Test Bank 9th-Edition Accounting Volume 1 Canadian by Charles T. Horngren

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Test Bank 9th-Edition Accounting Volume 1 Canadian by Charles T. Horngren

Sample Chapter No 1                                             

Accounting, Vol. 1, 9e Cdn. Ed. (Horngren et al.)

Chapter 1   Accounting and the Business Environment

 

Objective 1-1

 

1) Financial statements provide information about business activities to decision makers.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

2) Investors provide money to a business to begin operations.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

3) Not-for-profit organizations need accounting information, as do profit-oriented organizations.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

4) The designation CA stands for Certified Public Accountant.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

 

5) Which of the following users of accounting information seek to assess the organization’s ability to make scheduled payments?

  1. A) creditors
  2. B) taxing authorities
  3. C) government regulatory agencies
  4. D) employees

Answer:  A

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

6) The primary objective of financial reporting is to provide information:

  1. A) to the federal government.
  2. B) about the profitability of the business.
  3. C) regarding the cash flows of the business.
  4. D) useful for making investment decisions and for assessing management’s stewardship.

Answer:  D

Diff: 3

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

7) Which of the following statements best describes managerial accounting?

  1. A) Managerial accounting focuses on information for internal decision making.
  2. B) Managerial accounting focuses on outside investors and lenders.
  3. C) Managerial accounting provides information for the public.
  4. D) Managerial accounting provides information for taxing authorities.

Answer:  A

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

Match the following terms and definitions:

 

  1. A) account receivable
  2. B) proprietorship
  3. C) earnings estimate
  4. D) transaction
  5. E) generally accepted accounting principles
  6. F) corporation
  7. G) asset
  8. H) expense
  9. I) accounting
  10. J) liability
  11. K) limited-liability partnership
  12. L) revenue
  13. M) capital

 

8) The system that measures business activities and processes information into reports

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

 

Answers: 8) I

 

9) Describe the three forms of organizations and how they differ.

Answer:  A proprietorship has a single owner whereas a partnership has two or more individuals together as co-owners. In both of these forms of organization, the owners are individually liable for the debts of the business. A corporation is a business owned by shareholders, who may or may not have a part in the day-to-day operations of the business. The shareholders of a corporation are not legally liable for the debts of the business, and it is easier to transfer the ownership of a corporation than a proprietorship or partnership.

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-1 Define accounting, and describe the users of accounting information

Objective 1-2

 

1) Rules of professional conduct for accountants apply to accountants working in public practice but not for accountants employed by companies.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

2) Some rules of conduct apply to accountants in public practice and not to those employed in industry.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

3) Audits are conducted by accountants internal to the organization so that the users of the financial information can have confidence in the accuracy of the financial reporting.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

4) Which of the following is not addressed by rules of professional conduct?

  1. A) competence
  2. B) confidentiality
  3. C) number of clients
  4. D) compliance with professional standards

Answer:  C

Diff: 2

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

5) The provincial securities commissions oversee operations of:

  1. A) all publicly accountable enterprises.
  2. B) banks and other federally constituted financial institutions.
  3. C) large investors from foreign counties.
  4. D) companies with publicly traded stock.

Answer:  D

Diff: 3

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

6) What classifications of Canadian corporations are required to use International Financial Reporting Standards (IFRS)?

  1. A) publicly accountable enterprises
  2. B) all companies
  3. C) private companies
  4. D) none

Answer:  A

Diff: 1

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

7) Audits conducted by external accountants express an opinion:

  1. A) that evaluates the effectiveness of management.
  2. B) that taxing authorities use to ensure that the correct of amount of tax owing has been calculated.
  3. C) that gives investors confidence their investment is not at risk.
  4. D) on whether or not the financial statements fairly reflect the economic events that occurred during the accounting period.

Answer:  D

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

8) Rules of professional conduct for accountants should:

  1. A) be considered a minimum standard of performance.
  2. B) not be seen as strict when the client requests certain requirements.
  3. C) be the same as those for lawyers or engineers.
  4. D) clearly spell out right from wrong in every situation.

Answer:  A

Diff: 1

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Comprehension

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

9) Why is it in the interest of a corporation for management to behave ethically?

Answer:  Since the financial health of a company is important to many different groups of users, these users must be confident that they can rely on the financial information they are given when they are making decisions. If the various stakeholders lose confidence then they will end their relationship with the company: shareholders may sell their investments or vote to replace the Board; lenders may stop lending or raise interest rates charged; regulators may impose fines or delist the company’s stock from the exchange; employees may leave their positions.

Diff: 3

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Comprehension

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

10) The members of all four professional accounting organizations in Canada are all governed by rules of professional conduct created by their respective organizations. Describe two of the rules of professional conduct presented in the text book.

Answer:  These rules concern the confidentiality of information the accountant is privy to, maintenance of the reputation of the profession, the need to perform accountancy work with integrity and due care, competence, refusal to be associated with false or misleading information, and compliance by the accountant with professional standards. Other rules are applicable only to those members in public practice, and deal with things like the need for independence, and how to advertise, seek clients, and conduct a practice.

Diff: 3

Learning Outcome:  A-17 Describe the role of ethics and how it applies to accounting

Skill:  Knowledge

Objective:  1-2 Explain why ethics and rules of conduct are crucial in accounting and business

 

Objective 1-3

 

1) A proprietorship can have two owners, so long as they are husband and wife.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

2) In a corporation, the shareholders have liability for the actions of the corporation that extends beyond their investment.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

3) All of the following are forms of business organizations except:

  1. A) proprietorship.
  2. B) partnership.
  3. C) corporation.
  4. D) governmental unit.

Answer:  D

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

4) Which of the following forms of business organizations protect the personal assets of the owners from creditors of the business?

  1. A) proprietorship
  2. B) partnership
  3. C) corporation
  4. D) corporation and partnership

Answer:  C

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

5) Which of the following types of organizations have the entity legally separate from its owners?

  1. A) corporation
  2. B) proprietorship
  3. C) partnership
  4. D) sole proprietorship

Answer:  A

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

6) Which of the following sets of characteristics best describes those of a corporation?

  1. A) limited liability, definite life, shareholders are legally separate
  2. B) limited liability, indefinite life, shareholders are legally separate
  3. C) unlimited liability, definite life, shareholders are not legally separate
  4. D) unlimited liability, indefinite life, shareholders are not legally separate

Answer:  B

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

7) Partnerships and proprietorships:

  1. A) are separate legal entities from their owners, are for small businesses, and for financial reporting purposes do not keep the business affairs separate from those of the owners.
  2. B) are separate legal entities from their owners, are for small to large businesses, and for financial reporting purposes keep the business affairs separate from those of the owners.
  3. C) are not separate legal entities from their owners, are for small to large businesses, and for financial reporting purposes do not keep the business affairs separate from those of the owners.
  4. D) are not separate legal entities from their owners, are for small to large businesses, and for financial reporting purposes keep the business affairs separate from those of the owners.

Answer:  D

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  1-3 Describe and discuss the forms of business organizations

 

8) Which of the following is a feature of limited-liability partnerships?

  1. A) They are restricted to a limited number of partners who are liable for the business.
  2. B) Liability is limited to 150% of each partners investment in the business.
  3. C) Partner liability is unlimited but the liability of partner families is limited.
  4. D) Each partner is liable for his or her own actions.

Answer:  D

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  1-3 Describe and discuss the forms of business organizations

 

Match the following terms and definitions:

 

  1. A) account receivable
  2. B) proprietorship
  3. C) earnings estimate
  4. D) transaction
  5. E) generally accepted accounting principles
  6. F) corporation
  7. G) asset
  8. H) expense
  9. I) accounting
  10. J) liability
  11. K) limited-liability partnership
  12. L) revenue
  13. M) capital

 

9) A business owned by shareholders

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

10) Another name for the owner’s equity of a proprietorship

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

11) An entity with a single owner

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

Answers: 9) F 10) M 11) B

 

12) Describe the three forms of business ownership and include how the owners’ liability is affected by each form.

Answer:

Proprietorship A proprietorship has a single owner, called the proprietor, who often manages the business. Proprietorships tend to be small retail stores, restaurants, and service businesses, but also can be very large. From an accounting viewpoint, each proprietorship is distinct from its owner. Thus, the accounting records of the proprietorship do not include the proprietor’s personal accounting records. However, from a legal perspective, the business is the proprietor, so if the business cannot pay its debts, lenders can take the proprietor’s personal assets (cash and belongings) to pay the proprietorship’s debt.

Partnership A partnership joins two or more individuals together as co-owners. Accounting treats the partnership as a separate organization distinct from the personal affairs of each partner. But again, from a legal perspective, a partnership is the partners in a manner similar to a proprietorship. If the partnership cannot pay its debts, lenders can take each partner’s personal assets to pay the partnership’s debts.

