Ch01 Introduction To Accounting and Business

Chapter 1
Introduction to Accounting and Business

OBJECTIVES
Obj 1
Obj 2
Obj 3
Obj 4
Obj 5
Describe the nature of a business and the role of ethics and accounting in business.
Summarize the development of accounting principles and relate them to practice.
State the accounting equation and define each element of the equation.
Describe and illustrate how business transactions can be recorded in terms of the
resulting change in the basic elements of the accounting equation.
Describe the financial statements of a proprietorship and explain how they
interrelate.
QUESTION GRID
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Chapter 1/Introduction to Accounting and Business 2
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Chapter 1Introduction to Accounting and Business

TRUE/FALSE
4 Chapter 1/Introduction to Accounting and Business
1. The main objective of a not-for-profit business is not to make a profit.

ANS: F
DIF: Moderate
OBJ: 01-01
2. An example of a business stakeholder is the government.
ANS: T
DIF: Moderate
OBJ: 01-01
3. A corporation is a business that is legally separate and distinct from its owners.
ANS: T
DIF: Easy OBJ: 01-01
5. Primary users of accounting information are accountants.
ANS: F
DIF: Moderate
OBJ: 01-01
6.
Accounting is thought to be the "language of business" because business information is

communicated to stakeholders.
ANS: T
7.
The role of accounting is to provide many different users with financial information to
make economic decisions.
ANS: T
DIF: Moderate
OBJ: 01-01
8. Proprietorships are owned by one owner and provide only services to their customers.
ANS: F
9.
Large corporations such as Wal-Mart, Coca-Cola, and Nike operate as manufacturing

businesses.
ANS: F
11. A business stakeholder is a person or entity that has an economic interest in the company.
ANS: T
12. Senior executives cannot be criminally prosecuted for the wrong doings they commit on
behalf of the companies where they work.
ANS: F
13. The primary role of accounting is to determine the amount of taxes a business will be
required to pay to taxing entities.
ANS: F
DIF: Moderate
OBJ: 01-01
14. Stakeholders use only accounting reports as the source of information to base all of their
business decisions.
ANS: F
15. Accounting reports are designed with the information needs of the stakeholders in mind.
ANS: T
17. Managerial accounting information is used by external and internal users equally.
ANS: F
DIF:
Easy
OBJ: 01-01
18. Financial accounting provides information to all of the business stakeholders, while the main
focus for managerial accounting is to provide information to the management.
ANS: T
DIF: Moderate
OBJ: 01-01
19. Proper ethical conduct implies that you only consider what's in your best interest.
ANS: F
20. Some of the major fraudulent acts by senior executives started as what they considered to be
small ethical lapses which grew out of control.
ANS: T
DIF: Moderate
OBJ: 01-01
21. CMA is an acronym that stands for Certified Manufacturing Accountant.
ANS: F
22. Individuals who wish to practice public accounting as a CPA must meet the requirements of
the state in which they reside.
ANS: T
23. A business is an organization that provides goods or services to their customers in exchange
for money or other items of value.
ANS: T
24. Profits are the difference between the amounts received from customers and the amounts
paid to provide the goods or services.
ANS: T
25. The main objective for all businesses is to maximize profits.
ANS: F
26. Manufacturing and merchandising companies are similar because they purchase products
from other companies to sell to their customers.
ANS: F
27. Managerial accounting is primarily concerned with the recording and reporting of economic
data and activities of an entity for use by owners, creditors, governmental agencies, and the
public.
ANS: F
28. The International Accounting Standards Board (IASB) is the authoritative body that has
primary responsibility for developing accounting principles.
ANS: T
29. The cost concept is the basis for entering the exchange price into the accounting records.
ANS: T
DIF: Moderate
OBJ: 01-02
30. Without the cost concept, accounting reports would become unstable and unreliable.
ANS: T
31. The unit of measurement concept requires that economic data be recorded in a common unit
of measurement.
ANS: T
32. If a building is appraised for $90,000, offered for sale at $95,000, and the buyer pays
$85,000 cash for it, the buyer would record the building at $90,000.
ANS: F
DIF: Moderate
OBJ: 01-02
33. GAAP stands for General Accepted Accounting Protocols.
ANS: F
34. Generally accepted accounting principles regulate how and what financial information is
reported by businesses.
ANS: T
35. The accounting equation can be expressed as Assets - Liabilities = Stockholders' Equity.
ANS: T
36. The rights or claims to the assets of a business may be subdivided into rights of creditors and
rights of stockholders.
ANS: T
DIF: Difficult
OBJ: 01-03
37. The stockholders rights to the assets rank ahead of the creditors' rights to the assets.
ANS: F
38. If the liabilities owed by a business total $500,000 and stockholders equity is equal to
$500,000, then the assets also total $500,000.
ANS: F
DIF: Moderate
OBJ: 01-03
39. If total assets decreased by $40,000 during a specific period and stockholders' equity
decreased by $45,000 during the same period, the period's change in total liabilities was an
$85,000 increase.
ANS: F
DIF: Moderate
OBJ: 01-03
40. If the assets owned by a business total $500,000, and stockholders' equity totals $400,000,
liabilities total $100,000.
ANS: T
DIF: Moderate
OBJ: 01-03
41. If the assets owned by a business total $100,000 and liabilities total $50,000, the total for
stockholders' equity is $150,000.
ANS: F
DIF: Moderate
OBJ: 01-03
42. If total assets increased by $175,000 during a specific period and liabilities decreased by
$10,000 during the same period, the period's change in total stockholders' equity was a
$185,000 increase.
ANS: T
DIF: Moderate
OBJ: 01-03
43. If net income for a corporation was $25,000, the dividends paid in cash of $10,000, and the
stockholders invested $5,000 in cash, the stockholders equity increased by $20,000.
ANS: T
DIF: Difficult
OBJ: 01-04
44. If net income for a corporation was $175,000, dividends were $40,000 in cash, and the
stockholders made no additional investment, the stockholders equity increased $215,000.
ANS: F
DIF: Moderate
OBJ: 01-04
45. An account receivable is a claim against a customer arising from a sale on account.
ANS: T
46. Paying an account payable increases liabilities and decreases assets.
ANS: F
DIF: Moderate
OBJ: 01-04
47. Receiving payments on an account receivable increases both stockholders equity and assets.
ANS: F
DIF: Difficult
OBJ: 01-04
48. Cash investments by stockholders increase both stockholders equity and assets.
ANS: T
DIF: Moderate
OBJ: 01-04
49. Cash dividends decrease assets and increase stockholders equity.
ANS: F
DIF: Moderate
OBJ: 01-04
50. Purchasing supplies on account increases liabilities and decreases stockholders equity.
ANS: F
DIF: Moderate
OBJ: 01-04
51. The dividends paid to stockholders are from the profits made by the corporation.
ANS: T
52. Receiving a bill or otherwise being notified that an amount is owed is not recorded until the
amount is paid.
ANS: F
DIF: Moderate
OBJ: 01-04
53. Revenue is earned only when money is received.
ANS: F
DIF: Moderate
OBJ: 01-04
54. Expenses are expired costs of doing business.
ANS: T
55. The excess of revenue over the expenses incurred in earning the revenue is called capital.
ANS: F
56. Expenses increase stockholders equity.

