Test Bank 3rd_Ed Financial Accounting by Spiceland

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Test Bank 3rd_Ed Financial Accounting by Spiceland

Sample Chapter No 1                                 

File: Chapter 001 A Framework for Financial Accounting

 

True/False

 

 

[Question]

  1. Accounting is a system of maintaining records of a company’s operations and communicating this information to decision makers.

Answer: True

Learning Objective: 01-01

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Defining Accounting

 

[Question]

  1. Accounting information is used by investors to decide whether to invest in a company’s stock.

Answer: True

Learning Objective: 01-01

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Users of Financial Accounting

 

[Question]

  1. Accounting information is used by creditors to decide whether to invest in a company’s stock.

Answer: False

Feedback: Creditors lend money to a company.

Learning Objective: 01-01

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Users of Financial Accounting

 

[Question]

  1. The primary functions of financial accounting are to measure business activities of a company and to communicate those measurements to internal parties for decision-making purposes.

Answer: False

Feedback: Financial accounting primarily serves to provide information to external parties.

Learning Objective: 01-01

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Functions of Financial Accounting

 

[Question]

  1. Financing activities are transactions involving externals sources of funding.

Answer: True

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Remember

Topic: Business Activities

 

[Question]

  1. Investing activities include the purchase and sale of (1) long-term resources and (2) any resources not directly related to a company’s normal operations.

Answer: True

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Remember

Topic: Business Activities

 

[Question]

  1. Operating activities include transactions that relate to the primary operations of the company.

Answer: True

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Remember

Topic: Business Activities

 

[Question]

  1. A corporation is an entity that is legally separate from its owners.

Answer: True

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Forms of Business Organizations

 

[Question]

  1. Cash, inventory, supplies, and buildings are examples of liabilities.

Answer: False

Feedback: These are examples of assets.

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Assets

 

[Question]

  1. Amounts owed to suppliers, workers, governments, and utility companies are examples of liabilities.

Answer: True

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Liabilities

 

[Question]

  1. If total assets of a company equal $12,000 and total stockholders’ equity equals $4,000, then total liabilities equal $8,000.

Answer: True

Learning Objective: 01-02

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Apply

Topic: Accounting Equation

 

[Question]

  1. If total liabilities of a company equal $16,000 and total stockholders’ equity equals $9,000, then total assets equal $7,000.

Answer: False

Feedback: Total assets = Total liabilities ($16,000) + Total stockholders’ equity ($9,000) = $25,000.

Learning Objective: 01-02

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Apply

Topic: Accounting Equation

 

[Question]

  1. The accounting equation shows that a company’s resources equal creditors’ and owners’ claims to those resources.

Answer: True

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Accounting Equation

 

[Question]

  1. The costs of advertising, utilities, and salaries in the current reporting period are examples of liabilities.

Answer: False

Feedback: These are examples of expenses.

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Expenses

 

[Question]

  1. The difference between revenues and expenses is referred to as net income or net loss.

Answer: True

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Net Income/Loss

 

[Question]

  1. If a company reports revenues of $17,000 and expenses of $12,000, then net income equals $5,000.

Answer: True

Learning Objective: 01-02

Difficulty: Medium

AACSB: Analytic

AICPA: FN Reporting

Blooms: Understand

Topic: Net Income/Loss

 

[Question]

  1. Expenses are regular cash payments by a corporation to its stockholders.

Answer: False

Feedback: Dividends are payments to stockholders.

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Dividends

 

[Question]

  1. Dividends represent a return of the company’s profits to its owners, the stockholders.

Answer: True

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Dividends

 

[Question]

  1. One of the differences between a partnership and a corporation is that owners of a partnership have limited liability.

Answer: False

Feedback: Stockholders of a corporation have limited liability.

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Forms of Business Organizations

 

[Question]

  1. Limited liability means the stockholders are not held personally responsible for the financial obligations of the corporation.

Answer: True

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Forms of Business Organizations

 

[Question]

  1. One advantage of the corporate form of business is double taxation.

Answer: False

Feedback: Double taxation is a disadvantage of the corporate form of business.

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Forms of Business Organizations

 

[Question]

  1. Double taxation refers to a corporation’s income being taxed twice—first when the company earns it and pays corporate income taxes on it, and then again when stockholders pay personal income taxes on any amounts the firm distributes to them as dividends.

Answer: True

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Forms of Business Organizations

 

[Question]

  1. Financial statements are periodic reports published by the company for the purpose of providing information to managers.

Answer: False

Feedback: Financial statements are designed to provide information to external users.

Learning Objective: 01-03

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Remember

Topic: Financial Statements

 

[Question]

  1. The balance sheet is a financial statement that reports the company’s revenues and expenses over an interval of time.

Answer: False

Feedback: The income statement reports revenues and expenses.

Learning Objective: 01-03

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Remember

Topic: Income Statement

 

[Question]

  1. The statement of stockholders’ equity is a financial statement that summarizes the changes in stockholders’ equity over an interval of time.

Answer: True

Learning Objective: 01-03

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Remember

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. The two primary components of stockholders’ equity include common stock and revenue.

Answer: False

Feedback: The two components of stockholders’ equity include common stock and retained earnings.

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. Common stock represents an external source of stockholders’ equity, whereas retained earnings represents an internal source.

Answer: True

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. Retained earnings represents the cumulative amount of net income earned over the life of the company that has not been distributed to stockholders as dividends.

Answer: True

Learning Objective: 01-03

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Remember

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. Dividends are considered an expense in running the business and reported in the income statement.

Answer: False

Feedback: Dividends are a distribution of resources to owners and not considered a cost in running the business to produce revenues. Dividends are reported in the statement of stockholders’ equity.

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. All cash transactions reported in the statement of cash flows are classified as (1) operating activities, (2) investing activities, or (3) financing activities.

Answer: True

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Statement of Cash Flows

 

[Question]

  1. Investing cash flows generally include cash receipts and cash payments for transactions involving revenues and expenses.

Answer: False

Feedback: These are operating activities.

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Statement of Cash Flows

 

[Question]

  1. Operating cash flows generally include cash transactions for the purchase and sale of investments and productive long-term assets.

Answer: False

Feedback: These are investing activities.

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Statement of Cash Flows

 

[Question]

  1. Financing cash flows include cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends.

Answer: True

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Statement of Cash Flows

 

[Question]

  1. Any transaction that affects the income statement ultimately affects the balance sheet through the balance of retained earnings.

Answer: True

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Link Among Financial Statements

 

[Question]

  1. Financial accounting has an impact on everyday business decisions as well as wide-ranging economic consequences.

Answer: True

Learning Objective: 01-04

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Financial Accounting Information

 

[Question]

  1. Investors and creditors rely heavily on financial accounting information in making investment and lending decisions.

Answer: True

Learning Objective: 01-04

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Financial Accounting Information

 

[Question]

  1. In general, if a company’s net income is increasing, so will its stock price.

Answer: True

Learning Objective: 01-04

Difficulty: Hard

AACSB: Reflective Thinking

AICPA: FN Decision Making

Blooms: Analyze

Topic: Financial Accounting Information

 

[Question]

  1. The rules of financial accounting are called Generally Accepted Accounting Principles (GAAP).

Answer: True

Learning Objective: 01-05

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Rules of Financial Accounting

 

[Question]

  1. Today, financial accounting and reporting standards in the United States are established primarily by the Financial Accounting Standards Board (FASB).

Answer: True

Learning Objective: 01-05

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Rules of Financial Accounting

 

[Question]

  1. The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor confidence in financial accounting following the stock market crash in 1929.

Answer: True

Learning Objective: 01-05

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Rules of Financial Accounting

 

[Question]

  1. The 1934 Securities Exchange Act gives the Securities and Exchange Commission (SEC) the power to require companies with publicly traded securities to prepare periodic financial statements for distribution to investors and creditors.