Corporation A corporation is a business owned by shareholders. These are the people or other corporations who own shares of ownership in the business. From a legal perspective, a corporation is formed when the federal government or a provincial government approves its articles of incorporation. Unlike a proprietorship or a partnership, once a corporation is formed, it is a legal entity separate and distinct from its owners. The corporation operates as an “artificial person” that exists apart from its owners and that conducts business in its own name. The corporation has many of the rights that a person has. For example, a corporation may buy, own, and sell property. The corporation may enter into contracts and sue and be sued. Since corporations are entities separate from their owners, they will prepare financial reports separate from their owners.

Corporations differ significantly from proprietorships and partnerships in term of owners’ liability. If a proprietorship or partnership cannot pay its debts, lenders can take the owners’ personal assets to satisfy the business’s obligations. But if a corporation goes bankrupt, lenders cannot take the personal assets of the shareholders.

Diff: 3

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-3 Describe and discuss the forms of business organizations

 

Objective 1-4

 

1) An organization, for accounting purposes, stands apart from other organizations and individuals as a separate accounting entity.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

2) The reliability characteristic means that accounting information is free from error and bias, i.e., objective.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

3) The going-concern assumption states an entity will remain in operation for only the next accounting period.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

4) Publicly accountable enterprises, generally speaking, are publicly traded or for which a strong public interest exists.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

5) Financial statement users having easier access to information is a reason for the development of Accounting Standards for Private Enterprises (ASPE).

Answer:  TRUE

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

6) The Accounting Standards Board is responsible for authorizing:

  1. A) the Canadian Institute of Chartered Accountants.
  2. B) the IFRS and ASPE accounting standards used in Canada.
  3. C) the code of professional conduct for accountants.
  4. D) the Securities and Exchange Commission.

Answer:  B

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

7) GAAP stands for:

  1. A) generally accepted auditing practices.
  2. B) generally accrued auditing procedures.
  3. C) generally accepted accounting principles.
  4. D) generally accrued accounting principles.

Answer:  C

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

8) According to GAAP, to be useful, accounting information must be all of the following except:

  1. A) relevant.
  2. B) comparable.
  3. C) subjective.
  4. D) reliable.

Answer:  C

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

 

9) Which of the following statements is false?

  1. A) Reliable data are verifiable.
  2. B) Reliable data may be supported by objective evidence.
  3. C) Owner opinions are one source of objective evidence.
  4. D) An independent appraisal is usually considered reliable.

Answer:  C

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

10) The principle that states that assets acquired by the business should be recorded at their exchange price is the:

  1. A) subjectivity principle.
  2. B) cost principle of measurement.
  3. C) revenue-recognition principle.
  4. D) matching principle.

Answer:  B

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

11) What is the qualitative characteristic that states that accounting records and statements are based on the most reliable data available so they are as accurate and useful as possible?

  1. A) Reliability
  2. B) Relevance
  3. C) Comparability
  4. D) Understandability

Answer:  A

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

 

12) The relevant measure of value of the assets of a company that is going out of business is:

  1. A) their current market value.
  2. B) their book value.
  3. C) their historical cost.
  4. D) the higher of their historical cost or current market value.

Answer:  A

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Comprehension

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

13) Which of the following statements is true?

  1. A) The value of a dollar changes over time.
  2. B) German accountants record transactions in dollars.
  3. C) The stable-monetary-unit concept requires adjustments to the accounting records for the effects of inflation.
  4. D) High inflation rates indicate a dollar’s purchasing power is stable.

Answer:  A

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Evaluation

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

14) Which of the following statements is correct?

  1. A) Businesses classified as publicly accountable enterprises must use IFRS and other businesses must use ASPE.
  2. B) Businesses classified as publicly accountable enterprises may use IFRS or ASPE depending on their size.
  3. C) Businesses not classified as publicly accountable enterprises may not use IFRS.
  4. D) Businesses classified as publicly accountable enterprises must use IFRS and other businesses may use IFRS or ASPE.

Answer:  D

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

 

15) Both IFRS and ASPE:

  1. A) provide the detailed accounting treatment for every business transaction.
  2. B) are principles based.
  3. C) are specific guidelines that never require professional interpretation.
  4. D) are designed to meet the needs of publicly accountable enterprises in Canada.

Answer:  B

Diff: 2

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

Match the following terms and definitions:

 

  1. A) account receivable
  2. B) proprietorship
  3. C) earnings estimate
  4. D) transaction
  5. E) generally accepted accounting principles
  6. F) corporation
  7. G) asset
  8. H) expense
  9. I) accounting
  10. J) liability
  11. K) limited-liability partnership
  12. L) revenue
  13. M) capital

 

16) Guidelines that govern how businesses report their financial statements to the public

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

Answers: 16) E

 

Match the assumption, principle, or constraint description with the appropriate term.

 

  1. A) understandability characteristic
  2. B) stable-monetary unit assumption
  3. C) cost/benefit constraint
  4. D) materiality constraint
  5. E) relevance principle
  6. F) cost principle of measurement
  7. G) recognition principle
  8. H) going-concern assumption
  9. I) reliability characteristic
  10. J) economic-entity assumption

 

17) Benefits of the information produced by an accounting system must be greater than the costs

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

18) Amounts may be ignored if the effect on a decision maker’s decision is not significant

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

19) Transactions are recorded based on the cash amount received or paid

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

20) Transactions are expressed using units of money

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

 

21) Assumes that a business is going to continue operations indefinitely

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

22) Business must keep its accounting records separate from its owner’s accounting records

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

Answers: 17) C 18) D 19) F 20) B 21) H 22) J

 

23) List and define three generally accepted accounting concepts/principles discussed in Chapter 1.

Answer:

  • Economic-Entity Assumption — An accounting entity is an organization or a section of an organization that stands apart from other organizations and individuals as a separate economic unit. From an accounting perspective, sharp boundaries are drawn around each entity so as not to confuse its affairs with those of other entities.
  • Reliability characteristic — Accounting records and statements are based on the most reliable data available so that they will be as accurate and as useful as possible.
  • Cost principle of measurement — States that acquired assets and services should be recorded at their actual cost. The cost of an asset should be maintained in the accounting records for as long as the business holds the asset.
  • Going-Concern Assumption — Holds that the entity will remain in operation for the foreseeable future.
  • Stable-Monetary-Unit Assumption — Assumes that the dollar’s purchasing power is relatively stable and thus ignores the effect of inflation in the accounting records.

Diff: 2

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

24) Why has Canada, along with most other countries, adopted International Financial Reporting Standards?

Answer:  Many companies do business internationally and also seek to raise capital around the globe. For investors, it is difficult to assess and compare the financial statements of companies that have been prepared using different accounting standards. To address the concerns of international investors, regulatory groups and other interested parties, International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board have recently been adopted by or are in the process of being adopted by most of the industrialized countries of the world. Financial statements prepared under a common set of accounting standards (IFRS) will be more useful to decision makers around the globe.

Diff: 3

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

25) Why were Accounting Standards for Private Enterprises (ASPE) implemented in Canada?

Answer:  The IFRS standards are much more complex than many Canadian businesses require in preparing their financial statements. Most Canadian businesses are small to medium in size and are privately owned. The most significant users of their financial information are their creditors (likely their bank) and the government (for computing income taxes and sales taxes). Consequently, a second set of accounting standards, Accounting Standards for Private Enterprises, was developed for these types of businesses.

Diff: 3

Learning Outcome:  A-18 Compare and contrast IFRS and ASPE

Skill:  Knowledge

Objective:  1-4 Explain the development of accounting standards, and describe the concepts and principles

 

Objective 1-5

 

1) The accounting equation can be stated as assets + liabilities = owner’s equity.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

2) Assets are economic resources of a business expected to be of benefit in the future.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

3) Owner’s equity is often referred to as net assets and represents the residual amount of business assets that can be claimed by the owner.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

4) An owner investment would increase the assets and decrease the liabilities of the firm.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

5) The purchase of supplies on account would have an effect on the owner’s equity of the firm.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

6) One way of increasing the equity of a business is to increase a liability.

Answer:  FALSE

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

7) The recording of an owner withdrawal has the same effect on owner’s equity as the recording of an owner investment.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

8) When a revenue is recorded, the asset account cash is always increased along with owner’s equity.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

9) Increases in owner’s equity result from revenues and owner investments while decreases result from expenses and owner withdrawals.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

10) The accounting equation can be stated as:

  1. A) Assets = Liabilities – Owner’s Equity.
  2. B) Assets – Liabilities = Owner’s Equity.
  3. C) Liabilities = Assets + Owner’s Equity.
  4. D) Owner’s Equity = Assets + Liabilities.

