $16,000. Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 87. Using the above table, determine the retained earnings as of December 31, 2019? A) $150,000 B) $170,000 C) $110.000 D) $130,000 Answer: D Rationale: Assets – Liabilities - Common stock = Retained earnings ($20,000 + $300,000) - $60,000 - $130,000 = $130,000 Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 88. Using the above table, determine the revenues for the year ending on December 31, 2019? A) $56,000 B) $44,000 C) $32,000 D) $74,000 Answer: A Rationale: Assets – Liabilities - Common Stock = Retained earnings (($20,000 + $300,000) - $60,000 - $130,000 = $130,000) Ending retained earnings + Dividends – Beginning retained earnings = Net income (loss) ($130,000 + $16,000 - $160,000 = $(14,000)) Revenue – Expense = Net income (X - $70,000 = $(14,000)) (X = $56,000)

Financial Accounting for Undergraduates, 4th Edition

USE THE FOLLOWING INFORMATION FOR QUESTIONS 89-90. TOTALS Current assets All other assets

January 1, 2019 $30,000 900,000

December 31, 2019 $ 60,000 900,000

Liabilities

150,000

180,000

Common stock Retained earnings

300,000 480,000

390,000 ?

Additional data: $48,000.

Total expenses for the year were $210,000; Dividends paid during the year were

Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 89. Using the above table, determine the retained earnings as of December 31, 2019? A) $390,000 B) $450,000 C) $510,000 D) $330,000 Answer: A Rationale: Assets – Liabilities - Common stock = Retained earnings ($60,000 + $900,000) - $180,000 - $390,000 = $390,000 Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 90. Using the above table, determine the revenues for the year ending on December 31, 2019? A) $222,000 B) $168,000 C) $132,000 D) $ 96,000 Answer: B Rationale: Assets – Liabilities - Common Stock = Retained earnings (($60,000 + $900,000) - $180,000 - $390,000 = $390,000) Ending retained earnings + Dividends – Beginning retained earnings = Net income (loss) (390,000 + $48,000 - $480,000 = $(42,000)) Revenue – Expense = Net income (X - $210,000 = $(42,000)) (X = $168,000)

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Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 91. Chelsea Corporation reported the following information at the end of its first year of operations: Common stock: Sales revenue: Total assets: Total liabilities: Dividends:

$40,000 $210,000 $170,000 $70,000 $30,000

What must have been the expenses for the year? A) $120,000 B) $130,000 C) $ 32,000 D) $150,000 Answer: A Rationale: Assets – Liabilities - Common Stock = Retained earnings ($170,000 - $70,000 - $40,000 = $60,000) Ending retained earnings + Dividends – Beginning retained earnings = Net income (loss) ($60,000 + $30,000 - $0 = $90,000) Expense = Revenue - Net income (X = $210,000 - $90,000) (X = $120,000) Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 92. Kimick Corporation reported the following information at the end of its first year of operations: Common stock: Sales revenue: Total assets: Total liabilities: Dividends:

$120,000 $630,000 $510,000 $210,000 $ 90,000

What must have been the expenses for the year? A) $450,000 B) $360,000 C) $390,000 D) $ 51,000

Financial Accounting for Undergraduates, 4th Edition

Answer: B Rationale: Assets – Liabilities - Common Stock = Retained earnings ($510,000 - $210,000 - $120,000 = $180,000) Ending retained earnings + Dividends – Beginning retained earnings = Net income (loss) ($180,000 + $90,000 - $0 = $270,000) Expense = Revenue - Net income (x = $630,000 - $270,000) (x = $360,000) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 93. On January 1, 2019, Little Robot invested $300,000 to start Bot Corporation. During the year, Bot Corporation had total revenues of $60,000 and total expenses of $16,000. Cash dividends paid totaled $12,000. What was the balance in Bot Corporation's retained earnings account at the end of the year? A) $314,000 B) $ 32,000 C) $302,000 D) $ 14,000 Answer: B Rationale: Ending retained earnings = Beginning retained earnings - Dividends + Net income X = ($0 - $12,000 + ($60,000 - $16,000)) X = $32,000 Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 94. On January 1, 2019, Les Holt invested $900,000 to start Holt Corporation. During the year, Holt Corporation had total revenues of $180,000 and total expenses of $48,000. Cash dividends paid totaled $36,000. What was the balance in Holt Corporation's retained earnings account at the end of the year? A) $ 42,000 B) $942,000 C) $ 96,000 D) $906,000 Answer: C Rationale: Ending retained earnings = Beginning retained earnings - Dividends + Net income X = ($0 - $36,000 + ($180,000 - $48,000)) X = $96,000

