Test Bank for College Accounting A Contemporary Approach 4th Edition By David Haddock, John Ellis Pr by digitaldownload87

Chapter 01 Accounting: The Language of Business True / False Questions

1. The purpose of accounting is to provide financial information about an economic or social entity. True

False

2. An accounting system is designed to accumulate and classify data about a firm's financial affairs and summarize it in the general journal. True

False

3. In a sole proprietorship, the owner is responsible for the debts of the business if the firm is unable to pay. True

False

4. Laws passed by Congress in 1933 and 1934 gave the Securities and Exchange Commission (SEC) final say on matters of financial reporting by publicly owned corporations. True

False

1-1

5. Currently, generally accepted accounting principles are developed by the American Institute of Certified Public Accountants (AICPA).

True

False

6. The Securities and Exchange Commission (SEC) requires that publicly owned corporations submit financial statements to it each year.

True

False

7. Public accounting firms provide three major types of services: auditing, tax accounting, and management advisory services.

True

False

8. The financial statements and the auditor's report must be made available to stockholders of publicly owned corporations.

True

False

9. Anyone can invest in a closely held corporation.

True

False

10. Managerial Accounting is any activity associated with the preparation of tax returns and the audit of those returns.

True

False

11. The separate entity assumption applies only to the corporate form of business.

True

False

12. As the first step in the development of generally accepted accounting principles, the FASB writes an exposure draft, which explains the topic under consideration.

True

False

13. Public accountants work on the staff of federal, state, or local governmental units.

True

False

14. The SEC uses financial information to determine a company's tax base.

True

False

15. When a partner leaves, the partnership is dissolved and a new partnership may be formed with the remaining partners.

True

False

16. Accounting is defined as the process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties.

True

False

17. The owners and managers of a business are the only users of the financial information.

True

False

18. Most owners and managers rely heavily on the accountant's judgment and knowledge when making financial decisions.

True

False

19. Accountants provide financial information to various parties so they can make business decisions.

True

False

20. When a business is organized as a sole proprietorship, the owner should combine his/her personal financial information with the business financial information.

True

False

21. A business partnership can have only two partners.

True

False

Fill in the Blank Questions

22. Accounting is often referred to as the language of ___________________.

________________________________________

23. The results of the accounting process are summarized in periodic reports called financial ___________________.

________________________________________

24. Financial information users such as owners, managers and employees, are referred to as ___________________ users.

________________________________________

25. The three major legal forms of business entity are the sole proprietorship, the partnership, and the ___________________.

________________________________________

26. A partnership has ____________________ or more owners.

________________________________________

27. Ownership in a corporation is evidenced by shares of ___________________.

________________________________________

28. The Securities and Exchange Commission (SEC) regulates the accounting methods and financial reporting of ____________________ owned corporations.

________________________________________

29. The financial statements submitted to the SEC by a corporation must be ____________________ by an independent accountant to ensure their fairness and adherence to generally accepted accounting principles.

________________________________________

30. Accountants normally choose to practice in one of three areas: public accounting, managerial accounting, or ____________________ accounting.

________________________________________

31. A form of business entity owned by one person is called a(n) ___________________.

________________________________________

32. The people, companies, or government agencies to whom a firm owes money are called ___________________.

________________________________________

33. The process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties is called ___________________.

________________________________________

34. Tax accounting is a service offered by public accounting firms that involves tax ____________________ and tax planning.

________________________________________

35. Generally accepted accounting ____________________ are financial accounting standards that are changed and refined in response to changes in the environment in which businesses operate.

________________________________________

36. The owners of a corporation are called ___________________.

________________________________________

Multiple Choice Questions

37. Which of the following is NOT an area in which accountants usually practice?

A. Public Accounting B. Industrial Accounting C. Governmental Accounting D. Managerial (Private) Accounting

38. Managerial accountants usually do which of the following?

A. audit financial statements B. prepare tax returns and audit the returns C. establish accounting policies D. investigate companies for possible violations of law

39. Identify which of the following are considered OUTSIDE users of financial accounting information.

A. employees B. managers C. owners D. banks

40. An example of an economic entity is

A. a town. B. a business. C. a politician. D. a church.

41. The form of a business organization that is not affected by the withdrawal or death of an owner and can continue forever is

A. the sole proprietorship. B. the partnership. C. the corporation. D. the nonprofit organization.

42. Which of the following is NOT a type of information communicated by the financial statements?

A. whether or not the business is profitable B. what types of assets business owns C. how long the business has been in operation D. how much the business owes others

43. Which of the following is NOT a type of information communicated by the financial statements?

A. the equity, or value, of the business B. the amount spent on costs (expenses) of the business C. the types of products and services the business provides D. the amount of revenue earned by the business

44. The Financial Accounting Standards Board is responsible for

A. auditing financial statements. B. developing generally accepted accounting principles. C. establishing accounting systems for businesses. D. making recommendations to the Securities and Exchange Commission.

45. The government agency that has final authority over the financial reporting of publicly owned corporations is

A. the Securities and Exchange Commission. B. the Federal Trade Commission. C. the Internal Revenue Service. D. the Financial Accounting Standards Board.

46. The financial affairs of a business and the financial affairs of the owners should be

A. combined in the firm's accounting records. B. reported in different parts of the firm's accounting records. C. combined only if the owner wants them to be. D. kept totally separate.

47. All financial statements submitted to the SEC by publicly owned corporations must include an auditor's report prepared by

A. an internal auditor. B. the firm's managerial accountant. C. an independent certified public accountant. D. anyone in the accounting department.

48. The area of accounting that involves the preparation of internal reports for a firm's executives and the analysis of the data in these reports to aid in decision making is known as

A. financial accounting. B. managerial accounting. C. auditing. D. cost accounting.

49. The corporations whose stock can be bought and sold on stock exchanges and in over-thecounter markets are referred to as

A. privately owned corporations. B. closely held corporations. C. publicly owned corporations. D. sole proprietorships.

50. The group of accounting educators who offer their opinions about proposed FASB statements, after research has been done to determine the possible effects on financial reporting and the economy, is

A. the FCC. B. the AICPA. C. the SEC. D. the AAA.

51. Owners are not personally responsible for the debts of the business if the form of business organization is

A. the sole proprietorship. B. the partnership. C. the corporation. D. the nonprofit organization.

52. Identify the form of business that is considered a separate legal entity.

A. a sole proprietorship B. a corporation C. a limited liability partnership D. a partnership

53. Identify the advantages of forming a business as an S Corporation.

A. owners avoid double taxation and owners have limited liability B. treated as a separate legal entity and owners avoid double taxation C. owners have limited liability and corporation's earnings are tax free D. owner is personally responsible for debts of the business and earnings are reported directly on owner's personal tax return

54. A firm issues periodic reports called

A. financial statements. B. summaries. C. tax returns. D. audits.

55. Which of the following is NOT part of the process of accounting for financial information?

A. recording B. identifying C. communicating D. classifying

56. Which of the following is a true statement in regards to the International Accounting Standards Board?

A. The IASB deals with issues caused by the lack of uniform accounting principles existing in different countries B. The IASB was created by the American Accounting Association C. The IASB develops all accounting principles to be used in the United States D. The IASB has the authority to audit financial statements of all US corporations

57. Which of the following is NOT a service of public accounting firms?

A. auditing B. tax accounting C. management advisory services D. investment services

58. Tax accounting involves tax compliance and

A. tax evaluation. B. tax planning. C. tax configuration. D. tax obfuscation.

59. Tax planning includes

A. preparing tax returns. B. auditing tax returns. C. correcting tax returns. D. suggesting actions to reduce tax liability.

60. Managerial accounting is

A. public accounting. B. government accounting. C. private accounting. D. tax accounting.

61. The following are all government agencies except

A. SEC. B. AICPA. C. IRS. D. FBI.

62. An act passed in response to the wave of corporate accounting scandals is the

A. Saxon-Ordanly Act. B. Sarbanes-Oxley Act. C. Sardonic-Oxone Act. D. Sorbine-Oxide Act.

63. Owners and managers need financial information in order to

A. grant loans. B. issue credit. C. collect taxes. D. make decisions.

64. The Sarbanes-Oxley Act includes rules on

A. auditor retention. B. auditor reliability. C. auditor rotation. D. auditor reporting.

65. A form of the partnerships business entity is

A. LLP. B. LLC. C. INP. D. DBA.

66. Identify the statement below that represents what GAAP stands for

A. Generally Accepted Accounting Principles. B. Generally Accepted Auditing Practices. C. General Accounting Actuary Principles. D. Generally Approved Accounting Practices.

