Test Bank canadian 5th_Ed Financial Accounting by Robert Lilly
Sample Chapter No 1
1. Accounting is a system that collects and processes financial information about an organization and
reports that information to decision makers.
2. The purpose of the statement of financial position is to report the financial position (amount of assets,
liabilities, and shareholders’ equity) of an accounting entity at a particular point in time.
3. In accounting and reporting for a business entity, the accounting and reporting for the business must be
kept separate from other economic affairs of its owners.
4. The debts of a corporation can be generally viewed as debts of its owners.
5. A balance sheet should be dated for a period (such as “For the year ended December 31, 20A”), whereas
an income statement should be dated at a point in time (such as “December 31, 20A”).
6. The accounting period in which service revenue is recognized (i.e., revenue for services rendered) is
generally the period in which the cash is collected.
7. If expenses are understated on the income statement, shareholders’ equity is overstated on the balance
8. Total assets are $60,000, total liabilities, $30,000, and share capital is $20,000; therefore, retained
earnings is $5,000.
9. Assets are measured and reported on the balance sheet at their current market value at the date of the
10. The payment of a cash dividend to shareholders reduces shareholders’ equity.
11. The report of management indicates management’s primary responsibility for financial statement
information and the steps to ensure the accuracy of the company’s records.
12. The organization for which financial data are to be collected and reported is called an accounting
13. The accounting model for the balance sheet is: Assets + Liabilities – Shareholders’ Equity.
14. One feature of the cash flow statement is to show the change in cash for the period.
15. Profit (also called net income or net earnings) is the excess of total revenues over total expenses incurred
to generate revenue during a specific period.
16. The financial statements prepared by a corporation include a balance sheet, income statement, cash flow
statement, and statement of money.
17. A banker who is considering making a loan to a corporation would be one of the corporation’s internal
18. Assets are economic resources controlled by the entity as a result of past business events and from which
future economic benefits can be obtained.
19. The financial statement that shows an entity’s economic resources and its liabilities is the statement of
20. The statement of comprehensive income reports the change in shareholders’ equity during a period from
business activities other than investments by shareholders or distributions to shareholders.
21. A note payable is a borrowing instrument that generally does not involve the payment of interest.
22. If a corporation does not pay its obligations when they are due, its creditors may be able to force the sale
of the business’s assets to pay their claims.
23. When a company ships products to a customer and bills the customer, the company should recognize
revenue as earned.
24. The amount of cash paid by a business for office rent would be reported on the cash flow statement as a
25. Repayment of a bank loan is classified on the cash flow statement as an operating activity.
26. Liabilities are the entity’s legal obligations that result from past business events.
27. International Financial Accounting Standards are produced by the International Accounting Standards
Board (IASB), which is an independent standard-setting board consisting of 15 members from nine
28. Accounting is based on man-made rules that sometimes undergo change.
29. Primary responsibility for the information in the financial statements lies with management.
30. The AcSB is currently the body responsible for establishing accounting standards.
31. The Accounting Standards Board (AcSB) is an agency of the federal government that establishes
generally accepted accounting principles for businesses.
32. Generally accepted accounting principles (GAAP) are essentially identical in most developed
33. Independent CAs in the public practice of accounting are viewed as employees of their clients.
34. An audit involves the examination of the financial reports (prepared by the management of the company)
to ensure that they represent what they claim and conform with IFRS.
35. Many opportunities exist for managers to intentionally prepare misleading financial reports.
36. Failure to comply with professional rules of conduct can result in serious penalties for professional
accountants, but not the rescinding of the professional designation of an offending member.
37. In terms of economic importance, the sole proprietorship is the dominant form of organization in Canada
because of its ease of formation.
38. One of the disadvantages of a corporation when compared to a partnership is the limited liability of the
39. A partnership is an incorporated entity that has more than one owner.
40. Accountants generally must meet educational requirements, pass a rigorous exam, and meet experience
requirements before becoming licensed CAs, CGAs, or CMAs.
41. What is the primary purpose of the balance sheet?
A. To measure the net income of a business up to a particular point in time.
B. To report the difference between cash inflows and cash outflows for the period.
C. To report the financial position of the reporting entity at a particular point in time.
D. To report assets at their current market value at a particular point in time.
42. On January 1, 20A, two individuals invested $150,000 each to form Hornbeck Corporation. Hornbeck
had total revenues of $15,000 during 20A and $40,000 during 20B. Total expenses for the same periods
were $8,000 and $22,000, respectively. Cash dividends paid out to shareholders totalled $6,000 in 20A
and $12,000 in 20B. What was the ending balance in Hornbeck’s retained earnings account at the end of
20A and 20B?