Answer: True

Learning Objective: 01-05

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Rules of Financial Accounting

 

[Question]

  1. The role of auditors is to help ensure that management has in fact appropriately applied Generally Accepted Accounting Principles (GAAP) in preparing the company’s financial statements.

Answer: True

Learning Objective: 01-05

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Role of Auditors

 

[Question]

  1. Auditors are trained individuals hired by a company as an independent party to express a professional opinion of the accuracy of that company’s financial statements.

Answer: True

Learning Objective: 01-05

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Role of Auditors

 

[Question]

  1. The primary objective of financial reporting is to provide useful information to managers in making decisions.

Answer: False

Feedback: Financial reporting is intended primarily to provide information to investors and creditors.

Learning Objective: 01-05

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Objectives of Financial Accounting

 

[Question]

  1. Public accounting firms are professional service firms that traditionally have focused on three areas: auditing, tax preparation/planning, and business consulting.

Answer: True

Learning Objective: 01-06

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Careers in Accounting

 

[Question]

  1. The Financial Accounting Standards Board’s conceptual framework does not prescribe Generally Accepted Accounting Principles. It provides an underlying foundation for the development of accounting standards and interpretation of accounting information.

Answer: True

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Conceptual Framework

 

 

Multiple Choice

 

 

[Question]

  1. The primary focus for financial accounting information is to provide information useful for:

Answer: a

Learning Objective: 01-01

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Users of Financial Accounting

 

[Question]

  1. What is the primary purpose of financial accounting?
  2. Determine the amount of tax liability owed to the government.
  3. Communicate business transactions to internal management.
  4. Measure business transactions and communicate those measures to external users to make decisions.
  5. Measure the profitability of the company in order to assist employees with making decisions.

Answer: c

Learning Objective: 01-01

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Defining Accounting

 

[Question]

  1. Financial accounting does not deal with which of the following?
  2. Measuring a company’s economic activity.
  3. Making business decisions.
  4. Preparing financial reports.
  5. Communicating financial results to investors.

Answer: b

Learning Objective: 01-01

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Defining Accounting

 

[Question]

  1. Which of the following groups is not among the external users for whom financial statements are prepared?
  2. Creditors.
  3. Regulators.
  4. Investors.
  5. Managers.

Answer: d

Learning Objective: 01-01

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Users of Financial Accounting

 

[Question]

  1. Financial accounting:
  2. Provides information primarily for external decision makers.
  3. Provides information primarily for a company’s employees.
  4. Provides information primarily for the use of managers of the company.
  5. Is primarily used to compute a company’s tax obligation.

Answer: a

Learning Objective: 01-01

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Users of Financial Accounting

 

[Question]

  1. The primary purpose(s) of financial accounting is (are) to:
  2. Measure and record business transactions.
  3. Prepare federal and state tax returns.
  4. Communicate financial results to investors and creditors.
  5. Both measure and communicate financial information.

Answer: d

Learning Objective: 01-01

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Functions of Financial Accounting

 

[Question]

  1. Which definition below best describes financial accounting?
  2. Process of measuring income taxes owed to the government.
  3. System of maintaining communication with a company’s customers and suppliers.
  4. Procedures designed to enhance the company’s image to potential investors.
  5. Measuring business activities and communicating them to external parties.

Answer: d

Learning Objective: 01-01

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Defining Accounting

 

[Question]

  1. The accounting equation is defined as:
  2. Assets = Liabilities + Stockholders’ Equity.
  3. Assets = Liabilities Stockholders’ Equity.
  4. Net Income = Revenues Expenses.
  5. Liabilities + Revenues = Assets.

Answer: a

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Accounting Equation

 

[Question]

  1. Which statement below best describes the accounting equation?
  2. The change in retained earnings equals net income less dividends.
  3. Equality of revenue and expense transactions over time.
  4. Resources of the company equal creditors’ and owners’ claims to those resources.
  5. Financing activities equal investing and operating activities.

Answer: c

Feedback: Assets = Liabilities + Stockholders’ Equity.

Learning Objective: 01-02

Difficulty: Hard

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Evaluate

Topic: Accounting Equation

 

[Question]

  1. If a company has stockholders’ equity of $60,000 at the end of the year, which of the following statements must be true?
  2. The company’s assets exceed liabilities by $60,000.
  3. The company has issued $60,000 of common stock.
  4. Net income for the year equals $60,000.
  5. Total revenues earned during the year equal $60,000.

Answer: a

Feedback: Assets  Liabilities = Stockholders’ Equity.

Learning Objective: 01-02

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Accounting Equation

 

[Question]

  1. Emmitt had the following final balances after the first year of operations: assets, $55,000; stockholders’ equity, $25,000; dividends, $3,000; and net income, $10,000. What is the amount of Emmitt’s liabilities?
  2. $55,000.
  3. $30,000.
  4. $13,000.
  5. $7,000.

Answer: b

Feedback: Assets ($55,000) = Liabilities + Stockholders’ Equity ($25,000).

Learning Objective: 01-02

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Apply

Topic: Accounting Equation

 

[Question]

  1. Transactions of a company involving external sources of funding are referred to as:
  2. Investing activities.
  3. Financing activities.
  4. External activities.
  5. Operating activities.

Answer: b

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Remember

Topic: Business Activities

 

[Question]

  1. Transactions of a company that include the purchase and sale of long-term productive assets are referred to as:
  2. Investing activities.
  3. Financing activities.
  4. Expenditure activities.
  5. Operating activities.

Answer: a

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Remember

Topic: Business Activities

 

[Question]

  1. McGill purchases additional office equipment to better serves its customers. This purchase is classified as what type of activity?
  2. Company activity.
  3. Financing activity.
  4. Investing activity.
  5. Operating activity.

Answer: c

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Business Activities

 

[Question]

  1. Transactions related to the primary business activities of the company, such as selling goods and services to customers, are referred to as:
  2. Investing activities.
  3. Operating activities.
  4. Management activities.
  5. Financing activities.

Answer: b

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Remember

Topic: Business Activities

 

[Question]

  1. Stimpleton Company engages in the following cash payments:

What is the total amount of cash paid for operating activities?

  1. $6,000.
  2. $2,000.
  3. $7,000.
  4. $1,500.

Answer: d

Feedback: $500 + $1,000 = $1,500.

Learning Objective: 01-02

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Business Activities

 

[Question]

  1. The form of business organization that is legally separate from its owners is a:
  2. Partnership.
  3. Sole proprietorship.
  4. Corporation.
  5. Separation entity.

Answer: c

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Forms of Business Organizations

 

[Question]

  1. Which business form has the advantage of limited liability?
  2. Corporation.
  3. Sole proprietorship.
  4. Partnership.
  5. All business forms share equal limited liability.

Answer: a

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Forms of Business Organizations

 

[Question]

  1. Limited liability means:
  2. Stockholders of a corporation are not obligated to pay the corporation’s debts out of their own pocket.
  3. Liabilities of a company cannot exceed its assets.
  4. Companies are not allowed to borrow unless they are profitable.
  5. Companies are less likely to be sued if they are formed as a corporation.

Answer: a

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Forms of Business Organizations

 

[Question]

  1. One disadvantage of the corporate form of business is:
  2. Limited liability.
  3. Access to more capital.
  4. Smaller in size.
  5. Double taxation.

Answer: d

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Forms of Business Organizations

 

[Question]

  1. The costs of providing goods and services to customers are referred to as:
  2. Assets.
  3. Expenses.
  4. Liabilities.
  5. Revenues.

Answer: b

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Expenses

 

[Question]

  1. The accounts that represent the resources of the company are called:
  2. Liabilities.
  3. Revenues.
  4. Expenses.
  5. Assets.