67. The review of financial statements to assess their fairness and adherence to GAAP is

A. accounting. B. preparation. C. compliance. D. auditing.

68. Management advisory services are designed to help

A. government agencies. B. clients. C. employers. D. creditors.

69. An independent accountant who provides accounting services to the public for a fee is a

A. CIA. B. CFE. C. CMA. D. CPA.

70. The Financial Accounting Standards Board has the authority to develop generally accepted accounting principles. Choose the option below that contains the steps used by the FASB in developing GAAP.

A. steps include: publishing a notice in the newspaper, seeking public opinion, and issuing a statement of principle. B. steps include: issuing a discussion memorandum, filing a legal draft, and notifying the SEC. C. steps include: filing a complaint with the SEC, issuing an internal report, and issuing a statement of principle. D. steps include: issuing a discussion memorandum, issuing an exposure draft, and issuing a statement of principle.

Short Answer Questions

71. What is the "language of business?" List three groups who use this financial information.

72. Cullen Company of country X and Shaw Industries of country Y have issued financial statements in compliance with the accounting principles of their respective countries. They would like to work together on a project and need to compare their current financial statements prior to beginning. However, the accounting principles of the two countries differ. What organization might they turn to regarding this issue? (Give both the full name of the organization and its acronym.) What is the function of this organization?

73. You have just entered college and decide to pursue a career as an accountant. What are the three areas in which an accountant can practice?

74. There are three general services public accountants offer. List and briefly describe each.

75. List at least five activities performed by managerial accountants.

76. Define the following terms: entity, economic entity, and social entity.

77. How do sole proprietorships, partnerships, and corporations differ?

78. List three individuals or groups who use financial information to make decisions about a firm. For each listed, give an example of why they would need the information.

79. List the "Big Four" public accounting firms in the United States.

80. Audited financial statements include an auditor's report. What does this auditor's report contain?

81. List at least three of the provisions of the Sarbanes-Oxley Act.

82. What determines the independence of Certified Public Accountants (CPAs)?

Chapter 01 Accounting: The Language of Business Answer Key

True / False Questions

The purpose of accounting is to provide financial information about an economic or social entity.

TRUE

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Define accounting. Topic: What is Accounting?

An accounting system is designed to accumulate and classify data about a firm's financial affairs and summarize it in the general journal.

FALSE

In a sole proprietorship, the owner is responsible for the debts of the business if the firm is unable to pay.

TRUE

AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Learning Objective: 01-06 Define the accounting terms new to this chapter. Topic: Business Entities

Laws passed by Congress in 1933 and 1934 gave the Securities and Exchange Commission (SEC) final say on matters of financial reporting by publicly owned corporations.

TRUE

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-03 Identify the users of financial information. Topic: What is Accounting?

Currently, generally accepted accounting principles are developed by the American Institute of Certified Public Accountants (AICPA).

FALSE

AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Topic: Accounting Standards

The Securities and Exchange Commission (SEC) requires that publicly owned corporations submit financial statements to it each year.

TRUE

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Topic: Accounting Standards

Public accounting firms provide three major types of services: auditing, tax accounting, and management advisory services.

TRUE

The financial statements and the auditor's report must be made available to stockholders of publicly owned corporations.

TRUE

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Topic: Accounting Standards

Anyone can invest in a closely held corporation.

FALSE

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Accounting Standards

10.

Managerial Accounting is any activity associated with the preparation of tax returns and the audit of those returns.

FALSE

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Topic: What is Accounting?

11.

The separate entity assumption applies only to the corporate form of business.

FALSE

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Learning Objective: 01-06 Define the accounting terms new to this chapter. Topic: Accounting Standards

12.

As the first step in the development of generally accepted accounting principles, the FASB writes an exposure draft, which explains the topic under consideration.

FALSE

AACSB: Analytic AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Topic: Accounting Standards

13.

Public accountants work on the staff of federal, state, or local governmental units.

FALSE

AACSB: Analytic

AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Topic: What is Accounting?

14.

The SEC uses financial information to determine a company's tax base.

FALSE

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Identify the users of financial information. Topic: What is Accounting?

15.

When a partner leaves, the partnership is dissolved and a new partnership may be formed with the remaining partners.

TRUE

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Business Entities

16.

Accounting is defined as the process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties.

TRUE

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-01 Define accounting. Topic: What is Accounting?

17.

The owners and managers of a business are the only users of the financial information.

FALSE

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-03 Identify the users of financial information. Topic: What is Accounting?

18.

Most owners and managers rely heavily on the accountant's judgment and knowledge when making financial decisions.

TRUE

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Define accounting. Topic: What is Accounting?

19.

Accountants provide financial information to various parties so they can make business decisions.

TRUE

20.

When a business is organized as a sole proprietorship, the owner should combine his/her personal financial information with the business financial information.

FALSE

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Business Entities

21.

A business partnership can have only two partners.

FALSE

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Business Entities

Fill in the Blank Questions

22.

Accounting is often referred to as the language of ___________________.

business

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Define accounting. Topic: What is Accounting?

23.

The results of the accounting process are summarized in periodic reports called financial ___________________.

statements

AACSB: Analytic

AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Define accounting. Topic: What is Accounting?

24.

Financial information users such as owners, managers and employees, are referred to as ___________________ users.

inside or internal

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-03 Identify the users of financial information. Topic: Users of Accounting

25.

The three major legal forms of business entity are the sole proprietorship, the partnership, and the ___________________.

corporation

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Business Entities

26.

A partnership has ____________________ or more owners.

two

27.

Ownership in a corporation is evidenced by shares of ___________________.

stock

28.

The Securities and Exchange Commission (SEC) regulates the accounting methods and financial reporting of ____________________ owned corporations.

publicly

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-03 Identify the users of financial information.

Topic: Accounting Standards

29.

The financial statements submitted to the SEC by a corporation must be ____________________ by an independent accountant to ensure their fairness and adherence to generally accepted accounting principles.

audited

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Topic: Accounting Standards

30.

Accountants normally choose to practice in one of three areas: public accounting, managerial accounting, or ____________________ accounting.

governmental

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Topic: What is Accounting?

31.

A form of business entity owned by one person is called a(n) ___________________.

sole proprietorship

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal

AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Learning Objective: 01-06 Define the accounting terms new to this chapter. Topic: Business Entities

32.

The people, companies, or government agencies to whom a firm owes money are called ___________________.

creditors

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Business and Accounting

33.

The process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties is called ___________________.

accounting

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Define accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Topic: What is Accounting?

34.

Tax accounting is a service offered by public accounting firms that involves tax ____________________ and tax planning.

compliance

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Topic: What is Accounting?

35.

Generally accepted accounting ____________________ are financial accounting standards that are changed and refined in response to changes in the environment in which businesses operate.

principles

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Topic: Accounting Standards

36.

The owners of a corporation are called ___________________.

stockholders or shareholders

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Blooms: Remember

Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Business Entities

Multiple Choice Questions

37.

Which of the following is NOT an area in which accountants usually practice?

A. Public Accounting B. Industrial Accounting C. Governmental Accounting D. Managerial (Private) Accounting

38.

Managerial accountants usually do which of the following?

A. audit financial statements B. prepare tax returns and audit the returns C. establish accounting policies D. investigate companies for possible violations of law

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making 1-35 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Topic: What is Accounting?

39.

Identify which of the following are considered OUTSIDE users of financial accounting information.

A. employees B. managers C. owners D. banks

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-03 Identify the users of financial information. Topic: Users of Financial Information

40.

An example of an economic entity is

A. a town. B. a business. C. a politician. D. a church.

AACSB: Analytic AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Business Entities

41.

The form of a business organization that is not affected by the withdrawal or death of an owner and can continue forever is

A. the sole proprietorship. B. the partnership. C. the corporation. D. the nonprofit organization.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Business Entities

42.

Which of the following is NOT a type of information communicated by the financial statements?

A. whether or not the business is profitable B. what types of assets business owns C. how long the business has been in operation D. how much the business owes others

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making AICPA FN: Reporting

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-01 Define accounting. Topic: What is Accounting?

43.

Which of the following is NOT a type of information communicated by the financial statements?

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-01 Define accounting. Topic: What is Accounting?

44.

The Financial Accounting Standards Board is responsible for

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Topic: Accounting Standards

45.

The government agency that has final authority over the financial reporting of publicly owned corporations is

A. the Securities and Exchange Commission. B. the Federal Trade Commission. C. the Internal Revenue Service. D. the Financial Accounting Standards Board.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Topic: Accounting Standards

46.