A. $1,000 and $6,000 respectively.
B. $1,000 and $7,000, respectively.
C. $7,000 and $19,000 respectively.
D. $301,000 and $306,000 respectively.
43. The BAT Corporation had 20B revenues of $110,000, expenses of $85,000, and an income tax rate of 20
percent. What would net income after taxes be?
44. Brown Corporation reported the following amounts at the end of the first year of operations, December
31, 20A: share capital $20,000; sales revenue $95,000; total assets $85,000, no dividends, and total
liabilities $35,000. What would shareholders’ equity and total expenses be?
A. Shareholders’ equity, $50,000 and expenses $65,000.
B. Shareholders’ equity, $60,000 and expenses $75,000.
C. Shareholders’ equity, $80,000 and expenses $40,000.
D. Shareholders’ equity, $80,000 and expenses $85,000.
45. Which financial statement reports the financial position of a business?
A. Income statement.
B. Balance sheet.
C. Cash flow statement.
D. Footnotes to the financial statements.
46. If total liabilities increased by $25,000 and shareholders’ equity increased by $5,000 during a period of
time, then total assets must change by what amount and direction during that same period?
A. $20,000 decrease
B. $20,000 increase
C. $25,000 increase
D. $30,000 increase
47. Which of the following reports the cash inflows, cash outflows, and change in cash for a period?
A. Income statement.
B. Cash flow statement.
C. Balance sheet.
D. Auditor’s report.
48. What is the primary means that a corporation uses to communicate financial information to its
shareholders and creditors?
A. News stories printed in the business press.
B. Financial statements.
C. Letters from management sent to the local newspaper editor.
D. Information circulated by fraud examiners.
49. External decision makers want answers to all of the following questions except
A. Will the company be able to pay its debts as they come due?
B. Will the company be able to afford employee pay-raises this year?
C. How does the company compare in profitability with competitors?
D. Is the company earning satisfactory income?
50. For a business, what is an example of an internal decision maker?
A. A loan officer at a bank.
B. A supplier who sells goods to the company on account.
C. One of the business’s long-term customers.
D. One of the business’s managers.
51. Which of the following is true of financial accounting?
A. It provides information primarily for external decision makers.
B. It is required for corporations but probably would not be done by other business entities.
C. It provides information primarily for the use of managers of the company.
D. It has been practiced in this country for approximately the last 15 years.
52. What is accounting information developed primarily for external decision makers called?
A. Financial accounting.
B. Cost accounting.
D. Management accounting.
53. What form does financial accounting information provided by an entity to decision makers generally
A. Financial statements.
B. Various forecasts and performance reports.
C. An analysis of changes in the price of a corporation’s shares.
D. Comparisons between the company and its competitors.
54. Retained earnings at the end of the period is equal to
A. Retained earnings at the beginning of the period plus net earnings minus liabilities.
B. Retained earnings at the beginning of the period plus net earnings minus dividends.
C. Net earnings.
D. Assets plus liabilities.
55. If Bender Corporation recently purchased goods from you on account, which of Bender’s financial
statements would you look at to determine whether Bender has sufficient resources to be able to pay for
the goods when payment is due in 30 days?
A. income statement.
B. balance sheet.
C. statement of retained earnings.
D. cash flow statement.
56. Which financial statement is prepared first?
A. Balance sheet.
B. Income statement.
C. Statement of retained earnings.
D. Cash flow statement.
57. What does the separate entity assumption state?
A. Assets should be recorded at their initial acquisition cost.
B. Each business is considered to be part of its owners.
C. The monetary unit should be Canadian dollars.
D. For measurement purposes, the resources, debts, and activities of a business should be kept separate
from those of the owners.
58. Carrington Company owes you $500 on account due within 15 days. Which of the following amounts on
its balance sheet would help you to determine the likelihood that you will be paid in full and on time?
