Financial & Managerial Accounting 15th Edition By Williams Test Bank

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Financial & Managerial Accounting 15th Edition By Williams Test Bank

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WITH ANSWERS
Financial & Managerial Accounting 15th Edition By Williams Test Bank

 

Chapter 02

Basic Financial Statements

 

True / False Questions

  1. A business entity is regarded as separate from the personal activities of its owners whether it is a sole proprietorship, a partnership, or a corporation.
    True    False

 

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

 

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

 

  1. Notes payable and accounts payable are written promises to pay an amount owed by a certain date. Notes payable generally have interest, while accounts payable generally do not.
    True    False

 

  1. A net profit results from having more revenues than liabilities.
    True    False

 

  1. The sale of additional shares of capital stock will cause treasury stock to increase.
    True    False

 

  1. Articulation between the financial statements means that they relate closely to each other.
    True    False

 

 

  1. Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford.
    True    False

 

  1. In a business organized as a corporation, it is not necessary to list the equity of each stockholder on the balance sheet.
    True    False

 

  1. Total assets must always equal total liabilities plus total owners equity.
    True    False

 

  1. A cash flows statement reports revenue and expense activities for a specific time period such as one month or one year.
    True    False

 

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

 

  1. Total assets plus total liabilities must equal total owners equity.
    True    False

 

  1. The practice of showing assets on the balance sheet at their cost, rather than at their current market value is explained, in part, by the fact that cost is supported by objective evidence that can be verified by independent experts.
    True    False

 

 

  1. The realization principle states that the activities of an entity should be kept separate from those of its owner.
    True    False

 

  1. The entity principle states that the affairs of the owners are not part of the financial operations of a business entity and should be separated.
    True    False

 

  1. The accounting equation may be stated as assets minus liabilities equals owners equity.
    True    False

 

  1. A transaction that causes an increase in an asset may also cause a decrease in another asset, an increase in a liability, or an increase in owners equity.
    True    False

 

  1. The collection of an account receivable will cause total assets to decrease.
    True    False

 

  1. The payment of a liability causes an increase in owners equity.
    True    False

 

  1. When a business borrows money from a bank, the immediate effect is an increase in total assets and a decrease in liabilities or owners equity.
    True    False

 

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

 

 

  1. The owner of a sole proprietorship is personally liable for the debts of the business, whereas the stockholders of a corporation are not personally liable for the debts of the business.
    True    False

 

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

 

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

 

  1. It is not unusual for an entity to report a significant increase in cash from operating activities, but a decrease in the total amount of cash.
    True    False

 

  1. The cash flows statement provides a link between two balance sheets by showing how net income (or loss) has changed owners equity from one balance sheet date to the next.
    True    False

 

  1. According to the Sarbanes-Oxley Act of 2002, internal controls must be audited by the same accounting firm that audits the financial statements.
    True    False

 

  1. The Public Company Accounting Oversight Board was created by the American Institute of CPAs to oversee the public accounting profession.
    True    False

 

 

  1. The major outgrowth from business failures and allegations of fraudulent financial reporting during the 1990s was the passage of the Securities and Exchange Act.
    True    False

 

 

Multiple Choice Questions

  1. Which of the following best describes liquidity?
    A. The ability to increase the value of retained earnings.
    B. The ability to pay the debts of the company as they become due.
    C. Being able to buy everything the company requires for cash.
    D. Purchasing everything the company requires on credit.

 

  1. Profitability may be defined as:
    A. The ability to pay the debts of the company as they fall due.
    B. The ability to increase retained earnings.
    C. Distributing dividends.
    D. Having excess cash.

 

  1. The principle of adequate disclosure means that a company should disclose:
    A. Only the important monetary information.
    B. All confidential information regarding the company.
    C. Any financial facts that a reasonably informed person would consider necessary for the proper interpretation of the financial statements.
    D. Only subsequent events.

 

  1. Blue Wholesale Shirt Co. sold shirts to Pink Retail Shoppe. The owner of Pink Retail said she would pay Blue at a later date, which Blue Wholesale agreed to. Blue Wholesale Shirt Co. is considered to be a:
    A. borrower.
    B. liability.
    C. creditor.
    D. debtor.

 

 

  1. Owners equity in a business increases as a result of which of the following?
    A. Payments of cash to the owners.
    B. Losses from unprofitable operation of the business.
    C. Earnings from profitable operation of the business.
    D. Borrowing from a commercial bank.

 

  1. Owners equity in a business decreases as a result of which of the following?
    A. Investments of cash by the owners.
    B. Profits from operating the business.
    C. Losses from unprofitable operation of the business.
    D. Repaying a loan to a commercial bank.

 

  1. Which one of the following is not considered one of the three primary financial statements?
    A. Balance sheet.
    B. Income statement.
    C. Statement of cash flows.
    D. Statement of budgeting activities.

 

  1. Which of the following is the primary objective of financial statements?
    A. Providing managers with detailed information tailored to the managers specific information needs.
    B. Providing users outside the business organization with information about the companys financial position and operating results.
    C. Reporting to the Internal Revenue Service the companys taxable income.
    D. Indicating to investors in a particular company the current market values of their investments.