The financial affairs of a business and the financial affairs of the owners should be

A. combined in the firm's accounting records. B. reported in different parts of the firm's accounting records. C. combined only if the owner wants them to be. D. kept totally separate.

AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Accounting Standards

47.

All financial statements submitted to the SEC by publicly owned corporations must include an auditor's report prepared by

A. an internal auditor. B. the firm's managerial accountant. C. an independent certified public accountant. D. anyone in the accounting department.

48.

The area of accounting that involves the preparation of internal reports for a firm's executives and the analysis of the data in these reports to aid in decision making is known as

A. financial accounting. B. managerial accounting. C. auditing. D. cost accounting.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making 1-40 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Topic: What is Accounting?

49.

The corporations whose stock can be bought and sold on stock exchanges and in overthe-counter markets are referred to as

A. privately owned corporations. B. closely held corporations. C. publicly owned corporations. D. sole proprietorships.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Business Entities

50.

The group of accounting educators who offer their opinions about proposed FASB statements, after research has been done to determine the possible effects on financial reporting and the economy, is

A. the FCC. B. the AICPA. C. the SEC. D. the AAA.

AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Topic: What is Accounting?

51.

Owners are not personally responsible for the debts of the business if the form of business organization is

A. the sole proprietorship. B. the partnership. C. the corporation. D. the nonprofit organization.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Business Entities

52.

Identify the form of business that is considered a separate legal entity.

A. a sole proprietorship B. a corporation C. a limited liability partnership D. a partnership

AACSB: Analytic AICPA BB: Industry

AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Business Entities

53.

Identify the advantages of forming a business as an S Corporation.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Business Entities

54.

A firm issues periodic reports called

A. financial statements. B. summaries. C. tax returns. D. audits.

AACSB: Analytic AICPA BB: Industry

AICPA FN: Decision Making AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Define accounting. Topic: What is Accounting?

55.

Which of the following is NOT part of the process of accounting for financial information?

A. recording B. identifying C. communicating D. classifying

56.

Which of the following is a true statement in regards to the International Accounting Standards Board?

AACSB: Analytic

AICPA BB: Global AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Accounting Standards Topic: What is Accounting?

57.

Which of the following is NOT a service of public accounting firms?

A. auditing B. tax accounting C. management advisory services D. investment services

58.

Tax accounting involves tax compliance and

A. tax evaluation. B. tax planning. C. tax configuration. D. tax obfuscation.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making 1-45 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Topic: What is Accounting?

59.

Tax planning includes

A. preparing tax returns. B. auditing tax returns. C. correcting tax returns. D. suggesting actions to reduce tax liability.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Topic: What is Accounting?

60.

Managerial accounting is

A. public accounting. B. government accounting. C. private accounting. D. tax accounting.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Identify and discuss career opportunities in accounting. 1-46 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Topic: What is Accounting?

61.

The following are all government agencies except

A. SEC. B. AICPA. C. IRS. D. FBI.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Topic: What is Accounting?

62.

An act passed in response to the wave of corporate accounting scandals is the

A. Saxon-Ordanly Act. B. Sarbanes-Oxley Act. C. Sardonic-Oxone Act. D. Sorbine-Oxide Act.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Identify the users of financial information. Topic: Accounting Standards

63.

Owners and managers need financial information in order to

A. grant loans. B. issue credit. C. collect taxes. D. make decisions.

64.

The Sarbanes-Oxley Act includes rules on

A. auditor retention. B. auditor reliability. C. auditor rotation. D. auditor reporting.

65.

A form of the partnerships business entity is

A. LLP. B. LLC. C. INP. D. DBA.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Business Entities

66.

Identify the statement below that represents what GAAP stands for

A. Generally Accepted Accounting Principles. B. Generally Accepted Auditing Practices. C. General Accounting Actuary Principles. D. Generally Approved Accounting Practices.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Topic: Accounting Standards

67.

The review of financial statements to assess their fairness and adherence to GAAP is

A. accounting. B. preparation. C. compliance. D. auditing.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Topic: What is Accounting?

68.

Management advisory services are designed to help

A. government agencies. B. clients. C. employers. D. creditors.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Topic: What is Accounting?

69.

An independent accountant who provides accounting services to the public for a fee is a

A. CIA. B. CFE. C. CMA. D. CPA.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Learning Objective: 01-06 Define the accounting terms new to this chapter. Topic: What is Accounting?

70.

The Financial Accounting Standards Board has the authority to develop generally accepted accounting principles. Choose the option below that contains the steps used by the FASB in developing GAAP.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal

AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Topic: Accounting Standards

Short Answer Questions

71.

What is the "language of business?" List three groups who use this financial information.

Accounting is the language of business. The groups who use this information are owners and managers, suppliers, banks, tax authorities, regulatory agencies and investors, customers, and employees and unions.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-01 Define accounting. Learning Objective: 01-03 Identify the users of financial information. Topic: What is Accounting?

72.

Cullen Company of country X and Shaw Industries of country Y have issued financial statements in compliance with the accounting principles of their respective countries. They would like to work together on a project and need to compare their current financial statements prior to beginning. However, the accounting principles of the two countries differ. What organization might they turn to regarding this issue? (Give both the full name of the organization and its acronym.) What is the function of this organization?

Organization: International Accounting Standards Board (IASB). The function of the IASB is to deal with issues caused by the lack of uniform accounting principles and make recommendations to enhance comparability.

AACSB: Analytic AICPA BB: Global AICPA BB: Industry AICPA FN: Decision Making Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Topic: Business and Accounting

73.

You have just entered college and decide to pursue a career as an accountant. What are the three areas in which an accountant can practice?

public accounting, managerial (private) accounting, and governmental accounting

74.

There are three general services public accountants offer. List and briefly describe each.

Auditing: the review of financial statements to assess their fairness and adherence to GAAP. Tax accounting: tax compliance-dealing with the preparation of tax returns and the audit of those returns, and tax planning-giving advice to clients on how to structure their financial affairs in order to reduce their tax liability. Management advisory services: helping clients improve their information systems or their business performance.

75.

List at least five activities performed by managerial accountants.

establishing accounting policies, managing the accounting system, preparing financial statements, interpreting financial information, providing financial advice to management, preparing tax forms, performing tax planning services, and preparing internal reports for management.

76.

Define the following terms: entity, economic entity, and social entity.

Entity-recognized as having its own separate identity. Social entity-nonprofit organizations. Economic entity-business or organization whose major purpose is to produce a profit.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-04 Compare and contrast the three types of business entities. Learning Objective: 01-06 Define the accounting terms new to this chapter. Topic: Business Entities

77.

How do sole proprietorships, partnerships, and corporations differ?

Sole proprietorships-business entities owned by one person who is responsible for the business debts and taxes. The business ends when the owner dies. Partnerships-business entities owned by two or more individuals who are individually, and as a group, responsible for the partnership's debts and taxes. A partnership ends when one or more partners withdraw or die. Corporations-business entities with one or more owners which can continue indefinitely unless bankruptcy occurs or the stockholders vote to liquidate. Stockholders (owners) are not personally responsible for the corporation's debts and can only lose the amount they invested.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Blooms: Apply

Difficulty: 1 Easy Learning Objective: 01-04 Compare and contrast the three types of business entities. Learning Objective: 01-06 Define the accounting terms new to this chapter. Topic: Business Entities

78.

List three individuals or groups who use financial information to make decisions about a firm. For each listed, give an example of why they would need the information.

Owners and managers-to evaluate results of operations or to make decisions about the future. Suppliers-to assess the ability of the firm to pay its bills and to set credit limits. Banks-to determine whether the firm can repay the loan in a timely manner. Tax authorities-to determine the tax base of the firm. Regulatory agencies and investors-to fulfill the requirements of the law. Customers-to determine whether service on purchases will continue into the future. Employees and unions-to negotiate wages and benefits.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-03 Identify the users of financial information. Topic: Users of Accounting Information Topic: What is Accounting?

79.

List the "Big Four" public accounting firms in the United States.

Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium 1-56 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Topic: What is Accounting?

80.

Audited financial statements include an auditor's report. What does this auditor's report contain?

It contains the auditor's opinion regarding the fairness of the firm's financial statements and confirms the adherence to GAAP in those financial reports.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Blooms: Analyze Difficulty: 2 Medium Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Topic: Accounting Standards

81.

List at least three of the provisions of the Sarbanes-Oxley Act.

