Test Bank 3rd-Ed Financial & Managerial Accounting by Charles T.Horngren

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Test Bank 3rd-Ed Financial & Managerial Accounting by Charles T.Horngren

Sample Chapter No 1                                 

Financial and Managerial Accounting, 3e (Horngren)
Chapter 1 Accounting and the Business Environment

Learning Objective 1-1

1) Accounting is the information system that measures business activity, processes the data into reports, and communicates the results to decision makers.
Answer: TRUE
Diff: 1
LO: 1-1
EOC: QC1-6
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

2) Accounting is “the language of business.”
Answer: TRUE
Diff: 1
LO: 1-1
EOC: Accounting Vocabulary
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

3) A debt that a corporation owes to an outside party is called:
A) an asset.
B) a liability.
C) stockholders’ equity.
D) revenue.
Answer: B
Diff: 1
LO: 1-1
EOC: E1-14
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

4) There are relatively few types of revenue. Which of the following in NOT a type of revenue?
A) Common Stock
B) Service
C) Interest
D) Sales
Answer: A
Diff: 1
LO: 1-1
EOC: S1-1
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

5) A promise received from a company’s customers to pay for goods and services that they received from the company is called a(n):
A) account receivable.
B) account payable.
C) revenue.
D) expense.
Answer: A
Diff: 1
LO: 1-1
EOC: Accounting Vocabulary
AACSB: Analytic Skills
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

6) Which of the following statements BEST describes managerial accounting?
A) Managerial accounting focuses on information for internal decision making.
B) Managerial accounting focuses on outside investors and lenders.
C) Managerial accounting provides information for the public.
D) Managerial accounting provides information for taxing authorities.
Answer: A
Diff: 1
LO: 1-1
EOC: S1-2
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

7) By definition, which of the following represent the owners of a corporation?
A) Customers
B) Creditors
C) Stockholders
D) Employees
Answer: C
Diff: 1
LO: 1-1
EOC: QC1-2
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting
8) Which of the following statements BEST defines financial statements?
A) Financial statements are the information system that records and measures business transactions.
B) Financial statements are the verbal statements made to business news organizations by chief financial officers.
C) Financial statements are documents that report on a business in monetary terms, providing information to help people make informed business decisions.
D) Financial statements are plans and forecasts for future time periods.
Answer: C
Diff: 2
LO: 1-1
EOC: Accounting Vocabulary
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

9) Items such as buildings and land are:
A) liabilities.
B) equity.
C) assets.
D) revenues.
Answer: C
Diff: 1
LO: 1-1
EOC: Accounting Vocabulary
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

Learning Objective 1-2

1) Managerial accounting focuses on information for decision makers outside the company, such as creditors and taxing authorities.
Answer: FALSE
Diff: 1
LO: 1-2
EOC: S1-2
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Decision Modeling

2) Business owners use accounting information to set goals, evaluate progress toward those goals, and take corrective action when needed.
Answer: TRUE
Diff: 1
LO: 1-2
EOC: E1-15
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting
3) Outside investors would ordinarily use financial accounting information to decide whether or not to invest in a business.
Answer: FALSE
Diff: 1
LO: 1-2
EOC: S1-2
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

4) An investor is someone who loans money to a business.
Answer: FALSE
Diff: 1
LO: 1-2
EOC: S1-2
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

5) A creditor is a party that has an ownership interest in a business.
Answer: FALSE
Diff: 1
LO: 1-2
EOC: S1-2A
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

6) Different users of the financial statements (investors, creditors, tax authorities, etc.) all focus on the same parts of the financial statements for the information they need.
Answer: FALSE
Diff: 1
LO: 1-2
EOC: S1-2
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Decision Modeling, Measurement
7) Many organizations have contributed to the establishment of generally accepted accounting principles. Which of the following organizations has the primary responsibility for formulating accounting standards?
A) FASB
B) CMA
C) AICPA
D) SEC
Answer: A
Diff: 1
LO: 1-2
EOC: QC1-1
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

8) Which of the following is a licensed accountant who serves the general public rather than an accountant who serves one particular company?
A) CPA
B) CMA
C) SEC
D) FASB
Answer: A
Diff: 1
LO: 1-2
EOC: S1-3A
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

9) The primary objective of financial reporting is to provide information useful for making investment and lending decisions. Which of the following is NOT one of the basic characteristics that financial information must possess to be useful?
A) Reliability
B) Creativity
C) Relevance
D) Comparability
Answer: B
Diff: 1
LO: 1-2
EOC: S1-6
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
10) Accountants often refer to GAAP. What do the letters GAAP represent in accounting?
A) Globally accepted and accurate policies
B) Global accommodation accounting principles
C) Generally accredited accounting policies
D) Generally accepted accounting principles
Answer: D
Diff: 1
LO: 1-2
EOC: Accounting Vocabulary
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

11) Which of the following are MOST likely to be users of managerial accounting information?
A) Potential investors
B) Creditors
C) Customers
D) Company managers
Answer: D
Diff: 1
LO: 1-2
EOC: S1-2
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Decision Modeling

12) Which of the following are likely to be users of financial accounting information?
A) Taxing authorities
B) Creditors
C) Potential investors
D) All of the above
Answer: D
Diff: 1
LO: 1-2
EOC: S1-2
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Research

Learning Objective 1-3

1) The AICPA’s Code of Professional Conduct for Accountants provides guidance to CPAs in the performance of their work.
Answer: TRUE
Diff: 1
LO: 1-3
EOC: S1-3
AACSB: Ethical Understanding
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
2) GAAP is the set of accounting rules for international accounting.
Answer: FALSE
Diff: 1
LO: 1-3
EOC: QC1-1
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

3) IFRS accounting rules apply to all U.S. corporations.
Answer: FALSE
Diff: 1
LO: 1-3
EOC: QC1-1
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

4) A U.S. publicly traded company does not come under SEC regulations as long as it follows the rules of GAAP.
Answer: FALSE
Diff: 1
LO: 1-3
EOC: QC1-1
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

5) IFRS are the international accounting rules that U.S. companies must follow for their international operations.
Answer: TRUE
Diff: 1
LO: 1-3
EOC: E1-17
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

6) IFRS (international accounting rules) are much more specific than GAAP and allow for far less professional judgment.
Answer: FALSE
Diff: 1
LO: 1-3
EOC: E1-17
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
7) The PCAOB is a watchdog agency that monitors the work of small, privately owned businesses.
Answer: FALSE
Diff: 1
LO: 1-3
EOC: S1-3
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

8) Independent accountants that audit public companies come under the regulatory supervision of the PCAOB.
Answer: TRUE
Diff: 1
LO: 1-3
EOC: S1-3
AACSB: Communication
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

9) Accounting standards are formulated by the:
A) SEC.
B) AICPA.
C) FASB.
D) IRS.
Answer: C
Diff: 1
LO: 1-3
EOC: S1-3
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