A. cash and accounts receivable.
B. cash and property and equipment.
C. cash and inventory.
D. share capital and retained earnings.
59. Which of the following is true about a business’ assets?
A. They are equal to liabilities minus shareholders’ equity.
B. They are the economic resources of the business.
C. They are reported on the balance sheet at current market value.
D. They are reported on the income statement.
60. Which of the following might be included in the assets of a particular business?
A. cash, accounts payable, and notes payable.
B. cash, retained earnings, and accounts receivable.
C. cash, accounts receivable, and inventory.
D. inventories, property and equipment, and share capital.
61. Why can’t a business’ balance sheet be used to accurately predict what the business might be sold for?
A. it identifies all the revenues and expenses of the business.
B. assets are generally listed on the balance sheet at their historical cost, not their current value.
C. it gives the results of operations for the current period.
D. some of the assets and liabilities on the balance sheet may actually be those of another entity.
62. Kamil’s Car Repair Shop Ltd. started the year with total assets of $70,000 and total liabilities of $40,000.
During the year, the business recorded $100,000 in car repair revenues, $65,000 in expenses, and
dividends of $5,000. Shareholders’ equity at the end of the year was
63. What is the accounting equation (balance sheet equation)?
A. Assets + Liabilities = Shareholders’ equity.
B. Assets + Shareholders’ equity = Liabilities.
C. Assets = Liabilities + Shareholders’ equity.
D. Revenues – Expenses = Net income.
64. What are business liabilities?
A. Amounts it expects to collect in the future from customers.
B. Debts or obligations resulting from past transactions.
C. The amounts that owners have invested in the business.
D. The increases in assets that result from profitable operations.
65. Why would Parker Bank, in deciding whether to make a loan to Davis Company, be interested in the
amount of liabilities Davis has on its balance sheet?
A. The liabilities represent resources that could be used to repay the loan.
B. If Davis already has many other obligations, it might not be able to repay the loan.
C. Existing liabilities give an indication of how profitable Davis has been in the past.
D. Parker would be interested in the amount of Davis’s assets but not the amount of liabilities.
66. What are the two categories of shareholders’ equity usually found on the balance sheet of a corporation?
A. share capital and long-term liabilities.
B. share capital and property, plant, and equipment.
C. retained earnings and notes payable.
D. share capital and retained earnings.
67. Allentown Corporation has on its balance sheet the following
What is the amount of retained earnings that should appear on Allentown’s balance sheet?
68. Which financial statement for a business would you look at to determine the company’s performance
during an accounting period?
A. balance sheet.
B. statement of retained earnings.
C. income statement.
D. cash flow statement.
69. Which of the following is not a principal type of business activity?
70. How do most businesses earn revenues?
A. When they collect accounts receivable.
B. Through sales of goods or services to customers.
C. By borrowing money from a bank.
D. By selling shares to shareholders.
71. During 20B, its second year in operation, Banner Company delivered goods to customers for which
customers paid or promised to pay $5,850,000. The amount of cash collected from customers was
$5,960,000. The amount of accounts receivable at the beginning of 20B was $1,200,000. What is the
amount of sales revenue that Banner should report on its income statement for 20B?
72. During 20B, its second year in operation, Banner Company delivered goods to customers for which
customers paid or promised to pay $5,850,000. Assume all sales were on account and the amount of cash
collected from customers was $5,960,000. The amount of accounts receivable at the beginning of 20B
was $1,200,000. Based on this information, what is the amount of accounts receivable that Banner would
report at the end of 20B?
73. What is the amount of revenue recognized in the income statement by a company that sells goods to
A. The cash collected from customers during the current period.
B. Total sales, both cash and credit sales, for the period.
C. Total sales minus beginning amount of accounts receivable.
D. The amount of cash collected plus the beginning amount of accounts receivable.
74. The cash flow statement and the balance sheet are interrelated because
A. the ending amount of cash on the cash flow statement must agree with the amount in the statement of
B. the ending amount of cash on the cash flow statement must agree with the amount in the balance sheet.
C. both disclose the corporation’s net earnings.
D. the ending amount of cash on the cash flow statement must agree with the amount on the statement of
75. On January 1, 20A, Taylor Corporation had retained earnings of $6,500,000. During 20A, Taylor had net
income of $1,050,000 and dividends of $450,000. What is the amount of Taylor’s retained earnings at the
end of 20A?