The act: tightens regulation of financial reporting by publicly held companies and their accountants and auditors; creates a five-member Public Company Accounting Oversight Board to oversee the accounting profession which in turn is overseen by the SEC; includes rules on consulting services, auditor rotation, criminal penalties, corporate governance, and securities regulation; requires auditors to maintain all audit or review work papers for five years; requires chief executives and chief financial officers of publicly traded corporations to certify their financial statements; requires quicker disclosure of material changes in a firm's financial position; provides protection for whistle blowers; and lengthens the time investors have to file lawsuits for securities fraud.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal 1-57 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA FN: Decision Making Blooms: Analyze Difficulty: 2 Medium Learning Objective: 01-02 Identify and discuss career opportunities in accounting. Topic: Accounting Standards Topic: What is Accounting?

82.

What determines the independence of Certified Public Accountants (CPAs)?

They are not employees of the companies they audit and they do not have a financial interest in those companies.

AACSB: Analytic AICPA BB: Industry AICPA BB: Legal AICPA FN: Decision Making Blooms: Analyze Difficulty: 2 Medium Learning Objective: 01-05 Describe the process used to develop generally accepted accounting principles. Topic: Accounting Standards

Chapter 02 Analyzing Business Transactions

True / False Questions

1. The entire process of analyzing, recording, and reporting business transactions is based on the fundamental accounting equation.

True

False

2. When using the fundamental accounting equation, an accountant must make sure that total assets are always equal to total liabilities and owner's equity.

True

False

3. Assets always equal debts of the business plus the financial interest of the owner.

True

False

4. When cash is paid to a creditor, the firm's liabilities decrease.

True

False

5. Al Dunn Bakery bought a new oven for $1,380. Al paid $300 as a cash down payment and will pay the balance in 30 days. Total assets increased by $1,080.

True

False

6. If the owner takes cash out of the business for personal use, the withdrawal should be recorded as an expense of the business.

True

False

7. When cash is collected from accounts receivable, the total amount of assets increases.

True

False

8. A company has assets of $56,320 and liabilities of $29,500. The owner's equity is $85,820.

True

False

9. The expenses for a period are reported on the balance sheet.

True

False

10. A double line drawn under the figures in a money column shows that the computation is complete.

True

False

11. A business transaction is a financial event that affects the resources of a business.

True

False

12. If there is an excess of expenses over revenues, the excess represents a profit.

True

False

13. A withdrawal of funds by the owner for personal use is considered a business expense.

True

False

14. The statement of owner's equity is prepared before the balance sheet so that the ending capital balance is available.

True

False

15. If assets are $8,000 and liabilities are $2,000, owner's equity is $10,000.

True

False

16. The amount of net income or net loss is needed to complete the statement of owner's equity.

True

False

17. Withdrawals by the owner are reported on the income statement.

True

False

18. The income statement is also known as the profit and loss statement.

True

False

19. The net income or net loss for the period is shown on both the income statement and the balance sheet.

True

False

Fill in the Blank Questions

20. The property that a business owns is referred to as its ___________________.

________________________________________

21. The debts or obligations of a business are known as its ___________________.

________________________________________

22. The income statement shows revenue, ___________________, and net income or net loss for a period of time.

________________________________________

23. The financial interest of the owner in a business is called owner's equity or ___________________.

________________________________________

24. The account used to record amounts that are owed for goods or services purchased on credit are known as ___________________.

________________________________________

25. When a business sells services for cash, assets increase and revenue ___________________.

________________________________________

26. The account used to record amounts that will be collected from charge account customers in the future are referred to as ___________________.

________________________________________

27. The ____________________ is the financial report that shows the assets, liabilities, and owner's equity of a business on a specific date.

________________________________________

28. If assets are $17,000 and owner's equity is $10,000, liabilities are ___________________.

________________________________________

29. When a business pays cash for salaries, assets decrease and expenses ___________________.

________________________________________

30. Funds taken from the business by the owner for personal use are called ___________________.

________________________________________

31. The statement of ____________________ reports the changes that have occurred in the owner's financial interest during the reporting period.

________________________________________

32. When revenue is greater than expenses, the result is a net ___________________.

________________________________________

33. When revenue and expenses are equal, the firm is said to ___________________.

________________________________________

34. The three-line heading of a financial statement shows who, what, and ___________________.

________________________________________

Multiple Choice Questions

35. The balance sheet shows

A. the results of business operations. B. all revenues and expenses. C. the amount of net income or loss. D. the financial position of a business at a given time.

36. Amounts that a business must pay in the future are known as

A. accounts receivable. B. accounts payable. C. capital. D. expenses.

37. Examples of assets are:

A. cash and accounts receivable. B. cash and revenue. C. cash and rent expense. D. investments by the owner and revenue.

38. Ginger Yale Ice Company receives money from a customer on account. Recording this transaction will

A. increase Accounts Receivable. B. increase G. Yale, Capital. C. decrease Accounts Payable. D. increase Cash.

39. If a business issues a check for $100 to purchase office supplies, analyze the effect on the accounting equation.

A. Financial Interest will increase B. Property will decrease C. Financial Interest will decrease D. Total Property will remain the same

40. If a business issued a check for $1,000 to pay for two months rent in advance, analyze the effect on the firms' assets, liabilities and owner's equity.

A. Cash will increase B. Accounts Payable will decrease C. Prepaid Rent will increase D. Owner's Capital will increase

41. The owner's investment or equity in a business is called

A. cash. B. drawing. C. capital. D. accounts payable.

42. At the end of the first month of operations for SloMo Delivery Service, the business had the following accounts: Accounts Receivable, $1,200; Prepaid Insurance, $500; Equipment, $36,200 and Cash, $40,650. On the same date, SloMo owed the following creditors: Simpson Supply Company, $12,000; Allen Office Equipment, $9,500. The total assets for the SloMo Delivery Service are

A. $42,350. B. $78,550. C. $76,850. D. $41,850.

43. At the end of the first month of operations for SloMo Delivery Service, the business had the following accounts: Accounts Receivable, $1,200; Prepaid Insurance, $500; Equipment, $36,200 and Cash, $40,650. On the same date, SloMo owed the following creditors: Simpson Supply Company, $12,000; Allen Office Equipment, $9,500. The total amount of Liabilities is

A. $36,200. B. $9,500. C. $21,500. D. $40,650.

44. Total assets of Douglas Fuhr Furniture Co. are $36,000 and the total liabilities are $12,000. What is the amount of the owner's equity?

A. $36,000 B. $24,000 C. $48,000 D. $6,000

45. If during the year total assets increase by $75,000 and total liabilities decrease by $16,000, by how much did owner's equity increase/decrease?

A. $91,000 increase B. $59,000 decrease C. $91,000 decrease D. $75,000 increase

46. Which financial statement is reported as of a specific date?

A. Balance Sheet B. Statement of Owner's Equity C. Income Statement D. Statement of Changes in Financial Position

47. A net loss results

A. when expenses are greater than revenue. B. when assets are greater than liabilities. C. when revenue is greater than expenses. D. when expenses are greater than assets.

48. The income statement shows

A. the financial position of a business on a specific date. B. revenue and owner's equity. C. the results of operations for a period of time. D. the total value of the business.

49. If the income statement covered a six-month period ending on November 30, 2013, the third line of the income statement heading would read

A. Month Ended November 30, 2013. B. November 30, 2013. C. Six-month Period Ended November 30, 2013. D. Month of November, 2013.

50. When the owner invests cash in a business,

A. assets and revenue increase. B. assets increase and owner's equity decreases. C. liabilities decrease and owner's equity increases. D. assets and owner's equity increase.

51. When equipment is purchased on credit,

A. assets and liabilities increase. B. assets increase and liabilities decrease. C. assets and owner's equity increase. D. assets and expenses increase.

52. When equipment is purchased for cash,

A. assets decrease and expenses increase. B. one asset increases and another asset decreases. C. assets and owner's equity increase. D. assets increase and liabilities decrease.

53. If a business receives $5,000 on account from clients who owed money for services previously billed, identify the effect on the accounting equation

54. When the owner withdraws cash for personal use,

A. assets decrease and expenses increase. B. assets decrease and owner's equity increases. C. assets decrease and owner's equity decreases. D. owner's equity decreases and revenue decreases.

55. When the owner writes a company check to pay the firm's electric bill,

A. assets and owner's equity increase. B. assets decrease and expenses increase. C. assets and liabilities decrease. D. expenses increase and owner's equity increases.

56. Identify the account below that is classified as an asset account and would appear on the left side of the accounting equation.