Answer:  B

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

11) Liabilities are:

  1. A) insider claims to the business’s assets.
  2. B) outsider claims to the business’s assets.
  3. C) economic resources of a business.
  4. D) increases in owner’s equity earned by delivering goods or services.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

12) Owner’s equity is an:

  1. A) insider claim to the business’s assets.
  2. B) outsider claim to the business’s assets.
  3. C) obligation to pay cash today.
  4. D) obligation to pay cash in the future.

Answer:  A

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

13) All of the following are assets except:

  1. A) land.
  2. B) cash.
  3. C) merchandise inventory.
  4. D) owner withdrawals.

Answer:  D

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

14) All of the following describe a liability except:

  1. A) investments by owners.
  2. B) economic obligations to creditors.
  3. C) debts to creditors.
  4. D) outsider claims.

Answer:  A

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

15) A promise by a customer to pay cash in the future is a(n):

  1. A) account receivable.
  2. B) liability.
  3. C) prepaid asset.
  4. D) note payable.

Answer:  A

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

16) If owner’s equity is $135,000 and total liabilities are $90,000, then total assets would be:

  1. A) $45,000.
  2. B) $225,000.
  3. C) $90,000.
  4. D) $135,000.

Answer:  B

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

17) Owner’s equity and total assets were $32,000 and $79,000 respectively at the beginning of the period. Assets increased 50% and liabilities decreased 60% during the period. What is owner’s equity at the end of the period?

  1. A) $47,000
  2. B) $43,300
  3. C) $99,700
  4. D) $105,700

Answer:  C

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

18) Total assets and total liabilities were $31,000 and $26,000 respectively at the beginning of the period. Assets increased by 20% and liabilities increased by 10% during the period. What is the owner’s equity at the end of the period?

  1. A) $8,600
  2. B) $65,800
  3. C) $290
  4. D) $5,000

Answer:  A

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

19) A business paid $8,500 to a creditor. The effect of this transaction is to:

  1. A) increase assets and decrease liabilities.
  2. B) increase assets and decrease owner’s equity.
  3. C) decrease liabilities and owner’s equity.
  4. D) decrease assets and decrease liabilities.

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

20) If total liabilities decrease by $22,000 and owner’s equity increases by $8,000 during the period, then assets must have:

  1. A) increased $30,000.
  2. B) decreased $30,000.
  3. C) increased $14,000.
  4. D) decreased $14,000.

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

21) If total liabilities are $98,000 and owner’s equity is $150,000, total assets would be:

  1. A) $52,000.
  2. B) $248,000.
  3. C) $98,000.
  4. D) $300,000.

Answer:  B

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

22) If owner’s equity is $200,000 and total assets are $325,000, total liabilities would be:

  1. A) $200,000.
  2. B) $525,000.
  3. C) $125,000.
  4. D) $325,000.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

23) Earning revenue on account:

  1. A) decreases assets.
  2. B) increases liabilities.
  3. C) decreases owner’s equity.
  4. D) increases owner’s equity.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

24) The amount owed by an entity when it makes a purchase on account is termed a(n):

  1. A) accounts receivable.
  2. B) accounts payable.
  3. C) note receivable.
  4. D) note payable.

Answer:  B

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

25) On December 31, the assets of a business include: Cash, $3,500, Accounts Receivable, $14,000, and Supplies, $1,050. The liabilities on December 31 total $7,600. The owner’s equity on December 31 is:

  1. A) $18,550.
  2. B) $25,100.
  3. C) $10,950.
  4. D) $11,100.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

26) Purchasing office equipment on account would:

  1. A) decrease owner’s equity.
  2. B) increase owner’s equity.
  3. C) have no effect on owner’s equity.
  4. D) decrease liabilities.

Answer:  C

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

27) Purchasing a parcel of land for $100,000 by paying $10,000 in cash and signing a promissory note for the remainder would:

  1. A) decrease owner’s equity by $90,000.
  2. B) increase owner’s equity by $10,000.
  3. C) decrease liabilities by $90,000.
  4. D) increase total assets by $90,000.

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

28) Collection of an account receivable would:

  1. A) decrease liabilities.
  2. B) have no effect on owner’s equity.
  3. C) decrease owner’s equity.
  4. D) increase total assets.

Answer:  B

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

29) The payment of an account payable would:

  1. A) increase owner’s equity.
  2. B) decrease owner’s equity.
  3. C) have no effect on total assets.
  4. D) have no effect on owner’s equity.

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

30) Transactions affecting owner’s equity include:

  1. A) owner withdrawals and owner investments.
  2. B) purchases of assets for cash.
  3. C) purchases of assets on account.
  4. D) only owner investments.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

31) Borrowing money from a bank would:

  1. A) have no effect on owner’s equity.
  2. B) decrease assets.
  3. C) decrease liabilities.
  4. D) increase revenues.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

32) Earning a revenue and immediately collecting the related cash would:

  1. A) decrease total assets.
  2. B) have no effect on owner’s equity.
  3. C) have no effect on total assets.
  4. D) increase owner’s equity.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

33) Earning a revenue on account would:

  1. A) have no effect on owner’s equity.
  2. B) increase owner’s equity.
  3. C) decrease owner’s equity.
  4. D) decrease total assets.

Answer:  B

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

34) Earning a revenue on account would:

  1. A) have no effect on liabilities.
  2. B) decrease owner’s equity.
  3. C) increase accounts receivable.
  4. D) decrease total assets.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

35) The payment of rent each month for office space would:

  1. A) increase total assets.
  2. B) increase owner’s equity.
  3. C) decrease liabilities.
  4. D) increase expenses.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

36) A cash investment into the business by the owner would:

  1. A) increase liabilities and increase owner’s equity.
  2. B) increase total assets and decrease owner’s equity.
  3. C) increase owner’s equity and increase total assets.
  4. D) increase total assets and decrease liabilities.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

37) An owner investment of office furniture into the business would:

  1. A) decrease owner’s equity and decrease liabilities.
  2. B) increase total assets and increase liabilities.
  3. C) increase owner’s equity and increase total assets.
  4. D) decrease owner’s equity and increase liabilities.

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

38) Purchasing office equipment on account would:

  1. A) increase total assets and increase liabilities.
  2. B) increase total assets and decrease owner’s equity.
  3. C) have no effect on total assets or liabilities.
  4. D) increase liabilities and decrease owner’s equity.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

39) Purchasing supplies for cash would:

  1. A) decrease total assets and decrease owner’s equity.
  2. B) increase total assets and increase liabilities.
  3. C) decrease liabilities and decrease total assets.
  4. D) have no effect on total assets.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

40) Purchasing a building for $120,000 by paying cash of $30,000 and obtaining a mortgage for $90,000 would:

  1. A) increase assets and increase liabilities by $90,000.
  2. B) increase owner’s equity by $90,000.
  3. C) increase liabilities by $30,000.
  4. D) decrease assets and decrease liabilities by $30,000.

Answer:  A

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

41) Purchasing a building for $150,000 by paying cash of $30,000 and obtaining a mortgage for $120,000 would:

  1. A) increase assets and liabilities by $150,000.
  2. B) increase liabilities by $120,000.
  3. C) increase liabilities by $30,000.
  4. D) decrease assets and liabilities by $120,000.

Answer:  B

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

42) Receiving cash from a customer in payment of an account receivable would:

  1. A) decrease total assets and increase owner’s equity.
  2. B) increase owner’s equity and increase liabilities.
  3. C) increase total assets and decrease liabilities.
  4. D) have no effect on total assets or owner’s equity.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

43) A cash payment of an account payable would:

  1. A) decrease total assets and decrease owner’s equity.
  2. B) increase total assets and decrease liabilities.
  3. C) have no effect on total assets.
  4. D) decrease liabilities and decrease assets.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

44) A withdrawal of cash for personal use by an owner would:

  1. A) decrease total assets and decrease owner’s equity.
  2. B) increase owner’s equity and increase liabilities.
  3. C) decrease total assets and increase owner’s equity.
  4. D) increase total assets and decrease owner’s equity.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

45) Borrowing money and signing a note payable would:

  1. A) increase total assets and increase liabilities.
  2. B) decrease liabilities and increase total assets.
  3. C) increase liabilities and increase owner’s equity.
  4. D) increase total assets and increase owner’s equity.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

46) Receiving cash for services performed the same day would:

  1. A) increase owner’s equity and decrease total assets.
  2. B) decrease total assets and decrease liabilities.
  3. C) increase liabilities and increase total assets.
  4. D) increase owner’s equity and have no effect on liabilities.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

47) A business receives its bill for utilities for the current month that it plans to pay next month when the payment is due. This transaction causes:

  1. A) an increase in both assets and owner’s equity.
  2. B) a decrease in both owner’s equity and liabilities.
  3. C) an increase in both assets and liabilities.
  4. D) an increase in liabilities and a decrease in owner’s equity.