Answer: d

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Assets

 

[Question]

  1. An alternative form of the accounting equation is:
  2. Net Income = Revenues Expenses.
  3. Stockholders’ Equity = Assets + Liabilities.
  4. Assets = Liabilities Stockholders’ Equity.
  5. Assets Liabilities = Stockholders’ Equity.

Answer: d

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Accounting Equation

 

[Question]

  1. The owners’ interest in a corporation is called:
  2. Dividends.
  3. Assets.
  4. Liabilities.
  5. Stockholders’ equity.

Answer: d

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Stockholders’ Equity

 

[Question]

  1. Creditors’ claims to a corporation’s resources are referred to as:
  2. Dividends.
  3. Assets.
  4. Liabilities.
  5. Stockholders’ equity.

Answer: c

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Liabilities

 

[Question]

  1. Net income can best be described as:
  2. Net cash received by a company during the year.
  3. Revenues minus expenses.
  4. The amount of profits retained in a company for the year.
  5. Resources of a company.

Answer: b

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Remember

Topic: Net Income/Loss

 

[Question]

  1. Use the following appropriate amounts to calculate net income: Revenues, $12,000; Liabilities, $5,000; Expenses, $4,000; Assets, $19,000; Dividends, $4,000.
  2. $6,000.
  3. $8,000.
  4. $4,000.
  5. $14,000.

Answer: b

Feedback: Revenues ($12,000)  Expenses ($4,000) = Net Income.

Learning Objective: 01-02

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Apply

Topic: Net Income/Loss

 

[Question]

  1. Liabilities are best defined as:
  2. Amounts the company expects to collect in the future from customers.
  3. Debts or obligations the company owes resulting from past transactions.
  4. The amounts that owners have invested in the business.
  5. Payments to stockholders.

Answer: b

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Liabilities

 

[Question]

  1. Which of the following best describes revenue?
  2. Resources of a company.
  3. Amounts earned from providing goods and services to a customer.
  4. Cash received from a customer.
  5. Dividends paid to stockholders.

Answer: b

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Revenues

 

[Question]

  1. The account type that represents payments to stockholders is called:
  2. Liabilities.
  3. Assets.
  4. Stockholders’ equity.
  5. Dividends.

Answer: d

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Dividends

 

[Question]

  1. The accounts that represent resources owed to creditors are called:
  2. Assets.
  3. Liabilities.
  4. Dividends.
  5. Stockholders’ equity.

Answer: b

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Liabilities

 

[Question]

  1. Using the information below from the accounting records of Thomas Corporation, owners’ claims to the company’s resources amount to:
Assets $1,200,000
Liabilities   $800,000
Net income $100,000
Retained earnings $250,000

 

  1. $1,200,000.
  2. $800,000.
  3. $250,000.
  4. $400,000.

Answer: d

Learning Objective: 01-02

Feedback: Owners’ claims (Stockholders’ Equity) = Assets ($1,200,000) − Liabilities ($800,000)

Difficulty: Hard

AACSB: Analytic

AICPA: FN Measurement

Blooms: Analyze

Topic: Accounting Equation

 

[Question]

  1. The accounting equation is defined as:
  2. Common Stock + Retained Earnings = Stockholders’ Equity.
  3. Revenues – Expenses = Net Income.
  4. Revenues – Expenses – Dividends = Retained Earnings.
  5. Assets = Liabilities + Stockholders’ Equity.

Answer: d

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Accounting Equation

 

[Question]

  1. The costs associated with producing revenues are referred to as:
  2. Dividends.
  3. Assets.
  4. Liabilities.
  5. Expenses.

Answer: d

Learning Objective: 01-02

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Expenses

 

[Question]

  1. Accountants are responsible for measuring various operating, investing and financing activities. Which of the following correctly matches the activity with its type?
  2. Investing – paying utilities for the month.
  3. Investing – purchasing land.
  4. Operating – paying dividends to stockholders.
  5. Financing – selling equipment for cash.

Answer: b

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Business Activities

 

[Question]

  1. Which of the following is an operating activity?
  2. Issuing common stock.
  3. Paying dividends.
  4. Borrowing cash from a bank to acquire a factory.
  5. Paying electricity bills for the month.

Answer: d

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Business Activities

 

[Question]

  1. How many of the following transactions are operating activities?

Borrowed $50,000 from the bank

Purchased $12,000 in supplies

Provide services to customers for $27,000

Paid the utility bill of $750

Purchased a delivery truck for $12,000

Received $25,000 from issuing common stock

  1. One.
  2. Two.
  3. Three.
  4. Four.

Answer: c

Feedback: (1) Purchased supplies, (2) Provided services to customers, and (3) Paid utility bill.

Learning Objective: 01-02

Difficulty: Hard

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Evaluate

Topic: Business Activities

 

[Question]

  1. Which of the following accounts appears in the statement of stockholders’ equity?
  2. Supplies.
  3. Cash.
  4. Salaries Payable.
  5. Retained Earnings.

Answer: d

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. Sooner Company has had a net income of $8,000, $5,000, $12,000, and $10,000 over the first four years of the company’s existence. If the average annual amount of dividends paid over the last four years is $3,000, what is the ending retained earnings balance?
  2. $47,000.
  3. $35,000.
  4. $23,000.
  5. $7,000.

Answer: c

Feedback: Beginning Retained Earnings ($0) + Net Income ($8,000 + $5,000 + $12,000 + $10,000)  Dividends ($3,000 * 4) = Ending Retained Earnings.

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Measurement

Blooms: Analyze

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. The equation best describing the income statement is:
  2. Revenues Expenses = Net Income.
  3. Assets = Revenues Expenses.
  4. Assets = Liabilities + Stockholders’ Equity.
  5. Revenues + Expenses = Net Income.

Answer: a

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Income Statement

 

[Question]

  1. On January 1, Gucci Brothers Inc. started the year with a $492,000 balance in Retained Earnings and a $605,000 balance in Common Stock. During the year, the company earned net income of $92,000, paid a dividend of $15,200, and issued more common stock for $27,500. What is total stockholders’ equity at the end of the year?
  2. $1,231,700.
  3. $1,097,000.
  4. $1,201,300.
  5. $1,588,300.

Answer: c

Feedback: Stockholders Equity = Common Stock ($605,000 + $27,500) + Retained Earnings ($492,000 + $92,000  $15,200).

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. The financial statement that represents activity over the entire life of the company is the:
  2. Income statement.
  3. Balance sheet.
  4. Statement of financial accounting.
  5. Statement of cash flows.

Answer: b

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Balance Sheet

 

[Question]

  1. Which of the following is the correct order for preparing the financial statements?
  2. Balance sheet, statement of stockholders’ equity, and income statement.
  3. Balance sheet, income statement, and statement of stockholders’ equity.
  4. Statement of stockholders’ equity, income statement, and balance sheet.
  5. Income statement, statement of stockholders’ equity, and balance sheet.

Answer: d

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Order for Preparing Financial Statements

 

[Question]

  1. The financial statement(s) that record activity over an interval of time is (are) the:
  2. Income statement.
  3. Balance sheet.
  4. Balance sheet and income statement.
  5. Income statement and statement of cash flows.

Answer: d

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Income Statement

Topic: Statement of Cash Flows

 

[Question]

  1. Which of the following items would not appear in an income statement?
  2. Salaries expense.
  3. Advertising expense.
  4. Service revenue.
  5. Cash.

Answer: d

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Income Statement

 

[Question]

  1. The two categories of stockholders’ equity usually found in the balance sheet of a corporation are:
  2. Common stock and liabilities.
  3. Assets and liabilities.
  4. Common stock and retained earnings.
  5. Revenues and expenses.