 

  1. Which of the following is descriptive of the proper form of a balance sheet?
    A. The heading sets forth the period of time covered.
    B. Cash is always the first asset listed, followed by permanent assets (such as land and buildings), and finally by assets such as receivables and supplies.
    C. Liabilities are listed before owners equity.
    D. A subtotal for total assets plus total liabilities is shown.

 

 

  1. A balance sheet is designed to show:
    A. How much a business is worth.
    B. The profitability of the business during the current year.
    C. The assets, liabilities, and owners equity of a business as of a particular date.
    D. The cost of replacing the assets and of paying off the liabilities at December 31.

 

  1. The way in which financial statements relate is known as:
    A. Solvency.
    B. Objectivity.
    C. Articulation.
    D. Entity.

 

  1. If total assets equal $270,000 and total liabilities equal $202,500, the total owners equity must equal:
    A. $472,500.
    B. $67,500.
    C. $270,000.
    D. Cannot be determined from the information given.

 

  1. Which of the following best defines an asset?
    A. Something with physical form that is valued at cost in the accounting records.
    B. An economic resource owned by a business and expected to benefit future operations.
    C. An economic resource representing cash or the right to receive cash in the near future.
    D. Something owned by a business that has a ready market value.

 

  1. To appear in a balance sheet of a business entity, an asset need not:
    A. Be an economic resource.
    B. Have a ready market value.
    C. Be expected to benefit future operations.
    D. Be owned by the business.

 

 

  1. If total assets equal $345,000 and total owners equity equal $120,000, then total liabilities must equal:
    A. $465,000.
    B. $225,000.
    C. $120,000.
    D. Cannot be determined from the information given.

 

  1. A balance sheet:
    A. Provides owners, investors, and other interested parties with all the financial information they need to evaluate the financial strength, profitability, and future prospects of a given business entity.
    B. Shows the current market value of the owners equity in the business at the balance sheet date.
    C. Assists creditors in evaluating the debt-paying ability of a business by showing the assets and liabilities of the business combined with those of its owner (or owners).
    D. Shows the assets, liabilities, and owners equity of a business entity, valued in conformity with generally accepted accounting principles.

 

  1. Which of the following is correct if a company purchases equipment for $70,000 cash?
    A. Total assets will increase by $70,000.
    B. Total assets will decrease by $70,000.
    C. Total assets will remain the same.
    D. The companys total owners equity will decrease.

 

  1. From an accounting viewpoint, when is a business considered an entity separate from its owner(s)?
    A. Only when organized as a sole proprietorship.
    B. Only when organized as a partnership.
    C. Only when organized as a corporation.
    D. In each of the above situations, the business is an accounting entity separate from the activities of the owner(s).

 

 

  1. If a company purchases equipment for $65,000 by issuing a note payable:
    A. Total assets will increase by $65,000.
    B. Total assets will decrease by $65,000.
    C. Total assets will remain the same.
    D. The companys total owners equity will decrease.

 

  1. The valuation of assets in the balance sheet is based primarily upon:
    A. What it would cost to replace the assets.
    B. Cost, because cost is usually factual and verifiable.
    C. Current fair market value as established by independent appraisers.
    D. Cost, because in the event of liquidation, the assets would be sold at an amount equal to their original cost.

 

  1. Which of the following is not a generally accepted accounting principle relating to the valuation of assets?
    A. The cost principle in general, assets are valued at cost, rather than at estimated market values.
    B. The objectivity principle accountants prefer to use objective, rather than subjective, information as the basis for accounting information.
    C. The safety principle assets are valued at no more than the value for which they are insured.
    D. The going-concern assumption one reason for valuing assets such as buildings and equipment at cost rather than at their current market values is the assumption that the business will use these assets rather than sell them.

 

  1. Each year, the accountant for Southern Real Estate Company adjusts the recorded value of each asset to its market value. Using these market value figures on the balance sheet violates:
    A. The accounting equation.
    B. The stable-dollar assumption.
    C. The business entity concept.
    D. The cost principle.

 

 

  1. The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurants balance sheet. The reporting of this item in this manner violated the:
    A. Cost principle.
    B. Business entity concept.
    C. Objectivity principle.
    D. Going-concern assumption.

 

  1. Which of the following is correct when a corporation uses cash to pay for an expense?
    A. Total assets will decrease.
    B. Retained earnings will decrease.
    C. Owners equity will decrease.
    D. All three of the above statements are correct.

 

  1. If cash flows from operating activities is a negative amount:
    A. The company must have a net loss for the year.
    B. The company must have a net profit for the year.
    C. The company must have paid off more debts than it earned during the year.
    D. The company may have net income or a net loss for the year.

 

  1. Eton Corporation purchased land in 1990 for $190,000. In 2008, it purchased a nearly identical parcel of land for $430,000. In its 2008 balance sheet, Eton valued these two parcels of land at a combined value of $860,000. Reporting the land in this manner violated the:
    A. Cost principle.
    B. Principle of the business entity.
    C. Objectivity principle.
    D. Going-concern assumption.

 

 

  1. Bob Bertolucci, owner of Bobs Bazaar, also owns a personal residence that costs $575,000. The market value of his residence is $725,000. During preparation of the financial statements for Bobs Bazaar, the accounting principle most relevant to the presentation of Bobs home is:
    A. The concept of the business entity.
    B. The cost principle.
    C. The going-concern assumption.
    D. The objectivity principle.