10) The Sarbanes-Oxley Act (“SOX”) made it a criminal offense to:
A) steal shareholders’ money.
B) default on loans from creditors.
C) declare bankruptcy.
D) falsify financial information.
Answer: D
Diff: 1
LO: 1-3
EOC: Accounting Vocabulary
AACSB: Ethical Understanding
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

11) Which of the following organizations requires publicly owned companies to be audited by independent accountants (CPAs)?
A) SEC
B) PCAOB
C) FASB
D) AICPA
Answer: A
Diff: 1
LO: 1-3
EOC: QC1-1
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

12) Which of the following organizations or groups issue an opinion on whether a company’s financial statements are a fair representation of the company’s financial situation?
A) SEC
B) Board of Directors
C) Shareholders
D) Independent Accountants (CPAs)
Answer: D
Diff: 1
LO: 1-3
EOC: S1-3
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

Learning Objective 1-4

1) A not-for-profit organization has owners just like other forms of business.
Answer: FALSE
Diff: 1
LO: 1-4
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

2) Board members of a not-for-profit organization have fiduciary responsibilities that constitute legal obligations to manage the organization in a trustworthy manner.
Answer: TRUE
Diff: 1
LO: 1-4
EOC: S1-4
AACSB: Ethical Understanding
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

3) There are four major forms of business organizations.
Answer: FALSE
Diff: 1
LO: 1-4
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

4) Similar to partnerships, in a limited-liability company (LLC), the members are personally liable for the debts and obligations of the business.
Answer: FALSE
Diff: 1
LO: 1-4
EOC: P1-29A
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Risk Analysis

5) The largest businesses are usually organized as:
A) corporations.
B) partnerships.
C) proprietorships.
D) LLCs.
Answer: A
Diff: 1
LO: 1-4
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Decision Modeling

6) Businesses can be organized in a variety of forms. The types of businesses commonly found in the U.S. include all of the following EXCEPT:
A) corporations.
B) state government-run companies.
C) partnerships.
D) proprietorships.
Answer: B
Diff: 1
LO: 1-4
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

7) A corporation possesses all but one of the following characteristics. Which of the following is NOT a characteristic of a corporation?
A) If a corporation cannot pay its debts, lenders can take the owners’ personal assets to satisfy the obligations.
B) A corporation is a distinct entity in the eyes of the law.
C) Corporation ownership is divided into shares of stock.
D) A corporation is owned by shareholders or stockholders.
Answer: A
Diff: 1
LO: 1-4
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

8) Corporate ownership is a very popular type of ownership in the United States because:
A) corporate shareholders have limited liability for the debts of the corporation.
B) most corporations are small or medium-sized companies.
C) the life of a corporation is limited by the death of an owner.
D) a corporation is usually managed by the owners.
Answer: A
Diff: 1
LO: 1-4
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

9) Which of the following is NOT a characteristic of a traditional partnership?
A) A partnership is owned by shareholders or stockholders.
B) If a partnership cannot pay its debts, lenders can take the owners’ personal assets to satisfy the obligations.
C) A partnership joins two or more individuals as co-owners.
D) Each partner has the authority to commit the entire partnership to a binding contract.
Answer: A
Diff: 1
LO: 1-4
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting
10) Which of the following is TRUE for a proprietorship?
A) A proprietorship joins two or more individuals as co-owners.
B) The proprietor is not personally liable for the debts of the proprietorship.
C) A proprietorship has a single owner.
D) A proprietorship has an indefinite life.
Answer: C
Diff: 1
LO: 1-4
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

11) Which of the following is a characteristic of a limited liability partnership (LLP)?
A) A limited liability partnership issues shares of stock to shareholders.
B) Each partner is liable only for the actions under his or her control.
C) A limited liability partnership is owned by a single investor.
D) The limited liability partners are subject to “double taxation.”
Answer: B
Diff: 2
LO: 1-4
EOC: S1-4
AACSB: Analytic Skills
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

12) Caleb Brown has been the sole owner of a bicycle sales and repair shop for many years. Which of the following business types would best protect Caleb’s personal assets from product liability exposure?
A) Partnership
B) Limited liability company
C) Proprietorship
D) Not-for-profit
Answer: B
Diff: 2
LO: 1-4
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Decision Modeling
13) Dylan Chase is a partner in a CPA practice. One of Dylan’s partners sometimes takes a very aggressive position when auditing clients. Which of the following business types would protect Dylan’s personal assets from malpractice liability for his partner’s aggressive auditing tactics?
A) Limited liability partnership
B) Traditional partnership
C) Not-for-profit
D) Proprietorship
Answer: A
Diff: 1
LO: 1-4
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Decision Modeling

14) Phillip and Reed have developed a new technology for home computer systems. However, they need to raise a large amount of capital to build the production and support facilities to market their product successfully. Which of the following business types would be best suited to help the company raise the necessary capital to begin production?
A) Corporation
B) Proprietorship
C) Partnership
D) Limited liability partnership
Answer: A
Diff: 1
LO: 1-4
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Decision Modeling

15) David has decided to open an auto-detailing business. He will pick up an automobile from the client, take it to his parents’ garage, detail it, and return it to the client. If he does all of the work himself and takes no legal steps to form a special organization, which type of business organization, in effect, has he chosen?
A) Limited liability company
B) Partnership
C) Corporation
D) Proprietorship
Answer: D
Diff: 2
LO: 1-4
EOC: S1-4
AACSB: Analytic Skills
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
Learning Objective 1-5

1) In an LLC, the business-not the owners-are responsible for the corporation’s debts.
Answer: TRUE
Diff: 1
LO: 1-5
EOC: P1-29A
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Risk Analysis

2) Corporations are subject to stricter regulation than other forms of businesses, so it is more difficult for corporations to raise large amounts of investment capital.
Answer: FALSE
Diff: 1
LO: 1-5
EOC: S1-4
AACSB: Analytic Skills
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

3) The most an investor in a corporation can lose-in the event the business fails-is limited to the amount the party has invested.
Answer: TRUE
Diff: 1
LO: 1-5
EOC: S1-4
AACSB: Ethical Understanding
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

4) Stockholders of a corporation each have “mutual agency,” meaning they are authorized to carry out transactions on behalf of the corporation.
Answer: FALSE
Diff: 1
LO: 1-5
EOC: S1-4
AACSB: Ethical Understanding
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
5) The first step in incorporation is to:
A) have the board of directors designate a president.
B) agree to a set of bylaws.
C) issue the first shares of stock.
D) obtain a charter from the state.
Answer: D
Diff: 1
LO: 1-5
EOC: S1-5
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Decision Modeling

6) In an LLC, who is responsible for the company’s debts?
A) The company itself
B) The partners
C) The individual investors
D) The proprietor
Answer: A
Diff: 1
LO: 1-5
EOC: P1-29A
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Risk Analysis

7) A corporation is a legal entity entirely distinct from its:
A) proprietors.
B) vendors.
C) customers.
D) stockholders.
Answer: D
Diff: 1
LO: 1-5
EOC: S1-5
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Decision Modeling