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Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 95. On January 1, 2019, Little Robot invested $300,000 to start Bot Corporation. During the year, Bot Corporation had total revenues of $60,000 and total expenses of $16,000. Cash dividends paid totaled $12,000. What must have been the balance in Bot Corporation's total assets at the end of the year, assuming no liabilities? A) $300,000 B) $ 32,000 C) $332,000 D) $268,000 Answer: C Rationale: Ending retained earnings = Beginning retained earnings - Dividends + Net income X = ($0 - $12,000 + ($60,000 - $16,000)) X = $32,000 Assets = Liabilities + Retained earnings + Contributed capital Y = $0 + $32,000 + $300,000 Y = $332,000 Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 96. On January 1, 2019, Les Holt invested $900,000 to start Holt Corporation. During the year, Holt Corporation had total revenues of $180,000 and total expenses of $48,000. Cash dividends paid totaled $36,000. What must have been the balance in Holt Corporation's total assets at the end of the year, assuming no liabilities? A) $804,000 B) $900,000 C) $ 96,000 D) $996,000 Answer: D Rationale: Ending retained earnings = Beginning retained earnings - Dividends + Net income X = ($0 - $36,000 + ($180,000 - $48,000)) X = $96,000 Assets = Liabilities + Retained earnings + Contributed capital Y = $0 + $96,000 + $900,000 Y = $996,000

Financial Accounting for Undergraduates, 4th Edition

Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 97. On January 1, 2019, R. Lupin Corporation's retained earnings account had a balance of $1,570,000. During 2019 the company had revenues of $270,000 and expenses of $186,000. On December 31, the company’s retained earnings had a balance of $1,601,000. Determine the amount of dividends paid during 2019. A) $53,000 B) $26,500 C) $85,000 D) $61,500 Answer: A Rationale: Dividends = Beginning retained earnings + Net income – Ending retained earnings (X = $1,570,000 + ($270,000 - $186,000) – $1,601,000) (X = $53,000) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 98. On January 1, 2019, Pigwidgeon Corporation's retained earnings account had a balance of $4,710,000. During 2019 the company had revenues of $810,000 and expenses of $558,000. On December 31, the company’s retained earnings had a balance of $4,803,000. Determine the amount of dividends paid during 2019. A) $184,500 B) $159,000 C) $ 79,500 D) $255,000 Answer: B Rationale: Dividends = Beginning retained earnings + Net income – Ending retained earnings (X = $4,710,000 + ($810,000 - $558,000) - $4,803,000) (X = $159,000)

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Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 99. Nichole Company’s balance sheet as of December 31, 2019 showed total assets of $170,000, and total liabilities of $70,000, and common stock of $64,000. During 2020, the company reported revenues of $64,000, expenses of $50,000, and paid dividends of $16,000. What was the balance in the Retained Earnings account on January 1, 2021? A) $34,000 B) $56,000 C) $36,000 D) $28,000 Answer: A Rationale: 2019 Ending retained earnings = Assets - Liabilities - Common stock (X = $170,000 - $70,000 - $64,000 = $36,000) 2020 Beginning retained earnings = 2019 Ending retained earnings = $36,000 2020 Beginning retained earnings + Net income – Dividends = 2020 Ending retained earnings ($36,000 + ($64,000 - $50,000) - $16,000 = $34,000) 2021 Beginning retained earnings = 2020 Ending retained earnings = $34,000 Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 100. CN Company’s balance sheet as of December 31, 2019 showed total assets of $510,000, and total liabilities of $210,000, and common stock of $192,000. During 2020, the company reported revenues of $192,000, expenses of $150,000, and paid dividends of $48,000. What was the balance in the Retained Earnings account on January 1, 2021? A) $ 84,000 B) $102,000 C) $168,000 D) $108,000 Answer: B Rationale: 2019 Ending retained earnings = Assets - Liabilities - Common stock (X = $510,000 - $210,000 - $192,000 = $108,000) 2020 Beginning retained earnings = 2019 Ending retained earnings = $108,000 2020 Beginning retained earnings + Net income – Dividends = 2020 Ending retained earnings ($108,000 + ($192,000 - $150,000) - $48,000 = $102,000) 2021 Beginning retained earnings = 2020 Ending retained earnings = $102,000