 

  1. Which of the following will not cause a change in the owners equity of a business?
    A. Payment of an interest free business debt.
    B. Withdrawal of cash by the owner.
    C. Sale of land at a profit.
    D. Losses from unprofitable operations.

 

  1. Which business organization is recognized as a separate legal entity under the law?
    A. Corporation.
    B. Sole proprietorship.
    C. Partnership.
    D. All business organizations are separate legal entities.

 

  1. The amount of owners equity in a business is not affected by:
    A. The percentage of total assets held in cash.
    B. Investments made in the business by the owner.
    C. The profitability of the business.
    D. The amount of dividends paid to stockholders.

 

  1. Decreases in owners equity are caused by:
    A. Purchases of assets and payment of liabilities.
    B. Purchases of assets and incurrence of liabilities.
    C. Payment of liabilities and unprofitable operations.
    D. Distributions of assets to the owner and unprofitable operations.

 

 

  1. Which of the following transactions would cause a change in owners equity?
    A. Repayment of the principal on a bank loan.
    B. Purchase of a delivery truck on credit.
    C. Sale of land on credit for a price above cost.
    D. Borrowing money from a bank.

 

  1. An expense is best defined as:
    A. Any payment of cash for the benefit of the company.
    B. Past, present, or future payments of cash required to generate revenues.
    C. Past payments of cash required to generate revenues.
    D. Future payments of cash required to generate revenues.

 

  1. If a transaction causes an asset account to decrease, which of the following related effects may occur?
    A. An increase of equal amount in an owners equity account.
    B. An increase in a liability account.
    C. An increase of equal amount in another asset account.
    D. An increase in the combined total of liabilities and owners equity.

 

  1. The payment of a business debt not including interest:
    A. Decreases total assets.
    B. Increases total liabilities.
    C. Increases the owners equity in the business.
    D. Decreases the owners equity in the business.

 

  1. The accounting principle that assumes that a company will operate in the foreseeable future is:
    A. Going concern.
    B. Objectivity.
    C. Liquidity.
    D. Disclosure.

 

 

  1. Deerpark Corporation recently borrowed $70,000 cash from its bank. Which of the following was unaffected by this transaction?
    A. Assets.
    B. Liabilities.
    C. Owners equity.
    D. Cash.

 

  1. Which of the following transactions would cause an increase in both assets and owners equity?
    A. Investment of cash in the business by the owner.
    B. Sale of land for a price less than its cost.
    C. Borrowing money from a bank.
    D. Sale of land for cash at a price equal to its cost.

 

  1. A transaction caused an increase in both assets and owners equity. This transaction could have been:
    A. A sale of service to a customer producing revenue.
    B. Sale of land for a price less than its cost.
    C. Borrowing money from a bank.
    D. Sale of land for cash at a price equal to its cost.

 

  1. Retained earnings is:
    A. The positive cash flows of a company.
    B. Net worth of a company.
    C. The owners equity that has accumulated as a result of profitable operations.
    D. Equal to the total assets of a company.

 

  1. A revenue transaction results in all of the following except:
    A. An increase in assets.
    B. An increase in owners equity.
    C. A positive cash flow in either the past, present, or future.
    D. An increase in liabilities.

 

 

  1. If a company has a profit:
    A. Assets will be equal to liabilities plus owners equity.
    B. Assets will be less than liabilities plus owners equity.
    C. Assets will be greater than liabilities plus owners equity.
    D. Owners equity will be greater than its assets.

 

  1. Which of the following activities is not a category into which cash flows are classified?
    A. Marketing activities.
    B. Operating activities.
    C. Financing activities.
    D. Investing activities.

 

  1. The change in owners equity from one balance sheet to the next is partially explained by the:
    A. Statement of cash flows.
    B. Statement of financial position.
    C. Income statement.
    D. Tax return.

 

  1. Capital stock represents:
    A. The amount invested in the business by stockholders when shares of stock were initially issued by a corporation.
    B. The owners equity for a business organized as a corporation.
    C. The owners equity accumulated through profitable operations that have not been paid out as dividends.
    D. The price paid by the current owners to acquire shares of stock in the corporation, regardless of whether they bought the shares directly from the corporation or from another stockholder.

 

 

  1. The balance sheet item that represents the portion of owners equity resulting from profitable operations of the business is:
    A. Accounts receivable.
    B. Cash.
    C. Capital stock.
    D. Retained earnings.

 

  1. Retained earnings appears on:
    A. The income statement.
    B. The balance sheet.
    C. The statement of cash flows.
    D. All three of the financial statements.

 

  1. Which of the following statements regarding liquidity and profitability is not true?
    A. If a business is unable to pay its debts as they come due, it is operating unprofitably.
    B. A business may be liquid, yet operate unprofitably for several years.
    C. A business may operate profitably, yet be unable to meet its obligations.
    D. In order to survive in the long-run, a business must both remain liquid and operate profitably.

 

  1. The concept of adequate disclosure means that:
    A. The accounting department of a business must inform management of the accounting principles used in preparing the financial statements.
    B. The company must inform users of any significant facts necessary for proper interpretation of the financial statements, including events occurring after the financial statement date.
    C. The independent auditors must disclose in the financial statements any and all errors detected in the companys accounting records.
    D. The financial statements should include a comprehensive list of each transaction that occurred during the year.