8) A corporation has all of the following EXCEPT:
A) a state charter.
B) a board of directors.
C) unlimited liability for shareholders.
D) shares of stock.
Answer: C
Diff: 2
LO: 1-5
EOC: S1-5
AACSB: Analytic Skills
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting
9) A financial examination of a company’s financial records is called a(n):
A) audit.
B) criminal investigation.
C) financial analysis.
D) appraisal.
Answer: A
Diff: 1
LO: 1-5
EOC: Accounting Vocabulary
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

10) If a corporation cannot pay its debts, the creditors may make claims against the:
A) assets of the shareholders.
B) assets of the company only.
C) assets of the board of directors.
D) employees of the company.
Answer: B
Diff: 1
LO: 1-5
EOC: S1-6
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Risk Analysis

11) The owner(s) of a business will most likely face “double taxation” if their business is organized as a(n):
A) corporation.
B) LLC.
C) partnership.
D) proprietorship.
Answer: A
Diff: 1
LO: 1-5
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement
12) The ability to raise large amounts of capital is a key characteristic of a:
A) partnership.
B) not-for-profit.
C) corporation.
D) proprietorship.
Answer: C
Diff: 1
LO: 1-5
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement

13) The separation between the owners and the managers of a business is most distinct in a(n):
A) corporation.
B) LLP.
C) partnership.
D) proprietorship.
Answer: A
Diff: 1
LO: 1-5
EOC: S1-4
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

Learning Objective 1-6

1) Many liabilities have the word “receivable” in their titles.
Answer: FALSE
Diff: 1
LO: 1-6
EOC: Accounting Vocabulary
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

2) The faithful representation principle requires that information is complete, neutral and free from material error.
Answer: TRUE
Diff: 1
LO: 1-6
EOC: P1-29A
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
3) Which of the following concepts (or principles) would dictate that a person with three different businesses keep three different checking accounts?
A) Cost principle
B) Faithful representation principle
C) Going-concern concept
D) Entity concept
Answer: D
Diff: 1
LO: 1-6
EOC: S1-6
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

4) Which of the following concepts (or principles) would be most likely to require that data be complete, neutral, and free from error?
A) Cost principle
B) Faithful representation principle
C) Entity concept
D) Going-concern concept
Answer: B
Diff: 1
LO: 1-6
EOC: S1-6
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Reporting

5) Which of the following concepts (or principles) addresses the ability of partners to commit other partners and the business to a contract?
A) Going-concern concept
B) Cost principle
C) Mutual agency
D) Objectivity principle
Answer: C
Diff: 1
LO: 1-6
EOC: S1-6
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

6) Counting the actual physical inventory of a company and comparing it to accounting records would be an example of the:
A) faithful representation principle.
B) entity concept.
C) going-concern concept.
D) stable monetary unit concept.
Answer: A
Diff: 1
LO: 1-6
EOC: S1-6
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

7) An American business records transactions using the U.S. dollar and disregards fluctuation in the buying power of the dollar over time. This represents which of the following concepts or principles?
A) The entity concept
B) The going-concern concept.
C) The faithful representation
D) The stable monetary unit principle
Answer: D
Diff: 1
LO: 1-6
EOC: S1-6
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

8) Which of the following concepts (principles) would require that an item be recorded at the amount actually paid rather than at estimated market value?
A) Going-concern concept
B) Entity concept
C) Cost principle
D) Stable monetary unit concept
Answer: C
Diff: 1
LO: 1-6
EOC: S1-6
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
9) Which of the following concepts (principles) require an assumption that the entity will remain in operation for the foreseeable future?
A) Entity concept
B) Faithful representation principle
C) Going-concern concept
D) Cost principle
Answer: C
Diff: 1
LO: 1-6
EOC: S1-6
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

10) Bill Rogers has three different businesses. He has only one bank account for transactions relating to all his various businesses. Which of the following concepts or principles of accounting is Bill violating?
A) Faithful representation principle
B) Entity concept
C) Cost principle
D) Going-concern concept
Answer: B
Diff: 2
LO: 1-6
EOC: S1-6
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

11) Lindsey Smith decided to start her own CPA practice as a professional corporation, Smith CPA PC. Her corporation purchased an office building for $35,000 which her real estate agent said was worth $50,000 in the current market. The corporation records the building as a $50,000 asset because Lindsey believes that is the real value of the building. Which of the following concepts or principles of accounting is being violated?
A) Cost principle
B) Entity concept
C) Stable monetary unit concept
D) Going-concern concept
Answer: A
Diff: 1
LO: 1-6
EOC: S1-6
AACSB: Analytic Skills
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
12) Tate Corporation purchased a building for its grocery store for $30,000 in 1970. Based on inflation estimates, the amount of this asset has been adjusted in the accounting records. The building is now reported at $75,000. Which of the following concepts or principles of accounting is being violated?
A) Going-concern concept
B) Stable monetary unit concept
C) Entity concept
D) None of the above
Answer: B
Diff: 2
LO: 1-6
EOC: S1-6
AACSB: Analytic Skills
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

13) The Ragun Cajun Bar and Grill, Inc. has been a popular restaurant in Beaumont, Texas. With no insurance, a recent hurricane has left the business with large losses due to a damaged building and lost business income. Which of the following concepts or principles of accounting will be of the greatest concern to Ragun Cajun’s auditors?
A) Going-concern concept
B) Faithful representation principle
C) Entity concept
D) Stable monetary unit concept
Answer: A
Diff: 2
LO: 1-6
EOC: S1-6
AACSB: Analytic Skills
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

Learning Objective 1-7

1) Which of the following is the CORRECT accounting equation?
A) Assets + Liabilities = Stockholders’ equity
B) Assets = Liabilities + Stockholders’ equity
C) Assets + Revenue = Stockholders’ equity
D) Assets + Revenue = Liabilities + Expenses
Answer: B
Diff: 1
LO: 1-7
EOC: E1-14
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
2) Stockholders’ equity is $150,000 and total liabilities are $90,000. Total assets would be:
A) $300,000.
B) $180,000.
C) $60,000.
D) $240,000.
Answer: D
Explanation: D) Calculations: $150,000 + $90,000 = $240,000
Diff: 1
LO: 1-7
EOC: E1-14
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

3) The owners’ claims to the assets of the business are called:
A) revenues.
B) liabilities.
C) owners’ equity.
D) expenses.
Answer: C
Diff: 1
LO: 1-7
EOC: E1-14
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
4) A $5,000 account payable is paid by the company. How is the accounting equation affected?
A) Assets decrease $5,000; stockholders’ equity increases $5,000.
B) Assets decrease $5,000; liabilities decrease $5,000.
C) Assets increase $5,000; stockholders’ equity decreases $5,000.
D) Assets increase $5,000; liabilities increase $5,000.
Answer: B
Diff: 2
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
5) Assets are $150,000 and total liabilities are $90,000. Total stockholders’ equity will be:
A) $180,000.
B) $300,000.
C) $240,000.
D) $60,000.
Answer: D
Explanation: D) Calculations: $150,000 – $90,000 = $60,000
Diff: 1
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