A. Accounts Receivable. B. Owner's Capital. C. Accounts Payable. D. Revenue.

57. Assets and liabilities are reported on

A. the balance sheet. B. the income statement. C. the statement of owner's equity. D. both the balance sheet and the income statement.

58. The financial statement that is prepared first is

A. up to the accountant. B. the income statement. C. the balance sheet. D. the statement of owner's equity.

59. The rent paid for future months is a(n)

A. asset. B. liability. C. expense. D. revenue.

60. The statement of financial position is another term for which financial statement?

A. Income Statement B. Statement of Owner's Equity C. Balance Sheet D. Trial Balance

61. Which financial statement is a representation of the accounting equation?

A. Income Statement B. Statement of Owner's Equity C. Balance Sheet D. Profit and Loss Statement

62. The Statement of Owner's Equity is calculated as follows:

A. beginning capital + net income - withdrawals + additional investments = ending capital B. beginning capital + net loss + withdrawals + additional investments = ending capital C. beginning capital + net loss - withdrawals + additional investments = ending capital D. beginning capital + net income + withdrawals + additional investments = ending capital

63. An Income Statement is all of the following except:

A. a formal report of business operations. B. a profit and loss statement. C. a statement of revenues less withdrawals and expenses. D. a statement of income and expenses.

64. At the end of the first month of operations for Jackson's Catering Service, the business had the following accounts: Cash, $19,000; Prepaid Rent, $500; Equipment, $5,000 and Accounts Payable $2,000. By the end of the month, Jackson's had earned $20,000 of Revenues, $1,000 of Utilities Expenses and $1,500 of Salaries Expenses. Calculate the net income to be reported by the company for this first month.

A. $20,000 B. $19,000 C. $17,500 D. $12,000

65. At the end of its first year of operations, Shapiro's Consulting Services reported net income of $25,000. They also had account balances of: Cash, $18,000; Office Supplies, $2,000 and Accounts Receivable $10,000. The owner's total investment for this first year was $5,000. Calculate the ending balance to be reported on the Statement of Owner's Equity in the Owner's Capital account.

A. $30,000 B. $25,000 C. $20,000 D. $5,000

66. Identify the type of accounts that would appear on a firm's income statement

A. assets and liabilities. B. revenues and expenses. C. assets and revenues. D. liabilities and expenses.

67. Owner's equity is:

A. the amount taken out of a business by the owner for personal use. B. the financial interest of the owner of a business. C. the amount the owner owes the business. D. the revenues less the expenses.

68. Given the options below, identify the correct accounting equation formula.

A. Assets = Liabilities + Owner's Equity B. Liabilities = Assets + Owner's Equity C. Assets + Liabilities = Owner's Equity D. Assets + Owner's Equity = Liabilities

69. The balance sheet shows each of the following except the:

A. net income of the business. B. amount and types of property the business owns. C. owner's interest. D. amount owed creditors.

70. The Balance Sheet heading includes each of the following except:

A. firm's name. B. firm's address. C. title of the report. D. date of the report.

71. Choose the option below that reflects the correct order in which to prepare the three financial statements

A. Balance Sheet; Income Statement; Statement of Owner's Equity. B. Income Statement; Statement of Owner's Equity; Balance Sheet. C. Income Statement; Balance Sheet; Statement of Owner's Equity. D. Statement of Owner's Equity; Balance Sheet; Income Statement.

72. An expense by definition is not:

A. an amount a business must pay in the future. B. an outflow of cash. C. the use of other assets. D. the incurring of a liability.

Short Answer Questions

73. On December 1, 2016, Geneva Jordan opened her new business with the following assets and liabilities. Complete the accounting equation for the firm.

Assets $________ = Liabilities $________ + Owner's Equity $________

74. During October, a firm had the following transactions involving revenue and expenses. Did the firm earn a net income or incur a net loss for the period? What was the amount? Paid $1,200 for rent Provided services for $2,750 in cash Paid $250 for telephone service Provided services for $1,900 on credit Paid salaries of $1,675 to employees Paid $350 for office cleaning service

75. The transactions listed below took place at the Mitchell Advertising Agency. These transactions affected the following accounts. Indicate the accounts affected and use plus and minus to show the changes caused by each transaction.

Performed services on credit

76. The transactions listed below took place at the Mitchell Advertising Agency. These transactions affected the following accounts. Indicate the accounts affected and use plus and minus to show the changes caused by each transaction.

Paid cash for utilities

77. The transactions listed below took place at the Mitchell Advertising Agency. These transactions affected the following accounts. Indicate the accounts affected and use plus and minus to show the changes caused by each transaction.

Sent a check to a creditor

78. The transactions listed below took place at the Mitchell Advertising Agency. These transactions affected the following accounts. Indicate the accounts affected and use plus and minus to show the changes caused by each transaction.

Issued checks to pay salaries

79. The transactions listed below took place at the Mitchell Advertising Agency. These transactions affected the following accounts. Indicate the accounts affected and use plus and minus to show the changes caused by each transaction.

Purchased a computer for cash

80. The transactions listed below took place at the Mitchell Advertising Agency. These transactions affected the following accounts. Indicate the accounts affected and use plus and minus to show the changes caused by each transaction.

Received cash from credit customers

81. The transactions listed below took place at the Mitchell Advertising Agency. These transactions affected the following accounts. Indicate the accounts affected and use plus and minus to show the changes caused by each transaction.

Performed services for cash

82. The transactions listed below took place at the Mitchell Advertising Agency. These transactions affected the following accounts. Indicate the accounts affected and use plus and minus to show the changes caused by each transaction.

The owner made an additional investment of cash

83. The transactions listed below took place at the Mitchell Advertising Agency. These transactions affected the following accounts. Indicate the accounts affected and use plus and minus to show the changes caused by each transaction.

Purchased furniture on credit

84. The transactions listed below took place at the Mitchell Advertising Agency. These transactions affected the following accounts. Indicate the accounts affected and use plus and minus to show the changes caused by each transaction.

Had a computer repaired; payment is due in 30 days

85. Guy McKinley started the McKinley Charter Service at the beginning of August 2016. On August 31, 2016, the accounting records of the business showed the following information. Prepare an income statement and a statement of owner's equity for the month and a balance sheet as of August 31, 2016.

86. On September 1, Shawn Dahl established Whitewater Rentals, a canoe and kayak rental business. The following transactions occurred in the month of September and affected the following accounts:

Transactions 1. Shawn Dahl invested $45,000 in cash to open the business 2. Paid $12,700 in cash for the purchase of kayak and canoe equipment 3. Paid $1,050 in cash for rent expense 4. Purchased additional kayak and canoe equipment for $3,800 on credit 5. Received $3,900 in cash for kayak rentals 6. Rented canoes and kayaks for $1,200 on account 7. Purchased office equipment for $125 in cash 8. Received $800 in cash from credit clients 9. Shawn Dahl withdrew $1,500 in cash for personal expenses Based on the information shown in transaction #4 above, indicate the accounts affected and use plus and minus to show the changes caused by the transaction.

87. On September 1, Shawn Dahl established Whitewater Rentals, a canoe and kayak rental business. The following transactions occurred in the month of September and affected the following accounts:

Transactions 1. Shawn Dahl invested $45,000 in cash to open the business 2. Paid $12,700 in cash for the purchase of kayak and canoe equipment 3. Paid $1,050 in cash for rent expense 4. Purchased additional kayak and canoe equipment for $3,800 on credit 5. Received $3,900 in cash for kayak rentals 6. Rented canoes and kayaks for $1,200 on account 7. Purchased office equipment for $125 in cash 8. Received $800 in cash from credit clients 9. Shawn Dahl withdrew $1,500 in cash for personal expenses Based on the information shown above, what is the balance of Accounts Receivable for Whitewater Rentals at the end of September?

88. On September 1, Shawn Dahl established Whitewater Rentals, a canoe and kayak rental business. The following transactions occurred in the month of September and affected the following accounts:

Transactions 1. Shawn Dahl invested $45,000 in cash to open the business 2. Paid $12,700 in cash for the purchase of kayak and canoe equipment 3. Paid $1,050 in cash for rent expense 4. Purchased additional kayak and canoe equipment for $3,800 on credit 5. Received $3,900 in cash for kayak rentals 6. Rented canoes and kayaks for $1,200 on account 7. Purchased office equipment for $125 in cash 8. Received $800 in cash from credit clients 9. Shawn Dahl withdrew $1,500 in cash for personal expenses Based on the information above, what is the fundamental accounting equation at the end of September for Whitewater Rentals?