 

 

  1. According to the Sarbanes-Oxley Act, CEOs and CFOs must certify to the accuracy of their companys financial statements:
    A. Monthly and Quarterly.
    B. Quarterly and Annually.
    C. Monthly and Annually.
    D. CEOs and CFOs are not required to certify to the companys financial statement; only CPAs do.

 

  1. A strong statement of cash flows indicates that significant cash is being generated by:
    A. Operating activities.
    B. Financing activities.
    C. Investing activities.
    D. Effective tax planning.

 

At December 31, 2009, the accounting records of Braun Corporation contain the following items:
 

  1. If Capital Stock is $260,000, what is the December 31, 2009 cash balance?
    A. $86,000.
    B. $94,000.
    C. $46,000.
    D. $686,000.

 

 

  1. If Capital Stock is $320,000, total assets of Braun Corporation at December 31, 2009, amount to:
    A. $686,000.
    B. $926,000.
    C. $726,000.
    D. $106,000.

 

  1. If Cash at December 31, 2009, is $86,000, Capital Stock is:
    A. $260,000.
    B. $300,000.
    C. $620,000.
    D. $168,000.

 

  1. If Cash at December 31, 2009, is $26,000, total owners equity is:
    A. $160,000.
    B. $366,000.
    C. $606,000.
    D. $400,000.

 

  1. If Cash at December 31, 2009, is $66,000, total assets amount to:
    A. $606,000.
    B. $806,000.
    C. $662,000.
    D. $646,000.

 

At December 31, 2010, the accounting records of Hercules Manufacturing, Inc. contain the following items:
 

 

  1. If total assets of Hercules Manufacturing, Inc. are $556,000, Equipment is carried in Hercules Manufacturing accounting records at:
    A. $377,000.
    B. $179,000.
    C. $150,000.
    D. $90,000.

 

  1. If total assets of Hercules Manufacturing, Inc. are $556,000, Retained Earnings at December 31, 2010, must be:
    A. $811,000.
    B. $180,000.
    C. $221,000.
    D. $335,000.

 

  1. If Retained Earnings at December 31, 2010, is $140,000, total assets amount to:
    A. $98,000.
    B. $377,000.
    C. $475,000.
    D. $188,000.

 

  1. If Retained Earnings at December 31, 2010, is $100,000, Equipment is carried in Hercules Manufacturing, Inc. accounting records at:
    A. $42,000.
    B. $58,000.
    C. $43,500.
    D. $345,000.

 

  1. Assume the Equipment shown above was acquired by the business five years ago and has a book value of $156,000, but has a current appraised value of $200,000. Hercules Manufacturings Retained Earnings at December 31, 2010, amounts to:
    A. $533,000.
    B. $345,000.
    C. $198,000.
    D. $356,000.

 

 

At December 31, 2011 the accounting records of Gordon, Inc. contain the following items:
 

  1. If the Notes Payable is $10,000, the December 31, 2011 cash balance is:
    A. $60,000.
    B. $160,000.
    C. $30,000.
    D. $20,000.

 

  1. If the Notes Payable balance is $25,000, then the total assets of Gordon, Inc. at December 31, 2011 amount to:
    A. $27,500.
    B. $152,500.
    C. $120,000.
    D. $165,000.

 

  1. If the Cash balance at December 31, 2011 is $67,500, the Notes Payable balance is:
    A. $118,750.
    B. $47,500.
    C. $137,500.
    D. $140,000.

 

  1. If the Cash balance at December 31, 2011 is $62,500 then total liabilities amount to:
    A. $42,500.
    B. $140,000.
    C. $45,000.
    D. $182,500.

 

 

  1. Which of the following is correct if at the end of Crystal Imports first year of operations, assets are $800,000 and owners equity is $720,000?
    A. The owner must have invested $720,000 to start the business.
    B. The business must be operating profitably.
    C. Liabilities are $80,000.
    D. Liabilities are $1,520,000.

 

  1. During the current year, the assets of Wheatleys increased by $362,000, and the liabilities increased by $260,000. The owners equity in the business must have:
    A. Decreased by $102,000.
    B. Decreased by $622,000.
    C. Increased by $102,000.
    D. Increased by $622,000.

 

  1. The total liabilities of Hogans Company on the balance sheet are $270,000; this amount is equal to three-fourths of the total assets. What is the amount of owners equity?
    A. $202,500.
    B. $90,000.
    C. $360,000.
    D. $630,000.

 

  1. Thirty percent of the total assets of Shanahan Corporation have been financed through borrowing. The total liabilities of the company are $600,000. What is the amount of owners equity?
    A. $180,000.
    B. $2,000,000.
    C. $1,400,000.
    D. $2,600,000.

 

 

  1. A transaction caused a $60,000 increase in both assets and total liabilities. This transaction could have been which of the following?
    A. Purchase of office equipment for $60,000 cash.
    B. Purchase of office equipment for $120,000, paying $60,000 cash and issuing a note payable for the balance.
    C. Repayment of a $60,000 bank loan.
    D. Investment of $60,000 cash in the business by the owner.