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

48) Performing a service on account would:

  1. A) increase liabilities and decrease total assets.
  2. B) decrease liabilities and increase total assets.
  3. C) increase owner’s equity and decrease liabilities.
  4. D) increase total assets and increase owner’s equity.

Answer:  D

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

49) Collecting cash on account causes:

  1. A) assets to increase and owner’s equity to decrease.
  2. B) assets to increase and liabilities to increase.
  3. C) assets to increase and owner’s equity to increase.
  4. D) no change in total assets.

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

50) A business acquires a parcel of land by issuing a note payable for $50,000. This transaction causes:

  1. A) total assets to increase.
  2. B) owner’s equity to increase.
  3. C) assets to increase and equity to increase.
  4. D) liabilities to decrease.

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

51) Which of the following transactions would increase an asset and increase owner’s equity?

  1. A) payment of a note payable
  2. B) receipt of cash in payment of an account receivable
  3. C) owner investment of land into the business
  4. D) payment of the telephone bill

Answer:  C

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

52) Which of the following transactions would both increase and decrease an asset?

  1. A) purchasing equipment for cash
  2. B) borrowing money from a bank
  3. C) performing a service and receiving the cash immediately
  4. D) purchasing office supplies on account

Answer:  A

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

53) Which of the following transactions would increase an asset and increase a liability?

  1. A) payment of an account payable
  2. B) borrowing money from a bank
  3. C) an owner investment of cash into the business
  4. D) purchasing office equipment for cash

Answer:  B

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

54) Which of the following transactions would increase one asset, decrease another asset, and increase a liability?

  1. A) purchasing supplies and equipment on account
  2. B) paying liabilities incurred last period
  3. C) owner investment of cash and equipment into the business
  4. D) purchasing land with a cash down payment and a note payable

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

55) Which of the following transactions would have no effect on total assets, total liabilities, or owner’s equity?

  1. A) payment of a liability
  2. B) borrowing cash by issuing a note payable
  3. C) purchasing supplies for cash
  4. D) purchasing supplies on account

Answer:  C

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

56) Determine net income for the period if beginning owner’s equity is $20,000, cash withdrawals by the owner amount to $7,000, and ending owner’s equity is $37,000.

  1. A) $10,000
  2. B) $27,000
  3. C) $24,000
  4. D) $13,000

Answer:  C

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

57) If beginning capital was $25,000, ending capital is $37,000, and the owner’s withdrawals were $23,000, the amount of net income or net loss for the period was:

  1. A) net loss of $35,000.
  2. B) net income of $35,000.
  3. C) net income of $14,000.
  4. D) net loss of $14,000.

Answer:  B

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

58) Determine cash withdrawals for the period if net income is $34,000, beginning owner’s equity is $29,000, and ending owner’s equity is $45,000.

  1. A) $74,000
  2. B) $5,000
  3. C) $11,000
  4. D) $18,000

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

59) Total assets at the end of the period were $330,000 and liabilities were 25% of owner’s equity. Determine owner’s equity at the end of the period.

  1. A) $264,000
  2. B) $132,000
  3. C) $462,000
  4. D) $825,000

Answer:  A

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

Ace Builders had the following transactions in June: earned $4,000 “on account” that will be collected in cash next month; collected $3,000 from a customer that was owed from a previous month; incurred $500 of repair expense and paid cash to the repairman; paid $1,200 cash to a supplier that it owed from the previous month; paid out $800 in cash withdrawals to the owner.

 

 

60) For Ace Builders, what is the combined effect on owner’s capital from the June transactions?

  1. A) Up $2,700
  2. B) Up $3,500
  3. C) Up $4,500
  4. D) Down $800

Answer:  A

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

61) For Ace Builders, what is the combined effect on cash from the June transactions?

  1. A) Down $800
  2. B) Down $2,500
  3. C) Up $4,500
  4. D) Up $500

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

62) For Ace Builders, how much was the net income or net loss in June?

  1. A) $6,500 net income
  2. B) $3,500 net income
  3. C) $5,300 net income
  4. D) $2,500 net loss

Answer:  B

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

ABC Delivery Service had the following transactions in June: earned $4,000 cash for services rendered; collected $2,500 from a customer “on account” for work completed the previous month; 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 withdrawals to the owner.

 

63) For ABC Delivery Service, what is the combined effect on owner’s capital from the June transactions?

  1. A) Up $2,800
  2. B) Up $5,300
  3. C) Up $1,800
  4. D) Down $1,000

Answer:  A

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

64) For ABC Delivery Service, what is the combined effect on cash from the June transactions?

  1. A) Up $4,000
  2. B) Up $5,300
  3. C) Up $1,800
  4. D) Up $2,800

Answer:  B

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

65) For ABC Delivery Service, how much was net income or net loss in June?

  1. A) $2,800 net income
  2. B) $1,800 net income
  3. C) $6,300 net loss
  4. D) $3,800 net income

Answer:  D

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

Match the following terms and definitions:

 

  1. A) account receivable
  2. B) proprietorship
  3. C) earnings estimate
  4. D) transaction
  5. E) generally accepted accounting principles
  6. F) corporation
  7. G) asset
  8. H) expense
  9. I) accounting
  10. J) liability
  11. K) limited-liability partnership
  12. L) revenue
  13. M) capital

 

66) An event that affects the financial position of a particular entity and can be reliably measured

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

67) An increase in owner’s equity that is earned by delivering goods or services to customers

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

68) An economic resource that is expected to be of benefit in the future

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

69) An economic obligation payable to an individual or an organization outside of the business

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

70) A decrease in owner’s equity that occurs in the course of delivering goods or services to customers

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

Answers: 66) D 67) L 68) G 69) J 70) H

For the items listed below, choose the appropriate code letter to indicate whether the item is an asset, liability, or owner’s equity item:

 

Asset                          A

Liability                    L

Owner’s Equity      OE

 

  1. A) L
  2. B) A
  3. C) OE

 

71) Accounts receivable

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

72) Office supplies

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

73) Truck

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

74) Don Smith, Capital

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

75) Salary payable

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

76) Note payable

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

77) Cash

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

78) Land

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

79) Accounts payable

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

80) Office furniture

Diff: 1

Learning Outcome:  A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

Answers: 71) B 72) B 73) B 74) C 75) A 76) A 77) B 78) B 79) A 80) B

 

 

81) Provide the accounting equation.

Answer:  Assets = Liabilities + Owner’s Equity

Diff: 1

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Knowledge

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

82) Determine the expenses for the current period based on the following data:

 

Net income for the current period        $55,000

Ending owner’s equity                               85,000

Beginning owner’s equity                          49,000

Owner withdrawals                                    19,000

Revenue for the current period                96,000

Answer:  Revenue – net income = expenses

$96,000 – $55,000 = $41,000

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

83) Determine the expenses for the current period based on the following data:

 

Net income for the current period         $15,000

Ending owner’s equity                                45,000

Beginning owner’s equity                          40,000

Owner withdrawals                                    10,000

Revenue for the current period                 90,000

Answer:  Revenue – net income = expenses

$90,000 – $15,000 = $75,000

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

84) Selected transactions for Sarah’s Kitchen are shown below. State the effect in dollars on the accounting equation of each transaction.

 

  1. a) Sarah Cook invests $20,000 cash into a business known as Sarah’s Kitchen.
  2. b) Sarah purchases kitchen supplies on account for $500.
  3. c) Sarah purchases a new oven for $6,500 cash.
  4. d) Sarah receives and pays the kitchen’s utilities bill amounting to $425.
  5. e) Kitchen revenue for the current period amounts to $2,500. (all revenue transactions involved cash)

 

Item Assets Liabilities Owner’s

Equity

a)
b)
c)
d)
e)
Totals

 

Answer:

Item Assets Liabilities Owner’s

Equity

a) 20,000 20,000
b) 500 500
c) 6,500

(6,500)

d) (425) (425)
e) 2,500 2,500
Totals 22,575 500 22,075

 

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

85) Selected transactions for Mac’s Garage are shown below. State the effect in dollars on the accounting equation of each transaction.

 

  1. a) George McGuire invests $4,000 cash into a business known as Mac’s Garage.
  2. b) George purchases supplies on account for $300.
  3. c) George purchases a new welder for $1,500 cash.
  4. d) George receives the garage’s telephone bill amounting to $100 to be paid next month.
  5. e) George withdraws $200 cash for personal use.
  6. f) Garage revenue for the current period amounts to $2,500. (all revenue transactions involved cash)

 

Item Assets Liabilities Owner’s

Equity

a)
b)
c)
d)
e)
f)
Totals

 

Answer:

Item Assets Liabilities Owner’s

Equity

a) 4,000 4,000
b) 300 300
c) 1,500

(1,500)

d) 100 (100)
e) (200) (200)
f) 2,500 2,500
Totals 6,600 400 6,200

 

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

86) Assets and liabilities for Stan’s Garage at the beginning and end of the current accounting period are as follows:

 

                                           January 1         December 31

Total assets                     $450,000               $690,000

Total liabilities              $325,000               $440,000

 

  1. a) Determine net income or net loss for the current year. The owner did not invest any additional assets during the year and made no withdrawals.