ANS: F
57. The excess of expenses over revenues is called net income.
ANS: F
59. A balance sheet is a list of the assets, liabilities, and stockholders equity of a business for a
period of time.
ANS: F
60. An income statement is a summary of the revenues and expenses of a business as of a
specific date.
ANS: F
62. The statement of cash flows consists of an operating section, an income section, and a
stockholders equity section.
ANS: F
63. The financial statements of a corporation should include the stockholders personal assets
and liabilities.
ANS: F
DIF: Moderate
OBJ: 01-05
64. The Balance Sheet represents the accounting equation.
ANS: T
MATCHING
Match the following transactions with their affects to the accounting equation.
a. Increase assets, increase liabilities
b. Increase liabilities, decrease stockholders equity
c. Increase assets, increase stockholders equity
d. No affect
e. Decrease assets, decrease liabilities
f. Decrease assets, decrease stockholders equity
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Received cash for services provided

Received utility invoice to be paid next month
Investment of land by stockholder
Paid part of an amount owed to a creditor
Paid cash for the purchase of a one year insurance policy
Received payment from a customer for an invoice that was billed last month
Dividends paid
Provided a service to a customer on account
Purchased supplies on credit
Paid wages
1. ANS:
C
DIF: Moderate
OBJ: 01-04
NAT: AACSB Analytic | AICPA FN-Measurement
2. ANS:
B
DIF: Moderate
OBJ: 01-04
3. ANS:
C
DIF: Moderate
OBJ: 01-04
4. ANS:
E
DIF: Moderate
OBJ: 01-04
5. ANS:
D
DIF: Moderate
OBJ: 01-04
6. ANS:
D
DIF: Moderate
OBJ: 01-04
7. ANS:
F
DIF: Moderate
OBJ: 01-04
8. ANS:
C
DIF: Moderate
OBJ: 01-04
9. ANS:
A
DIF: Moderate
OBJ: 01-04
10. ANS:
F
DIF: Moderate
OBJ: 01-04
Match the following accounts to the financial statement where they can be found.
a. Balance Sheet
b. Income Statement
c. Statement of Cash Flows
d. Statement of Retained Earnings
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Dividends
Revenues
Supplies
Land
Accounts Payable
Accounts Receivable
Operating Activities
Wages Expense
Net Income
Cash
11. ANS:
D
12. ANS:
B
13. ANS:
A
14. ANS:
A
15. ANS:
A
16. ANS:
A
17. ANS:
C
18. ANS:
B
19. ANS:
D
20. ANS:
A
MULTIPLE CHOICE
1.
Profit is the difference between

a. assets and liabilities
b. the incoming cash and outgoing cash
c. the assets purchased with cash contributed by the owner and the cash spent to operate the
business
d. the assets received for goods and services and the amounts used to provide the goods and
services
ANS: D
2.
Most businesses are

a. sole proprietorships
b. partnerships
c. corporations
d. separate entities
ANS: A
DIF: Easy
OBJ: 01-01
3.
Which of the items below is not a business organization form?

a. entrepreneurship
b. proprietorship
c. partnership
d. corporation
ANS: A
4.
An entity that is organized in which ownership is divided into shares of stock is a

a. proprietorship
b. corporation
c. partnership
d. governmental unit
ANS: B
5.
Financial reports are used by

a. management
b. creditors
c. investors
d. all are correct
ANS: D
6.
Which of the following best describes accounting?

a. records economic data but does not communicate the data to users according to any
specific rules
b. is an information system that provides reports to stakeholders
c. is of no use by individuals outside of the business
d. is used only for filling out tax returns and for financial statements for various type of
governmental reporting requirements
ANS: B
DIF: Moderate
OBJ: 01-01
7.
Which of the following is not a step in providing accounting information to stakeholders?

a. design the accounting information system
b. prepare accounting surveys
c. identify stakeholders
d. record economic data
ANS: B
DIF: Moderate
OBJ: 01-01
8.
The two most common specialized fields of accounting in practice are

a. forensic accounting and financial accounting
b. managerial accounting and financial accounting
c. managerial accounting and environmental accounting
d. financial accounting and tax accounting systems
ANS: B
9.
Public accountants are normally

a. Certified Public Accountants
b. Forensic accountants
c. Certified Internal Auditors
d. Certified Management Accountants
ANS: A
10. Which of the following is a specialized field of accounting?
a. social accounting
b. tax accounting
c. environmental accounting
d. all are correct
ANS: D
11. Which of the following is not true about a manufacturing business?
a. They change inputs to products which are sold to their customers.
b. Their primary goal is to maximize profits.
c. Only large business can be considered a manufacturing business.
d. All are true.
ANS: C
DIF: Moderate
OBJ: 01-01
14. Select the type of business that is most likely to obtain large amounts of resources by issuing
stock.
a. Partnership
b. Corporation
c. Proprietorship
d. None are correct.
ANS: B
16. Capital market stakeholders have an interest in the company because

a. they provide incentives for the company to market their products.
b. they are part of the Marketing Department that is responsible for promoting the products
or services to increase the business profits.
c. they help market their products to customers or find vendors to supply needed inputs.
d. they provide major financing for the business.
ANS: D
DIF: Moderate
OBJ: 01-01
17. ____ are considered to be product or service market stakeholders.
a. Employees and customers
b. Customers and vendors
c. Owners and managers
d. Government and banks
ANS: B
18. The following are examples of internal stakeholders except:
a. Managers
b. Owners
c. Employees
d. all of the above
ANS: B
19. Due to various fraudulent business practices and accounting coverups in the early 2000s,
Congress enacted the Sarbanes-Oxley Act of 2002. The act was responsible for establishing
a new oversight board for public accountants called the
a. Generally Accepted Accounting Practices for Public Accountants Board.
b. Public Company Accounting Oversight Board.
c. Congressional Accounting Oversight Board.
d. None are correct.
ANS: B
20. Which of the following is the best description of accountings role in business?
a. Accounting provides stockholders with information regarding the market value of the
companys stocks.
b. Accounting provides information to managers to operate the business and to other
stakeholders to make decisions regarding the economic condition of the company.
c. Accounting provides creditors and banks with information regarding the credit risk rating
of the company.
d. Accounting is not responsible for providing any form of information to stakeholders.
That is the role of the Information Systems Department.
ANS: B
DIF: Moderate
OBJ: 01-01
21. Managerial accountants would be responsible for providing the following information:
a. Tax reports to government agencies.
b. Profit reports to owners and management.
c. Expansion of a product line report to management.