76. What are the categories of cash flows that appear on a cash flow statement?
A. cash flows from investing, financing, and service activities.
B. cash flows from operating, production, and internal activities.
C. cash flows from financing, production, and growth activities.
D. cash flows from operating, investing, and financing activities.
77. Borrowing money is an example of a(n)
A. delivering activity.
B. financing activity.
C. investing activity.
D. operating activity.
78. On the cash flow statement, how would a company report the purchase of machinery?
A. As cash used in operating activities.
B. As cash used in financing activities.
C. As cash used in purchasing activities.
D. As cash used in investing activities.
79. When would a company report a net loss?
A. When retained earnings decreased due to paying dividends to shareholders.
B. When its assets decreased during an accounting period.
C. When its liabilities increased during an accounting period.
D. When its expenses exceeded its revenues for an accounting period.
80. Which of the following is the amount of rent expense reported on the income statement?
A. The amount of cash paid for rent in the current period.
B. The amount of cash paid for rent in the current period less any unpaid rent at the end of the period.
C. The amount of rent used up in the current period to earn revenue.
D. An increase in net income.
81. What events cause changes in a corporation’s retained earnings?
A. net income or net loss and declaration of dividends.
B. declaration of dividends and issuance of shares to new shareholders.
C. net income, issuance of shares, and borrowing from a bank.
D. declaration of dividends and purchase of new machinery.
82. The balance sheet
A. reports the changes in assets, liabilities, and shareholders’ equity over a period of time.
B. reports the assets, liabilities, and shareholders’ equity at a specific date.
C. presents the revenues and expenses for a specific period of time.
D. summarizes the changes in retained earnings for a specific period of time.
83. If you wanted to know how much of its net income a corporation distributed as dividends, which financial
statement would you look at?
A. balance sheet.
B. income statement.
C. cash flow statement.
D. statement of retained earnings.
84. Why is the operating activities section often believed to be the most important part of a cash flow
A. it gives the most information about how operations have been financed.
B. it shows the dividends that have been paid to shareholders.
C. it indicates a company’s ability to generate cash from sales to meet current cash needs.
D. it shows the net increase or decrease in cash during the period.
85. If you wanted to know what accounting rules a company follows related to its inventory, where would
A. the balance sheet.
B. the income statement.
C. the notes to the financial statements.
D. the headings to the financial statements.
86. During 20A, Burton Company delivered products to customers for which customers paid or promised
to pay $3,820,000. The company collected $3,670,000 in cash from customers during the year. Indicate
which of these amounts will appear on the income statement and which on the cash flow statement.
A. $3,670,000 appears on both the income statement and the cash flow statement.
B. $3,670,000 appears on the cash flow statement, and $3,820,000 appears on the income statement.
C. $3,820,000 appears on both the income statement and the cash flow statement.
D. $3,820,000 appears on the cash flow statement, and $3,670,000 appears on the income statement.
87. At the beginning of 20B, Rodriguez Corporation had assets of $820,000 and liabilities of $340,000.
During the year, assets increased by $40,000 and liabilities decreased by $8,000. What was the total
amount of shareholders’ equity at the end of 20B?
88. What term is used for probable future economic benefits owned by an entity as a result of past
D. retained earnings.
89. What results from the purchase of goods or services on credit and from borrowing?
C. Share capital.
90. How are the differing claims of creditors and investors recognized by a corporation?
A. The claims of creditors are liabilities; those of investors are assets.
B. The claims of both creditors and investors are liabilities, but only the claims of investors are considered
to be long term.
C. The claims of creditors are liabilities; the claims of investors are recorded as shareholders’ equity.
D. The claims of creditors and investors are considered to be essentially equivalent.
91. In what order are assets are listed on a balance sheet?
A. dollar amount (largest first).
B. date of acquisition (earliest first).
C. ease of conversion to cash.
D. importance to the operation of the business.
92. In what order would the assets of Mertz Company be listed on their balance sheet?
A. Cash, Accounts Receivable, Inventory, Plant and Equipment.
B. Cash, Inventory, Accounts Receivable, Plant and Equipment.
C. Cash, Accounts Receivable, Marketable Securities, Inventory.
D. Cash, Accounts Receivable, Plant and Equipment, Inventory.
93. The ending retained earnings balance of the Brown Hat restaurant chain increased by $4.3 billion from
the beginning of the year. The company had declared a dividend of $1.5 billion. What was the net income
earned during the year?
A. $2.8 billion.
B. $3.0 billion.
C. $5.8 billion.
D. There is no way to determine net income as not enough information was given.
94. What section of the cash flow statement do bankers consider to be the most important?
D. All the sections are equally important.
95. Which of the following statements regarding private enterprises is TRUE?
A. Private enterprises must use IFRS for external reporting.
Private enterprises may choose to not follow either IFRS or the accounting standards prescribed for
private enterprises for external reporting.
Private enterprises that are not dependent on significant external sources of financing for their
operations must use IFRS for external reporting.
D. Private enterprises must use the accounting standards prescribed for private enterprises for external
96. Which of the following activities would cause investors to overpay for the acquisition of a company from
its current owners?
A. Understated accounts payable and overstated inventory.
B. Understated revenues and overstated expenses.
C. Understated assets and overstated expenses.
D. Understated assets and overstated revenues.
97. Which of the following statements is true about the price earnings (P/E) ratio?
A. It is a ratio of importance to creditors.
B. A high P/E ratio indicates investors have little confidence in the future earnings potential of the
The P/E ratio could be used to approximate the value investors would be willing to pay for the
company’s acquisition from existing owners.