6) Assets are $270,000 and stockholders’ equity is $90,000. Liabilities will be:
A) $60,000.
B) $360,000.
C) $270,000.
D) $180,000.
Answer: D
Explanation: D) Calculations: $270,000 – $90,000 = $180,000
Diff: 1
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

7) A business performs services for its customers. Payment is expected to be received next month. How does the performance of services affect the accounting equation?
A) Liabilities increase; stockholders’ equity decreases.
B) Assets increase; stockholders’ equity increases.
C) Assets decrease; stockholders’ equity decreases.
D) Assets increase; stockholders’ equity decreases.
Answer: B
Diff: 2
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

8) A business receives a bill for services rendered from one of its suppliers. The business will pay the supplier next month. When the business receives the bill from its supplier, how does this affect the accounting equation?
A) Assets decrease; stockholders’ equity decreases.
B) Liabilities increase; stockholders’ equity decreases.
C) Assets increase; liabilities increase.
D) Liabilities increase; stockholders’ equity increases.
Answer: B
Diff: 2
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

9) A business settles a liability by making a payment with cash. How does paying this liability affect the accounting equation?
A) Assets decrease; liabilities decrease.
B) Liabilities decrease; stockholders’ equity increases.
C) Assets increase; liabilities increase.
D) Assets increase; liabilities decrease.
Answer: A
Diff: 2
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

10) A corporation pays cash dividends. How does the payment of these dividends affect the accounting equation?
A) There is no effect on the assets, liabilities, or stockholders’ equity.
B) Assets decrease; stockholders’ equity decreases.
C) Assets increase; liabilities decrease.
D) Assets decrease; stockholders’ equity increases.
Answer: B
Diff: 2
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
11) Equipment is sold for cash in an amount equal to the cost of the equipment recorded on the books. How does this sale affect the accounting equation?
A) One asset increases; one asset decreases.
B) Assets increase; liabilities increase.
C) Assets increase; liabilities decrease.
D) Assets increase; stockholders’ equity increases.
Answer: A
Diff: 2
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

12) The business receives cash from a customer that is owed to company “on account,” based on services rendered to the customer previously. How does the collection of the cash affect the accounting equation?
A) Assets increase; stockholders’ equity increases.
B) Assets increase; liabilities increase.
C) One asset increases; one asset decreases.
D) Assets decrease; stockholders’ equity decreases.
Answer: C
Diff: 2
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

13) Land was originally purchased for $20,000. It is sold for $20,000 in cash. How does the sale affect the accounting equation?
A) Assets increase $20,000; liabilities decrease $20,000.
B) Assets increase $20,000; liabilities increase $20,000.
C) Assets increase $20,000; stockholders’ equity increases $20,000.
D) Assets increase $20,000; assets decrease $20,000.
Answer: D
Diff: 2
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
14) Land is purchased by the company for $100,000. The company pays for land with a $20,000 cash payment and the execution of an $80,000 promissory note payable to the seller. How does this purchase affect the company’s accounting equation?
A) Assets increase $80,000; liabilities decrease $20,000.
B) Assets increase $20,000; liabilities decrease $80,000.
C) Assets increase $80,000; stockholders’ equity increases $80,000.
D) Assets increase $80,000; liabilities increase $80,000.
Answer: D
Diff: 3
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

15) The business collects a $5,000 account receivable from its customer. How is the accounting equation affected?
A) Assets increase $5,000; liabilities decrease $5,000.
B) One asset increases by $5,000; another asset decreases $5,000.
C) Assets increase $5,000; liabilities increase $5,000.
D) Assets increase $5,000; stockholders’ equity increases $5,000.
Answer: B
Diff: 2
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

16) Total liabilities increase by $7,000. How is the accounting equation affected?
A) Either assets have increased by $7,000, or stockholders’ equity has decreased by $7,000.
B) Assets have decreased by $7,000.
C) Assets and stockholders’ equity have each decreased by $3,500.
D) Stockholders’ equity has increased by $7,000.
Answer: A
Diff: 3
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
17) An individual asset has increased. Which of the following is possible?
A) There is an equal decrease in another asset.
B) There is an equal decrease in stockholders’ equity.
C) There is an equal decrease in a liability account.
D) Both liabilities and stockholders’ equity decrease.
Answer: A
Diff: 2
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

18) Scott’s Camera Shop, Inc. started the year with total assets of $80,000 and total liabilities of $40,000. During the year, the business earned revenues of $120,000 and incurred expenses of $70,000. Scott paid dividends of $60,000.

What is the amount of Scott’s stockholders’ equity at the end of the year?
A) $40,000
B) $50,000
C) $30,000
D) $10,000
Answer: C
Explanation: C) Calculations: $80,000 – $40,000 + 120,000 – $70,000 – $60,000 = $30,000
Diff: 3
LO: 1-7
EOC: P1-31A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

19) Scott’s Camera Shop, Inc. started the year with total assets $80,000 and total liabilities of $40,000. During the year, the business earned revenues of $120,000 and incurred expenses of $70,000. Scott paid dividends of $60,000.

What is the amount of Scott’s Camera Shop Inc.’s net income for the year?
A) $50,000
B) $10,000
C) $30,000
D) $40,000
Answer: A
Explanation: A) Calculations: $120,000 – $70,000 = $50,000
Diff: 2
LO: 1-7
EOC: E1-24
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
20) Scott’s Camera Shop, Inc. started the year with total assets $80,000 and total liabilities of $40,000.
During the year, the business earned revenues of $120,000 and incurred expenses of $70,000. Scott paid dividends of $60,000.

The net change in Scott’s stockholders’ equity for the year is a:
A) $10,000 decrease.
B) $40,000 increase.
C) $30,000 decrease.
D) $50,000 increase.
Answer: A
Explanation: A) Calculations: $120,000 – $70,000 – $60,000 = $(10,000)
Diff: 2
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

21) Net income is $29,000. Beginning retained earnings were $34,000. Ending retained earnings are $55,000. What amount of cash dividends was paid out?
A) $18,000
B) $8,000
C) $5,000
D) $60,000
Answer: B
Explanation: B) Calculations: $34,000 + $29,000 – $55,000 = $8,000
Diff: 2
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

22) Sharon Samson starts a plumbing service, Reliable Waterworks, Inc. Selected transactions are described as follows:

A) Sharon deposits $7,000 into a new checking account for the company, receiving stock in exchange.
B) Reliable pays $4,000 cash for equipment to be used for plumbing repairs.
C) Reliable borrows $15,000 from a local bank and deposits the money in the checking account.
D) Reliable pays $600 rent for the first month.
E) Reliable pays $400 cash for plumbing supplies to be used on various jobs in the future.
F) Reliable completes a plumbing repair project for a local lawyer and receives $1,300 cash.
G) Reliable pays dividends of $2,500.