Answer: c

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Balance Sheet

 

[Question]

  1. Which of the following statements regarding financial reports is not correct?
  2. A balance sheet contains assets, liabilities, and stockholders’ equity information.
  3. An income statement shows revenues and expenses.
  4. A statement of stockholders’ equity reports revenues, net income, and dividends information.
  5. A statement of cash flows shows cash inflows and outflows from operating, investing, and financing activities.

Answer: c

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Elements of Financial Statements

 

[Question]

  1. Which of the following is not a balance sheet item?
  2. Assets.
  3. Common stock.
  4. Retained earnings.
  5. Revenues.

Answer: d

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Balance Sheet

 

[Question]

  1. In what order are the following financial statements prepared: (1) balance sheet, (2) income statement, and (3) statement of stockholders’ equity?
  2. 1, 2, 3.
  3. 3, 2, 1.
  4. 1, 3, 2.
  5. 2, 3, 1.

Answer: d

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Order of Preparing Financial Statements

 

[Question]

  1. Nina Corp. had the following net income (loss) the first three years of operation: $7,100, ($1,600), and $3,600. If the Retained Earnings balance at the end of year three is $1,100, what was the total amount of dividends paid over these three years?
  2. $500.
  3. $0.
  4. $9,100.
  5. $8,000.

Answer: d

Feedback: Beginning Retained Earnings ($0) + Net Income ($7,100  $1,600 + $3,600)  Dividends = Ending Retained Earnings ($1,100).

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. Aikman Company has paid dividends of $2,410, $0, $1,570 and $1,060 over the first four years of the company’s existence. If Retained Earnings after year four has an ending balance of $9,700, what is the average annual amount of net income (loss) over the past four years for Aikman?
  2. $3,685.
  3. $14,740.
  4. $840.
  5. $1,260.

Answer: a

Feedback: Beginning Retained Earnings ($0) + Net Income  Dividends ($2,410 + $0 + $1,570 + $1,060) = Ending Retained Earnings ($9,700). Divide net income amount by 4 to get average.

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. The equation best describing the balance sheet is:
  2. Assets = Liabilities + Stockholders’ Equity.
  3. Revenues Expenses = Net Income.
  4. Ending Retained Earnings + Dividends = Net Income.
  5. Revenues + Expenses = Net Income.

Answer: a

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Balance Sheet

 

[Question]

  1. DW has an ending Retained Earnings balance of $51,100. If during the year DW paid dividends of $4,300 and had net income of $22,500, then what was the beginning Retained Earnings balance?
  2. $24,300.
  3. $32,900.
  4. $300.
  5. $69,300.

Answer: b

Feedback: Beginning Retained Earnings + Net Income ($22,500)  Dividends ($4,300) = Ending Retained Earnings ($51,100).

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. The ending Retained Earnings balance of Boomer Inc. decreased by $1.0 million from the beginning of the year. The company declared a dividend of $5.4 million during the year. What was the net income earned during the year?
  2. $7.5 million.
  3. $6.4 million.
  4. $4.4 million.
  5. $1.0 million.

Answer: c

Feedback: Beginning Retained Earnings ($0) + Net Income  Dividends ($5.4) = Ending Retained Earnings ($1.0).

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. Which financial statement is typically prepared first?
  2. Balance sheet.
  3. Income statement.
  4. Statement of stockholders’ equity.
  5. Statement of cash flows.

Answer: b

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Order of Preparing Financial Statements

 

[Question]

  1. Expenses are shown in which of the following statements?
  2. Income statement.
  3. Statement of cash flows.
  4. Balance sheet.
  5. Statement of stockholders’ equity.

Answer: a

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Income Statement

 

[Question]

  1. Given the information below about Thomas Corporation, what was the amount of dividends the company paid in the current period?

 

Beginning retained earnings $54,000
Ending retained earnings $110,000
Decrease in cash $10,000
Net income $84,000
Change in stockholders’ equity $15,000

 

  1. $13,000.
  2. $110,000.
  3. $28,000.
  4. $18,000.

Answer: c

Feedback: Beginning Retained Earnings ($54,000) + Net Income ($84,000)  Dividends = Ending Retained Earnings ($110,000).

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. Retained earnings at the end of the year is calculated using:
  2. Beginning retained earnings, net income, and dividends.
  3. Common stock and dividends.
  4. Stockholders’ equity, net income, and dividends.
  5. Net income and dividends.

Answer: a

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Retained Earnings

 

[Question]

  1. The financial statement that represents the accounting equation is the:
  2. Income statement.
  3. Statement of cash flows.
  4. Balance sheet.
  5. Statement of stockholders’ equity.

Answer: c

Learning Objective: 01-03

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Remember

Topic: Balance Sheet

 

[Question]

  1. Which of the following is not a major section in the statement of cash flows?
  2. Cash flows from operating activities.
  3. Cash flows from customers.
  4. Cash flows from financing activities.
  5. Cash flows from investing activities.

Answer: b

Learning Objective: 01-03Difficulty: Easy

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Remember

Topic: Statement of Cash Flows

 

[Question]

  1. Given the information below about David Corporation, what was the amount of dividends the company paid in the current period?
  1. $140,000.
  2. $0.
  3. $30,000.
  4. $20,000.

Answer: c

Feedback: Beginning Retained Earnings ($35,000) + Net Income ($85,000)  Dividends = Ending Retained Earnings ($90,000).

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. Liabilities are shown in which of the following statements?
  2. Income statement.
  3. Statement of cash flows.
  4. Balance sheet.
  5. Statement of stockholders’ equity.

Answer: c

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Balance Sheet

 

[Question]

  1. Consider the following account balances of the Shattuck Law Firm at the end of the year:

Accounts Payable       $ 4,400

Salaries Expense         12,800

Cash                               1,700

Common Stock              2,400

Service Revenue            8,300

Supplies                          4,300

Retained Earnings          1,100

Utilities Expense            5,000

How many of these accounts would appear in Shattuck’s year-end income statement?

  1. Five.
  2. Four.
  3. Three.
  4. Two.

Answer: c

Feedback: Salaries Expense, Service Revenue, and Utilities Expense.

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Income Statement

 

[Question]

  1. Consider the following account balances of the Shattuck Law Firm at the end of the year:

Accounts Payable       $ 4,400

Salaries Expense         12,800

Cash                               1,700

Common Stock              2,400

Service Revenue            8,300

Supplies                          4,300

Retained Earnings          1,100

Utilities Expense            5,000

How many of these accounts would appear in Shattuck’s year-end balance sheet?

  1. Five.
  2. Four.
  3. Three.
  4. Two.

Answer: a

Feedback: Accounts Payable, Cash, Common Stock, Supplies, and Retained Earnings.

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Balance Sheet

 

[Question]

  1. If total change in cash = $44,000, net operating cash flows = $22,000, and net investing cash flows = ($13,000); then net financing cash flows =
  2. $15,000.
  3. $35,000.
  4. $25,000.
  5. $45,000.

Answer: b

Feedback: Total change in cash = net operating cash flows + net investing cash flows + net financing cash flows.

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Statement of Cash Flows

 

[Question]

  1. For the past five years, Mookie Consulting Services reported the following annual net income and dividend amounts:

Year    Net Income     Dividends

1          $22,000           $2,000

2            17,000             2,000

3              9,000             1,000

4            14,000             3,000

5            25,000             4,000

If Mookie had Retained Earnings of $88,000 at the end of year 5, what was the company’s Retained Earnings at the beginning of Year 1?

  1. $13,000.
  2. $25,000.
  3. $7,000.
  4. $1,000.

Answer: a

Feedback: Beginning retained earnings = ending retained earnings ($88,000) − total net income ($87,000) + total dividends ($12,000).

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Measurement

Blooms: Analyze

Topic: Retained Earnings

 

[Question]

  1. Which of the following items is reported in the statement of stockholders’ equity?
  2. Total assets.
  3. Total expenses.
  4. Net income.
  5. Operating cash flows.

