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True/False Questions 1.

Accounting is a system that collects and processes financial information about an organization and reports that information to decision makers. Answer: True Difficulty: Easy L.O.: 1 2. Assets on the balance sheet are recorded at historical cost or their exchange value. Answer: True Difficulty: Easy L.O.: 1 3. The debts of a corporation can be generally viewed as debts of both the corporation and the stockholders. Answer: False Difficulty: Easy L.O.: 1 Response: False! The corporation's debts are separate and apart from the owners' debts. 4. 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). Answer: False Difficulty: Medium L.O.: 1 Response: False! It should be vice versa. The balance sheet should be dated at a point in time and the income statement should be dated for a period of time. 5. 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. Answer: False Difficulty: Medium L.O.: 1 Response: False! Generally, recognition of service revenues should be when they are earned (accrual accounting). This may not coincide with the collection of cash. 6. If expenses are overstated on the income statement, stockholders' equity is overstated on the balance sheet. Answer: False Difficulty: Hard L.O.: 1 Response: False! An overstatement of expenses will understate net income which will cause stockholders' equity under retained earnings to be understated. 7. Total assets are $40,000, total liabilities, $10,000 and contributed capital is $20,000; therefore, retained earnings is $15,000. Answer: False Difficulty: Medium L.O.: 1 Response: False! Since assets equal liabilities plus stockholders' equity, we can

solve for total stockholders' equity by deducting liabilities of $10,000 from assets of $40,000 to derive $30,000. If contributed capital is $20,000 then the remaining $10,000 must be retained earnings. 8. The payment of a cash dividend to stockholders reduces stockholders' equity. Answer: True Difficulty: Medium L.O.: 1 9. An income statement presents the revenues, expenses, and net income (or net loss) of the business for a period of time. Answer: True Difficulty: Easy L.O.: 1 10. The accounting model for the balance sheet is: Assets + Liabilities Stockholders' Equity. Answer: False Difficulty: Easy L.O.: 1 Response: False! A = L + SE or Assets = Liabilities + Stockholders' Equity A - L = SE or Assets - Liabilities = Stockholders' Equity 11. One feature of the statement of cash flows is to show the change in cash for the period. Answer: True Difficulty: Medium L.O.: 1 12. An example of an internal decision maker is one of the managers of the company. Answer: True Difficulty: Easy L.O.: 1 13. A banker who is considering making a loan to a corporation would be one of the corporation's internal decision makers. Answer: False Difficulty: Easy L.O.: 1 Response: False! A banker is an external decision maker. The banker is outside the company. 14. A decision maker who wants to understand a company's financial statements must carefully read the notes to the financial statements because the notes provide useful supplemental information. Answer: True Difficulty: Easy L.O.: 1 15. The financial statement that shows an entity's economic resources and its liabilities is the statement of cash flows.

Answer: False Difficulty: Medium L.O.: 1 Response: False! Economic resources and liabilities appear on the balance sheet. Multiple Choice Questions 1. The primary purpose of the balance sheet is to A) measure the net income of a business up to a particular point in time. B) report the difference between cash inflows and cash outflows for the period. C) report the financial position of the reporting entity at a particular point in time. D) None of the above is correct. Answer: C Difficulty: Easy L.O.: 1 2. Which of the following reports the cash inflows, cash outflows, and change in cash for period? A) Income statement. B) Balance sheet. C) Statement of cash flows. D) Auditor's report. E) None of the above is correct. Answer: C Difficulty: Easy L.O.: 1 3. The primary means that a corporation uses to communicate financial information to its shareholders and creditors is 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. Answer: B Difficulty: Easy L.O.: 1 4. Financial accounting information provided by an entity to decision makers generally takes the form of A) financial statements. B) various forecasts and performance reports. C) an analysis of changes in the price of a corporation's stock. D) comparisons between the company and its competitors. Answer: A Difficulty: Easy L.O.: 1

5.

What financial statement would you look at to determine the total expenses of a business? A) income statement. B) statement of retained earnings. C) statement of cash flows. D) balance sheet. E) None of the above is correct. Answer: A Difficulty: Easy L.O.: 1

6.

A business's assets are A) equal to liabilities plus shareholders' equity. B) the economic resources of the business. C) Reported at historical cost. D) Reported on the balance sheet. E) All of the above are correct. Answer: E Difficulty: Easy L.O.: 1

7.