d. Consumer reports to customers.
ANS: C
DIF: Moderate
OBJ: 01-01
22. Which of the following is not a certification for accountants?
a. CIA
b. CMA
c. CISA
d. All are true.
ANS: D
DIF: Moderate
OBJ: 01-01
23. Which of the following is not a characteristic of a corporation?
a. Corporations are organized as a separate legal taxable entity
b. Ownership is divided into shares of stock.
c. Corporations experience an ease in obtaining large amounts of resources by issuing stock.
d. A corporations resources are limited to their individual owners resources.
ANS: D
DIF: Moderate
OBJ: 01-01
24. Which of the following is not a role of accounting in business?
a. To provide reports to stakeholders about the economic activities and conditions of a
business.
b. To personally guarantee loans of the business.
c. To provide information for managers to use in operating the business.
d. To assess the various informational needs of stakeholders and design its accounting
system to meet those needs.
e. To provide information to other stakeholders to use in assessing the economic
performance and condition of the business.
ANS: B
DIF: Moderate
OBJ: 01-01
25. Which of the following is one of the sound principles for ethical behavior?
a. avoiding small ethical lapses
b. focusing on long-term reputation
c. possibly suffering adverse consequences for holding to an ethical position
d. all are correct
ANS: D
DIF: Moderate
OBJ: 01-01
27. The initials GAAP stand for
a. General Accounting Procedures
b. Generally Accepted Plans
c. Generally Accepted Accounting Principles
d. Generally Accepted Accounting Practices
ANS: C
DIF: Moderate
OBJ: 01-02
29. The business entity concept means that
a. the owner is part of the business entity
b. an entity is organized according to state or federal statutes
c. an entity is organized according to the rules set by the IASB

d. the entity is an individual economic unit for which data are recorded, analyzed, and
reported
ANS: D
30. For accounting purposes, the business entity should be considered separate from its owners
if the entity is
a. a corporation
b. a proprietorship
c. a partnership
d. all of the above
ANS: D
DIF: Moderate
OBJ: 01-02
31. Smith Company purchased $105,000 of computer equipment from Brown Company. Smith
Company paid for the equipment using cash that had been obtained from the initial
investment by Connie Smith. The transaction involving the computer equipment should be
recorded on the accounting records of which of the following entities?
a. Smith Company and Connie Smith's personal records
b. Brown Company and Connie Smith's personal records
c. Brown Company
d. Smith Company and Brown Company
ANS: D
DIF: Difficult
OBJ: 01-02
32. The objectivity principle requires that
a. business transactions must be consistent with the objectives of the entity
b. the International Accounting Standards Board must be fair and unbiased in its
deliberations over new accounting standards
c. accounting principles must meet the objectives of the SEC
d. amounts recorded in the financial statements must be based on independently verifiable
evidence
ANS: D
DIF: Moderate
OBJ: 01-02
33. The Reynolds Company estimated that the value of its land had increased from $10,000 to
$16,000 and therefore wrote up the land account to $16,000. Which accounting concept(s)
was (were) violated?
a. cost concept
b. objectivity concept
c. unit of measure concept
d. cost and objectivity concepts
ANS: A
DIF: Difficult
OBJ: 01-02
34. John Williams owns stock in the Indoor Advertising Company. Recently, John was paid
$18,000 in the form of cash dividends from Indoor Advertising, and he contributed $10,000,
in his name, to the Red Cross. The contribution of the $10,000 should be recorded on the
accounting records of which of the following entities?
a. Indoor Advertising and the Red Cross
b.
c.
d.
ANS:
John William's personal records and the Red Cross

John William's personal records and Indoor Advertising
John William's personal records, Indoor Advertising, and the Red Cross
B
DIF: Difficult
OBJ: 01-02
35. Equipment with an estimated market value of $45,000 is offered for sale at $65,000. The
equipment is acquired for $10,000 in cash and a note payable of $40,000 due in 30 days. The
amount used in the buyer's accounting records to record this acquisition is
a. $50,000
b. $65,000
c. $10,000
d. $45,000
ANS: A
DIF: Difficult
OBJ: 01-02
36. ____ is the authoritative body having the primary responsibility for developing accounting
principles.
a. FASB
b. IRS
c. SEC
d. AICPA
ANS: A
37. Which of the following concepts relates to separating the reporting of business and personal
economic transactions?
a. Cost Concept
b. Unit of Measure Concept
c. Business Entity Concept
d. Objectivity Concept
ANS: C
38. Aztec Company is selling a piece of land adjacent to their business. An appraisal reported
the market value of the land to be $100,000. The Majestic Company initially offered to buy
the land for $87,000. The companies settled on a purchase price of $95,000. On the same
day, another piece of land on the same block sold for $102,000. Under the cost concept,
what is the amount that will be used to record this transaction in the accounting records?
a. $100,000
b. $87,000
c. $102,000
d. $95,000
ANS: D
DIF: Moderate
OBJ: 01-02
39. Which of the following is not true of accounting principles?
a. Financial accountants follow generally accepted accounting principles (GAAP).
b. Following GAAP allows users to compare one company to another.
c. A new accounting principle can be adopted with stockholders approval.
d. The Financial Accounting Standards Board (FASB) has primary responsibility for
developing accounting principles.
e. Accounting principles develop from research, accepted accounting practices, and
pronouncements of authoritative bodies.
ANS: C
DIF: Moderate
OBJ: 01-02
40. Owned resources of a business are referred to as
a. assets
b. liabilities
c. equities
d. revenues
ANS: A
41. Assets are
a. always greater than liabilities.
b. either cash or accounts receivables
c. the same as expenses because they are acquired with cash
d. financed by the company and/or creditors
ANS: D
42. Debts owed by a business are referred to as
a. accounts receivables
b. equities
c. stockholders equity
d. liabilities
ANS: D
43. The accounting equation may be expressed as
a. Assets = Equities - Liabilities
b. Assets + Liabilities = Stockholders Equity
c. Assets = Revenues less Liabilities
d. Assets - Liabilities = Stockholders Equity
ANS: D
DIF: Moderate
OBJ: 01-03
44. Which of the following is not an asset?
a. Investments
b. Cash
c. Inventory
d. Stockholders Equity
ANS: D
45. The assets and liabilities of the company are $155,000 and $60,000 respectfully.
Stockholders equity should equal
a. $215,000
b. $155,000
c. $60,000
d. $95,000
ANS: A
DIF:
Easy
OBJ: 01-03
46. If total liabilities decreased by $25,000 during a period of time and stockholders' equity
increased by $30,000 during the same period, the amount and direction (increase or
decrease) of the period's change in total assets is
a. $65,000 increase
b. $5,000 decrease
c. $5,000 increase
d. $65,000 decrease
ANS: C
DIF: Moderate
OBJ: 01-03
47. Which of the following is not a true statement about the accounting equation and its
elements?
a. The accounting equation is Assets = Liabilities - Stockholders Equity.
b. Assets are the resources a business possesses.
c. Liabilities represent debts of a business.
d. Examples of assets are cash, land, buildings, and equipment.
e. Stockholders equity are the rights of the stockholders.
ANS: A
DIF: Moderate
OBJ: 01-03
48. Which of the following is not a business transaction?
a. make a sales offer
b. sell goods for cash
c. receive cash for services to be rendered later
d. pay for supplies
ANS: A
DIF: Moderate
OBJ: 01-04
49. A business paid $9,000 to a creditor in payment of an amount owed. The effect of the
transaction on the accounting equation was to
a. increase one asset, decrease another asset
b. increase an asset, increase a liability
c. decrease an asset, decrease a liability
d. increase an asset, increase stockholders' equity
ANS: C
DIF: Moderate
OBJ: 01-04
50. Earning revenue
a. increases assets, increases stockholders equity.
b. increases assets, decreases stockholders' equity
c. increases one asset, decreases another asset
d. decreases assets, increases liabilities
ANS: A
DIF: Moderate
OBJ: 01-04
51. The monetary value charged to customers for the performance of services sold is called a(n)
a. asset
b. net income
c. capital
d. revenue
ANS: D
DIF:
Easy
OBJ: 01-04
52. Revenues are reported when