After all of the transactions, what is the amount of total assets?
A) $25,700
B) $5,200
C) $24,200
D) $20,200
Answer: D
Explanation: D) Calculations: $7,000 + $15,000 – $600 + $1,300 – $2,500 = $20,200
Diff: 3
LO: 1-7
EOC: P1-31A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
23) Sharon Samson starts a plumbing service, Reliable Waterworks, Inc. Selected transactions are described as follows:

A) Sharon deposits $7,000 into a new checking account for the company, receiving stock in exchange.
B) Reliable pays $4,000 cash for equipment to be used for plumbing repairs.
C) Reliable borrows $15,000 from a local bank and deposits the money in the checking account.
D) Reliable pays $600 rent for the first month.
E) Reliable pays $400 cash for plumbing supplies to be used on various jobs in the future.
F) Reliable completes a plumbing repair project for a local lawyer and receives $1,300 cash.
G) Reliable pays dividends of $2,500.

After all of the transactions, what is the amount of total liabilities?
A) $15,000
B) $4,000
C) $19,000
D) $4,400
Answer: A
Diff: 2
LO: 1-7
EOC: P1-31A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

24) Sharon Samson starts a plumbing service, Reliable Waterworks, Inc. Selected transactions are described as follows:

A) Sharon deposits $7,000 into a new checking account for the company, receiving stock in exchange.
B) Reliable pays $4,000 cash for equipment to be used for plumbing repairs.
C) Reliable borrows $15,000 from a local bank and deposits the money in the checking account.
D) Reliable pays $600 rent for the first month.
E) Reliable pays $400 cash for plumbing supplies to be used on various jobs in the future.
F) Reliable completes a plumbing repair project for a local lawyer and receives $1,300 cash.
G) Reliable pays dividends of $2,500.

After all of the transactions, what is the amount of total stockholders’ equity?
A) $5,200
B) $20,200
C) $7,700
D) $7,300
Answer: A
Explanation: A) Calculations: $7,000 – $600 + $1,300 – $2,500 = $5,200
Diff: 3
LO: 1-7
EOC: P1-31A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
25) Sharon Samson starts a plumbing service, Reliable Waterworks, Inc. Selected transactions are described as follows:

A) Sharon deposits $7,000 into a new checking account for the company, receiving stock in exchange.
B) Reliable pays $4,000 cash for equipment to be used for plumbing repairs.
C) Reliable borrows $15,000 from a local bank and deposits the money in the checking account.
D) Reliable pays $600 rent for the first month.
E) Reliable pays $400 cash for plumbing supplies to be used on various jobs in the future.
F) Reliable completes a plumbing repair project for a local lawyer and receives $1,300 cash.
G) Reliable pays dividends of $2,500.

After all of the transactions, what is net income?
A) $700
B) $300
C) $4,500
D) $1,300
Answer: A
Explanation: A) Calculations: $1,300 – $600 = $700
Diff: 3
LO: 1-7
EOC: P1-31A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

26) Sharon Samson starts a plumbing service, Reliable Waterworks, Inc. Selected transactions are described as follows:

A) Sharon deposits $7,000 into a new checking account for the company, receiving stock in exchange.
B) Reliable pays $4,000 cash for equipment to be used for plumbing repairs.
C) Reliable borrows $15,000 from a local bank and deposits the money in the checking account.
D) Reliable pays $600 rent for the first month.
E) Reliable pays $400 cash for plumbing supplies to be used on various jobs in the future.
F) Reliable completes a plumbing repair project for a local lawyer and receives $1,300 cash.
G) Reliable pays dividends of $2,500.

After all of the transactions, what is cash balance?
A) $15,800
B) $300
C) $4,500
D) $1,300
Answer: A
Explanation: A) Calculations: $7,000 – $4,000 + $15,000 – $600 – $400 + $1,300 – $2,500 = $15,800
Diff: 3
LO: 1-7
EOC: P1-31A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

27) Following is a list of account balances (except for stockholders’ equity) of Wilson Mowing Corporation as of December 31 of the first year of operation:

Accounts receivable $ 2,500
Accounts payable 3,500
Salary expense 4,500
Repairs expense 800
Truck 8,500
Equipment 6,300
Notes payable 8,200
Cash 6,800
Supplies expense 1,600
Service revenue 31,900
Gasoline expense 3,800
Salary payable 200

The sole stockholder, J.D. Wilson, contributed $3,000 at the beginning of the year in exchange for stock; during the year, the company paid J. D. Wilson $12,000 in dividends.

At the end of the year, what is the amount of total assets?
A) $12,200
B) $24,100
C) $11,900
D) $21,200
Answer: B
Explanation: B) Calculations: $2,500 + $8,500 + $6,300 + $6,800 = $24,100
Diff: 1
LO: 1-7
EOC: P1-35A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

28) Following is a list of account balances (except for stockholders’ equity) of Wilson Mowing Corporation as of December 31 of the first year of operation:

Accounts receivable $ 2,500
Accounts payable 3,500
Salary expense 4,500
Repairs expense 800
Truck 8,500
Equipment 6,300
Notes payable 8,200
Cash 6,800
Supplies expense 1,600
Service revenue 31,900
Gasoline expense 3,800
Salary payable 200

The sole stockholder, J.D. Wilson, contributed $3,000 at the beginning of the year in exchange for stock: during the year, the company paid J.D. Wilson $12,000 in dividends.

At the end of the year, what is the amount of total liabilities?
A) $11,900
B) $24,100
C) $21,200
D) $12,200
Answer: A
Explanation: A) Calculations: $3,500 + $8,200 + 200 = $11,900
Diff: 1
LO: 1-7
EOC: P1-35A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

29) Following is a list of account balances (except for stockholders’ equity) of Wilson Mowing Corporation as of December 31 of the first year of operation:

Accounts receivable $ 2,500
Accounts payable 3,500
Salary expense 4,500
Repairs expense 800
Truck 8,500
Equipment 6,300
Notes payable 8,200
Cash 6,800
Supplies expense 1,600
Service revenue 31,900
Gasoline expense 3,800
Salary payable 200

The sole stockholder, J.D. Wilson, contributed $3,000 at the beginning of the year in exchange for stock; during the year, the company paid J.D. Wilson $12,000 in dividends.

At the end of the year, what is the amount of total stockholders’ equity?
A) $11,900
B) $24,100
C) $21,200
D) $12,200
Answer: D
Explanation: D) Calculations: $3,000 – $4,500 – $800 – $1,600 + $31,900 – $3,800 – $12,000 = $12,200
Diff: 3
LO: 1-7
EOC: P1-35A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

30) Following is a list of account balances (except for stockholders’ equity) of Wilson Mowing Corporation as of December 31 of the first year of operation:

Accounts receivable $ 2,500
Accounts payable 3,500
Salary expense 4,500
Repairs expense 800
Truck 8,500
Equipment 6,300
Notes payable 8,200
Cash 6,800
Supplies expense 1,600
Service revenue 31,900
Gasoline expense 3,800
Salary payable 200

The sole stockholder, J.D. Wilson, contributed $3,000 at the beginning of the year in exchange for stock; during the year, the company paid J.D. Wilson $12,000 in dividends.