 

  1. b) Determine net income or net loss for the current year. The owner invested an additional $100,000 of assets into the business during the year and made no withdrawals.

Answer:

  1. a) Owner’s equity at the end of the year $250,000

Owner’s equity at the beginning of the year                 25,000

Net income                                                                        $125,000

 

  1. b) Owner’s equity at the end of the year $250,000

Owner’s equity at the beginning of the year              125,000

Increase in owner’s equity                                               125,000

Owner investment                                                           – 100,000

Net income                                                                           $25,000

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

 

87) For each of the following events, indicate the amount by which total assets increased or decreased.

 

  1. a) Purchased $400 of supplies on account.
  2. b) Earned $800 of revenue by performing a service for cash.
  3. c) Received utilities bill for $500, to be paid in the following period.
  4. d) Paid salaries to employees of $5,000.
  5. e) Purchased equipment for $1,600 on account.
  6. f) Purchased equipment for $5,000 cash.
  7. g) Collected $475 from a customer on an account receivable.
  8. h) Performed $3,000 of services on account.

Answer:

  1. a) $400 increase
  2. b) $800 increase
  3. c) $0
  4. d) $5,000 decrease
  5. e) $1,600 increase
  6. f) $0
  7. g) $0
  8. h) $3,000 increase

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

88) For each of the following events, indicate the amount by which liabilities increased or decreased.

 

  1. a) Owner invested cash of $20,000 and equipment valued at $10,500 into the business.
  2. b) Purchased $600 of supplies on account.
  3. c) Borrowed $10,000 from the bank, issuing a note payable.
  4. d) Performed a service for $1,500 and immediately collected the cash.
  5. e) Paid the employee salaries of $1,200.
  6. f) Purchased equipment for $550 cash.
  7. g) Received monthly rent bill of $1,300, to be paid in the following period.
  8. h) Performed a service on account for $2,300.

Answer:

  1. a) $0
  2. b) $600 increase
  3. c) $10,000 increase
  4. d) $0
  5. e) $0
  6. f) $0
  7. g) $1,300 increase
  8. h) $0

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

89) Following is a list of events for Manning Cleaning for the month of April. Show the effects in dollars of these events on the accounting equation by completing the table below.

 

April   1    Owner invested $10,000 cash and equipment valued at

$25,000 into the business.

3    Purchased $5,500 of equipment on account.

5    Purchased $400 of supplies for cash.

10    Bought a truck, paying $4,000 in cash and signing a note for $11,000.

14    Performed services for a customer for $1,850 cash.

15    Paid employee wages of $1,200.

18    Paid $2,000 on the equipment purchased on April 3.

24    Performed services for a customer on account, $2,500.

27    Collected $500 from the customer of April 24.

30    Owner withdrew $900 cash for personal use.

 

Date Cash A/R Supp. Equip Truck A/P N/P Capital
Apr. 1
3
5
10
14
15
18
24
27
30
Total

 

Answer:

Date Cash A/R Supp. Equip Truck A/P N/P Capital
Apr. 1 10,000 25,000 35,000
3 5,500 5,500
5 (400) 400
10 (4,000) 15,000 11,000
14 1,850 1,850
15 (1,200) (1,200)
18 (2,000) (2,000)
24 2,500 2,500
27 500 (500)
30 (900) (900)
Total 3,850 2,000 400 30,500 15,000 3,500 11,000 37,250

 

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

90) Following is a list of events for Sterling Moving for the month of January. Show the effects in dollars of these events on the accounting equation by completing the table below.

 

Jan.  1    Owner invested $30,000 cash into the business.

3    Purchased $1,500 of equipment with cash.

5    Purchased $400 of supplies on account.

12    Bought a car, paying $2,000 in cash and signing a note

for $10,000.

14    Performed services for a customer for $1,000 on account.

15    Paid employee wages of $600.

18    Paid $2,000 on the note payable for the car purchased on Jan. 12.

24    Performed services for a customer for cash, $2,500.

27    Collected $500 from the customer of Jan. 14.

30    Owner withdrew $400 cash for personal use.

 

Date Cash A/R Supp. Equip Car A/P N/P Capital
Jan. 1
3
5
12
14
15
18
24
27
30
Total

 

Answer:

Date Cash A/R Supp. Equip Car A/P N/P Capital
Jan. 1 30,000 30,000
3 (1,500) 1,500
5 400 400
12 (2,000) 12,000 10,000
14 1,000 1,000
15 (600) (600)
18 (2,000) (2,000)
24 2,500 2,500
27 500 (500)
30 (400) (400)
Total 26,500 500 400 1,500 12,000 400 8,000 32,500

 

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

91) For each of the following events, indicate the amount by which liabilities increased or decreased.

 

  1. a) Owner invested cash of $25,000 and equipment valued at $10,500 into the business.
  2. b) Purchased $600 of supplies on account.
  3. c) Borrowed $10,000 from the bank, issuing a note payable.
  4. d) Performed a service for $1,500 and immediately collected the cash.
  5. e) Paid the employee salaries of $1,200.
  6. f) Purchased equipment for $550 cash.
  7. g) Received monthly rent bill of $1,300, to be paid in the following period.
  8. h) Performed a service on account for $2,300.

Answer:

  1. a) $0
  2. b) $600 increase
  3. c) $10,000 increase
  4. d) $0
  5. e) $0
  6. f) $0
  7. g) $1,300 increase
  8. h) $0

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

92) For each of the following events, indicate the amount by which assets increased or decreased.

 

  1. a) Owner invested cash of $25,000 and equipment valued at $10,500 into the business.
  2. b) Purchased $600 of supplies on account.
  3. c) Borrowed $10,000 from the bank, issuing a note payable.
  4. d) Performed a service for $1,500 and immediately collected the cash.
  5. e) Paid the employee salaries of $1,200.
  6. f) Purchased equipment for $550 cash.
  7. g) Received monthly rent bill of $1,300, to be paid in the following month.
  8. h) Performed a service on account for $2,300.

Answer:

  1. a) $35,500 increase
  2. b) $600 increase
  3. c) $10,000 increase
  4. d) $1,500 increase
  5. e) $1,200 decrease
  6. f) $0
  7. g) $0
  8. h) $2,300 increase

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

93) For each of the following events, indicate the amount by which owner’s equity increased or decreased.

 

  1. a) Owner invested cash of $25,000 and equipment valued at $10,500 into the business.
  2. b) Purchased $600 of supplies on account.
  3. c) Borrowed $10,000 from the bank, issuing a note payable.
  4. d) Performed a service for $1,500 and immediately collected the cash.
  5. e) Paid the employee salaries of $1,200.
  6. f) Purchased equipment for $550 cash.
  7. g) Received monthly rent bill of $1,300, to be paid in the following month.
  8. h) Performed a service on account for $2,300.

Answer:

  1. a) $35,500 increase
  2. b) $0
  3. c) $0
  4. d) $1,500 increase
  5. e) $1,200 decrease
  6. f) $0
  7. g) $1,300 decrease
  8. h) $2,300 increase

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

94) For the following independent situations, determine the amount of net income or net loss.

 

  1. a) Revenues for the year were $200,000 and expenses were $103,000. The owner withdrew $40,000 for personal use and made an additional investment of $30,000 during the year.
  2. b) Revenues for the year were $249,000 and expenses were $136,000. The owner withdrew $55,000 for personal use and made no additional investments.
  3. c) Revenues for the year were $154,000 and expenses were $189,000. The owner made an additional investment of $90,000 and withdrew $67,000 for personal use.
  4. d) Revenues for the year were $150,000 and expenses were $101,000. The owner made no withdrawals during the year but invested $20,000 cash during the year into the business.

Answer:

  1. a) $97,000 net income ($200,000 – $103,000)
  2. b) $113,000 net income ($249,000 – $136,000)
  3. c) $35,000 net loss ($154,000 – $189,000)
  4. d) $49,000 net income ($150,000 – $101,000)

Diff: 2

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

95) Describe how the accounting equation can be used to analyse business transactions.

Answer:  A transaction is an event that affects the financial position of an entity. and can be reliably recorded. Transactions affect a business’s assets, liabilities and owner’s equity. Therefore, transactions are often analysed in terms of their effect on the accounting equation.