a. a contract is signed
b. cash is received from the customer
c. work is begun on the job
d. work is completed on the job
ANS: D
DIF: Moderate
OBJ: 01-04
53. Expenses are recorded when
a. cash is paid for services rendered
b. a bill is received in advance of services rendered
c. services are rendered
d. none are correct
ANS: C
DIF: Moderate
OBJ: 01-04
54. Goods purchased on account for future use in the business, such as supplies, are called
a. prepaid liabilities
b. revenues
c. prepaid expenses
d. liabilities
ANS: C
55. The asset created by a business when it makes a sale on account is termed
a. accounts payable
b. prepaid expense
c. unearned revenue
d. accounts receivable
ANS: D
56. The debt created by a business when it makes a purchase on account is referred to as an
a. account payable
b. account receivable
c. asset
d. expense payable
ANS: A
57. If total assets decreased by $47,000 during a period of time and stockholders' equity
increased by $24,000 during the same period, then the amount and direction (increase or
decrease) of the period's change in total liabilities is
a. $23,000 increase
b. $47,000 decrease
c. $71,000 decrease
d. $71,000 increase
ANS: C
DIF:
Moderate
OBJ: 01-04
58. The payment of dividends

a. increase expenses
b. decrease expenses
c. increase cash
d. decrease stockholders' equity
ANS: D
59. Stockholders' Equity is increased by which of the following accounts?
a. cash
b. revenue
c. accounts receivable
d. all are correct
ANS: B
60. How does the purchase of supplies on account affect the accounting equation?
a. assets increase; stockholders' equity decreases
b. assets increase; liabilities increase
c. assets increase; liabilities decrease
d. liabilities increase; stockholders' equity decreases
ANS: B
DIF: Moderate
OBJ: 01-04
61. How does the rendering of services on account affect the accounting equation?
a. assets increase; stockholders equity increases
b. assets decrease; stockholders' equity decrease
c. assets increase; stockholders' equity decreases
d. liabilities increase; stockholders' equity decreases
ANS: A
DIF: Moderate
OBJ: 01-04
62. How does paying a liability in cash affect the accounting equation?
a. assets increase; liabilities decrease
b. assets increase; liabilities increase
c. assets decrease; liabilities decrease
d. liabilities decrease; stockholders' equity increases
ANS: C
DIF: Moderate
OBJ: 01-04
63. How does the payment of dividends affect the accounting equation?
a. assets decrease; stockholders' equity decreases
b. assets decrease; stockholders' equity increases
c. assets increase; liabilities decrease
d. no effect on the assets, liabilities, or stockholders' equity
ANS: A
DIF: Moderate
OBJ: 01-04
64. How does receiving a bill to be paid next month for services rendered affect the accounting
equation?
a.
b.
c.
d.
ANS:
assets decrease; stockholders' equity decreases

assets increase; liabilities increase
liabilities increase; stockholders' equity increases
liabilities increase; stockholders' equity decreases
D
DIF: Moderate
OBJ: 01-04
65. How does the collection of cash from a customer who was previously put on account affect
the accounting equation?
a. assets decrease; stockholders' equity decreases
b. assets increase; stockholders' equity increases
c. assets increase; assets decrease
d. assets increase; liabilities increase
ANS: C
DIF: Moderate
OBJ: 01-04
66. How does the purchase of equipment by signing a note affect the accounting equation?
a. assets increase; assets decrease
b. assets increase; liabilities decrease
c. assets increase; liabilities increase
d. assets increase; stockholders' equity increases
ANS: C
DIF: Moderate
OBJ: 01-04
67. Land, originally purchased for $20,000, is sold for $75,000 in cash. What is the effect of the
sale on the accounting equation?
a. assets increase $75,000; stockholders' equity increases $75,000
b. assets increase $55,000; stockholders' equity increases $55,000
c. assets increase $75,000; liabilities decrease $20,000; stockholders' equity increases
$55,000
d. assets increase $20,000; no change for liabilities; stockholders' equity increases $75,000
ANS: B
DIF: Difficult
OBJ: 01-04
68. The Kennedy Company sold land for $60,000 in cash. The land was originally purchased for
$40,000, and at the time of the sale, $15,000 was still owed to First National Bank on that
purchase. After the sale, The Kennedy Company paid off the loan to First National Bank.
What is the effect of the sale and the payoff of the loan on the accounting equation?
a. assets increase $20,000; liabilities decrease $15,000; stockholders' equity increases
$5,000
b. assets increase $5,000; liabilities decrease $15,000; stockholders' equity increases
$20,000
c. assets increase $60,000; liabilities decrease $15,000; stockholders' equity increases
$20,000
d. assets increase $20,000; liabilities decrease $15,000; stockholders' equity increases
$35,000
ANS: B
DIF: Difficult
OBJ: 01-04
69. On November 1 of the current year, the assets and liabilities of Jim Chu, M.D., are as
follows: Cash, $10,000; Accounts Receivable, $8,200; Supplies, $1,050; Land, $25,000;
Accounts Payable, $6,530. What is the amount of stockholders' equity as of November 1 of
the current year?
a. $37,720
b. $44,430
c. $21,500
d. $50,780
ANS: A
DIF: Moderate
OBJ: 01-04
70. Al Shea is a stockholder and operator of SawTooth Company. As of the end of its accounting
period, December 31, 2007, SawTooth Company has assets of $925,000 and liabilities of
$285,000. During 2008, Al Shea invested an additional $50,000 in exchange for capital
stock and was paid dividends in the amount of $30,000 from the business. What is the
amount of net income during 2008, assuming that as of December 31, 2008, assets were
$980,000, and liabilities were $255,000?
a. $ 95,000
b. $ 65,000
c. $165,000
d. $725,000
ANS: B
DIF: Difficult
OBJ: 01-04
71. The total assets and the total liabilities of a business at the beginning and at the end of the
year appear below. During the year, the stockholders were paid dividends in the amount of
$50,000 and had made an additional investment of $35,000 in the business.
Beginning of year
End of year
Assets
$295,000
355,000
Liabilities
$190,000
220,000
The amount of net income for the year was