 

  1. If $9,600 cash and a $31,000 note payable are given in exchange for some office machines to be used in a business:
    A. Total assets are increased.
    B. Total liabilities are decreased.
    C. Total assets are decreased.
    D. The owners equity is increased.

 

  1. If during the current year, liabilities of Corbetts Store increased by $220,000 and owners equity increased by $160,000, then:
    A. Assets at the end of the year total $380,000.
    B. Assets at the end of the year total $60,000.
    C. Assets increased during the year by $380,000.
    D. Assets decreased during the year by $60,000.

 

  1. If during the current year, liabilities of Hayden Travel decreased by $50,000 and owners equity increased by $75,000, then:
    A. Assets at the end of the year total $125,000.
    B. Assets at the end of the year total $25,000.
    C. Assets increased during the year by $25,000.
    D. Assets decreased during the year by $125,000.

 

 

  1. At the end of the current year, the owners equity in Barclay Bakery is $246,000. During the year, the assets of the business had increased by $120,000 and the liabilities had increased by $72,000. Owners equity at the beginning of the year must have been:
    A. $198,000.
    B. $174,000.
    C. $284,000.
    D. $438,000.

 

  1. At the end of the current year, the owners equity in Durante Co. is $360,000. During the year, the assets of the business had increased by $68,000 and the liabilities had increased by $118,000. Owners equity at the beginning of the year must have been:
    A. $410,000.
    B. $310,000.
    C. $546,000.
    D. $174,000.

 

  1. During the current year, the assets of Quality Stairs increased by $175,000 and the liabilities decreased by $15,000. If the owners equity in the business is $475,000 at the end of the year, the owners equity at the beginning of the year must have been:
    A. $335,000.
    B. $285,000.
    C. $665,000.
    D. $615,000.

 

  1. During the month of May, the Henderson Company had the following transactions:
    * Revenues of $60,000 were earned and received in cash.
    * Bank loans of $9,000 were paid off.
    * Equipment of $20,000 was purchased.
    * Expenses of $36,800 were paid.
    * Stockholders purchased additional shares for $22,000 cash.
    A statement of cash flows for May would report net cash flows from operating activities of:
    A. $60,000.
    B. $16,200.
    C. $23,200.
    D. $20,000.

 

 

Astoria Co. had the following transactions during the month of August:
 

  1. What amount of net income will be reported on an income statement for the month of August?
    A. $20,000.
    B. $7,500.
    C. $0.
    D. $33,500.

 

  1. At the beginning of August, 2010, owners equity in Astoria was $160,000. Given the transactions of August, what will owners equity be at the end of the month?
    A. $167,500.
    B. $150,500.
    C. $193,500.
    D. $158,000.

 

  1. For the month of August, net cash flows from operating activities for Astoria were:
    A. $33,500.
    B. $7,500.
    C. $20,000.
    D. $26,000.

 

 

  1. The major provisions of the Sarbanes-Oxley Act of 2002 include all of the following except:
    A. The creation of a new agency to oversee the public accounting profession.
    B. Restrictions on the types of consulting services that accounting firms can provide to audit clients.
    C. Reducing responsibility for audit committees when overseeing the financial reporting process.
    D. Requiring the chief executive office and the chief financial officer to certify the accuracy of their companys financial statements.

 

During the month of August, the Boyce Company had the following transactions:
 

  1. A statement of cash flows for August, would report net cash flows from operating activities of:
    A. $26,000.
    B. $32,400.
    C. $40,000.
    D. $46,400.

 

  1. A statement of cash flows for August, would report net cash flows from financing activities of:
    A. $26,000.
    B. $32,400.
    C. $40,000.
    D. $46,400.

 

 

  1. A statement of cash flows for August, would report net cash flows from investing activities of:
    A. $26,000.
    B. $32,400.
    C. $40,000.
    D. $46,400.

 

  1. A statement of cash flows for August, would report an increase in cash of:
    A. $26,000.
    B. $32,400.
    C. $40,000.
    D. $46,400.

 

Waldorf Co. had the following transactions during the month of October:
 

  1. What amount of net income will be reported on an income statement for the month of October?
    A. $18,500.
    B. $22,500.
    C. $78,000.
    D. $100,500.

 

  1. At the beginning of October, owners equity in Waldorf was $480,000. Given the transactions of October, 2011, what will owners equity be at the end of the month?
    A. $480,000.
    B. $484,000.
    C. $502,500.
    D. $580,500.

 

 

  1. For the month of October, net cash flows from operating activities for Waldorf were:
    A. $18,500.
    B. $22,500.
    C. $78,000.
    D. $100,500.

 

During the month of February, the Fadness Company had the following transactions:
 

  1. A statement of cash flows for February, would report net cash flows from operating activities of:
    A. $4,000.
    B. $47,000.
    C. $53,600.
    D. $96,600.

 

  1. A statement of cash flows for February, would report net cash flows from financing activities of:
    A. $4,000.
    B. $47,000.
    C. $53,600.
    D. $96,600.

 

 

  1. A statement of cash flows for February, would report net cash flows from investing activities of:
    A. $4,000.
    B. $47,000.
    C. $53,600.
    D. $96,600.

 

  1. A statement of cash flows for February, would report an increase in cash of:
    A. $4,000.
    B. $47,000.
    C. $53,600.
    D. $96,600.