D. The P/E ratio increases as net income increases.
98. Which government regulatory agency has the legal authority to prescribe financial reporting requirements
for corporations that sell their securities in commerce in the province of Ontario?
99. Which part of the provincial government in the province of Ontario has broad powers to determine
measurement rules for financial statements of publicly traded companies on the Toronto Stock Exchange?
A. the Canada Revenue Agency.
B. the Ontario Securities Commission.
C. the Federal Accounting Office.
D. the Supreme Court.
100.With whom does primary responsibility for the information in a corporation’s financial statements rest?
A. the shareholders of the corporation.
B. the managers of the corporation.
C. the Ontario Securities Commission.
D. the public accountant who audited the financial statements.
101.What is an examination of the financial statements of a business to ensure that they conform with
generally accepted accounting principles called?
A. a certification.
B. an audit.
C. a verification.
D. a validation.
102.What is the purpose of an audit?
A. to prove the accuracy of an entity’s financial statements.
B. to lend credibility to an entity’s financial statements.
C. to endorse the quality of leadership that managers provide for a corporation.
D. to establish that a corporation’s shares are a sound investment.
103.Why do the managers of a corporation hire independent auditors?
A. To guarantee annual and quarterly financial statements.
B. To handle some personnel issues and problems.
C. To audit and report on the fairness of financial statement presentation.
D. To lobby the AcSB for changes in generally accepted accounting principles.
104.Why is the auditor’s role in performing audits important to our society?
A. auditors provide direct financial advice to potential investors.
B. auditors have the primary responsibility for the information contained in financial statements.
C. auditors issue reports on the accuracy of each financial transaction.
an audit of financial statements helps investors and others to know that they can rely on the information
presented in the financial statements.
105.What is one of the disadvantages of a corporation when compared to a partnership?
A. the shareholders have limited liability.
B. the shareholders are treated as a separate legal entity from the corporation.
C. the corporation and its shareholders are subject to double taxation.
D. the corporation provides continuity of life.
106.Which of the following statements is true about a sole proprietorship?
A. The owner and the business are separate legal entities but not separate accounting entities.
B. The owner and the business are separate accounting entities but not separate legal entities.
C. The owner and the business are separate legal entities and separate accounting entities.
D. Most large businesses in this country are organized as sole proprietorships.
107.For a business organized as a general partnership, which statement is true?
A. The owners and the business are separate legal entities.
B. Each partner is potentially responsible for the debts of the business.
C. Formation of a partnership requires getting a charter from the province of incorporation.
D. A partnership is not considered to be a separate accounting entity.
108.For what reason might a group of people establishing a business prefer to set it up as a corporation rather
than a partnership?
A. to have limited liability.
B. to avoid double taxation.
C. because of ease of formation.
D. because a corporation is considered to be a separate business entity and a partnership is not.
109.Using the income statement model and the balance sheet model, fill-in the missing amounts for each
independent case below. Assume the amounts given are at the end of the first full year of operations of
110.Plants Supreme, Inc., a small retail store which sells house plants, started business
on January 1, 20A. At the end of January, 20A, the following information was
Cash expenditures during January:
A. Using the above information, prepare the income statement for Plants Supreme for the month ended
January 31, 20A.
B. What is the amount of cash flows provided by operating activities to be presented on the statement of
111.Indicate on which financial statement you would expect to find each of the following. The first is done for
112.For each of the following items that appear on the balance sheet, identify each as an asset (A), liability
(L), or element of shareholders’ equity (SE). For any item that would not appear on the balance sheet,
write the letter, N.
113.Lopez Corporation began operations at the start of 20C. During the year, it made cash and credit sales
totalling $974,000 and collected $860,000 in cash from its customers. It purchased inventory costing
$508,000, paid $25,000 for dividends and the cost of goods sold was $445,000. The corporation incurred
the following expenses:
1. Prepare an income statement showing revenues, expenses, pretax income, income tax expense, and net
income for the year ended December 31, 20C.
2. Based on the above information, what is the amount of accounts receivable on the balance sheet
prepared at the end of 20C?
3. Based on the above information, what is the amount of retained earnings on the balance sheet prepared
at the end of 20C?
114.Delft Corporation was established on December 31, 20A, by a group of investors who invested a total of
$100,000 for shares of the new corporation. During the month of January, 20B, Delft provided services
to customers for which the total revenue was $40,000. Of this amount, $4,500 had not been collected by
the end of January. Delft recorded salary expense of $17,000, of which 90% had been paid by the end of
the month; rent expense of $3,000, which had been paid on January 1, 20B; and other expenses of $8,500,
which had been paid by check. On January 31, 20B, Delft purchased a van by paying cash of $25,000.