a. $85,000
b. $40,000
c. $135,000
d. $45,000
ANS: D
DIF: Difficult
OBJ: 01-04
72. If stockholdersequity at the beginning of the period was $65,000, ending balance is
$43,000, and the dividends were paid in the amount of $16,000, the amount of net income or
net loss was
a. net income of $37,000
b. net income of $8,000
c. net loss of $22,000
d. net loss of $6,000
ANS: D
DIF: Difficult
OBJ: 01-04
73. Transactions affecting stockholders' equity include
a. stockholders investments and payment of liabilities
b. stockholders investments and dividends, revenues, and expenses
c. stockholders investments, revenues, expenses, and collection of accounts receivable
d. dividends, revenues, expenses, and purchase of supplies on account
ANS: B
74. Rudy River is starting his computer repair business and has deposited in initial investment of
$10,000 into the business cash account in exchange for capital stock. Identify how the
accounting equation will be affected.
a. Increase Assets (Cash) and increase Liabilities (Accounts Payable)
b. Increase Assets (Cash) and increase Assets (Accounts Receivable)
c. Increase Assets (Accounts Receivable) and decrease Liabilities (Accounts Payable)
d. Increase Assets (Cash) and increase Stockholders Equity (Capital Stock)
ANS: D
DIF: Moderate
OBJ: 01-04
75. Rivers Computer Makeover Company purchased $15,000 of Computer and Office
Equipment. The company paid $3,000 in cash at the time of the purchase and signed a
promissory note for the remainder to be paid in six monthly installments. How will this
transaction affect the accounting equation?
a. Increase Assets (Computer and Office Equipment $15,000) and decrease Liabilities
(Accounts Payable $15,000)
b. Increase Total Assets by a net amount of $12,000 (increase Computer and Office
Equipment $15,000 and decrease Cash $3,000) and increase Liabilities (Notes Payable
$12,000)
c. Increase Total Assets by a net amount of $15,000 (increase Computer and Office
Equipment $12,000 and increase Cash $3,000) and decrease Liabilities (Accounts
Payable $15,000)
d. Increase Assets (Computer and Office Equipment $12,000) and increase Liabilities
(Accounts Payable $12,000)
ANS: B
DIF: Difficult
OBJ: 01-04
76. Rivers Computer Makeover Company purchased various computer supplies on account to be
used for repairing their customers computers. How will this business transaction affect the
accounting equation?
a. Increase Assets (Supplies) and decrease Assets (Cash)
b. Increase Assets (Supplies) and Increase Liabilities (Accounts Payable)
c. Increase Assets (Supplies) and decrease Stockholders Equity (Supplies Expense)
d. Increase Stockholders Equity (Supplies Expense) and increase Liabilities (Accounts
Payable)
ANS: A
DIF: Moderate
OBJ: 01-04
77. There are four transactions that affect stockholders equity. Which are the two transactions
that increase stockholders equity?
a. Revenues and expenses
b. Expenses and dividends
c. Revenues and stockholders investments
d. Stockholders investments and expenses
ANS: C
78.
There are four transactions that directly affect Stockholders Equity. Which are the two
transactions that decrease Stockholders Equity?
a. Dividends and expenses
b. Revenues and expenses
c. Stockholders investments and revenues
d. Stockholders investments and expenses
ANS: A
79. Rivers Computer Makeover Company has received $3,500 in cash for services rendered.
What affect does this transaction have on the accounting equation?
a. Increase Assets (Cash) and decrease Stockholders Equity (Expenses)
b. Increase Assets (Cash) and decrease Assets (Accounts Receivable)
c. Increase Assets (Accounts Receivable) and increase Stockholders Equity (Fees Earned)
d. Increase Assets (Cash) and increase Stockholders Equity (Fees Earned)
ANS: D
DIF: Moderate
OBJ: 01-04
80. Rivers Computer Makeover Company paid their first installment on their Notes Payable in
the amount of $2,000. How will this transaction affect the accounting equation?
a. Increase Liabilities (Notes Payable) and decrease Assets (Cash)
b. Decrease Assets (Cash) and decrease Stockholders Equity (Note Payable Expense)
c. Decrease Assets (Cash) and decrease Assets (Notes Receivable)
d. Decrease Assets (Cash) and decrease Liabilities (Notes Payable)
ANS: D
DIF: Moderate
OBJ: 01-04
81. Rivers Computer Makeover Company received their first electric bill in the amount of $60
which will be paid next month. How will this transaction affect the accounting equation?
a. Increase Liabilities (Accounts Payable) and decrease Stockholders Equity (Utilities
Expense)
b. Increase Liabilities (Accounts Receivable) and decrease Stockholders Equity (Utilities
Expense)
c. Decrease Assets (Cash) and decrease Liabilities (Accounts Payable)
d. Decrease Assets (Cash) and decrease Stockholders Equity (Utilities Expense)
ANS: A
DIF: Moderate
OBJ: 01-04
82. Rudy Rivers has withdrawn $750 from Rivers Computer Makeover Companys cash account
to deposit in his personal account. How does this transaction affect Rivers Computer
Makeover Companys accounting equation?
a. Increase Assets (Accounts Receivable) and decrease Assets (Cash)
b. Decrease Assets (Cash) and decrease Stockholders Equity (Dividends)
c. Decrease Assets (Cash) and decrease Liabilities (Accounts Payable)
d. Increase Assets (Cash) and decrease Stockholders Equity (Dividends)
ANS: B
DIF: Moderate
OBJ: 01-04
83. Which of the following is not a business transaction?
a. Becky deposits $25,000 in a bank account in the name of Beckys Daycare.
b. Becky provided services to customers earning fees of $300.
c. Becky pays her monthly personal credit card bill.
d. Becky hires a part-timer to begin work next week.
e. Becky purchased cribs for her daycare agreeing to pay the supplier next month.
ANS: C
DIF: Difficult
OBJ: 01-04
84. The financial statement that presents a summary of the revenues and expenses of a business
for a specific period of time, such as a month or year, is called a(n)
a. prior period statement
b. statement of retained earnings
c. income statement
d. balance sheet
ANS: C
85. All of the following are financial statement(s) of a corporation except the
a. statement of retained earnings
b. statement of owner's equity
c. income statement
d. statement of cash flows
ANS: B
86. Which of the following financial statements reports information as of a specific date?
a. income statement
c. statement of cash flows
d. balance sheet
ANS: D
DIF: Easy
OBJ: 01-05
87. Four financial statements are usually prepared for a business. The statement of cash flows is
usually prepared last. The statement of retained earnings (RE), the balance sheet (B), and the
income statement (I) are prepared in a certain order to obtain information needed for the
next statement. In what order are these three statements prepared?
a. I,RE, B
b. B, I, RE
c. RE, I, B
d. B,RE, I
ANS: A
88. Liabilities are reported on the
a. income statement
c. statement of cash flows
d. balance sheet
ANS: D
89. Cash investments made by the stockholders of the business are reported on the statement of
cash flows in the
a. financing activities section
b. investing activities section
c. operating activities section
d. supplemental statement
ANS: A
90. The year-end balance of the retained earnings account appears in
a. both the statement of retained earnings and the income statement
b. only the statement of retained earnings
c. both the statement of retained earnings and the balance sheet
d. both the statement of retained earnings and the statement of cash flows
ANS: C
91. A financial statement user would determine if a company was profitable or not during a
specific period of time by reviewing
a. the Income Statement.
b. the Balance Sheet.
c. the Statement of Cash Flows.
d. cannot be determined.
ANS: A
92. If the president of the company wanted to know how money flowed into and out of the
company, what financial statement would she use?
a. Income Statement
b.
c.
d.
ANS:
Statement of Cash Flows