At the end of the year, what is net income?
A) $21,200
B) $11,900
C) $12,200
D) $24,100
Answer: A
Explanation: A) Calculations: $31,900 – $4,500 – $800 – $1,600 – $3,800 = $21,200
Diff: 2
LO: 1-7
EOC: P1-35A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

31) The assets and liabilities of Matt Wesley Corporation are as follows: Cash, $10,000; Accounts receivable, $8,200; Supplies, $1,050; Land, $25,000; Accounts payable, $6,530. What is the amount of stockholders’ equity?
A) $21,500
B) $44,430
C) $50,780
D) $37,720
Answer: D
Explanation: D) Calculations: $10,000 + $8,200 + $1,050 + $25,000 – $6,530 = $37,720
Diff: 2
LO: 1-7
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

32) The total assets and the total liabilities of Ty Williams, CPA, PC are shown below. During the year, the corporation paid dividends of $15,000.

Assets Liabilities
Beginning of year $395,000 $290,000
End of year 455,000 320,000

What was the amount of net income for the year?
A) $85,000
B) $40,000
C) $45,000
D) $135,000
Answer: C
Explanation: C) Calculations:
$395,000 – $290,000 = $105,000
$455,000 – $320,000 = $135,000
$135,000 + $15,000 – $105,000 = $45,000
Diff: 3
LO: 1-7
EOC: E1-18
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

33) The total assets and the total liabilities of Paragon, Inc. are shown below. During the year, the corporation earned net income of $50,000.

Assets Liabilities
Beginning of year $395,000 $290,000
End of year 455,000 320,000

What was the amount of dividends paid during the year?
A) $85,000
B) $40,000
C) $45,000
D) $20,000
Answer: D
Explanation: D) Calculations:
$395,000 – $290,000 = $105,000
$455,000 – $320,000 = $135,000
$105,000 + $50,000 – $135,000 = $20,000
Diff: 3
LO: 1-7
EOC: E1-18
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

Learning Objective 1-8

1) A business owner starts a new business and invests $6,000 in exchange for shares of stock. This transaction results in an increase in the corporation’s liabilities.
Answer: FALSE
Diff: 1
LO: 1-8
EOC: E1-20
AACSB: Analytic Skills
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

2) Tim invests money into his business in exchange for stock. The two accounts affected are:
A) an asset and a liability.
B) an asset and an equity.
C) a liability and an equity.
D) two asset accounts.
Answer: B
Diff: 1
LO: 1-8
EOC: E1-20
AACSB: Analytic Skills
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

3) Joe purchased office equipment for $1,250 cash. What is the effect on accounts?
A) One asset account increases; one liability account increases.
B) Two asset accounts increase.
C) One asset account increases; another asset account decreases.
D) One asset account increases; one equity account increases.
Answer: C
Diff: 1
LO: 1-8
EOC: E1-21
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

4) Bill purchased office supplies for $500 cash. What is the effect on accounts?
A) Cash account increases; Accounts payable increases.
B) Cash account increases; Supplies account increases.
C) Supplies account increases; Cash account decreases.
D) Supplies account increases; Retained earnings account increases.
Answer: C
Diff: 1
LO: 1-8
EOC: E1-21
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

5) Hamilton Service Company earned $1,000 for services rendered and collected cash from its customer. What is the effect on accounts?
A) Cash account increases; Accounts payable increases.
B) Cash account increases; Accounts receivable increases.
C) Cash account increases; Supplies account decreases.
D) Cash account increases; Retained earnings account increases.
Answer: D
Diff: 2
LO: 1-8
EOC: E1-21
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

6) Hamilton Service Company earned $1,000 for services rendered. The customer promised to pay at a later time. What is the effect on accounts?
A) Accounts receivable decreases; Retained earnings increases.
B) Cash and Accounts receivable both increase.
C) Cash account increases; Accounts receivable decreases.
D) Accounts receivable increases; Retained earnings increases.
Answer: D
Diff: 2
LO: 1-8
EOC: E1-21
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

7) Hamilton Service Company earned $1,000 for services rendered. The customer promised to pay at a later time. Which of the following accounts increased?
A) Accounts payable
B) Common stock
C) Cash
D) Accounts receivable
Answer: D
Diff: 2
LO: 1-8
EOC: E1-21
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
8) Hamilton Service Co. incurred an $800 repair expense and paid the repair company in cash. Which
account, besides Cash, decreased?
A) Retained earnings
B) Accounts payable
C) Common stock
D) Accounts receivable
Answer: A
Diff: 2
LO: 1-8
EOC: E1-21
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

9) Hamilton Service Co. incurred a $500 labor expense and promised to pay the labor agency within 30
days. Which account increased?
A) Accounts receivable
B) Cash
C) Accounts payable
D) Retained earnings
Answer: C
Diff: 2
LO: 1-8
EOC: E1-21
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

10) Hamilton Service Co. incurred a $500 labor expense and promised to pay the labor agency within 30
days. Which of the following accounts decreased?
A) Accounts payable
B) Retained earnings
C) Common stock
D) Accounts receivable
Answer: B
Diff: 2
LO: 1-8
EOC: E1-21
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
11) Martin Supply Co. paid $350 cash to a materials supplier that it owed from the previous month. What is the effect of the cash payment on the accounts of the company?
A) Materials account increases; Retained earnings account decreases.
B) Cash account decreases; Accounts payable increases.
C) Accounts payable increases; Retained earnings account decreases.
D) Cash account decreases; Accounts payable decreases.
Answer: D
Diff: 2
LO: 1-8
EOC: E1-21
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

12) Martin Supply Co. paid $350 cash to a materials supplier that it owed from the previous month. Which of the following accounts decreases?
A) Accounts receivable
B) Accounts payable
C) Retained earnings
D) Common stock
Answer: B
Diff: 2
LO: 1-8
EOC: E1-21
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

13) Martin Supply Co. received $1,000 cash from a customer which was owed to the company from the previous month. What is the effect of the cash receipt on the accounts of the company?
A) Accounts receivable decreases; Retained earnings account decreases.
B) Cash account increases; Accounts receivable decreases.
C) Accounts payable increases; Retained earnings account decreases.
D) Cash increases; Accounts payable decreases.
Answer: B
Diff: 2
LO: 1-8
EOC: E1-21
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
14) Martin Supply Co. received $1,000 cash from a customer which was owed to the company from the previous month. Which of the following accounts decreases?
A) Cash
B) Retained earnings
C) Accounts payable
D) Accounts receivable
Answer: D
Diff: 2
LO: 1-8
EOC: E1-21
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

15) Martin Supply Co. paid $5,000 cash dividends to its shareholders. What is the effect of the cash payment on the accounts of the company?
A) Cash account decreases; Retained earnings account decreases.
B) Cash account increases; Accounts receivable decreases.
C) Accounts payable increases; Retained earnings account decreases.
D) Cash account decreases; Common stock account decreases.
Answer: A
Diff: 2
LO: 1-8
EOC: P1-31A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

16) Martin Supply Co. paid $5,000 cash dividends to its shareholders. Which of the following accounts decreased?
A) Common stock
B) Accounts payable
C) Accounts receivable
D) Retained earnings
Answer: D
Diff: 2
LO: 1-8
EOC: P1-34A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