 

 

Essay Questions
 

  1. Accounting terminology
    Listed below are nine technical accounting terms introduced in this chapter:

    Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer None if the statement does not correctly describe any of the terms. Do not use a term more than once.
    (A.) Having the financial ability to pay debts as they become due.
    (B.) An assumption that a business will operate in the foreseeable future.
    (C.) Economic resources owned by businesses that are expected to benefit future operations.
    (D.) The debts or obligations of a business organization.
    (E.) Assets = Liabilities + Owners Equity
    (F.) The principle which states that assets are valued in the balance sheet at their historical cost.
    (G.) A residual amount equal to assets minus liabilities.

 

 

 

 

  1. Accounting equation
    (A.) During the current year, the assets of Duffy Stationery increased by $650,000 and the liabilities decreased by $340,000. What was the change in owners equity during the year?
    (B.) The owners equity of Graham Interiors appears on the balance sheet as $720,000 and is equal to one-fourth of total assets. Compute the amount of total liabilities.
    (C.) At the end of the year, the owners equity in Scott Mfg. amounted to $845,000. During 2009, the assets of the business increased by $515,000 and the liabilities increased by $205,000. The owners equity at the beginning of 2009 was how much?

 

 

 

 

 

  1. Effects of transactions on elements of the accounting equation. Some of the transactions carried out by Tudor Wholesale during the first month of the companys operations are listed below. You are to determine the effect of each transaction on the total assets, the total liabilities, and the owners equity. Prepare your answer in columnar form, identifying each transaction by letter and using the symbols (+) for increase, (-) for decrease, and (NC) for no change. An answer is provided for the first transaction to serve as an example.

 

 

 

 

 

  1. Effects of transactions on elements of the accounting equation. Some of the transactions carried out by Tsang Company during the first month of the companys operations are listed below. You are to determine the dollar effect of each transaction on the total assets, the total liabilities, and the owners equity of Tsang Company. Use the symbols (+) for increase, (?) (-) for decrease, and (NC) for no change. An answer is provided for the first transaction to serve as an example.

 

 

 

 

 

  1. List the following accounts in the order that they would appear in a balance sheet.
    Capital Stock
    Equipment
    Accounts Receivable
    Retained Earnings
    Revenue
    Accounts Payable
    Cash
    Rent Expense

 

 

 

 

  1. Computation of assets, liabilities, and owners equity after a series of transactions. On April 30, 2009, the balance sheet of China Collectibles showed total assets of $700,000, total liabilities of $400,000, and owners equity of $300,000. The following transactions occurred in May of 2009:
    (1) Capital stock was issued in exchange for $165,000 cash.
    (2) The business purchased equipment for $360,000, paying $160,000 cash and issuing a note payable for $200,000.
    (3) The business paid $70,000 of its accounts payable.
    (4) The business collected $54,000 of its accounts receivable.
    Compute the following as of May 31, 2009:
    (A.) Total assets $___________
    (B.) Total liabilities $___________
    (C.) Owners equity $___________

 

 

 

 

 

  1. Computation of assets, liabilities, and owners equity after a series of transactions. The December 31, 2009 balance sheet of Charles Realty reported total assets of $900,000, total liabilities of $350,000, and owners equity of $550,000. The following transactions occurred in January of 2010:
    (1) The business purchased land for $250,000, paying $100,000 cash and issuing a note payable for the balance.
    (2) The business collected accounts receivable totaling $45,000.
    (3) The business sold land costing $50,000 for $60,000 cash.
    (4) The business paid $50,000 of the note payable.
    Compute the following at January 31, 2010:
    (A.) Total assets $__________
    (B.) Total liabilities $__________
    (C.) Owners equity $__________

 

 

 

 

  1. Preparation of balance sheet
    Prepare the balance sheet as of December 31, 2009, for Gamma Company, from the following list of items which are arranged in random order. You must compute the amount for accounts payable to complete the balance sheet.

 

 

 

 

 

  1. Preparation of balance sheet after a series of transactions
    The balance sheet was as follows for Custom Ceramics on February 1, 2010:

    During the first week of February, the following transactions occurred:
    * The business used cash to pay off $5,000 of its accounts payable. (No payment was made on the notes payable.)
    * Additional capital stock was issued to Joan Custom for $15,000 cash.
    *Equipment was purchased on credit for $1,800
    * The business collected $4,000 cash from accounts receivable.
    Complete the balance sheet for Custom Ceramics as of February 8, 2010.

 

 

 

 

 

  1. Completion of balance sheet
    Use the following information to complete the balance sheet of Adelphi Construction as of December 31, 2010.
    (1) The company was organized on January 1, 2010 and has operated for the full year 2010.
    (2) Earnings were $275,000 and dividends of $70,000 were paid to stockholders.
    (3) Cash and accounts receivable together amount to one and one-half times as much as notes payable.

 

 

 

 

 

  1. Completion of balance sheet
    Use the following information to complete the December 31, 2009 balance sheet of Copper Supplies Company.
    (1) Owners equity as of January 1, 2009, totaled $175,000, which included capital stock of $150,000.
    (2) Additional capital stock was issued during 2009 in exchange for $40,000 cash.
    (3) Net income for 2009 amounted to $200,000; no dividends were paid during 2009.
    (4) Cash and accounts receivable together amount to 3 times as much as accounts payable.