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Comprehension

Objective:  1-5 Describe and use the accounting equation to analyze business transactions

 

Objective 1-6

 

1) The balance sheet lists all the entity’s assets, liabilities, and owner’s equity as of a specific date.

Answer:  TRUE

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

2) An income statement is dated for a period of time such as “For the Year Ended December 31, 2014.”

Answer:  TRUE

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

3) The income statement must be prepared before the statement of owner’s equity since net income or net loss is added to or subtracted from the beginning balance in the owner’s capital account.

Answer:  TRUE

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-6 Prepare and evaluate the financial statements

 

4) The income statement presents a summary of an entity’s revenues and liabilities over a period of time.

Answer:  FALSE

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

5) The income statement shows how much the cash account either increased or decreased during the period.

Answer:  FALSE

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

6) The financial statement that presents a summary of the assets, liabilities, and owner’s equity as of a specific date is the:

  1. A) statement of assets.
  2. B) balance sheet.
  3. C) statement of owner’s equity.
  4. D) cash flow statement.

Answer:  B

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

7) The statement that presents a summary of the revenues and expenses of an entity is called the:

  1. A) statement of owner’s equity.
  2. B) statement of financial position.
  3. C) income statement.
  4. D) balance sheet.

Answer:  C

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

8) The income statement presents a summary of the:

  1. A) cash inflows and outflows of an entity.
  2. B) revenues and expenses of an entity.
  3. C) assets and liabilities of an entity.
  4. D) changes that occurred in the owner’s equity of an entity.

Answer:  B

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

9) Which of the following financial statements reports owner’s equity as of the end of the accounting period?

  1. A) income statement and the balance sheet
  2. B) cash flow statement and the balance sheet
  3. C) statement of owner’s equity and the balance sheet
  4. D) cash flow statement and the income statement

Answer:  C

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

 

10) Which of the following statements should be prepared before the balance sheet is prepared?

  1. A) statement of owner’s equity
  2. B) statement of financial position
  3. C) income statement
  4. D) statement of owner’s equity and income statement

Answer:  D

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-6 Prepare and evaluate the financial statements

 

11) Assets are reported on the:

  1. A) income statement.
  2. B) income statement and balance sheet.
  3. C) statement of owner’s equity.
  4. D) balance sheet.

Answer:  D

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

12) Liabilities are reported on the:

  1. A) statement of owner’s equity.
  2. B) income statement.
  3. C) statement of owner’s equity and the income statement.
  4. D) balance sheet.

Answer:  D

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

13) Cash investments by the owner are reported on the:

  1. A) balance sheet.
  2. B) income statement.
  3. C) cash flow statement.
  4. D) income statement and the balance sheet.

Answer:  C

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 


Table 1-1

 

Following is a random list showing the account balances of various assets, liabilities, revenues, and expenses for Spiffy’s Garage at December 31, 2014, the end of its first year of operations.

 

Accounts receivable $15,000
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 12,800
Gasoline expense 800
Salary payable 2,200

 

The owner, Spiffy Sloan, invested $22,600 at the beginning of the year and withdrew $5,000 during the year for personal use.

 

14) Refer to Table 1-1. The net income or loss for the year was:

  1. A) $12,800.
  2. B) $5,100.
  3. C) $5,900.
  4. D) $7,700.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

15) Refer to Table 1-1. Total assets at December 31, 2014, were:

  1. A) $31,600.
  2. B) $32,700.
  3. C) $36,200.
  4. D) $36,600.

Answer:  D

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

 

16) Refer to Table 1-1. Owner’s equity at December 31, 2014, was:

  1. A) $13,900.
  2. B) $22,700.
  3. C) $22,600.
  4. D) $18,700.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

17) Refer to Table 1-1. The statement of owner’s equity would show an ending capital balance of:

  1. A) $36,600.
  2. B) $3,900.
  3. C) $22,700.
  4. D) $22,600.

Answer:  C

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

18) Refer to Table 1-1. Total liabilities at December 31, 2014, were:

  1. A) $12,800.
  2. B) $13,900.
  3. C) $20,600.
  4. D) $22,600.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

19) Refer to Table 1-1. Not including the investment, the net change in owner’s equity for the year ended December 31, 2014, was:

  1. A) an increase of $5,100.
  2. B) a decrease of $7,800.
  3. C) an increase of $22,700.
  4. D) an increase of $100.

Answer:  D

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

 

20) Refer to Table 1-1. Total expenses for the year were:

  1. A) $5,300.
  2. B) $7,700.
  3. C) $7,800.
  4. D) $6,900.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

Table 1-2

 

Following is a list showing the account balances of various assets, liabilities, revenues, and expenses for Tim’s Landscaping at December 31, 2014, the end of its first year of operations.

 

Accounts receivable $30,000
Accounts payable 7,000
Salary expense 9,000
Repairs expense 1,600
Truck 17,000
Equipment 12,600
Notes payable 16,400
Cash 13,600
Supplies expense 3,200
Service revenue 25,600
Gasoline expense 1,600
Salary payable 4,400

 

The owner, Tim Brown, invested $45,200 during the year and withdrew $10,000 during the year for personal use.

 

21) Refer to Table 1-2. The net income or loss for the year was:

  1. A) $10,200.
  2. B) $25,600.
  3. C) $11,800.
  4. D) $15,400.

Answer:  A

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

 

22) Refer to Table 1-2. The statement of owner’s equity would show an ending balance in the Capital account at December 31, 2014, of:

  1. A) $73,200.
  2. B) $7,800.
  3. C) $45,400.
  4. D) $45,200.

Answer:  C

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

23) Refer to Table 1-2. Not including the investment, the net change in owner’s equity for the year ended December 31, 2014, was:

  1. A) an increase of $200.
  2. B) an increase of $45,400.
  3. C) an increase of $10,200.
  4. D) a decrease of $15,600.

Answer:  A

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

24) Refer to Table 1-2. Total liabilities at December 31, 2014, were:

  1. A) $25,600.
  2. B) $27,800.
  3. C) $41,200.
  4. D) $45,200.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

25) Refer to Table 1-2. Total assets at December 31, 2014, were:

  1. A) $65,400.
  2. B) $72,400.
  3. C) $73,200.
  4. D) $63,200.

Answer:  C

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

 

26) Refer to Table 1-2. Owner’s equity at December 31, 2014, was:

  1. A) $26,800.
  2. B) $45,400.
  3. C) $45,200.
  4. D) $37,400.

Answer:  B

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

27) Which of the following financial statements reports an increase or decrease in net cash during the time period covered?

  1. A) Income statement
  2. B) Trial balance
  3. C) Statement of owner’s equity
  4. D) Cash flow statement

Answer:  D

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

28) Which of the following amounts appears on both the income statement and statement of owner’s equity?

  1. A) Ending capital
  2. B) Net income
  3. C) Total revenues
  4. D) Drawings

Answer:  B

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

29) On the financial statements, which line item connects the balance sheet to the statement of cash flows?

  1. A) Owner’s equity (ending balance)
  2. B) Net income
  3. C) Total assets
  4. D) Cash (ending balance)

Answer:  D

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-6 Prepare and evaluate the financial statements

 

 

30) The financial statements should be prepared in what order?

  1. A) Income statement, statement of owner’s equity, balance sheet, statement of cash flows
  2. B) Statement of owner’s equity, balance sheet, income statement, statement of cash flows
  3. C) Balance sheet, statement of owner’s equity, income statement, statement of cash flows
  4. D) Balance sheet, income statement, statement of owner’s equity, statement of cash flows

Answer:  A

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

31) Each financial statement includes a heading giving three pieces of data. Which of the following items is not included in these headings?

  1. A) Name of the financial statement
  2. B) Date or time period covered
  3. C) Name of the preparer of the statement
  4. D) Name of the business

Answer:  C

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

32) Which of the following financial statements uses net income or net loss taken directly from the income statement?

  1. A) Statement of owner’s equity
  2. B) Statement of cash flow
  3. C) Balance sheet
  4. D) Statement of expenditures

Answer:  A

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

33) Which of the following financial statements lists the entity’s assets, liabilities, and owner’s equity as of a specific date?

  1. A) Balance sheet
  2. B) Statement of owner’s equity
  3. C) Income statement
  4. D) Statement of cash flows

Answer:  A

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

34) State whether the following accounts are assets, liabilities or owner’s equity.

 

  1. a) ________ Equipment
  2. b) ________ Capital
  3. c) ________ Supplies
  4. d) ________ Accounts payable
  5. e) ________ Accounts receivable
  6. f) ________ Wages payable
  7. g) ________ Cash

Answer:

  1. a) asset
  2. b) owner’s equity
  3. c) asset
  4. d) liability
  5. e) asset
  6. f) liability
  7. g) asset

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

35) State whether the following accounts would appear on an income statement, balance sheet, or statement of owner’s equity.