Balance Sheet
None are correct.
B
93. The asset section of the Balance Sheet normally presents assets in
a. alphabetical order.
b. order of largest to smallest dollar amounts.
c. in the order what will be converted into cash.
d. no order.
ANS: C
94. The statement of cash flows is separately in three major sections. They are as follows:
a. Operating, Investing, and Financing
b. Revenues, Expenses, and Net Income
c. Assets, Liabilities, and Stockholders Equity
d. Investments, Dividends, and Income
ANS: A
95. Which of the following is not a principle financial statement?
a. Income Statement
b. Statement of Resources Owned
c. Statement of Retained Earnings
d. Statement of Cash Flows
e. Balance Sheet
ANS: B
EXERCISE/OTHER
1.
Give the major disadvantage of disregarding the cost concept and constantly revaluing assets
based on appraisals and opinions.
ANS:
Accounting reports would become unstable and unreliable.
2.
On June 7, Roller Skates Company offered to pay $75,000 for land that had a selling price of
$90,000. On June 15, Roller Skates accepted a counteroffer of $83,000. On July 5, the land
was assessed at a value of $100,000 for property tax purposes. On December 10, Roller
Skates Company was offered $125,000 for the land by another company. At what value
should the land be recorded in Roller Skates Companys records?
ANS:
$83,000
NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 1-1
3.
Dan Aaron is the president and operator of Reach It Baseball Batting Cages. At the end of its
accounting period, December 31, 2007, Reach It has assets of $650,000 and liabilities of
$225,000. Using the accounting equation, determine the following amounts:
(a) Stockholders Equity as of December 31, 2007.
(b) Stockholders Equity as of December 31, 2008, assuming that assets increased
by $85,000 and liabilities increased by $15,000 during 2008.
ANS:
(a) $650,000 = $225,000 + $425,000
(b) ($650,000 + $85,000) = ($225,000 + $15,000) + $495,000
DIF: Moderate
OBJ: 01-03
4. Sara Thomson is the president and operates the Thomson Company. The following selected
transactions were completed by Thomson Company during August:
1.
2.
3.
4.
5.
6.
Received cash from the stockholder as additional investment $15,000.

Paid creditors on account $3,000.
Billed customers for services on account, $7,665.
Received cash from customers on accounts $5,645.
Paid cash dividends, $3,500.
Received electric bill $60, to be paid next month.
Indicate the effect of each transaction on the accounting equation:

1) By Account type - (A)assets, (L)liabilities, (SE)Stockholders Equity,
(R)revenue, and (E)expense
2) Name of Account for the entry
3) The amount by of the transaction.
4) Indicate the specific item within the account equation element that is affected.
Note: Each transaction has two entries.
Entry
Acct Name of Amount Increase or
Type Acct
Decrease
(1)
(2)
(3)
(4)
1
2
3
4
5
6
Acct
Type
(1)
Entry
Name
Amount Increase or
of Acct
Decrease
(2)
(3)
(4)
ANS:
Entry
Name of Amount Increase or
Acct
Decrease
(2)
(3)
(4)
Cash
15,000 Incr
Acct
Type
(1)
A
2
3
A
A
4
5
A
A
5.
The assets and liabilities of Robinson Tree Services at May 31, 2008, the end of the current
year, and its revenue and expenses for the year are listed below. The stockholders equity
was $190,000 at June 1, 2007, the beginning of the current year.
Cash
Acct
Rec
Cash
Cash
Acct
Type
(1)
SE
3,000 Decr
7,665 Incr
L
R
5,645 Incr
3,500 Decr
A
SE
Name of
Acct
(2)
Capital
stock
Liab
Fees
Earned
Acct Rec
Dividend
s
Util Exp
Entry
Amount
Increase or
Decrease
(3)
(4)
15,000 Incr
3,000 Decr
7,665 Incr
5,645 Decr
3,500 Incr
Acct
60 Incr
E
60 Incr
Pay
DIF: Difficult
OBJ: 01-04
Accounts Payable
Accounts Receivable
Cash
Fees Earned
Land
Building
$1,200
$12,340
$32,990
$78,350
$65,000
$143,670
Miscellaneous Expense
Office Expense
Supplies
Wages Expense
Dividends
$220
$560
$1,670
$26,770
$3,000
Prepare an income statement for the current year ended May 31, 2008.
ANS:
Robinson Tree Services
Income Statement
For the Year Ended May 31, 2008
Fees Earned
Expenses:
$78,350
Wages Expense
Office Expense
Total Expenses
Net Income
$26,770
560
220
27,550
$50,800
DIF: Moderate
OBJ: 01-05
6.
year, and its revenue and expenses for the year are listed below. The capital stock was
$100,000 at June 1, 2007, the beginning of the current year. Mr. Robinson invested an
additional $15,000 in the business in exchange for capital stock during the year.
Accounts Payable
Accounts Receivable
Cash
Fees Earned
Land
Building
$1,200
$12,340
$32,990
$78,350
$65,000
$143,670
Office Expense
Supplies
Wages Expense
Dividends
Retained Earnings
$220
$560
$1,670
$26,770
$3,000
$90,000
Prepare a statement of retained earnings for the current year ended May 31, 2008.
ANS:
Statement of Retained Earnings
Retained earnings, June 1, 2007
Net Income for the year
$90,000
50,800
$140,800
3,000
$137,800
Less dividends
Retained earnings, May 31, 2008
DIF: Moderate
OBJ: 01-05
7.
year, and its revenue and expenses for the year are listed below. The capital stock account
was $100,000 at June 1, 2007, the beginning of the current year. Additional information: Mr.
Robinson made an additional investment of $15,000 in exchange for capital stock during the
year.
Accounts Payable
Accounts Receivable
Cash
Fees Earned
Land
Retained earnings
$1,200
$12,340
$32,990
$78,350
$65,000
$90,000
Office Expense
Building
Wages Expense
Dividends
$220
$560
$143,670
$26,770
$3,000
Prepare a balance sheet for the current year ended May 31, 2008.
ANS:
Balance Sheet
May 31, 2008
Assets
Cash
Accounts Receivable
Land
Building
Total Assets
Liabilities
$32,990 Accounts Payable
12,340
65,000 Stockholders Equity
143,670 Capital stock
115,000
Retained Earnings
137,800
Total Stockholders Equity
$254,000 Total liab and Stockholders
Equity
$ 1,200
252,800
$254,000
DIF: Moderate
OBJ: 01-05
8.
A summary of cash flows for Robinson Tree Services for the year ended May 31, 2008, is
shown below.
Cash receipts:
Cash received from customers
Cash received from additional investment by stockholder
$82,990
15,000
Cash payments:
Cash paid for expenses
Cash paid for land
Cash paid for supplies
Dividends
$26,000
65,000
430
3,000
The cash balance as of June 1, 2007
$29,340
Prepare a statement of cash flows for Robinson Tree Services for the year ended May 31,
2008.
ANS:
Cash flows from operating activities:
Deduct cash payments for expenses/supplies
Net cash flows from operating expenses
$82,990
26,430
$56,560
Cash flows from investing activities:

Cash paid for land and building
(65,000)
Cash from financing activities:

Cash received from stockholder as investment
Deduct cash dividends paid
Net cash flows from financing activities
Net increase in cash during year
Cash as of June 1, 2007
Cash as of May 31, 2008
15,000
3,000
12,000
$ 3,560
29,340
$32,900
DIF: Difficult
OBJ: 01-05
9. What information does the Income Statement give to business stakeholders?
ANS:
The Income Statement reports the revenues and expenses for a period of time. The result is either
a Net Income or a Net Loss.
10. What are the three sections of the Statement of Cash Flows?
ANS:
Operating Activities, Investing Activities, and the Financing Activities
PROBLEM
1.
For each of the following companies, identify whether they are a service, merchandising, or
manufacturing business.
A.
B.
C.
D.
E.
F.
G.
H.
I.
Dillards
Time Warner Cable
ebay.com
Blockbuster
Applebees
Sylvania
Circuit City
Banana Republic
H & R Block
ANS:
A.
B.
C.
D.
E.
F.
G.
H.
I.
Merchandising
Service
Service
Service
Service / Manufacturing
Manufacturing
Merchandising
Merchandising
Service
DIF: Moderate
OBJ: 01-01
2.
What type of business stakeholders are the following? Identify them as Capital Market
Stakeholders, Product or Service Market Stakeholders, Government Stakeholders, or
Internal Stakeholders.
A.
B.
C.
D.
E.
F.
G.
H.
Payroll Manager
Bank
Presidents Secretary
Internal Revenue Service
Raw Material Vendors
Owner
Social Security Administration
Health Insurance Provider
ANS:
A.
B.
C.
D.
E.
F.
G.
H.
Internal Stakeholder
Capital market stakeholder
Internal Stakeholder
Government Stakeholder
Product or service market stakeholder
Capital market stakeholder
Government Stakeholder
Product or service market stakeholder
DIF: Moderate
OBJ: 01-01
3.
Determine the missing amount for each of the following:

Assets
(a)
$50,000
$35,000
Liabilities
$18,000
(b)
$ 7,000
Stockholders' Equity
$11,000
$28,000
(c)
ANS:
(a) $29,000
(b) $22,000
(c) $28,000
4.
Indicate whether each of the following represents an asset, liability, or stockholders' equity:
(a)
(b)
(c)
(d)
(e)
(f)
accounts payable
wages expense
capital
accounts receivable
dividends
land
ANS:
(a) liability
(b) stockholders equity
(c) stockholders equity
(d) asset
(e) stockholders equity
(f) asset

5.
Identify each of the following as an (1) increase in stockholders' equity, or a (2) decrease in
stockholders' equity.
(a)
(b)
(c)
(d)
(e)
(f)
Fees Earned
Wages Expense
Dividends
Lawn Care Revenue
Investment
Supplies Expense
ANS:
(a) 1
(b) 2
(c) 2
(d) 1
(e) 1
(f) 2
6.
Selected transactions completed by a corporation are described below. Indicate the effects of
each transaction on assets, liabilities, and stockholders' equity by inserting "+" for increase
and "-" for decrease in the appropriate columns at the right. If appropriate, you may insert
more than one symbol in a column. If there is no change in the column, leave it blank.
(a)
Received cash from stockholder as an additional

investment
(b) Purchased supplies on account
(c) Paid rent for the current month
(d) Received cash for services sold to customers
(e) Returned some defective supplies purchased in (b)
(f) Paid insurance premiums in advance
(g) Paid cash to creditor for purchases in (b)
(h) Charged customers for services sold on account
(i) Paid cash to a customer as a refund for an
overcharge
(j) Received cash on account from customers
(k) Dividends paid
(l) Recorded the cost of supplies used during the year
(m) Received invoice for electricity used
(n) Paid wages
(o) Purchased a truck for cash
ANS:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
A
+
+
+
+,+
+,-
L
+
+
+
-
+
+,-
SE
+
DIF: Moderate
OBJ: 01-04
A
_____
L
_____
SE
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
7.
Henrys Taxes, a tax preparation business had the following transactions during the month of
April:
Example: Received cash the stockholder, $15,000.
1. Received cash for providing accounting services, $8,000.
2. Billed customers on account for providing services, $4,000.
3. Paid advertising expense, $400.
4. Received cash from customers on account, $3,500.
5. Dividends were paid to stockholders, $1,000.
6. Received telephone bill, $100.
7. Paid telephone bill, $100.
Required:
1) In the table below, state the accounts affected by each transaction.
2) Indicate the effect on the accounting equation of each transaction.
Assets
= Liabilities
Ex Cash
+15,000
1.
2.
3.
4.
5.
6.
7.
+ Stockholders
Equity
+15,000
ANS:
Ex
1.
2.
3.
4.
5.
6.
7.
Assets
Cash +15,000
Cash + 8,000
A/R + 4,000
Cash -400
Cash + 3,500
A/R -3,500
Cash -1,000
Cash -100
= Liabilities
A/P + 100
A/P -100
DIF: Moderate
OBJ: 01-04
+ Stockholders Equity
+15,000
Revenues + 8,000
Revenues + 4,000
Expenses - 400
Dividends -1,000
Expenses -100
8.
From the following list of accounts taken from Danson's accounting records, identify those
that would appear on the Income Statement.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Rent Expense
Land
Capital
Fees Earned
Dividends
Wages Expense
Investment
ANS:
(a), (d), (f)
9.
Identify which of the following accounts appear on a balance sheet.

(a)
(b)
(c)
(d)
(e)
(f)
(g)
Cash
Fees Earned
Capital Stock
Wages Payable
Rent Expense
Prepaid Advertising
Land
ANS:
(a), (c), (d), (f), (g)
10. Indicate whether each of the following activities would be reported on the Statement of Cash
Flows as an Operating Activity, an Investing Activity, a Financing Activity, or does not
appear on the Cash Flow Statement.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Cash paid for building

Cash paid to suppliers
Cash paid for dividends
Cash received from the sale of capital stock.
Cash received from the sale of a building
Borrowed cash from a bank
ANS:
(a) Investing
(b) Operating
(c) Financing
(d) Operating
(e) Financing
(f) Investing
(g) Financing
DIF: Difficult
OBJ: 01-05
11. For each of the following, determine the amount of net income or net loss for the year.
(a)
(b)
(c)
(d)
Revenues for the year totaled $90,500 and expenses totaled $44,500. The
stockholder made an additional investment of $15,000 in exchange for capital
stock during the year.
Revenues for the year totaled $75,500 and expenses totaled $110,500. Dividends
were paid in the amount of $20,000 during the year.
Revenues for the year totaled $198,000 and expenses totaled $85,000. The
stockholder invested an additional $20,000 in exchange for capital stock and
dividends of $15,000 per paid during the year.
Revenues for Smith Co. totaled $273,500 and expenses totaled $263,800. Cash
dividends of $30,000 were paid during the year.
ANS:
(a) $46,000 net income ($90,500 - $44,500)
(b) $35,000 net loss ($75,500 - $110,500)
(c) $113,000 net income ($198,000 - $85,000)
(d) $9,700 net income ($273,500 - $263,800)
DIF: Difficult
OBJ: 01-05
12. The total assets and total liabilities of Missy's Draperies, Inc. at the beginning and at the end
of the current fiscal year are as follows:
Total assets
Total liabilities
Jan. 1 Dec. 31
$250,000 $430,000
200,000 140,000
(a)
(b)
(c)
(d)
Determine the amount of net income earned during the year. The stockholders
did not invest any additional assets in the business during the year and made no
dividends were paid.
Determine the amount of net income during the year. The assets and liabilities
at the beginning and at the end of the year are unchanged from the amounts
presented above. However, dividends of $32,000 were paid in cash during the
year (no additional investments).
Determine the amount of net income earned during the year. The assets and
liabilities at the beginning and at the end of the year are unchanged from the
amounts presented above. However, the stockholder invested an additional
$40,000 in exchange for capital stock in the business in June of the current
fiscal year (no dividends).
Determine the amount of net income earned during the year. The assets and
liabilities at the beginning and at the end of the year are unchanged from the
amounts presented above. However, the stockholder invested an additional
$10,000 in exchange for capital stock in August of the current fiscal year and
dividends of $32,000 were paid during the year.
ANS:
(a) Stockholders' Equity at end of year
Stockholders' Equity at beginning of year
Net income
$290,000
50,000
$240,000
(b)
Increase in Stockholders' Equity as in (a)