17) Ace Machine Co. had the following transactions in June: Earned $4,000 “on account;” collected $3,000 from a customer which was owed from a previous month; incurred $500 of repair expense and paid cash to the repairman; paid $1,200 to a supplier that it owed from the previous month; paid out $800 in cash dividends to shareholders. What is the combined effect on Retained earnings of the June transactions?
A) Down $2,700
B) Down $5,700
C) Up $2,700
D) Down $4,500
Answer: C
Explanation: C) Calculations: $4,000 – $500 – $800 = $2,700 increase
Diff: 3
LO: 1-8
EOC: P1-31A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

18) Ace Machine Co. had the following transactions in June: Earned $4,000 “on account;” collected $3,000 from a customer which was owed from a previous month; incurred $500 of repair expense and paid cash to the repairman; paid $1,200 to a supplier that it owed from the previous month; paid out $800 in cash dividends to shareholders. What is the combined effect on Cash of the June transactions?
A) Up $500
B) Down $5,700
C) Down $2,700
D) Up $4,500
Answer: A
Explanation: A) Calculations: $3,000 – $500 – $1,200 – $800 = $500 increase
Diff: 3
LO: 1-8
EOC: P1-31A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
19) Ace Machine Co. had the following transactions in June: Earned $4,000 “on account;” collected $3,000 from a customer which was owed from a previous month; incurred $500 of repair expense and paid cash to the repairman; paid $1,200 to a supplier that it owed from the previous month; paid out $800 in cash dividends to shareholders. How much was the Net income in June?
A) $500
B) $5,700
C) $2,700
D) $3,500
Answer: D
Explanation: D) Calculations: $4,000 – $500 = $3,500
Diff: 3
LO: 1-8
EOC: P1-31A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

20) ABC Delivery Co. had the following transactions in June: Earned $4,000 cash for services rendered; collected $2,500 from a customer “on account;” paid out $200 cash for plumbing services; received $3,500 of supplies and promised to pay one month later; paid out $1,000 in cash dividends to shareholders. What is the combined effect on Retained earnings of the June transactions?
A) Up $2,800
B) Down $300
C) Down $6,300
D) Up $5,300
Answer: A
Explanation: A) Calculations: $4,000 – $300 – $1,000 = $2,800
Diff: 3
LO: 1-8
EOC: P1-31A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
21) ABC Delivery Co. had the following transactions in June: Earned $4,000 cash for services rendered; collected $2,500 from a customer “on account;” paid out $200 cash for plumbing services; received $3,500 of supplies and promised to pay one month later; paid out $1,000 in cash dividends to shareholders. What is the combined effect on Cash of the June transactions?
A) Up $1,800
B) Down $300
C) Down $6,300
D) Up $5,300
Answer: D
Explanation: D) Calculations: $4,000 + $2,500 – $200 – $1,000 = $5,300
Diff: 3
LO: 1-8
EOC: P1-31A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

22) ABC Delivery Co. had the following transactions in June: Earned $4,000 cash for services rendered; collected $2,500 from a customer “on account;” paid out $200 cash for plumbing services; received $3,500 of supplies and promised to pay one month later; paid out $1,000 in cash dividends to shareholders. How much was Net income in June?
A) $5,300
B) $2,800
C) $6,300
D) $3,800
Answer: D
Explanation: D) Calculations: $4,000 – $200 = $3,800
Diff: 3
LO: 1-8
EOC: P1-31A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

Learning Objective 1-9

1) The balance sheet of a corporation represents the account balances as of a particular date in time.
Answer: TRUE
Diff: 1
LO: 1-9
EOC: QC1-9
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
2) By looking at a statement of retained earnings, you can evaluate the effect that paying dividends has on the ending balance in stockholders’ equity.
Answer: TRUE
Diff: 1
LO: 1-9
EOC: E1-14
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

3) Beginning retained earnings was $25,000. Ending retained earnings is $37,000. Dividends paid were $23,000. What was net income or loss for the year?
A) Net income of $16,000
B) Net loss of $35,000
C) Net loss of $14,000
D) Net income of $35,000
Answer: D
Explanation: D) Calculations: $37,000 + $23,000 – $25,000 = $35,000
Diff: 1
LO: 1-9
EOC: E1-25
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

4) Net income is $34,000. Beginning retained earnings is $29,000. Ending retained earnings is $55,000. What was the amount of dividends paid?
A) $18,000
B) $8,000
C) $60,000
D) $5,000
Answer: B
Explanation: B) Calculations: $29,000 + $34,000 – $55,000 = $8,000
Diff: 1
LO: 1-9
EOC: E1-25
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

5) Beginning retained earnings is $20,000. Dividends paid were $7,000. Ending retained earnings is $37,000. What was net income?
A) $24,000
B) $13,000
C) $10,000
D) $27,000
Answer: A
Explanation: A) Calculations: $37,000 + $7,000 – $20,000 = $24,000
Diff: 1
LO: 1-9
EOC: E1-25
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

6) Financial statements are prepared after an entity’s transactions are analyzed and recorded. Which of the following reports is NOT one of the required financial statements?
A) Statement of cash flows
B) Balance sheet
C) Statement of dividends paid
D) Income statement
Answer: C
Diff: 1
LO: 1-9
EOC: E1-14
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

7) The statement of retained earnings shows the changes in retained earnings. Which one of these statements is TRUE?
A) Increases in Retained earnings result from owner investments.
B) Decreases in Retained earnings result from net losses.
C) Increases in Retained earnings result from net losses.
D) Decreases in Retained earnings result from revenues earned.
Answer: B
Diff: 2
LO: 1-9
EOC: E1-14
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
8) The income statement presents a summary of an entity’s revenues and expenses for a period of time. Which of the following statements is TRUE?
A) There is net income when total revenues are greater than total expenses.
B) There is a net loss when total expenses are greater than total revenue.
C) There is a net loss when dividends are paid.
D) Both A and B are true.
Answer: D
Diff: 1
LO: 1-9
EOC: E1-14
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
9) The balance sheet, or statement of financial position, is like a snapshot of the entity. Which of the following items are included on the balance sheet?
A) Revenues
B) Expenses
C) Assets
D) Dividends paid
Answer: C
Diff: 1
LO: 1-9
EOC: E1-14
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

10) Each financial statement includes a heading giving three pieces of data. Which of the following items is NOT included in these headings?
A) Name of the financial statement
B) Date or time period covered
C) Name of the preparer of the statement
D) Name of the business
Answer: C
Diff: 1
LO: 1-9
EOC: E1-14
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
11) Which of the following financial statements reports expenses in decreasing order of their amount, with the largest expense first?
A) Statement of cash flows
B) Income statement
C) Statement of retained earnings
D) Balance sheet
Answer: B
Diff: 1
LO: 1-9
EOC: E1-24
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