Answer: c

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. Which of the following statements is NOT correct about the financial statements?
  2. An income statement reports revenues, expenses, and net income information.
  3. The statement of stockholders’ equity presents common stock, dividends, and retained earnings information.
  4. A balance sheet reports assets, liabilities, revenues, and expenses.
  5. The statement of cash flows shows cash inflows and outflows from operating, financing, and investing activities.

Answer: c

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Income Statement

Topic: Statement of Stockholders’ Equity

Topic: Balance Sheet

Topic: Statement of Cash Flows

 

[Question]

  1. The balance sheet depicts which of the following equations?
  2. Net income = revenue − expenses.
  3. Ending retained earnings = beginning retained earnings + net income − dividends.
  4. Assets = liabilities + stockholders’ equity.
  5. Net cash flows = total cash inflows − total cash outflows.

Answer: c

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Balance Sheet

 

[Question]

  1. Which of the following financial statements reports a company’s retained earnings?
  2. Income statement.
  3. Balance sheet.
  4. Statement of cash flows.
  5. All of the other answers are correct.

Answer: b

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Balance Sheet

 

[Question]

  1. Net income (loss) appears in which two financial statements?
  2. Balance sheet and income statement.
  3. Income statement and statement of stockholders’ equity.
  4. Statement of stockholders’ equity and balance sheet.
  5. Net income appears in only one financial statement.

Answer: b

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Net Income/Loss

 

[Question]

  1. Which of the following accounts appears in the statement of stockholders’ equity?
  2. Accounts Payable.
  3. Accounts Receivable.
  4. Common Stock.
  5. Supplies.

Answer: c

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. Which of the following items would not appear in an income statement?
  2. Delivery Expense.
  3. Accounts Payable.
  4. Service Revenue.
  5. Utilities Expense.

Answer: b

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Income Statement

 

[Question]

  1. Which of the following is not a balance sheet item?
  2. Assets.
  3. Retained Earnings.
  4. Expenses.
  5. Liabilities.

Answer: c

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Balance Sheet

 

[Question]

  1. Which of the following is a balance sheet item?
  2. Net Income.
  3. Dividends.
  4. Utilities Expense.
  5. Cash.

Answer: d

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Balance Sheet

 

[Question]

  1. Which of the following best explains the meaning of total stockholders’ equity?
  2. The difference between total revenues and total expenses, less dividends for the year.
  3. The amount of common stock less dividends over the life of the company.
  4. All revenues, expenses, and dividends over the life of the company.
  5. The amount of capital invested by stockholders plus profits retained over the life of the company.

Answer: d

Feedback: Total stockholders’ equity equals the amount of common stock plus retained earnings. Common stock is the amount of capital invested by stockholders, and retained earnings are profits retained over the life of the company.

Learning Objective: 01-03

Difficulty: Hard

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Evaluate

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. Which one of the following statements regarding financial reports is correct?
  2. The balance sheet classifies all assets according to operating, investing, and financing activities.
  3. The income statement is used to show that a company’s resources equal claims to those resources.
  4. The statement of stockholders’ equity updates the balances of common stock and retained earnings for related transactions during the year.
  5. The statement of cash flows shows cash inflows and outflows from operating activities only.

Answer: c

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Income Statement

Topic: Statement of Stockholders’ Equity

Topic: Balance Sheet

Topic: Statement of Cash Flows

 

[Question]

  1. Liabilities can be best described as:
  2. The amount of expenses over the past year.
  3. The amount expected to be distributed to stockholders.
  4. The amount owed to creditors.
  5. The amount of services provided to customers during the year.

Answer: c

Learning Objective: 01-03

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Liabilities

 

[Question]

  1. Which accounting amount best represents value created for stockholders during the current period?
  2. Retained earnings.
  3. Total assets.
  4. Net income.
  5. Stockholders’ equity.

Answer: c

Learning Objective: 01-04

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Financial Accounting Information

 

[Question]

  1. Which accounting number has the single greatest impact on stock prices?
  2. Total dividends.
  3. Total assets.
  4. Total revenues.
  5. Net income.

Answer: d

Learning Objective: 01-04

Difficulty: Hard

AACSB: Reflective Thinking

AICPA: FN Decision Making

Blooms: Analyze

Topic: Financial Accounting Information

 

[Question]

  1. Which financial accounting number impacts stock prices more than any other single piece of information?
  2. Retained earnings.
  3. Net income.
  4. Common stock.
  5. Total assets.

Answer: b

Learning Objective: 01-04

Difficulty: Hard

AACSB: Reflective Thinking

AICPA: FN Decision Making

Blooms: Analyze

Topic: Financial Accounting Information

 

[Question]

  1. GAAP is an abbreviation for:
  2. Generally authorized accounting procedures.
  3. Generally applied accounting procedures.
  4. Generally accepted auditing practices.
  5. Generally accepted accounting principles.

Answer: d

Learning Objective: 01-05

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Rules of Financial Accounting

 

[Question]

  1. Generally Accepted Accounting Principles (GAAP) are best defined as:
  2. Standards or methods for presenting financial accounting information.
  3. Government-mandated rules that companies must follow.
  4. Rules that best estimate profitability for a company.
  5. The group of individuals that create and enforce all accounting rules.

Answer: a

Learning Objective: 01-05

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Rules of Financial Accounting

 

[Question]

  1. Today, financial accounting and reporting standards in the United States are established primarily by the:
  2. Securities and Exchange Commission.
  3. Financial Accounting Standards Board.
  4. International Accounting Standards Board.
  5. U.S. Congress.

Answer: b

Learning Objective: 01-05

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Rules of Financial Accounting

 

[Question]

  1. Financial reporting objectives do not include providing information:
  2. Useful to investors and creditors in making decisions.
  3. To determine market values, assess profit potential, and evaluate management.
  4. Helpful to investors in predicting cash flows.
  5. That tells about a company’s economic resources and claims to those resources.

Answer: b

Learning Objective: 01-05

Difficulty: Hard

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Evaluate

Topic: Objectives of Financial Accounting

 

[Question]

  1. Of the following, the most important objective for financial reporting is to provide information useful for:
  2. Predicting cash flows.
  3. Determining taxable income.
  4. Providing accountability.
  5. Increasing future profits.

Answer: a

Learning Objective: 01-05

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Objectives of Financial Accounting

 

[Question]

  1. The International Accounting Standards Board:
  2. Is governed by the U.S. Securities and Exchange Commission.
  3. Can overrule the FASB when their policies disagree.
  4. Promotes the use of high-quality, understandable global accounting standards.
  5. Is the primary standard-setting body in the United States.

Answer: c

Learning Objective: 01-05

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Rules of Financial Accounting

 

[Question]

  1. Independent auditors express an opinion on the:
  2. Fairness of financial statements.
  3. Amount of income taxes a company owes to the government.
  4. Quality of the company’s products.
  5. Quality of a company’s workforce.

Answer: a

Learning Objective: 01-05

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Role of Auditors

 

[Question]

  1. The body of rules and procedures that guide the measurement and communication of financial accounting information in the United States is known as:
  2. Standards of Professional Compliance (SPC).
  3. Generally Accepted Accounting Principles (GAAP).
  4. Generally Accepted Auditing Standards (GAAS).
  5. Rules of Financial Reporting (RFR).

Answer: b

Learning Objective: 01-05

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Rules of Financial Accounting

 

[Question]

  1. The independent, private-sector group that is primarily responsible for setting financial reporting standards in the United States is the:
  2. FASB.
  3. IASB.
  4. SEC.
  5. IRS.

Answer: a

Learning Objective: 01-05

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Rules of Financial Accounting

 

[Question]

  1. Which statement below best describes the objectives of financial accounting?
  2. Provide information that helps predict cash flows.
  3. Provide information about the economic resources, claims to resources and changes in resources and claims.
  4. Provide information that is useful in making decisions.
  5. All of the other answers are correct.