The accounting equation (balance sheet equation) is A) Assets + Liabilities = Stockholders' equity. B) Assets + Stockholder's equity = Liabilities. C) Assets = Liabilities + Stockholders' equity. D) Revenues - Expenses = Net income. E) None of the above is correct. Answer: C Difficulty: Easy L.O.: 1

8.

Business liabilities are 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. E) None of the above is correct. Answer: B Difficulty: Easy L.O.: 1

9.

The income statement equation is A) Assets - Liabilities = Stockholders' Equity. B) Assets + Stockholders' equity = Liabilities. C) Net income = Revenues - Expenses. D) Expenses - Net income = Revenues. E) None of the above is correct.

Answer: C Difficulty: Easy L.O.: 1 10. During 20B, its second year in operation, Sanborn Company delivered goods to customers equal to $6,250,000. The amount of cash collected from customers was $6,360,000. 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 Sanborn should report at the end of 20B? A) $1,310,000 B) $110,000 C) $1,090,000 D) None of the above is correct Answer: C Difficulty: Medium L.O.: 1 11. Retained earnings refers to A) the amount reported as the bottom line on the income statement. B) the accumulated amount of past earnings of a corporation that has not been distributed to shareholders as dividends. C) the total amount of stockholders' equity for a corporation. D) the amount that shareholders have invested by purchasing a corporation's stock. E) None of the above is correct. Answer: B Difficulty: Medium L.O.: 1 12. Stoner Corporation reported the following for 20B; total assets, $90,000; total liabilities, $35,000; contributed capital, $40,000. Therefore, retained earnings was A) $5,000. B) $40,000. C) $20,000. D) $15,000. E) None of the above is correct. Answer: D Difficulty: Medium L.O.: 1 13. The separate entity assumption states that 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 U.S. dollars. D) for measurement purposes, the resources, debts, and activities of a business

should be kept separate from those of the owners. Answer: D Difficulty: Medium L.O.: 1 14. Phillips Corporation has on its balance sheet the following amounts: Assets Liabilities Contributed capital $4,000,000 1,200,000 1,000,000

What is the amount of retained earnings that should appear on Phillips' balance sheet? A) $1,800,000. B) $1,000,000. C) $ 800,000. D) None of the above is correct. Answer: A Difficulty: Medium L.O.: 1 15. The separate entity assumption states that 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 U.S. dollars. D) for measurement purposes, the resources, debts, and activities of a business should be kept separate from those of the owners. Answer: D Difficulty: Medium L.O.: 1 16. On January 1, 20A Monmouth Corporation had retained earnings of $8,000,000. During 20A, they had net income of $1,550,000 and dividends of $450,000. What is the amount of Monmouth's retained earnings at the end of 20A? A) $8,900,000 B) $9,550,000 C) $6,050,000 D) $9,100,000 E) None of the above is correct Answer: D Difficulty: Medium L.O.: 1 17. On a balance sheet, assets are listed in the order of 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. Answer: C Difficulty: Medium L.O.: 1 18. Assets for a particular business might include 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 contributed capital. Answer: C Difficulty: Medium L.O.: 1 19. Abrahams Corporation reported the following amounts at the end of the first year of operations, December 31, 20A: contributed capital $50,000; sales revenue $200,000; total assets $150,000; $10,000 dividends; and total liabilities $80,000. Retained earnings and total expenses would be A) retained earnings $20,000 and expenses $170,000 B) retained earnings $30,000 and expenses $160,000. C) retained earnings $70,000 and expenses $120,000. D) retained earnings $80,000 and expenses $110,000 E) None of the above. Answer: A Difficulty: Hard L.O.: 1 20. If Zhou Corporation recently purchased goods from you on account, which of Zhou's financial statements would you look at to determine whether Zhou will 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) statement of cash flows. Answer: B Difficulty: Hard L.O.: 1 21. The Sigma Corporation had 20B revenues of $200,000, expenses of $140,000, and an income tax rate of 30 percent. Net income after taxes would be A) $60,000. B) $18,000. C) $42,000. D) $48,000. E) None of the above is correct.

Answer: C Difficulty: Hard L.O.: 1