Financial Accounting for Undergraduates, 4th Edition

Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 101. Assuming no other changes except a decrease in assets of $100,000, increase in liabilities of $20,000, and expenses of $120,000, by how much did stockholders' equity increase or decrease and what were revenues for the period? A) Stockholders' equity increased $80,000; revenues were $200,000 B) Stockholders' equity decreased $80,000; revenues were $200,000 C) Stockholders' equity increased $120,000; revenues were $240,000 D) Stockholders' equity decreased $120,000; revenues were $0 Answer: D Rationale: Change in Assets = Change in Liabilities + Change in Stockholders’ equity [(100,000) = $20,000 + X] [(120,000) = X = decrease in Stockholder’s equity] Change in Stockholder’s equity = Revenues – Expenses [($120,000) = X - $120,000] [($120,000) + $120,000 = $0 X = Revenues] Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 102. Assuming no other changes except a decrease in assets of $300,000, increase in liabilities of $60,000, and expenses of $360,000, by how much did stockholders' equity increase or decrease and what were revenues for the period? A) Stockholders' equity decreased $360,000; revenues were $0 B) Stockholders' equity increased $240,000; revenues were $600,000 C) Stockholders' equity decreased $240,000; revenues were $600,000 D) Stockholders' equity increased $360,000; revenues were $360,000 Answer: A Rationale: Change in Assets = Change in Liabilities + Change in Stockholders’ equity [($300,000) = $60,000 + X] [($360,000) = X = Decrease in Stockholder’s equity] Change in Stockholder’s equity = Revenues – Expenses [($360,000) = X - $360,000] [($360,000) + $360,000 = $0 X = Revenues]

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Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 103. At the beginning of the year, the Stephen Company had total assets of $1,800,000 and total stockholders’ equity of $690,000. During the year, total assets increased by $270,000, and total liabilities increased by $126,000. The company also paid $21,000 in dividends. How much was the net income for the year? A) $144,000 B) $195,000 C) $ 93,000 D) $165,000 Answer: D Rationale: Assets – Stockholder’s equity = Liabilities ($1,800,000 - $690,000 = $1,110,000) Year-end Assets – Year-end Liabilities = year-end Stockholders’ equity [($1,800,000 + $270,000) – ($1,110,000 + $126,000) = X = $834,000] Net income = Ending Stockholders’ equity + Dividends – Beginning Stockholders’ equity (X = $834,000 + $21,000 - $690,000) (X= $165,000) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 104. Takahashi Company reported the following the following statement of cash flows: Cash flows from operating activities ………….......…. $ 169,120 Cash flows from investing activities ……….……........ (84,700) Cash flows from financing activities…………........... ? Cash balance at the beginning of year ………….....… 25,700 Cash balance at the end of year……………….....…… 160,020 Determine the missing amount (cash flows from financing activities)? A) $232,740 B) $158,320 C) $ 49,900 D) $ 84,420 Answer: C Rationale: Cash flows from financing activities = Change in Cash balance – Cash flows from operations – Cash flows from investing activities (X = [($160,020 – $25,700) – $169,120 – $(84,700)] = $49,900)

Financial Accounting for Undergraduates, 4th Edition