 

  1. a) ________ Equipment
  2. b) ________ Owner’s withdrawals
  3. c) ________ Utilities expense
  4. d) ________ Accounts payable
  5. e) ________ Accounts receivable
  6. f) ________ Service revenue
  7. g) ________ Cash
  8. h) ________ Beginning owner’s equity

Answer:

  1. a) balance sheet
  2. b) statement of owner’s equity
  3. c) income statement
  4. d) balance sheet
  5. e) balance sheet
  6. f) income statement
  7. g) balance sheet
  8. h) statement of owner’s equity

Diff: 1

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Knowledge

Objective:  1-6 Prepare and evaluate the financial statements

 

36) On January 1, 2014, Brad Thomas invested $30,000 in Thomas Repairs. During 2014, Brad withdrew $17,000 for personal use. Thomas Repairs reports the following balances on December 31, 2014:

 

Accounts receivable                                    $ 9,000

Accounts payable                                           4,200

Service revenue                                             25,550

Land                                                                   4,000

Rent expense                                                    4,500

Note payable                                                    3,800

Supplies                                                                900

Brad Thomas, Capital, Jan. 1, 2014                   0

Salary expense                                                 9,650

Cash                                                                 18,500

Brad Thomas, Withdrawals                     17,000

 

Prepare an income statement for the year ended December 31, 2014.

Answer:

Thomas Repairs

Income Statement

For the Year Ended December 31, 2014

 

Revenue:

Service revenue                                               $25,550

Expenses:

Salary expense                  $9,650

Rent expense                        4,500

Total expenses                                                   14,150

Net income                                                           $11,400

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

37) On January 1, 2014, Brad Thomas invested $30,000 in Thomas Repairs. During 2014, Brad withdrew $17,000 for personal use. Thomas Repairs reports the following balances on December 31, 2014:

 

Accounts receivable                                   $ 9,000

Accounts payable                                           4,200

Service revenue                                             25,550

Land                                                                   4,000

Rent expense                                                    4,500

Note payable                                                    3,800

Supplies                                                                900

Brad Thomas, Capital, Jan. 1, 2014                   0

Salary expense                                                9,650

Cash                                                                 18,500

Brad Thomas, Withdrawals                     17,000

 

Prepare a balance sheet dated December 31, 2014, for Thomas Repairs.

Answer:

Thomas Repairs

Balance Sheet

December 31, 2014

                      Assets                                                   Liabilities

Cash                               $18,500                Accounts payable                $ 4,200

Accounts receivable       9,000                Note payable                            3,800

Supplies                                900                Total liabilities                      $ 8,000

Land                                   4,000

                                                                                Owner’s equity

Brad Thomas, Capital         24,400

Total liabilities and

Total assets                  $32,400                 owner’s equity                    $32,400

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

38) Classify each event below as an operating activity, investing activity, or financing activity.

 

  1. a) ________ Owner invested cash into the entity.
  2. b) ________ Purchased equipment for cash.
  3. c) ________ Paid salaries of employees.
  4. d) ________ Collected cash on account and from cash customers.
  5. e) ________ Paid utilities for the current period.
  6. f) ________ Borrowed money from the bank.
  7. g) ________ Pay for interest on bank loan.
  8. h) ________ Owner withdraws cash from the business for personal use.

Answer:

  1. a) financing activity
  2. b) investing activity
  3. c) operating activity
  4. d) operating activity
  5. e) operating activity
  6. f) financing activity
  7. g) operating activity
  8. h) financing activity

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-6 Prepare and evaluate the financial statements


Table 1-2

 

Following is a list showing the account balances of various assets, liabilities, revenues and expenses for Tim’s Landscaping at December 31, 2014, the end of its first year of operations.

 

Accounts receivable $30,000
Accounts payable 7,000
Salary expense 9,000
Repairs expense 1,600
Truck 17,000
Equipment 12,600
Notes payable 16,400
Cash 13,600
Supplies expense 3,200
Service revenue 25,600
Gasoline expense 1,600
Salary payable 4,400

 

The owner, Tim Brown, invested $45,200 during the year and withdrew $10,000 during the year for personal use.

 

39) Refer to Table 1-2. Prepare an income statement for Tim’s Landscaping for the year ending December 31, 2014, the end of its first year of operations.

Answer:

Tim’s Landscaping

Income Statement

For the Year Ended December 31, 2014

Revenue:

Service revenue                                                    $25,600

Expenses:

Salary expense                          $9,000

Repairs expense                          1,600

Supplies expense                        3,200

Gasoline expense                        1,600

Total expenses                                                       15,400

Net income                                                               $10,200

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

40) Refer to Table 1-2. Prepare a statement of owner’s equity for Tim’s Landscaping for the year ending December 31, 2014, the end of its first year of operations.

Answer:

Tim’s Landscaping

Statement of Owner’s Equity

For the Year Ended December 31, 2014

 

Tim Brown, capital, Jan. 1, 2014                                                           $           0

Add: Owner investments during 2014                                                  45,200

Add: Net income for the year                                                                    10,200

55,400

Less: Withdrawals by owner                                                                    10,000

Tim Brown capital, Dec. 31, 2010                                                         $45,400

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

41) Refer to Table 1-2. Prepare a balance sheet dated December 31, 2014, for Tim’s Landscaping

Answer:

Tim’s Landscaping

Balance Sheet

December 31, 2014

                      Assets                                                   Liabilities

Cash                               $13,600                Accounts payable                $ 7,000

Accounts receivable    30,000                Salary payable                         4,400

Truck                                17,000                Note payable                          16,400

Equipment                     12,600                Total liabilities                   $ 27,800

                                                                                 Owner’s equity

Tim Brown, capital              45,400

Total liabilities and

Total assets                  $73,200                owner’s equity                    $73,200

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

42) Alice Li started Li Design Consultants on December 1, 2013, and invested $5,000 into the business. On December 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 December 15, she purchased $900 of office supplies for cash. On December 20, she received $1,000 in cash payment from her first client and deposited it into the business account. On December 22, she incurred $2,000 for legal expense and paid cash. On December 31, she made a payment of $300 to one of the websites that she owed for advertising provided earlier in the month. No withdrawals were taken in December. Prepare an income statement for the month of December, a statement of owner’s equity for the month of December, and a balance sheet at December 31, 2013.

Answer:

Li Design Consultants

Income Statement

For the Month Ended December 31, 2013

Revenue:

Service revenue                                         $4,500

Expenses:

Advertising expense       $1,600

Legal expenses                    2,000

Total expenses                                         3,600

Net income                                                                                        $900

 

Li Design Consultants

Statement of Owner’s Equity

For the Month Ended December 31, 2013

 

Alice Li, capital, December 1, 2013                                                 $0

Add: Owner investments during December                          5,000

Add: Net income for December                                                     900

5,900

Less: Withdrawals by owner                                                              0

Alice Li, capital, December 31, 2013                                       $5,900

 

Li Design Consultants

Balance Sheet

December 31, 2013

                      Assets                                                   Liabilities

Cash                                 $2,800                Accounts payable                $ 1,300

Accounts receivable       3,500                Total liabilities                         1,300

Office supplies                    900

                                                                                 Owner’s equity

  1. Li, Capital 5,900

Total liabilities and

Total assets                     $7,200                owner’s equity                       $7,200

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

43) On January 1, 2013, William Kelly started Kelly’s Computer Service by investing $10,000. On January 3, the business borrowed $10,000 from a creditor and executed a Note payable with the principal and interest to be due in one year. On January 5, the business purchased $12,000 of equipment for cash. On January 8, Kelly’s rendered service to his first corporate client and earned $2,500 in cash. On January 12, Kelly’s incurred repair expense of $1,200 and promised to pay the repair contractor the following month. On January 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 took a withdrawal of $1,000. Prepare an income statement for the month of January, a statement of owner’s equity for the month of January, and a balance sheet at January 31, 2013.

Answer:

Kelly’s Computer Service

Income Statement

For the Month Ended January 31, 2013

Revenue:

Service revenue                                         $8,500

Expenses:

Repairs expenses                                        1,200

Net income                                                                                     $7,300

 

Kelly’s Computer Service

Statement of Owner’s Equity

For the Month Ended January 31, 2013

 

William Kelly, capital, January 1, 2013                                                 $0

Add: Owner investments during January                                    10,000

Add: Net income for January                                                              7,300

17,300

Less: Withdrawals by owner                                                              1,000

William Kelly, capital, January 31, 2013                                    $16,300

 

Kelly’s Computer Service

Balance Sheet

January 31, 2013

 

                     Assets                                                   Liabilities

Cash                                $ 9,500                Accounts payable                $ 1,200

Accounts receivable       6,000                Notes payable                        10,000

Equipment                      12,000                Total liabilities                      11,200

                                                                                 Owner’s equity

  1. Kelly, Capital 16,300

Total liabilities and

Total assets                  $27,500                owner’s equity                     $27,500

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

44) Scott’s Camera Shop started 2014 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 made an additional $15,000 capital contributions during the year, and made withdrawals of $60,000. Prepare a statement of owner’s equity for 2014.