89. On June 1, Donna Banhil established Solo Services, a voice consulting service. Enter the following transactions for June in the table below using + and - to indicate increases or decreases: Transactions 1. Donna Banhil invested $15,000 in cash to open the business 2. Paid $1,500 for June's rent 3. Paid $4,500 for rent in advance, for the next three months (July-September) 4. Purchased office supplies for $800 on credit 5. Performed voice consulting services and immediately received $1,200 from clients. 6. Gave voice lessons to charge account clients and earned $9,000 7. Paid $100 cash for the supplies purchased earlier in the month 8. Received $1,000 in cash from credit clients billed earlier in the month

90. The figure below shows the transactions for Sawyer Architecture Services during June. Greg Sawyer opened this business on June 1 with a capital investment of $72,000 (Transaction 1).

What was the net income or net loss for Sawyer Architecture Services for the month of June?

91. The figure below shows the transactions for Sawyer Architecture Services during June. Greg Sawyer opened this business on June 1 with a capital investment of $72,000 (Transaction 1).

Prepare the statement of owner's equity for Sawyer Architecture Services for the month ended June 30, 2016.

92. The figure below shows the transactions for Sawyer Architecture Services during June. Greg Sawyer opened this business on June 1 with a capital investment of $72,000 (Transaction 1).

Prepare the balance sheet for Sawyer Architecture Services as of June 30, 2016.

93. Cullen Beatty plans to start a consulting business—Cullen Consulting Services. In preparation to do this, on April 1, 2016, he invested $50,000 in cash and $19,000 in equipment, and opened an account at Office Plus by purchasing $1,500 in office supplies which is due by the end of the month. He then signed a one-year lease agreement on an office building for $6,000, paying the full amount in advance. Prepare a Balance Sheet for Cullen Consulting Services as of April 1, 2016, before he conducts any services.

94. Cullen Beatty plans to start a consulting business—Cullen Consulting Services. In preparation to do this, on April 1, 2016, he invested $50,000 in cash and $19,000 in equipment, and opened an account at Office Plus by purchasing $1,500 in office supplies which is due by the end of the month. He then signed a one-year lease agreement on an office building for $6,000, paying the full amount in advance. Cullen would like an explanation of the accounting for his business actions as of April 1, 2016. Explain the terms and interactions between the categories on a Balance Sheet.

Chapter 02 Analyzing Business Transactions Answer Key

True / False Questions

The entire process of analyzing, recording, and reporting business transactions is based on the fundamental accounting equation.

TRUE

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

When using the fundamental accounting equation, an accountant must make sure that total assets are always equal to total liabilities and owner's equity.

TRUE

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements 2-38 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Assets always equal debts of the business plus the financial interest of the owner.

TRUE

AACSB: Analytic AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Topic: Accounts and Their Relationships

When cash is paid to a creditor, the firm's liabilities decrease.

TRUE

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Topic: Accounts and Their Relationships

Al Dunn Bakery bought a new oven for $1,380. Al paid $300 as a cash down payment and will pay the balance in 30 days. Total assets increased by $1,080.

TRUE

AACSB: Analytic AICPA BB: Critical Thinking AICPA BB: Industry

AICPA FN: Decision Making AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

If the owner takes cash out of the business for personal use, the withdrawal should be recorded as an expense of the business.

FALSE

AACSB: Analytic AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Decision Making AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

When cash is collected from accounts receivable, the total amount of assets increases.

FALSE

A company has assets of $56,320 and liabilities of $29,500. The owner's equity is $85,820.

FALSE Using the fundamental accounting equation, owner's equity would be $26,820 ($56, 320 = $29,500 + $26,820)

AACSB: Analytic AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

The expenses for a period are reported on the balance sheet.

FALSE

10.

A double line drawn under the figures in a money column shows that the computation is complete.

TRUE

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 Prepare an income statement. Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Learning Objective: 02-06 Define the accounting terms new to this chapter. Topic: Accounting Equation and Financial Statements

11.

A business transaction is a financial event that affects the resources of a business.

TRUE

12.

If there is an excess of expenses over revenues, the excess represents a profit.

FALSE

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 1 Easy Learning Objective: 02-04 Prepare an income statement. Topic: Accounting Equation and Financial Statements

13.

A withdrawal of funds by the owner for personal use is considered a business expense.

FALSE

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

14.

The statement of owner's equity is prepared before the balance sheet so that the ending capital balance is available.

TRUE

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Topic: Accounting Equation and Financial Statements

15.

If assets are $8,000 and liabilities are $2,000, owner's equity is $10,000.

FALSE Using the fundamental accounting equation, owner's equity would be $6,000 ($8,000 = $2,000 + $6,000)

AACSB: Analytic AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

16.

The amount of net income or net loss is needed to complete the statement of owner's equity.

TRUE

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Topic: Accounting Equation and Financial Statements

17.

Withdrawals by the owner are reported on the income statement.

FALSE

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Topic: Accounting Equation and Financial Statements

18.

The income statement is also known as the profit and loss statement.

TRUE

AACSB: Analytic AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 Prepare an income statement. Topic: Accounting Equation and Financial Statements

19.

The net income or net loss for the period is shown on both the income statement and the balance sheet.

FALSE

AACSB: Analytic AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-04 Prepare an income statement. Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Topic: Accounting Equation and Financial Statements

Fill in the Blank Questions

20.

The property that a business owns is referred to as its ___________________.

assets

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Topic: Accounts and Their Relationships

21.

The debts or obligations of a business are known as its ___________________.

liabilities

22.

The income statement shows revenue, ___________________, and net income or net loss for a period of time.

expenses

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting

Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 Prepare an income statement. Topic: Accounting Equation and Financial Statements

23.

The financial interest of the owner in a business is called owner's equity or ___________________.

capital

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Topic: Accounts and Their Relationships

24.

The account used to record amounts that are owed for goods or services purchased on credit are known as ___________________.

accounts payable

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Topic: Accounts and Their Relationships

25.

When a business sells services for cash, assets increase and revenue ___________________.

increases

AACSB: Analytic

AICPA BB: Industry AICPA FN: Reporting Blooms: Understand Difficulty: 1 Easy Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

26.

The account used to record amounts that will be collected from charge account customers in the future are referred to as ___________________.

accounts receivable

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

27.

The ____________________ is the financial report that shows the assets, liabilities, and owner's equity of a business on a specific date.

balance sheet

28.

If assets are $17,000 and owner's equity is $10,000, liabilities are ___________________.

$7,000 Assets = Liabilities + Owner's Equity; therefore, $17,000 = $7,000 + $10,000.

AACSB: Analytic AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

29.

When a business pays cash for salaries, assets decrease and expenses ___________________.

increase

30.

Funds taken from the business by the owner for personal use are called ___________________.

withdrawals

AACSB: Analytic

AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

31.

The statement of ____________________ reports the changes that have occurred in the owner's financial interest during the reporting period.

owner's equity

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Topic: Accounting Equation and Financial Statements

32.

When revenue is greater than expenses, the result is a net ___________________.

income

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Blooms: Understand Difficulty: 1 Easy Learning Objective: 02-04 Prepare an income statement. Topic: Accounting Equation and Financial Statements

33.

When revenue and expenses are equal, the firm is said to ___________________.

break even

AACSB: Analytic

AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 Prepare an income statement. Topic: Accounting Equation and Financial Statements

34.

The three-line heading of a financial statement shows who, what, and ___________________.

when

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 Prepare an income statement. Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Topic: Accounting Equation and Financial Statements

Multiple Choice Questions

35.

The balance sheet shows

A. the results of business operations. B. all revenues and expenses. C. the amount of net income or loss. D. the financial position of a business at a given time.

AACSB: Analytic AICPA BB: Industry

AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Topic: Accounting Equation and Financial Statements

36.

Amounts that a business must pay in the future are known as

A. accounts receivable. B. accounts payable. C. capital. D. expenses.

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Topic: Accounts and Their Relationships

37.

Examples of assets are:

A. cash and accounts receivable. B. cash and revenue. C. cash and rent expense. D. investments by the owner and revenue.

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand 2-52 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 1 Easy Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounts and Their Financial Statements

38.

Ginger Yale Ice Company receives money from a customer on account. Recording this transaction will

A. increase Accounts Receivable. B. increase G. Yale, Capital. C. decrease Accounts Payable. D. increase Cash.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Topic: Accounts and Their Relationships

39.

If a business issues a check for $100 to purchase office supplies, analyze the effect on the accounting equation.

A. Financial Interest will increase B. Property will decrease C. Financial Interest will decrease D. Total Property will remain the same

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Topic: Property and Financial Interest

40.