Answer: d

Learning Objective: 01-05

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Objectives of Financial Accounting

 

[Question]

  1. The assumption that a business will continue to operate into the future is the:
  2. Monetary unit assumption.
  3. Periodicity assumption.
  4. Economic entity assumption.
  5. Going concern assumption.

Answer: d

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Underlying Assumptions

 

[Question]

  1. The qualitative characteristic that says accounting information can influence users’ decisions by allowing them to assess past performance is:
  2. Timeliness.
  3. Neutrality.
  4. Confirmatory value.
  5. Predictive value.

Answer: c

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Qualitative Characteristics

 

[Question]

  1. The major underlying assumptions of accounting include all of the following except:
  2. Economic entity.
  3. Monetary unit.
  4. Legal liability.
  5. Going concern.

Answer: c

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Underlying Assumptions

 

[Question]

  1. The assumption that the assets and liabilities of the business are accounted for on the books of the company but not included in the records of the owner is the:
  2. Monetary unit assumption.
  3. Economic entity assumption.
  4. Going concern assumption.
  5. Periodicity assumption.

Answer: b

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Underlying Assumptions

 

[Question]

  1. Accounting information that does not provide measurement bias in favor of a particular set of companies has the characteristic of:
  2. Relevance.
  3. Consistency.
  4. Materiality.
  5. Neutrality.

Answer: d

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Qualitative Characteristics

 

[Question]

  1. If accounting information is considered to have faithful representation, then which of the following is true?
  2. The information represents to users what it claims to represent.
  3. The information follows conservatism principles and is also material.
  4. The information is considered pertinent to or affects decisions.
  5. The information will have predictive value, feedback value, and is timely.

Answer: a

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Qualitative Characteristics

 

[Question]

  1. For accounting information to be relevant, it should possess which of the following characteristics?
  2. Predictive value, confirmatory value, and/or materiality.
  3. Large in amount and timely.
  4. Comparability or consistency.
  5. Verifiability.

Answer: a

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Qualitative Characteristics

 

[Question]

  1. Materiality is based upon which factor(s)?
  2. Timeliness of an item.
  3. Amount and nature of an item.
  4. Consistency of an item.
  5. Relevance of an item.

Answer: b

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Qualitative Characteristics

 

[Question]

  1. If a company has gone bankrupt, its financial statements likely violate the:
  2. Periodicity assumption.
  3. Monetary unit assumption.
  4. Going concern assumption.
  5. Economic entity assumption.

Answer: c

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Underlying Assumptions

 

[Question]

  1. The conceptual framework’s qualitative characteristic of relevance includes:
  2. Predictive value.
  3. Verifiability.
  4. Completeness.
  5. Neutrality.

Answer: a

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Qualitative Characteristics

 

[Question]

  1. The conceptual framework’s qualitative characteristic of faithful representation includes:
  2. Predictive value.
  3. Neutrality.
  4. Confirmatory value.
  5. Comparability.

Answer: b

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Qualitative Characteristics

 

[Question]

  1. Constraints on qualitative characteristics of accounting information include:
  2. Freedom from material error.
  3. Going concern.
  4. Neutrality.
  5. Cost effectiveness.

Answer: d

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Qualitative Characteristics

 

[Question]

  1. Fundamental qualitative characteristics of accounting information are:
  2. Relevance and comparability.
  3. Comparability and consistency.
  4. Faithful representation and relevance.
  5. Faithful representation and consistency.

Answer: c

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Qualitative Characteristics

 

[Question]

  1. Enhancing qualitative characteristics of accounting information include:
  2. Relevance and comparability.
  3. Comparability and consistency.
  4. Faithful representation and relevance.
  5. Cost effectiveness and materiality.

Answer: b

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Qualitative Characteristics

 

 

Problems

 

 

[Question]

  1. For each transaction, indicate whether a company would classify the related account as an asset, liability, stockholders’ equity, dividend, revenue, or expense.
Transactions Related Accounts
1. Receive cash from investors. Common Stock
2. Pay rent for the current period. Rent Expense
3. Purchase office equipment. Supplies
4. Pay cash to stockholders. Dividends
5. Provide services to customers. Service Revenue

 

Answer: 1. Stockholders’ equity; 2. Expense; 3. Asset; 4. Dividend; 5. Revenue.

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Account Classifications

 

[Question]

  1. Account classifications include assets, liabilities, stockholders’ equity, dividends, revenues, and expenses. Indicate the account classification for each account name.
Account Classifications Accounts Related Transactions
1.   Common Stock Sell common stock to investors.
2.   Cash Receive cash from customers.
3.   Salaries Payable Incur amounts owed to employees.
4.   Service Revenue Sell services to customers.
5.   Utilities Expense Incur cost of utilities.
6.   Supplies Purchase of office supplies.
7.   Advertising Expense Pay for cost of advertising.
8.   Buildings Purchase factory for operations.
9.   Accounts Payable Purchase supplies on credit.
10.   Dividends Distribute cash to stockholders.

 

Answer: 1. Stockholders’ equity; 2. Asset; 3. Liability; 4. Revenue; 5. Expense; 6. Asset; 7. Expense; 8. Asset; 9. Liability; 10. Dividend.

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Account Classifications

 

[Question]

  1. Indicate whether a company would classify the transaction as financing, investing, or operating.

Answer: 1. Financing; 2. Operating; 3. Investing; 4. Financing; 5. Operating.

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Business Activities

 

[Question]

  1. Below are typical transactions for a company. Indicate whether each transaction is classified as a financing, investing, or operating activity.

 

Type of Business Activity Transactions
1.   Purchase office building
2.   Pay building maintenance fees
3.   Pay sales taxes to the local government
4.   Provide services to customers
5.   Borrow from the bank
6.   Pay workers’ salaries
7.   Sell equipment used in operations
8.   Sell common stock to investors

 

Answer: 1. Investing; 2. Operating; 3. Operating; 4. Operating; 5. Financing; 6. Operating; 7. Investing; 8. Financing.

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Business Activities

 

[Question]

  1. Below are typical transactions for a company. Indicate whether each transaction is classified as a financing, investing, or operating activity.

Answer: 1. Financing; 2. Operating; 3. Operating; 4. Operating; 5. Operating; 6. Operating; 7. Operating; 8. Investing; 9. Operating; 10. Financing.

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Business Activities

 

[Question]

  1. At the end of the current period, Maltese, Inc. reports the following amounts: Assets = $50,000; Liabilities = $28,000; Dividends = $4,000; Revenues = $22,000; Expenses = $16,000. Calculate net income and stockholders’ equity at the end of the period.

Answer:

 

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Apply

Topic: Income Statement

Topic: Balance Sheet

 

[Question]

  1. At the end of the current period, Rogers Company reports the following amounts: Assets = $25,000; Liabilities = $15,000; Dividends = $3,000; Revenues = $20,000; Expenses = $13,000. Calculate net income and stockholders’ equity at the end of the period.

Answer:

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Apply

Topic: Income Statement

Topic: Balance Sheet

 

[Question]

  1. Below are the account balances for Huffman Corporation at the end of December. Use only the appropriate accounts to prepare an income statement.

 

Accounts Balances
Cash $  5,200
Salaries expense 2,300
Retained earnings 2,500
Advertising expense 1,200
Equipment 12,400
Service revenue 9,400
Common stock 8,000
Accounts payable 2,200

 

Answer:

Huffman Corporation

Income Statement

For the year ended December 31

Service revenue $9,400
Expenses:
Salaries $2,300
Advertising 1,200
Total expenses 3,500
Net income $5,900

 

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Income Statement

 

[Question]

  1. At the beginning of the year (January 1), Maurice and Sons has $12,000 of common stock outstanding and retained earnings of $4,200. During the year, the company reports net income of $3,200 and pays dividends of $1,200. In addition, the company issues additional common stock for $5,000. Prepare the statement of stockholders’ equity at the end of the year (December 31).