There were no other events that affected cash.
1. In which section of the cash flow statement would the amount of cash paid for salaries be reported?
2. In which section of the cash flow statement would the amount of cash paid for the van be reported?
3. By how much did Delft’s cash increase or decrease during January?
4. Assuming that the amount of cash was $100,000 at the beginning of January, how much cash did Delft
have at the end of the month?
5. What was Delft’s net income or net loss (after income tax expense) for the month of January? The
income tax rate was 25%.
6. Explain why the net increase or decrease in cash for a business generally will be different than the net
income, or net loss, for the same period.
115.Pool Supply, Inc., reported the following items for the year ended December 31,
Prepare an income statement for the year.
116.Empire Stores, Ltd., reported the following amounts on its balance sheet on December 31,
1. What is the amount of Empire’s total assets at the end of 20B?
2. Identify the items listed above that are liabilities.
3. What is the amount of Empire’s retained earnings at the end of 20B?
4. Prepare a balance sheet for Empire Stores as of December 31, 20B.
5. Empire Stores wishes to purchase merchandise from your company on account. The amount of the
purchases would probably be about $5,000 per month, and the terms would require Empire to make
payment in full within 30 days. Would you recommend that your company grant credit to Empire under
these terms? Explain the reasoning for your response.
117.During 20B, Wilmont Company performed services for which customers paid or promised to pay
$286,000. Of this amount, $270,000 had been collected by year end. Wilmont paid $125,000 in cash
for employee wages and owed the employees $5,000 at the end of the year for work that had been done
but had not paid for. Wilmont paid interest expense of $1,700 and $80,000 for other service expenses.
The income tax rate was 25%, and income taxes had not yet been paid at the end of the year. Wilmont
declared and paid dividends of $6,000. There were no other events that affected cash.
1. What was the amount of the increase or decrease in cash during the year?
2. Prepare an income statement for Wilmont for the year.
3. At the start of 20B, Wilmont reported retained earnings totalling $940,000. Prepare a statement of
118.Alfred Company manufactures men’s clothing. During 20B, the company reported the following items
that affected cash. Indicate whether each of these items is a cash flow from operating activities (O),
investing activities (I), or financing activities (F).
Purchased equipment by paying cash: ___
Collected cash on account from customers: ___
Paid dividends to shareholders: ___
Paid cash for supplies: ___
Paid suppliers for fabric: ___
Borrowed money from bank on a long-term note: ___
Paid interest to bank on the note: ___
Paid wages to employees: ___
Sold shares to new shareholders: ___
119.Fulton Company was established on January 1, 20D when several investors paid a total of $200,000
to purchase Fulton shares. No additional investments in shares were made during the year. By the end
of that year, Fulton had cash on hand of $45,000, office equipment (net) of $40,000, inventories of
$156,000, and accounts payable of $10,000. Sales for the year were $812,000. Of this amount, customers
still owed $20,000. Fulton paid dividends of $25,000 to its investors.
1. Based on the information above, prepare a balance sheet for Fulton Company as at December 31, 20D.
In the process of preparing the balance sheet, you must calculate the ending balance in retained earnings.
2. Prepare a statement of retained earnings. (The beginning amount of retained earnings was $0.)
3. What was the amount of Fulton’s net income for the year?
4. Was Fulton successful during its first year in operation?
120.For Baggerly Fashions, the following information is available for the year ended December 31,
The income tax rate is 35%.
Prepare an income statement for Baggerly Fashions.
121.Baseline Corporation was formed two years ago to manufacture fitness equipment. It has been profitable
and is growing rapidly. It currently has 150 shareholders and 90 employees; most of the employees own
at least a few shares of Baseline’s shares. The company has received financing from two banks. It will sell
additional shares within the next three months and will also seek additional loans and hire new employees
to support its continued growth.
1. Explain who relies on the information in financial statements prepared by Baseline Corporation.
2. Why is compliance with generally accepted accounting principles and accuracy in accounting
important for Baseline?
3. A new accountant who tried to prepare Baseline’s financial statements at the end of the current year
made several errors. For each of the following items, indicate how the income statement and balance
sheet are affected by the error and the nature of the effect. (For example, an error might cause revenues
and net income on the income statement and retained earnings and assets on the balance sheet to be
overstated). Ignore the effects of income taxes.