 

 

 

 

 

  1. Effects of transactions on balance sheet items
    Show the effect of each of the seven listed transactions on the balance sheet items of Distinctive Draperies. Indicate the new balances after the transaction of May 2 and each subsequent transaction. The effects of the May 1 transaction are already filled in to provide you with an example.

 

 

 

 

 

 

  1. Effects of transactions on balance sheet items
    Show the effect of each of the seven listed transactions on the balance sheet items of Renaissance Investment Services, Inc. Indicate the new balances after the transaction of November 2 and each subsequent transaction. The effects of the November 1 transaction are already filled in to provide you with an example.

 

 

 

 

 

  1. An inexperienced accounting intern at Tasso Company prepared the following income statement for the month of July 2009:

    Instructions: Prepare a revised income statement in accordance with generally accepted accounting principles.

 

 

 

 

 

  1. From the following accounts and amounts prepare a balance sheet for the Swell Company for December 31, 2010. You must compute the amount for retained earnings to complete the balance sheet.

 

 

 

 

  1. Financial statements
    A set of financial statements includes three related accounting reports, or statements. In the space provided, list the names of three primary statements, and give a brief description of the accounting information contained in each.

 

 

 

 

 

  1. Development of generally accepted accounting principles
    (A.) What is meant by the phrase generally accepted accounting principles?
    (B.) Give the names of three organizations that currently play an active role in the development of accounting principles in the United States.

 

 

 

 

  1. Valuation of assets under generally accepted accounting principles. Under generally accepted accounting principles, the assets owned by a business are reported in the balance sheet at their historical cost. Identify and briefly explain two accounting principles other than the cost principle that support the valuation of assets at cost in the balance sheet.

 

 

 

 

  1. Forms of Business Organization
    State and describe the three most common forms of business organizations in the United States.

 

 

 

 

 

Multiple Choice Questions
 

  1. The financial statements of a business entity:
    A. Include the balance sheet, income statement, and income tax return.
    B. Provide information about the profitability and financial position of the company.
    C. Are the first step in the accounting process.
    D. Are prepared for a fee by the Financial Accounting Standards Board.

 

  1. A balance sheet is designed to show the financial position of an entity:
    A. At a single point in time.
    B. Over a period of time such as a year or quarter.
    C. At December 31 of the current year.
    D. At January 1 of the coming year.

 

  1. Accounts payable and notes payable are:
    A. Always less than the amount of cash a business owns.
    B. Creditors.
    C. Written promises to pay a certain amount, plus interest, at a definite future date.
    D. Liabilities.

 

  1. The balance sheet of Dotty Designs includes the following items:

    This list includes:
    A. Four assets and three liabilities.
    B. Five assets and three liabilities.
    C. Five assets and two liabilities.
    D. Six assets and two liabilities.

 

 

  1. An accounting entity may best be described as:
    A. An individual.
    B. A particular economic unit.
    C. A publicly owned corporation.
    D. Any corporation, regardless of size.

 

Presented below is the balance sheet for Sabino Family Dentistry on January 1 of the current year.

During the first few days of January, the following transactions occurred:
Jan 1 The business borrowed $99,000 from the bank, giving a note payable due in 90 days.
3 Additional capital stock was issued in exchange for $44,550 cash.
3 Equipment was purchased for $62,700 on credit.
5 The business collected $26,400 of its accounts receivable and paid $37,950 of its accounts payable.

 

  1. On January 6, total assets of the business amount to:
    A. $826,650.
    B. $994,950
    C. $957,000.
    D. $950,400.

 

 

  1. On January 6, owners equity amounts to:
    A. $752,400.
    B. $44,550.
    C. $796,950.
    D. $895,950.

 

  1. On January 6, the accounts payable balance is:
    A. $136,950.
    B. $36,300.
    C. $24,750.
    D. $99,000.

 

  1. On January 6, the accounts receivable balance is:
    A. $24,750.
    B. $38,775.
    C. $77,550.
    D. $63,525.

 

  1. On January 6, the cash balance is:
    A. $127,050.
    B. $138,600.
    C. $165,000.
    D. $202,950

 

 

Essay Questions
 

  1. Presented below is the balance sheet for Manhattan Family Dentistry on January 1 of the current year.

    During the first few days of January, the following transactions occurred:
    Jan 2 Equipment was purchased for $38,000 on credit.
    2 The business collected $16,000 of its accounts receivable and paid $23,000 of its accounts payable.
    3 The business borrowed $60,000 from the bank, giving a note payable due in 90 days.
    3 Additional capital stock was issued in exchange for $27,000 cash.
    Complete the following balance sheet for Manhattan Family Dentistry on January 4 of the current year.

 

 

 

 

 

  1. Complete the January 31, 20__, balance sheet of Countrywide Legal Services using the following information.
    (1) Stockholders equity at January 1, 20__, included capital stock of $140,000.
    (2) The land and building were purchased by the business for a total price of $200,000 on January 25, 20__, from a company forced out of business. On January 31, an appraiser valued the property at $260,000.
    (3) Additional capital stock was issued in exchange for $50,000 cash.
    (4) Retained earnings at January 31, 20___, amounted to $49,400.