Answer:

Scott’s Camera Shop

Statement of Owner’s Equity

For the Year Ended December 31, 2014

 

Scott capital, January 1                                                    $ 40,000

Add: Investment by owner                                                15,000

Net income                                                                             50,000

105,000

Deduct: Withdrawals                                                       (60,000)

Scott capital, December 31                                             $ 45,000

Diff: 2

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

45) Your best friend has asked you to review the financial status of her company before she goes to the bank to request a loan. Answer the following questions:

 

1) What will you need to review in order to make a sound decision?

2) What will the bank be looking for?

Answer:

1) A decision maker would like to have access to all the financial statements of a company for several years, including the income statement, balance sheet, statement of owner’s equity, and cash flow statement.

 

2) Specifically, the bank will be looking at the company’s ability to repay the loan. It will look at the amount of income generated by the company for the past several years as well as whether or not it has been increasing or decreasing. The amount of debt already owed by the company will also be an issue. The bank would like to see that owner’s equity exceeds total liabilities at the time of the loan request. Also, the owner’s withdrawals should not exceed the net income in any given period.

Diff: 3

Learning Outcome:  A-02 Describe the components of and prepare the four basic financial statements

Skill:  Comprehension

Objective:  1-6 Prepare and evaluate the financial statements


Table 2-1

 

The following is a list of the accounts and their balances appearing in the ledger of Henry Garage Repairs as of December 31, 2014, the company’s year end. The accounts are in alphabetical order and have normal balances.

 

Accounts payable                                $450

Accounts receivable                           1,250

Cash                                                           400

Equipment                                          12,600

Gasoline expense                                   600

Ian Henry, Capital                             6,600

Ian Henry, Withdrawals                     500

Notes payable                                    11,000

Rent expense                                       1,200

Repairs expense                                     650

Salary expense                                        700

Salary payable                                        100

Service revenue                                    8,250

Supplies                                                    200

Supplies expense                                   300

Truck                                                      8,000

 

46) Refer to Table 2-1. Prepare a Statement of Owner’s Equity for Henry Garage Repairs for the year ended December 31, 2014. Assume the capital amount did not change since January 1, 2014.

Answer:

Henry Garage Repairs

Statement of Owner’s Equity

For the Year Ended December 31, 2014

 

Ian Henry, Capital January 1, 2014                             $6,600

Add:  Net income for the year                                         4,800

11,400

Less:  Withdrawal by owner                                              500

Ian Henry, Capital December 31, 2014                  $10,900

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-6 Prepare and evaluate the financial statements

 

47) Refer to Table 2-1. Prepare an Income statement for Henry Garage Repairs for the year ended December 31, 2014.

Answer:

Henry Garage Repairs

Income Statement

For the Year Ended December 31, 2014

 

Service revenue                                                               $8,250

Gasoline expense                    $ 600

Rent expense                           1,200

Repairs expense                         650

Salary expense                            700

Supplies expense                       300                                  

Total expenses                                                                   3,450

Net income                                                                     $ 4,800

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-6 Prepare and evaluate the financial statements


Table 2-2

 

The following is a list of the accounts and their balances appearing in the ledger of Martin Mann Garage as of December 31, 2014, the company’s year end. The accounts are in alphabetical order and have normal balances.

 

Accounts payable                                        1,350

Accounts receivable                                     3,750

Cash                                                                 1,200

Equipment                                                   37,800

Gasoline expense                                         1,800

Martin Mann, Capital                              19,800

Martin Mann, Withdrawals                     1,500

Notes payable                                             33,000

Rent expense                                                 3,600

Repairs expense                                            1,950

Salary expense                                              2,100

Salary payable                                                  300

Service revenue                                           24,750

Supplies                                                              600

Supplies expense                                             900

Truck                                                              24,000

 

48) Refer to Table 2-2.  Prepare an Income statement for Martin Mann Garage for the year ended December 31, 2014.

Answer:

Martin Mann Garage

Income Statement

For the Year Ended December 31, 2014

 

Service revenue                                                           $24,750

Gasoline expense                 $1,800

Rent expense                           3,600

Repairs expense                      1,950

Salary expense                         2,100

Supplies expense                      900                                 

Total expenses                                                              10,350

Net income                                                                   $14,400

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-6 Prepare and evaluate the financial statements

 

49) Refer to Table 2-2. Prepare a Statement of Owner’s Equity for Martin Mann Garage for the year ended December 31, 2014. Assume the capital amount did not change since January 1, 2014.

Answer:

Martin Mann Garage

Statement of Owner’s Equity

for the year ended December 31, 2014

 

Martin Mann, Capital January 1, 2014                    $19,800

Add:  Net income for the year                                      14,400

34,200

Less:  Withdrawal by owner                                           1,500

Martin Mann, Capital December 31, 2014           $ 32,700

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Analysis

Objective:  1-6 Prepare and evaluate the financial statements

 

50) Prepare a balance sheet dated December 31, 2013, for Canfield Enterprises based on the following transactions completed during 2013.

 

  1. a) Marilyn Canfield invested $16,000 cash and equipment valued at $6,000 into the business.
  2. b) Purchased $500 of supplies on account.
  3. c) Purchased $2,000 of equipment for cash.
  4. d) Purchased a building by issuing a $10,000 note.

Answer:

Canfield Enterprises

Balance Sheet

December 31, 2013

 

Assets                                                       Liabilities

Cash                                       $14,000             Accounts payable                  $     500

Supplies                                        500             Note payable                             10,000

Equipment                                8,000             Total liabilities                          10,500

Building                                  10,000

Owner’s equity

Marilyn Canfield, Capital      22,000

 

Total liabilities and

Total assets                          $32,500               owners’ equity                      $32,500

 

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

 

51) Given the following transactions in the month of July for Kootenay Outdoor Adventures, prepare journal entries; and, a trial balance and balance sheet as of July 31, 2013.

 

  1. a) Owner, Bill Thompson invested $35,000 cash and equipment with a value of $67,500 into the business.
  2. b) Purchased supplies on account, $250.
  3. c) Rented office space paying one month’s rent, $950.
  4. d) Performed guide service on account, $4,500.
  5. e) Purchased a truck by paying $4,000 cash and signing a promissory note for the balance of $29,800.
  6. f) Performed guiding service and immediately collected $2,900 cash.
  7. g) Owner, Bill Thompson withdrew $900 for personal use.

Answer:

Cash  35,000

Equipment                                                                      67,500

Thompson, capital                                                                102,500

Owner invested cash and equipment in the business.

 

Supplies                                                                               250

Accounts payable                                                                         250

Purchased supplies on account.

 

Rent expense                                                                       950                       

            Cash                                                                                                   950

Paid cash for one month’s rent.

 

Accounts receivable                                                       4,500

Service revenue                                                                           4,500

Performed service on account.

 

Truck                                                                                33,800

Cash                                                                                               4,000

Notes payable                                                                           29,800

Purchased a truck with cash and a promissory note.

 

Cash                                                                                    2,900

Service revenue                                                                           2,900

Performed service for cash.

 

Withdrawals                                                                       900

Cash                                                                                                   900

Owner withdrew cash for personal use.

 

 

Kootenay Outdoor Adventures

Trial Balance

July 31, 2013

 

Debit                   Credit

Cash                                                       $32,050

Accounts receivable                               4,500

Supplies                                                        250

Equipment                                              67,500

Truck                                                        33,800

Accounts payable                                                                    $250

Note payable                                                                          29,800

Bill Thompson, Capital                                                    102,500

Bill Thompson, Withdrawals                 900

Service revenue                                                                        7,400

Rent expense                                                950               _______

Total                                                     $139,950              $139,950

 

Kootenay Outdoor Adventures

Balance Sheet

July 31, 2013

 

                         Assets:                                           Liabilities and Owner’s Equity:

Cash                                       $32,050             Accounts payable                      $250

Accounts receivable               4,500             Notes payable                          29,800

Supplies                                        250                  Total liabilities                 $30,050

Equipment                              67,500

Truck                                        33,800             Bill Thompson, capital       108,050

$138,100                                                             $138,100

Diff: 3

Learning Outcome:  A-03 Analyze and record transactions and their effects on the financial statements

Skill:  Application

Objective:  1-6 Prepare and evaluate the financial statements

Test Bank 9th-Edition Accounting Volume 1 Canadian by Charles T. Horngren

Test Bank 9th-Edition Accounting Volume 1 Canadian by Charles T. Horngren