12) Which of the following financial statements uses net income or net loss taken directly from the income statement?
A) Statement of retained earnings
B) Statement of cash flow
C) Balance sheet
D) Statement of dividends paid
Answer: A
Diff: 1
LO: 1-9
EOC: E1-24
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

13) Which of the following financial statements reports that total assets equals total liabilities plus total stockholders’ equity?
A) Statement of retained earnings
B) Statement of cash flows
C) Income statement.
D) Balance sheet
Answer: D
Diff: 1
LO: 1-9
EOC: E1-24
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting
14) Which of the following financial statements reports cash receipts and cash payments during a period of time?
A) Statement of cash flows
B) Balance sheet
C) Income statement
D) Statement of retained earnings
Answer: A
Diff: 1
LO: 1-9
EOC: E1-24
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

15) Which of the following financial statements reports an increase or decrease in net cash during the time period covered?
A) Income statement
B) Statement of retained earnings
C) Statement of cash flows
D) Balance sheet
Answer: C
Diff: 1
LO: 1-9
EOC: E1-24
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

16) The financial statements should be prepared in what order?
A) Income statement, statement of retained earnings, balance sheet, statement of cash flows
B) Statement of retained earnings, balance sheet, income statement, statement of cash flows
C) Balance sheet, statement of retained earnings, income statement, statement of cash flows
D) Balance sheet, income statement, statement of retained earnings, statement of cash flows
Answer: A
Diff: 1
LO: 1-9
EOC: E1-15
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

17) Which of the following amounts appear on both the income statement and the statement of retained earnings?
A) Ending retained earnings
B) Total revenues
C) Net income
D) Dividends paid
Answer: C
Diff: 1
LO: 1-9
EOC: E1-15
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

18) Which of the following amounts appears on both the statement of retained earnings and the balance sheet?
A) Ending retained earnings
B) Total assets
C) Total revenues
D) Net income
Answer: A
Diff: 1
LO: 1-9
EOC: E1-15
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

19) Which of the following amounts appears on both the income statement and the balance sheet?
A) Total assets
B) Net income
C) Ending retained earnings
D) None of the above amounts appear on both
Answer: D
Diff: 1
LO: 1-9
EOC: E1-15
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting
20) Which of the following financial statements shows the changes in retained earnings during a period of time?
A) Income statement
B) Statement of retained earnings
C) Statement of cash flows
D) Balance sheet
Answer: B
Diff: 1
LO: 1-9
EOC: E1-14
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

21) Which of the following financial statements lists the entity’s assets, liabilities, and stockholders’ equity as of a specific date?
A) Balance sheet
B) Statement of retained earnings
C) Income statement
D) Statement of cash flows
Answer: A
Diff: 1
LO: 1-9
EOC: E1-14
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

22) On the financial statements, which line item connects the balance sheet to the statement of cash flows?
A) Retained earnings (ending balance)
B) Net income
C) Total assets
D) Cash (ending balance)
Answer: D
Diff: 1
LO: 1-9
EOC: E1-14
AACSB: Reflective Thinking
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting

23) On Jan. 1, 2012, William Kelly started Kelly’s Computer Service, Inc. by incorporating the company and investing $10,000 in exchange for company stock. On Jan. 3, the company borrowed $10,000 from another investor and executed a Note payable with the principal and interest to be due in one year. On Jan 5, the company purchased $12,000 of equipment for cash. On Jan. 8, Kelly’s rendered service to his first corporate client and earned $2,500 in cash. On Jan. 12, Kelly’s incurred repair expense of $1,200 and promised to pay the repair contractor the following month. On Jan. 18, Kelly’s rendered service to a new client in the amount of $6,000 “on account,” (the client promised to pay the following month). At the end of January, Kelly’s Computer Service, Inc. paid a dividend of $1,000 to William Kelly, the sole shareholder. Please prepare an income statement for the month of January, a statement of retained earnings for the month of January, and a balance sheet at Jan. 31, 2012.

Answer: Kelly’s Computer Service
Income Statement
Month Ended January 31, 2012

Explanation: This question is not available in MyAccountingLab.
Diff: 3
LO: 1-9
EOC: P1-35A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

24) Alice Li incorporated Li Design Company and invested $5,000 of her own money in exchange for stock on Dec. 1, 2012. On Dec. 12, she rendered services to three clients “on account” with total revenues earned of $4,500. She then incurred advertising expense on four different websites and promised to pay a total of $1,600 at a later date. On Dec. 15, she purchased $900 of office supplies for cash. On Dec. 20 she received $1,000 in cash payment from her first client, and deposited it into the company account. On Dec. 22, she incurred $2,000 for legal expense and paid cash. On Dec. 31, she made a payment of $300 to one of the websites that she owed for advertising provided earlier in the month. No dividends were paid out in December. Please prepare an income statement for the month of December, a statement of retained earnings for the month of December, and a balance sheet at Dec. 31, 2012.
Answer: Li Design Consultants
Income Statement
Month Ended December 31, 2012

Explanation: This question is not available in MyAccountingLab.
Diff: 3
LO: 1-9
EOC: P1-35A
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

Learning Objective 1-10

1) The relative proportion of economic resources and obligations would be shown by the balance sheet.
Answer: TRUE
Diff: 2
LO: 1-10
EOC: E1-23
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

2) The income statement shows whether or not a company can generate enough cash to pay its liabilities.
Answer: FALSE
Diff: 1
LO: 1-10
EOC: E1-23
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

3) The balance sheet shows whether or not a company is earning profits.
Answer: FALSE
Diff: 1
LO: 1-10
EOC: E1-14
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

4) You can evaluate business performance in terms of profitability by analyzing which of the following financial statements?
A) Income statement
B) Balance sheet
C) Statement of cash flows
D) None of the above
Answer: A
Diff: 1
LO: 1-10
EOC: E1-23
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

5) You can evaluate the economic resources, debt, and overall financial position of a company in which of the following financial statements?
A) Income statement
B) Balance sheet
C) Statement of cash flows
D) Statement of retained earnings
Answer: B
Diff: 1
LO: 1-10
EOC: E1-23
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

6) The explanation of why the net income differs from change in cash balance for the period is explained in which of the following statements?
A) Income statement
B) Balance sheet
C) Statement of retained earnings
D) Statement of cash flows
Answer: D
Diff: 1
LO: 1-10
EOC: E1-23
AACSB: Reflective Thinking
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Reporting

7) If an analyst wanted to know how likely it was that a company would be able to pay off all its debts, which of the following statement would be MOST useful?
A) Income statement
B) Balance sheet
C) Statement of retained earnings
D) Statement of cash flows
Answer: B
Diff: 2
LO: 1-10
EOC: E1-23
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

8) If an analyst wanted to know how likely it was that a company would be able to earn profits, which of the following statement would be MOST useful?
A) Income statement
B) Balance sheet
C) Statement of retained earnings
D) Statement of cash flows
Answer: A
Diff: 2
LO: 1-10
EOC: E1-23
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

Test Bank 3rd-Ed Financial & Managerial Accounting by Charles T.Horngren

Test Bank 3rd-Ed Financial & Managerial Accounting by Charles T.Horngren