Answer:

Maurice and Sons

Statement of Stockholders’ Equity

For the year ended December 31

 

Common

Stock

 

Retained

Earnings

Total

Stockholders’

Equity

Balance at January 1 $12,000 $  4,200 $16,200
Issuance of common stock 5,000 5,000
Add: Net income for the year 3,200 3,200
Less: Dividends (1,200) (1,200)
Balance at December 31 $17,000 $  6,200 $23,200

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Apply

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. Klein Interiors has the following account balances at the end of the year. Use only the appropriate accounts to prepare a balance sheet.

 

Accounts Balances
Equipment $78,000
Accounts Payable 12,000
Common Stock 20,000
Service Revenue 62,000
Cash 8,000
Retained Earnings ?
Salaries Expense 38,000
Notes Payable 25,000

 

Answer:

Klein Interiors

Balance Sheet

December 31

Assets Liabilities
Cash $ 8,000 Accounts payable $12,000
Equipment 78,000 Notes payable 25,000
Total liabilities 37,000
Stockholders’ Equity
Common stock 20,000
Retained earnings 29,000 *
Total stockholders’ equity 49,000
Total liabilities and stockholders’ equity $86,000
Total assets $86,000
* Assets = Liabilities + Stockholders’ equity
$86,000 = $37,000 + ($20,000 + Retained earnings)
$86,000 $37,000 $20,000 = Retained earnings
$29,000 = Retained earnings

 

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Apply

Topic: Balance Sheet

 

[Question]

  1. Thomason Financial has the following cash transactions for the year. Assume cash at the beginning of the period is $6,000. Prepare a statement of cash flows.

 

Accounts Amounts
Cash received for sale of services to customers $42,000
Cash received from issuance of common stock 33,000
Cash paid to purchase office equipment (49,000)
Cash paid to building maintenance (7,000)
Cash paid for advertisement (8,000)
Cash paid to workers (18,000)
Cash paid for dividends to stockholders (3,000)
Cash received from sale of land 7,000
Cash received from borrowing 14,000

 

Answer:

Thomason Financial

Statement of Cash Flows

For the year ended December 31

Cash Flows from Operating Activities
Cash inflows:
From sale of services to customers $42,000
Cash outflows:
For building maintenance (7,000)
For advertisement (8,000)
For workers (18,000)
Net cash flows from operating activities $  9,000
Cash Flows from Investing Activities
Purchase office equipment (49,000)
Sale of land 7,000
Net cash flows from investing activities (42,000)
Cash Flows from Financing Activities
Issue common stock 33,000
Borrow from bank 14,000
Pay dividends (3,000)
Net cash flows from financing activities 44,000
Net increase in cash 11,000
Cash at the beginning of the year 6,000
Cash at the end of the year $17,000

 

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Apply

Topic: Statement of Cash Flows

 

[Question]

  1. Each of the following independent situations represents amounts shown on the four basic financial statements. Fill in the missing blanks using your knowledge of amounts that appear on the financial statements.
  2. Revenues = $27,000; Expenses = $18,000; Net income = __________.
  3. Increase in stockholders’ equity = $20,000; Issuance of common stock = $12,000; Dividends = $5,000; Net income = __________.
  4. Assets = $25,000; Liabilities = $13,000; Stockholders’ equity = __________.
  5. Total change in cash = +$28,000; Net operating cash flows = +$30,000; Net financing cash flows = +$18,000; Net investing cash flows = __________.

 

Answer:

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Income Statement

Topic: Statement of Stockholders’ Equity

Topic: Balance Sheet

Topic: Statement of Cash Flows

 

[Question]

  1. During its first five years of operations, Della Manufacturing reports net income and pays dividends as follows. Calculate the balance of retained earnings at the end of each year. Note that retained earnings will always equal $0 at the beginning of year 1.

 

Answer:

* Retained earnings = beginning retained earnings + net income  dividends

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Measurement

Blooms: Analyze

Topic: Retained Earnings

 

[Question]

  1. Below is information related to retained earnings for five independent situations. Calculate the answer to each.
  2. A company reports an increase in retained earnings of $3,200 and net income of $4,800. What is the amount of dividends?
  3. A company reports beginning retained earnings of $1,800, net income of $1,200, and $200 dividends. What is the amount of ending retained earnings?
  4. A company reports an increase in retained earnings of $2,500 and dividends of $1,500. What is the amount of net income?
  5. A company reports ending retained earnings of $2,700, net income of $900, and dividends of $500. What is the amount of beginning retained earnings?
  6. A company reports an increase in retained earnings of $500 and net income of $1,200. What is the amount of dividends?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Answer:

Change in Retained Earnings = Net

Income

Dividends
1. $3,200 = $4,800 $X
$3,200 = $4,800 $1,600

 

2. [$X − $1,800] = $1,200 $200
$X = $2,800 =  

 

3. $2,500 = $X $1,500
$2,500 = $4,000 $1,500

 

4. [$2,700 − $X] = $900 $500
$X = $2,300 =  
=  
5. $500 = $1,200 $X
$500 = $1,200 $700

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Statement of Stockholders’ Equity

 

[Question]

  1. Below is balance sheet information for five independent situations. Calculate the answer to each.
  2. A company reports total assets of $2,000 and total liabilities of $900. What is the amount of stockholders’ equity?
  3. A company reports total liabilities of $2,400 and stockholders’ equity of $1,100. What is the amount of total assets?
  4. A company reports total assets of $2,700 and total stockholders’ equity of $700. What is the amount of total liabilities?
  5. A company reports an increase in assets of $1,700 and an increase in liabilities of $400. What is the amount of the change in stockholders’ equity?
  6. A company reports an increase in liabilities of $300 and a decrease in stockholders’ equity of $800. What is the amount of the change in total assets?

 

Answer:

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Balance Sheet

 

[Question]

  1. Below is cash flow information for five independent situations. Calculate the answer to each.
  2. A company reports operating cash flows of $3,200, investing cash flows of $700, and financing cash flows of $400. What is the amount of the change in total cash?
  3. A company reports operating cash flows of $1,800, investing cash flows of $400, and financing cash flows of $1,100. If the beginning cash amount is $500, what is the ending cash amount?
  4. A company reports operating cash flows of $700, investing cash flows of $300, and a change in total cash of $100. What is the amount of cash flows from financing activities?
  5. A company reports operating cash flows of $600, financing cash flows of $400, and a change in total cash of $100. What is the amount of cash flows from investing activities?
  6. A company reports investing cash flows of $1,400, financing cash flows of $900, and a change in total cash of $200. What is the amount of cash flows from operating activities?

 

Answer:

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Statement of Cash Flows

 

[Question]

  1. Riley Incorporated reports the following amounts at the end of the year:

 

Cash $  3,200 Service Revenue $ 92,500
Buildings 60,000 Salaries Expense 72,800
Accounts Payable 8,500 Equipment 72,000
Interest Expense 4,000 Supplies 6,400
Advertising Expense 11,300 Notes payable 40,000

In addition, the company had common stock of $65,000 at the beginning of the year and issued an additional $5,000 during the year. The company also had retained earnings of $20,700 at the beginning of the year and paid dividends of $2,000 during the year. Prepare the income statement, statement of stockholders’ equity, and balance sheet.