 

 

 

 

 

Multiple Choice Questions
 

  1. A set of financial statements:
    A. Is intended to assist users in evaluating the financial position, profitability, and future prospects of an entity.
    B. Is intended to assist the IRS in determining the amount of income taxes owed by a business organization.
    C. Includes notes disclosing information necessary for the proper interpretation of the statements.
    D. Is intended to assist investors and creditors in making decisions involving the allocation of economic resources.

 

  1. Which of the following statements is not consistent with generally accepted accounting principles relating to asset valuation?
    A. Many assets are originally recorded in accounting records at their cost to the business entity.
    B. Subtracting total liabilities from total assets indicates what the owners equity in the business is worth under current market conditions.
    C. Accountants assume that assets such as office supplies, land, and buildings will be used in business operations, rather than being sold at current market prices.
    D. Accountants prefer to base the valuation of assets upon objective, verifiable evidence rather than upon appraisals or personal opinion.

 

  1. Water world Boat Shop purchased a truck for $12,000, making a down payment of $5,000 cash, and signing a $7,000 note payable due in 60 days. As a result of this transaction:
    A. Total assets increased by $12,000.
    B. Total liabilities increased by $7,000.
    C. From the viewpoint of a short-term creditor, this transaction makes the business more solvent.
    D. This transaction had no immediate effect upon the owners equity in the business.

 

  1. A transaction caused a $15,000 decrease in both total assets and total liabilities. This transaction could have been:
    A. Purchase of a delivery truck for $15,000 cash.
    B. An asset with a cost of $15,000 was destroyed by fire.
    C. Repayment of a $15,000 bank loan.
    D. Collection of a $15,000 account receivable.

 

 

  1. Which of the following is (are) correct about a companys balance sheet?
    A. It displays sources and uses of cash for the period.
    B. It is an expansion of the basic accounting equation: Assets = Liabilities + Owners Equity.
    C. It is sometimes referred to as a statement of financial position.
    D. It is unnecessary if both an income statement and statement of cash flows are available.

 

  1. Which of the following would you expect to find in a correctly-prepared income statement?
    A. Cash balance at the end of the period.
    B. Revenues earned during the period.
    C. Contributions by the owner during the period.
    D. Expenses incurred during the period to earn revenues.

 

  1. What information would you find in a statement of cash flows that you would not be able to get from the other two primary financial statements?
    A. Cash provided by or used in financing activities.
    B. Cash balance at the end of the period.
    C. Total liabilities due to creditors at the end of the period.
    D. Net income.

 

  1. Which of the following statements relating to the role of professional judgment in the financial reporting process are valid?
    A. Different accountants may evaluate similar situations differently.
    B. The determination of which items should be disclosed in notes to financial statements requires professional judgment.
    C. Once a complete list of generally accepted accounting principles is prepared, judgment need no longer enter into the financial reporting process.
    D. The possibility always exists that professional judgment later may prove to have been incorrect.

 

 

 

Chapter 02 Basic Financial Statements Answer Key
 

True / False Questions

  1. A business entity is regarded as separate from the personal activities of its owners whether it is a sole proprietorship, a partnership, or a corporation.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Reporting
Blooms: Understand
Difficulty: Easy
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

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

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

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

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

 

  1. Notes payable and accounts payable are written promises to pay an amount owed by a certain date. Notes payable generally have interest, while accounts payable generally do not.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

  1. A net profit results from having more revenues than liabilities.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 02-05 Explain how the income statement reports an enterprises financial performance for a period of time in terms of the relationship of revenues and expenses.
Topic: Income Statement

  1. The sale of additional shares of capital stock will cause treasury stock to increase.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Resource Management
AICPA FN: Measurement
Blooms: Understand
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position

 

  1. Articulation between the financial statements means that they relate closely to each other.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-07 Explain how the statement of financial position (balance sheet); income statement; and statement of cash flows relate to each other.
Topic: Relationships among Financial Statements

  1. Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Measurement
Blooms: Remember
Difficulty: Medium
Learning Objective: 02-08 Explain common forms of business ownershipsole proprietorship; partnership; and corporationand demonstrate how they differ in terms of their presentation in the statement of financial position.
Topic: Forms of Business Organization

  1. In a business organized as a corporation, it is not necessary to list the equity of each stockholder on the balance sheet.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
Learning Objective: 02-08 Explain common forms of business ownershipsole proprietorship; partnership; and corporationand demonstrate how they differ in terms of their presentation in the statement of financial position.
Topic: Forms of Business Organization

 

  1. Total assets must always equal total liabilities plus total owners equity.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners Equity.
Topic: A Starting Point: Statement of Financial Position

  1. A cash flows statement reports revenue and expense activities for a specific time period such as one month or one year.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Blooms: Remember
Difficulty: Easy
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the companys operating; investing; and financing activities.
Topic: Statement of Cash Flows

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

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Blooms: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position

 

  1. Total assets plus total liabilities must equal total owners equity.
    FALSE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Easy
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners Equity.
Topic: A Starting Point: Statement of Financial Position

  1. The practice of showing assets on the balance sheet at their cost, rather than at their current market value is explained, in part, by the fact that cost is supported by objective evidence that can be verified by independent experts.
    TRUE

 

AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: Medium
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