A. The company had sales for cash of $3,000,000. It also had sales on account of $1,800,000 that had
been collected by the end of the year, and sales on account of $200,000 that are expected to be collected
early the following year. The accountant reported total sales revenue of $4,800,000.
B. The company had total inventories of $600,000 at the end of the year. Of this amount, inventory
reported at $30,000 was obsolete and will have to be scrapped. The balance sheet prepared by the
accountant showed total inventories of $600,000.
C. The company has a bank loan for which interest expense during the year of $10,000 will be paid
early in January of the next year. The accountant did not record either the interest expense or the related
D. An insurance policy was listed as an asset of $6,000 at the beginning of the year. The entire amount of
the policy was for the current year and the policy has expired. The accountant took no action to recognize
the expiration of the policy.
122.Lloyd Company ends the first year of operations with $2.2 million in retained earnings when no
dividends were paid out. Since the company began operations on January 1
, 20B of the current year
ending December 31
, 20B calculate the amount of beginning retained earnings and explain your
123.Alcorn Corp. has just published their financial information for the year on the company’s website. Their
reported earnings are $25.0 million and average common shares outstanding are 5.0 million. Answer the
(a) How much is earnings per share on the common shares?
(b) If the website shows the common shares is currently trading at $75 per share, what is the price
earnings (P/E) ratio?
(c) A group of investors is seeking to buy all the Alcorn shares. Using the above information, determine
an offering price.
124.Match the model with the financial statement by inserting the proper letter in the space to the left.
(A = Assets, L = Liabilities, SE = Shareholders’ equity, R = Revenue, NI = Net Income, E = Expenses)
1. Statement of retained earnings R – E = NI ____
2. Income statement None of the above is correct ____
3. Statement of cash flows A = L + SE ____
4. Balance sheet None of the above is correct ____
125.Match each definition with its related term or abbreviation by entering the appropriate letter in the space
A system that collects and processes financial information about
an organization and reports that information to decision makers.
The organization for which financial data are to be collected
(separate and distinct from its owners).
A report that describes the auditors’ opinion of the fairness of
the financial statement presentations and the evidence gathered to
support that opinion.
Initial recording of financial statement elements at acquisition
Measurement of information about an entity in the monetary
unit—dollars or other national currency
Company that can be bought and sold by investors on
established stock exchanges
126.Match each element with its financial statement by entering the appropriate letter in the space
1. Dividends Cash Flow Statement ____
2. Revenues Balance Sheet ____
3. Expenses Income Statement ____
4. Cash flow from financing Balance Sheet ____
5. Liabilities Cash Flow Statement ____
6. Shareholders’ Equity Income Statement ____
7. Assets Balance Sheet ____
8. Cash flow from operations Cash Flow Statement ____
9. Cash flow from investments Statement of Retained Earnings ____
127.Match each definition with its related term or abbreviation by entering the appropriate letter in the space
1. CICA Ontario Securities Commission ____
2. CA Canadian Institute of Chartered Accountants. ____
3. GAAP Financial Accounting Standards Board ____
4. OSC Chartered Accountant ____
5. AcSB Generally accepted accounting principles ____
128.Match the characteristics with the type of business by inserting the proper letter in the space to the
1. Corporation Ownership is represented by shares. ____
Ownership is limited to one person. ____
3. Partnership Each owner is responsible for the debts of the
129.Match the definition with the form of organization by inserting the proper letter in the space to the
1. Partnership Each owner has unlimited liability for the debts of
2. Corporation The owners are known as shareholders and enjoy
The manager is often the owner and does not enjoy
5. The balance sheet of Empire Stores shows that the company is capable of paying its short-term liabilities. There is cash of $300,000, more than
enough to settle the accounts payable of $131,000. I would recommend that my company grant credit to Empire Stores.
Retained earnings = $332,000
$900,000 + retained earnings = $1,232,000
Shareholder’s equity = $1,232,000 = Share capital + retained earnings
$1,523,000 – (131,000 + 160,000 + Shareholder’s equity)
3. Assets = Liabilities + Shareholder’s equity
2. Liabilities: Accounts payable and Notes payable.
116. 1. Total assets = $710,000 + 300,000 + 425,000 + 88,000 = $1,523,000
Sold shares to new shareholders: F
Paid wages to employees: O
Paid interest to bank on the note: O
Borrowed money from bank on a long-term note: F
Paid suppliers for fabric: O
Paid cash for supplies: O
Paid dividends to shareholders: F
Collected cash on account from customers: O
118. Purchased equipment by paying cash: I
4. Yes, Fulton’s first year was successful. The company earned a healthy amount of income, and many new companies have losses during their
early years of operations. Also, it was able to pay dividends to its shareholders. At the end of the first year, the company has just $10,000 in
liabilities. It appears to be in sound financial condition.