Answer:

Riley Incorporated

Income Statement

For the year ended December 31

Service revenue $92,500
Expenses:
Salaries $72,800
Advertising 11,300
Interest    4,000
Total expenses 88,100
Net income $  4,400

 

Riley Incorporated

Statement of Stockholders’ Equity

For the year ended December 31

 

Common

Stock

 

Retained

Earnings

Total

Stockholders’

Equity

Balance at beginning of the year $65,000 $20,700 $85,700
Issuance of common stock 5,000 5,000
Add: Net income for the year 4,400 4,400
Less: Dividends (2,000) (2,000)
Balance at end of the year $70,000 $23,100 $93,100

 

Riley Incorporated

Balance Sheet

December 31

Assets Liabilities
Cash $    3,200 Accounts payable $  8,500
Supplies 6,400 Notes payable 40,000
Equipment 72,000 Total liabilities 48,500
Building 60,000
Stockholders’ Equity
Common stock 70,000
Retained earnings 23,100
Total stockholders’ equity 93,100
Total liabilities and stockholders’ equity $141,600
Total assets $141,600

 

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Apply

Topic: Income Statement

Topic: Statement of Stockholders’ Equity

Topic: Balance Sheet

 

[Question]

  1. Below are incomplete financial statements for Beasley, Incorporated. Calculate the missing amounts.

 

Income Statement Statement of Stockholders’ Equity  
Revenues $ (a) Common

Stock

Retained

Earnings

Expenses: Beginning $25,000 $12,000
Salaries 8,000 Issuances (c)
Delivery 7,000 Net income 5,000
Utilities 5,000 Dividends (d)
Net income (b) Ending $30,000 $15,000
Balance Sheet  
Assets: Liabilities:  
Cash $15,000 Accounts payable 15,000
Supplies 7,000 Stockholders’ Equity:  
Prepaid rent (e) Common stock (g)
Equipment 35,000 Retained earnings (h)
Total assets (f) Total liabilities and stockholders’ equity (i)

 

Answer:

 

In the income statement, (b) = $5,000 (in the statement of stockholders’ equity)

In the income statement, (a)  $20,000 = $5,000

(a) = $25,000

 

In the statement of stockholders’ equity, $25,000 + (c) = $30,000

(c) = $5,000

In the statement of stockholders’ equity, $12,000 + 5,000  (d) = $15,000

(d) = $2,000

 

In the balance sheet, (g) = $30,000 and (h) $15,000 (in the statement of stockholders’ equity)

(i) = $15,000 + $30,000 (g) + $15,000 (h)

(i) = $60,000

(f) = $60,000 (i)

(e) = $60,000 (f)  $15,000  $7,000  $35,000

(e) = $3,000

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Analyze

Topic: Income Statement

Topic: Statement of Stockholders’ Equity

Topic: Balance Sheet

 

[Question]

  1. Use the following information available at the end of 2015 to prepare an income statement and balance sheet on December 31, 2015, for Goldie Company.

Fees for services performed during the year, $120,000

Accounts payable, $18,500

Accounts receivable, $17,300

Miscellaneous costs for the year, $8,700

Supplies on hand, $2,700

Notes payable outstanding, $30,000

Interest cost on the note for the year, $3,000

Equipment, $84,400

Cash on hand, $11,200

Salaries cost for the year, $71,500

Supplies cost for the year, $9,400

Rent cost for the year, $12,000

Common stock that has been issued, $60,000

Retained earnings at the end of the year, $7,100

 

Answer:

 

Goldie Company

Income Statement

For the year ended December 31, 2015

Service revenue $120,000
Expenses:
Salaries 71,500
Rent 12,000
Supplies 9,400
Interest 3,000
Miscellaneous 8,700
Total expenses 104,600
Net income $  15,400

 

Riley Incorporated

Balance Sheet

December 31

Assets Liabilities
Cash $   11,200 Accounts payable $  18,500
Accounts Receivable 17,300 Notes payable 30,000
Supplies 2,700 Total liabilities 48,500
Equipment 84,400
Stockholders’ Equity
Common stock 60,000
Retained earnings 7,100
Total stockholders’ equity 67,100
Total liabilities and stockholders’ equity $115,600
Total assets $115,600

Learning Objective: 01-03

Difficulty: Hard

AACSB: Analytic

AICPA: FN Reporting

Blooms: Apply

Topic: Income Statement

Topic: Balance Sheet

 

 

Essay

 

The following answers point out the key phrases that should appear in students’ answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be.

 

[Question]

  1. Define accounting. Describe the two primary functions of financial accounting and its role in our society.

Answer: Accounting is “the language of business.” The functions of financial accounting are to measure the business activities of a company and to communicate those measurements to external parties for decision-making purposes. A large number of people, including investors and creditors, rely on financial accounting information to make informed, and presumably, better decisions about companies.

Learning Objective: 01-01

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Defining Accounting

Topic: Functions of Financial Accounting

 

[Question]

  1. Describe the three fundamental business activities that accountants measure. What account classifications are typically associated with each type of business activity?

Answer: Financing activities are transactions involving external sources of funding. There are two basic sources of this external funding—the owners of the company who invest their own funds in the business, and creditors who lend money to the company. Investing activities include the purchase and sale of (1) long-term resources such as land, buildings, equipment, and machinery; and (2) any resources not directly related to a company’s normal operations. Operating activities include transactions that relate to the primary operations of the company, such as providing products and services to customers and the associated costs of doing so, like utilities, taxes, advertising, wages, rent, and maintenance. In general, financing activities are associated with long-term liabilities and stockholders’ equity (including dividends), investing activities are associated with long-term assets, and operating activities are associated with revenues and expenses.

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Business Activities

 

[Question]

  1. List and describe the four financial statements most frequently provided to external users.

Answer: The income statement presents revenues and expenses over an interval of time. The statement of shareholders’ equity summarizes the changes in stockholders’ equity (common stock and retained earnings) over an interval of time. The balance sheet presents the assets, liabilities, and stockholders’ equity at a point in time. The statement of cash flows presents the cash receipts and cash payments over an interval of time for operating, investing, & financing activities.

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Income Statement

Topic: Statement of Stockholders’ Equity

Topic: Balance Sheet

Topic: Statement of Cash Flows

 

[Question]

  1. How does the value of an audit affect financial statements?

Answer: Outside auditors add credibility to financial statements, increasing the confidence of capital market participants who rely on financial statements in making investment and credit decisions and recommendations.

Learning Objective: 01-05

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Role of Auditors

 

[Question]

  1. Define the four basic assumptions underlying Generally Accepted Accounting Principles: (a) economic entity, (b) going concern, (c) periodicity, (d) monetary unit.

Answer: Economic entity – All economic events can be identified with a particular economic entity. Going concern – In the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely. Periodicity – The life of a company can be divided into artificial time periods to provide timely information to external users. Monetary unit – In the U.S., financial statement elements should be measured in terms of the U.S. dollar. It assumes that the value of a dollar is stable over time.

Learning Objective: 01-07

Difficulty: Easy

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Remember

Topic: Underlying Assumptions

 

Matching

 

[Question]

  1. Match each account classification with its example.

Answer: 1. b; 2. d; 3. f; 4. e; 5. c; 6. a.

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Account Classifications

 

[Question]

  1. Match each business activity with its example.

Answer: 1. c; 2. a; 3. b.

Learning Objective: 01-02

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Measurement

Blooms: Understand

Topic: Business Activities

 

[Question]

  1. Match each financial statement with the accounts reported in it.

Answer: 1. a; 2. c; 3. b.

Learning Objective: 01-03

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: FN Reporting

Blooms: Understand

Topic: Income Statement

Topic: Statement of Stockholders’ Equity

Topic: Balance Sheet

 

[Question]

  1. Match each qualitative characteristic with its definition.

Answer: 1. c; 2. a; 3. b; 4. f; 5. e; 6. d.

Learning Objective: 01-07

Difficulty: Medium

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

Blooms: Understand

Topic: Qualitative Characteristics

Test Bank 3rd_Ed Financial Accounting by Spiceland

Test Bank 3rd_Ed Financial Accounting by Spiceland