If a business issued a check for $1,000 to pay for two months rent in advance, analyze the effect on the firms' assets, liabilities and owner's equity.

A. Cash will increase B. Accounts Payable will decrease C. Prepaid Rent will increase D. Owner's Capital will increase

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

41.

The owner's investment or equity in a business is called

A. cash. B. drawing. C. capital. D. accounts payable.

AACSB: Analytic AICPA BB: Industry

AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Topic: Accounts and Their Relationships

42.

At the end of the first month of operations for SloMo Delivery Service, the business had the following accounts: Accounts Receivable, $1,200; Prepaid Insurance, $500; Equipment, $36,200 and Cash, $40,650. On the same date, SloMo owed the following creditors: Simpson Supply Company, $12,000; Allen Office Equipment, $9,500. The total assets for the SloMo Delivery Service are

A. $42,350. B. $78,550. C. $76,850. D. $41,850. Assets = Accounts Receivable, $1,200 + Prepaid Insurance, $500 + Equipment $36,200 + Cash, $40,650 = $78,550.

AACSB: Analytic AICPA BB: Critical Thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Topic: Accounting Equation and Financial Statements

43.

A. $36,200. B. $9,500. C. $21,500. D. $40,650. Liabilities = Simpson Supply Company, $12,000 + Allen Office Equipment, $9,500 = $21,500.

44.

Total assets of Douglas Fuhr Furniture Co. are $36,000 and the total liabilities are $12,000. What is the amount of the owner's equity?

A. $36,000 B. $24,000 C. $48,000 D. $6,000 Assets = Liabilities + Owners' Equity: $36,000 = $12,000 + $24,000

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

45.

If during the year total assets increase by $75,000 and total liabilities decrease by $16,000, by how much did owner's equity increase/decrease?

A. $91,000 increase B. $59,000 decrease C. $91,000 decrease D. $75,000 increase $75,000 = ($16,000) + $91,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA BB: Industry

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

46.

Which financial statement is reported as of a specific date?

A. Balance Sheet B. Statement of Owner's Equity C. Income Statement D. Statement of Changes in Financial Position

47.

A net loss results

A. when expenses are greater than revenue. B. when assets are greater than liabilities. C. when revenue is greater than expenses. D. when expenses are greater than assets.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Analyze 2-58 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 1 Easy Learning Objective: 02-04 Prepare an income statement. Topic: The Accounting Equation and Financial Statements

48.

The income statement shows

A. the financial position of a business on a specific date. B. revenue and owner's equity. C. the results of operations for a period of time. D. the total value of the business.

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-04 Prepare an income statement. Topic: Accounting Equation and Financial Statements

49.

If the income statement covered a six-month period ending on November 30, 2013, the third line of the income statement heading would read

A. Month Ended November 30, 2013. B. November 30, 2013. C. Six-month Period Ended November 30, 2013. D. Month of November, 2013.

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-04 Prepare an income statement.

Topic: Accounting Equation and Financial Statements

50.

When the owner invests cash in a business,

A. assets and revenue increase. B. assets increase and owner's equity decreases. C. liabilities decrease and owner's equity increases. D. assets and owner's equity increase.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

51.

When equipment is purchased on credit,

A. assets and liabilities increase. B. assets increase and liabilities decrease. C. assets and owner's equity increase. D. assets and expenses increase.

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Topic: Accounts and Their Relationships

52.

When equipment is purchased for cash,

A. assets decrease and expenses increase. B. one asset increases and another asset decreases. C. assets and owner's equity increase. D. assets increase and liabilities decrease.

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Topic: Accounts and Their Relationships

53.

If a business receives $5,000 on account from clients who owed money for services previously billed, identify the effect on the accounting equation

A. assets decrease and liabilities increase. B. liabilities decrease and owner's equity decreases. C. assets remain the same and owner's equity remains the same. D. owner's equity increases and revenue increases. Cash is increased by $5,000 but Accounts Receivable is reduced by $5,000 so there is no change in total assets.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity

and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

54.

When the owner withdraws cash for personal use,

A. assets decrease and expenses increase. B. assets decrease and owner's equity increases. C. assets decrease and owner's equity decreases. D. owner's equity decreases and revenue decreases.

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

55.

When the owner writes a company check to pay the firm's electric bill,

A. assets and owner's equity increase. B. assets decrease and expenses increase. C. assets and liabilities decrease. D. expenses increase and owner's equity increases.

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements 2-62 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

56.

Identify the account below that is classified as an asset account and would appear on the left side of the accounting equation.

A. Accounts Receivable. B. Owner's Capital. C. Accounts Payable. D. Revenue.

57.

Assets and liabilities are reported on

A. the balance sheet. B. the income statement. C. the statement of owner's equity. D. both the balance sheet and the income statement.

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Topic: Accounts and Their Relationships

58.

The financial statement that is prepared first is

A. up to the accountant. B. the income statement. C. the balance sheet. D. the statement of owner's equity.

59.

The rent paid for future months is a(n)

A. asset. B. liability. C. expense. D. revenue.

60.

The statement of financial position is another term for which financial statement?

A. Income Statement B. Statement of Owner's Equity C. Balance Sheet D. Trial Balance

61.

Which financial statement is a representation of the accounting equation?

A. Income Statement B. Statement of Owner's Equity C. Balance Sheet D. Profit and Loss Statement

62.

The Statement of Owner's Equity is calculated as follows:

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Topic: Accounting Equation and Financial Statements

63.

An Income Statement is all of the following except:

A. a formal report of business operations. B. a profit and loss statement. C. a statement of revenues less withdrawals and expenses. D. a statement of income and expenses.

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Prepare an income statement. Topic: Accounting Equation and Financial Statements

64.

At the end of the first month of operations for Jackson's Catering Service, the business had the following accounts: Cash, $19,000; Prepaid Rent, $500; Equipment, $5,000 and Accounts Payable $2,000. By the end of the month, Jackson's had earned $20,000 of Revenues, $1,000 of Utilities Expenses and $1,500 of Salaries Expenses. Calculate the net income to be reported by the company for this first month.

A. $20,000 B. $19,000 C. $17,500 D. $12,000 Revenues $20,000 - Utilities Expense $1,000 - Salaries Expense $1,500 = Net Income $17,500

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-04 Prepare an income statement. Topic: Accounting Equation and Financial Statements

65.

At the end of its first year of operations, Shapiro's Consulting Services reported net income of $25,000. They also had account balances of: Cash, $18,000; Office Supplies, $2,000 and Accounts Receivable $10,000. The owner's total investment for this first year was $5,000. Calculate the ending balance to be reported on the Statement of Owner's Equity in the Owner's Capital account.

A. $30,000 B. $25,000 C. $20,000 D. $5,000 Investments $5,000 + Net Income $25,000 = $30,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-04 Prepare an income statement. Topic: Accounting Equation and Financial Statements

66.

Identify the type of accounts that would appear on a firm's income statement

A. assets and liabilities. B. revenues and expenses. C. assets and revenues. D. liabilities and expenses.

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation 2-68 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-04 Prepare an income statement. Topic: Accounting Equation and Financial Statements

67.

Owner's equity is:

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-06 Define the accounting terms new to this chapter. Topic: Accounting Equation and Financial Statements

68.

Given the options below, identify the correct accounting equation formula.

A. Assets = Liabilities + Owner's Equity B. Liabilities = Assets + Owner's Equity C. Assets + Liabilities = Owner's Equity D. Assets + Owner's Equity = Liabilities

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity 2-69 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

69.

The balance sheet shows each of the following except the:

A. net income of the business. B. amount and types of property the business owns. C. owner's interest. D. amount owed creditors.

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Topic: Accounting Equation and Financial Statements

70.

The Balance Sheet heading includes each of the following except:

A. firm's name. B. firm's address. C. title of the report. D. date of the report.

AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Topic: Accounting Equation and Financial Statements

71.

Choose the option below that reflects the correct order in which to prepare the three financial statements

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Topic: Accounting Equation and Financial Statements

72.

An expense by definition is not:

A. an amount a business must pay in the future. B. an outflow of cash. C. the use of other assets. D. the incurring of a liability.

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 02-06 Define the accounting terms new to this chapter. Topic: Accounting Equation and Financial Statements

Short Answer Questions

73.

On December 1, 2016, Geneva Jordan opened her new business with the following assets and liabilities. Complete the accounting equation for the firm.

Assets $________ = Liabilities $________ + Owner's Equity $________

Assets $37,400 = Liabilities $16,600 + Owner's Equity $20,800

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement AICPA FN: Reporting Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

74.