3. $76,000 (see statement of retained earnings above)
D. On the balance sheet, prepaid insurance and retained earnings are overstated by $6,000. On the income statement, expenses are understated and
net income is overstated.
C. On the income statement, expenses are understated and net income is overstated by $10,000. On the balance sheet, interest payable is
understated and retained earnings are overstated.
B. On the balance sheet, inventory and retained earnings are overstated by $30,000. On the income statement, expenses are understated and the net
income is overstated.
A. On the income statement, revenues are understated by $200,000 and net income is understated. On the balance sheet, accounts receivable and
retained earnings are understated.
2. Compliance with generally accepted accounting principles and accuracy in accounting are important to Baseline because they are important to
the people who use Baseline’s financial statements. To maintain the credibility of its financial statements, Baseline must comply with GAAP and
must ensure the accuracy of its accounting records.
121. 1. Various external decision makers rely on the financial statements of a corporation. For Baseline, these decision makers include the bankers
who have loaned money to the company. These creditors would monitor the performance of Baseline to estimate the likelihood that Baseline will
be able to repay existing loans when they come due, and to decide whether to make additional loans to Baseline in the future. Current shareholders
would want to review Baseline’s financial statements to decide whether they wanted to continue to own Baseline’s shares. Potential shareholders
and creditors would use the information to decide whether they wanted to purchase Baseline’s shares or loan money to the company in the future.
Baseline anticipates hiring additional workers in the near future; potential employees might use information in the financial statements to evaluate
the company as an employer.
122. The beginning balance of retained earnings is zero because a new business would not have generated income from prior operations. Retained
earnings represents the net income generated through operations not distributed in the form of a dividend. A company just beginning operations
could not have any earnings so there would always be a zero beginning balance for new companies.
123. (a) The earnings per share is $5 per share computed by dividing the net income of $25 million by the number of shares outstanding, 5.0
million shares. (b) The price earnings ratio is 15 to 1 computed by dividing the market price per share by the earnings per share amount ($75
divided by $5). (c) The investors could take the current level of earnings $25 million multiplied times the price earnings ratio of 15 to estimate a
beginning price in negotiating the purchase of the company of $375 million.
124. Income statement :: R – E = NI and Statement of cash flows :: None of the above is correct and Balance sheet :: A = L +
SE and Statement of retained earnings :: None of the above is correct
125. Accounting :: A system that collects and processes financial information about an organization and reports that information to decision
makers. and Separate entity :: The organization for which financial data are to be collected (separate and distinct from its owners). and Audit
report :: A report that describes the auditors’ opinion of the fairness of the financial statement presentations and the evidence gathered to support
that opinion. and Cost principle :: Initial recording of financial statement elements at acquisition cost. and Unit of measure :: Measurement of
information about an entity in the monetary unit—dollars or other national currency and Publicly traded :: Company that can be bought and sold
by investors on established stock exchanges
126. Cash flow from operations :: Cash Flow Statement and Liabilities :: Balance Sheet and Revenues :: Income
Statement and Assets :: Balance Sheet and Cash flow from investments :: Cash Flow Statement and Expenses :: Income
Statement and Shareholders’ Equity :: Balance Sheet and Cash flow from financing :: Cash Flow Statement and Dividends :: Statement of
127. OSC :: Ontario Securities Commission and CICA :: Canadian Institute of Chartered Accountants. and AcSB :: Financial Accounting
Standards Board and CA :: Chartered Accountant and GAAP :: Generally accepted accounting principles
128. Corporation :: Ownership is represented by shares. and Sole proprietorship :: Ownership is limited to one person. and Partnership :: Each
owner is responsible for the debts of the entity.
129. Partnership :: Each owner has unlimited liability for the debts of the entity. and Corporation :: The owners are known as shareholders and
enjoy limited liability. and Sole proprietorship :: The manager is often the owner and does not enjoy limited liability.
Category # of Questions
Difficulty: Easy 56
Difficulty: Hard 20
Difficulty: Medium 53
Learning Objective: 1 99
Learning Objective: 2 10
Learning Objective: 3 8
Learning Objective: 4 2
Learning Objective: Appendix 1A 9
Learning Objective: Appendix 1B 1
Libby – Chapter 01 129
Test Bank canadian 5th_Ed Financial Accounting by Robert Lilly
Test Bank canadian 5th_Ed Financial Accounting by Robert Lilly