During October, a firm had the following transactions involving revenue and expenses. Did the firm earn a net income or incur a net loss for the period? What was the amount? Paid $1,200 for rent Provided services for $2,750 in cash Paid $250 for telephone service Provided services for $1,900 on credit Paid salaries of $1,675 to employees Paid $350 for office cleaning service

Net income: $1,175 Feedback: $2,750 + 1,900 - $1,200 - $250 - $1,675 - $350 = $1,175 Net Income

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement AICPA FN: Reporting Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-04 Prepare an income statement. Topic: Accounting Equation and Financial Statements

75.

The transactions listed below took place at the Mitchell Advertising Agency. These transactions affected the following accounts. Indicate the accounts affected and use plus and minus to show the changes caused by each transaction.

Performed services on credit

plus Accounts Receivable; plus Revenue

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Analyze Difficulty: 1 Easy Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

76.

Paid cash for utilities

plus Expenses; minus Cash

77.

Sent a check to a creditor

minus Accounts Payable; minus Cash

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Analyze Difficulty: 1 Easy Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Topic: Accounting Equation and Financial Statements

78.

Issued checks to pay salaries

plus Expenses; minus Cash

79.

Purchased a computer for cash

plus Equipment; minus Cash

80.

Received cash from credit customers

plus Cash; minus Accounts Receivable

81.

Performed services for cash

plus Cash; plus Revenue

82.

The owner made an additional investment of cash

plus Cash; plus K. Mitchell, Capital

83.

Purchased furniture on credit

plus Furniture; plus Accounts Payable

84.

Had a computer repaired; payment is due in 30 days

plus Expenses; plus Accounts Payable

85.

Guy McKinley started the McKinley Charter Service at the beginning of August 2016. On August 31, 2016, the accounting records of the business showed the following information. Prepare an income statement and a statement of owner's equity for the month and a balance sheet as of August 31, 2016.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Create Difficulty: 3 Hard Learning Objective: 02-04 Prepare an income statement. Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Topic: Accounting Equation and Financial Statements

86.

On September 1, Shawn Dahl established Whitewater Rentals, a canoe and kayak rental business. The following transactions occurred in the month of September and affected the following accounts:

plus Canoe and Kayak Equipment; plus Accounts Payable

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Apply Difficulty: 1 Easy Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Topic: Accounting Equation and Financial Statements

87.

On September 1, Shawn Dahl established Whitewater Rentals, a canoe and kayak rental business. The following transactions occurred in the month of September and affected the following accounts:

Transactions 1. Shawn Dahl invested $45,000 in cash to open the business 2. Paid $12,700 in cash for the purchase of kayak and canoe equipment 3. Paid $1,050 in cash for rent expense 4. Purchased additional kayak and canoe equipment for $3,800 on credit 5. Received $3,900 in cash for kayak rentals 6. Rented canoes and kayaks for $1,200 on account 7. Purchased office equipment for $125 in cash 8. Received $800 in cash from credit clients 9. Shawn Dahl withdrew $1,500 in cash for personal expenses Based on the information shown above, what is the balance of Accounts Receivable for Whitewater Rentals at the end of September?

The balance of Accounts Receivable at September 30 is $400. Feedback: Beginning Accounts Receivable, $0 + sales on account, $1,200 - collections on account, $800 = Ending Accounts Receivable, $400.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement AICPA FN: Reporting Blooms: Apply

Difficulty: 1 Easy Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

88.

On September 1, Shawn Dahl established Whitewater Rentals, a canoe and kayak rental business. The following transactions occurred in the month of September and affected the following accounts:

Transactions 1. Shawn Dahl invested $45,000 in cash to open the business 2. Paid $12,700 in cash for the purchase of kayak and canoe equipment 3. Paid $1,050 in cash for rent expense 4. Purchased additional kayak and canoe equipment for $3,800 on credit 5. Received $3,900 in cash for kayak rentals 6. Rented canoes and kayaks for $1,200 on account 7. Purchased office equipment for $125 in cash 8. Received $800 in cash from credit clients 9. Shawn Dahl withdrew $1,500 in cash for personal expenses Based on the information above, what is the fundamental accounting equation at the end of September for Whitewater Rentals?

Assets $51,350 = Liabilities $3, 800 + Owner's Equity $47,550

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement AICPA FN: Reporting

Blooms: Analyze Difficulty: 3 Hard Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Accounting Equation and Financial Statements

89.

On June 1, Donna Banhil established Solo Services, a voice consulting service. Enter the following transactions for June in the table below using + and - to indicate increases or decreases: Transactions 1. Donna Banhil invested $15,000 in cash to open the business 2. Paid $1,500 for June's rent 3. Paid $4,500 for rent in advance, for the next three months (July-September) 4. Purchased office supplies for $800 on credit 5. Performed voice consulting services and immediately received $1,200 from clients. 6. Gave voice lessons to charge account clients and earned $9,000 7. Paid $100 cash for the supplies purchased earlier in the month 8. Received $1,000 in cash from credit clients billed earlier in the month

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Measurement AICPA FN: Reporting Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-01 Record in equation form the financial effects of a business transaction. Learning Objective: 02-03 Analyze the effects of business transactions on a firm's assets; liabilities; and owner's equity and record these effects in accounting equation form. Topic: Business Transactions and Events

90.

The figure below shows the transactions for Sawyer Architecture Services during June. Greg Sawyer opened this business on June 1 with a capital investment of $72,000 (Transaction 1).

What was the net income or net loss for Sawyer Architecture Services for the month of June?

Net income was $1,700. Feedback: Revenue, $5,200 - Expenses, $3,500 = Net Income, $1,700.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement AICPA FN: Reporting Blooms: Apply Difficulty: 1 Easy

Learning Objective: 02-04 Prepare an income statement. Topic: Accounting Equation and Financial Statements

91.

The figure below shows the transactions for Sawyer Architecture Services during June. Greg Sawyer opened this business on June 1 with a capital investment of $72,000 (Transaction 1).

Prepare the statement of owner's equity for Sawyer Architecture Services for the month ended June 30, 2016.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement AICPA FN: Reporting Blooms: Create Difficulty: 2 Medium Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet.

Topic: Accounting Equation and Financial Statements

92.

The figure below shows the transactions for Sawyer Architecture Services during June. Greg Sawyer opened this business on June 1 with a capital investment of $72,000 (Transaction 1).

Prepare the balance sheet for Sawyer Architecture Services as of June 30, 2016.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement AICPA FN: Reporting Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-05 Prepare a statement of owner's equity and a balance sheet. Topic: Accounting Equation and Financial Statements

93.

Cullen Beatty plans to start a consulting business—Cullen Consulting Services. In preparation to do this, on April 1, 2016, he invested $50,000 in cash and $19,000 in equipment, and opened an account at Office Plus by purchasing $1,500 in office supplies which is due by the end of the month. He then signed a one-year lease agreement on an office building for $6,000, paying the full amount in advance. Prepare a Balance Sheet for Cullen Consulting Services as of April 1, 2016, before he conducts any services.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement AICPA FN: Reporting Blooms: Create Difficulty: 2 Medium Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Topic: Accounting Equation and Financial Statements

94.

Cullen Beatty plans to start a consulting business—Cullen Consulting Services. In preparation to do this, on April 1, 2016, he invested $50,000 in cash and $19,000 in equipment, and opened an account at Office Plus by purchasing $1,500 in office supplies which is due by the end of the month. He then signed a one-year lease agreement on an office building for $6,000, paying the full amount in advance. Cullen would like an explanation of the accounting for his business actions as of April 1, 2016. Explain the terms and interactions between the categories on a Balance Sheet.

Answers will vary. Items that should be included are: The Balance Sheet is a format report of a business's financial condition --on a certain date --reports assets, liabilities, and owner's equity of a business --reports property owned by a business, obligations (debts) of a business --reports the financial interest (proprietorship, net worth) of the owner --total assets equals the total liabilities plus total owner's equity

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making AICPA FN: Reporting Blooms: Create Difficulty: 2 Medium Learning Objective: 02-02 Define; identify; and understand the relationship between asset; liability; and owner's equity accounts. Topic: Accounting Equation and Financial Statements

Chapter 03 Analyzing Business Transactions Using T Accounts

True / False Questions

1. When preparing the trial balance, the total debits should equal the total credits.

True

False

2. Credits increase Liabilities, Owner's Equity, and Revenue.

True

False

3. Increases in assets and expenses are both recorded with debits.

True

False

4. Increases in assets and revenue are both recorded with debits.

True

False

5. When an owner invests assets in a business, the capital account is debited.

True

False