Add dividends
Net income
$240,000
32,000
$272,000
(c)

Deduct additional investment
Net income
$240,000
40,000
$200,000
(d)

Add dividends
$240,000
36,000
$276,000
10,000
$266,000
Deduct additional investment

Net income
DIF: Difficult
OBJ: 01-05
13. Selected transaction data of a business for June are summarized below. Determine the
following amounts for June: (a) total revenue, (b) total expenses, (c) net income.
Service sales charged to customers on account during June
Cash received from cash customers for services performed in June
Cash received from customers on account during June:
Services performed and charged to customers prior to June
Services performed and charged to customers during June
Expenses incurred prior to June and paid during June
Expenses incurred and paid in June
Expenses incurred in June but not paid in June
Expenses for supplies used and insurance (not included above) applicable to
June
$35,000
30,000
15,000
20,000
8,250
38,500
7,000
1,000
ANS:
(a) $65,000 ($35,000 + $30,000)
(b) $46,500 ($38,500 + $7,000 + $1,000)
(c) $18,500 ($65,000 - $46,500)
DIF: Difficult
OBJ: 01-05
14. On May 1, 2007, Beths Services Company had account balances as follows:
Accounts payable
Accounts receivable
Cash
Fees earned
Insurance expense
Land
Miscellaneous expense
Prepaid insurance
Rent expense
Salary expense
Dividends
Supplies
Supplies expense
Utilities expense
Capital stock
Retained earnings
$ 8,900
25,950
11,390
70,800
1,475
74,400
1,510
2,000
8,000
35,300
15,100
950
825
3,800
81,000
20,000
Present, in good form, (a) an income statement for May, (b) a statement of retained earnings
for May, and (c) a balance sheet as of May 31.
ANS:
(a)
Beths Services Company
Income Statement
For the Month Ended May 31, 2007
Fees earned
$70,800
Operating expenses:
Salary expense
$35,300
Rent expense
8,000
Utilities expense
3,800
Supplies expense
825
Insurance expense
1,475
1,510
Total operating expenses
50,910
Net income
$19,890
(b)
For the Month Ended May 31, 2007
Retained Earnings May 1, 2007
Net income for the month
Subtotal
Less dividends
Retained Earnings, May 31, 2007
(c)
Balance Sheet
May 31, 2007
Assets
Liabilities
Cash
$ 11,390
Accounts payable
Accounts receivable
25,950
Prepaid insurance
2,000
Supplies
950
Capital Stock
81,000
Land
74,400
Retained Earnings
24,790
Total liabilities and
Total assets
$114,690
DIF: Difficult
OBJ: 01-05
$20,000
19,890
39,890
15,100
$24,790
8,900
105,790
$114,690
15. Koger Consultants began operations on June 1, 2007 by making an investment of $30,000 in
return for capital stock. The financial statements for Koger Consultants are shown below for
the month ended June 30, 2007 (the first month of operations). Determine the missing
amounts for letters (a) through (p).
Koger Consultants
Income Statement
For the Month Ended June 30, 2007
Fees earned
Operating expenses:
Wages expense
Rent expense
Supplies expense
Utilities expense
Net income
$22,000
$7,250
(a)
1,600
900
1,550
$
Koger Consultants
Statement of Retained Equity
Net income for June 30, 2007
Less dividends
(b)
(c)
0
(d)
$
(e)
4,000
(f)
Koger Consultants
Balance Sheet
June 30, 2007
Assets
Cash
Supplies
Land
(g)
1,100
(h)
Total assets
$45,900
Liabilities
Accounts payable
Capital stock
Retained earnings
$ (i)
(j)
(k)
$(l)
Koger Consultants
Cash flows from operating activities:
$22,000
Deduct cash payments for expenses and payments to
3,200
creditors
Net cash flow from operating activities
Cash flows from investing activities:
Cash payments for acquisition of land
Cash flows from financing activities:
Cash received as owner's investment
$
(m)
Deduct cash dividends paid
(n)
Net cash flow from financing activities
Net cash flow and Dec. 31, 2007 cash balance
$ 18,800
(20,000)
(o)
(p)
Place your answers in the space provided below. Hint: Use the interrelationships among the
financial statements to solve this problem.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
ANS:
(a) $4,600
(b) $15,900
(c) $6,100
(d) $6,100
(e) $6,100
(f) $2,100
(g) $24,800
(h) $20,000
(i) $13,800
(j) $30,000
(k) $2,100
(l) $45,900
(m) $30,000
(n) $ 4,000
(o) $26,000
(p) $24,800
DIF: Difficult
OBJ: 01-05
16. Pyle Computer Repairs, Inc. was organized on January 1, 2007, as a corporation. List the
errors that you find in the following financial statements and prepare the corrected
statements for the three months ended March 31, 2007.
Pyle Computer Repairs, Inc.
Income Statement
For the Three Months Ended March 31, 2007
Fees earned
Operating expenses:
Salary expense
Rent expense
Wages expense
Utilities expense
Answering service expense
Supplies expense
Net income
$40,000
$7,735
3,200
1,950
1,225
2,000
550
2,000
29,000
$11,000
Jay Pyle, CPA

March 31, 2007
Retained Earnings January, 1, 2007
Net income for the 3 months
Less dividends
Increase in Retained Earnings
Retained Earnings, March 31, 2007.
Assets
Land
Cash
Accounts payable
Supplies
Total assets
11,000
11,000
5,000
Balance Sheet
$10,000 Capital stock
15,860
Liabilities
2,670 Accounts receivable
925 Total liabilities and
$48,125 Stockholders' Equity
6,000
$6,000
$36,000
12,225
48,125
ANS:
Errors in the Jay Pyle, CPA, financial statements include the following:
(1)
Miscellaneous expense is incorrectly listed after utilities expense in the income

statement. Miscellaneous expense should be listed as the last expense, regardless of
the amount.
(2) The operating expenses are incorrectly added. Instead of $29,000, the total should
be $18,660.
(3) Because operating expenses are incorrectly added, the net income is incorrect. It
should be listed as $21,340.
(4) The statement of retained earnings should be for a period of time instead of a
specific date. That is, the statement of retained earnings should be reported "For the
Three Months Ended March 31, 2007."
(5) The amount of the stockholders equity is incorrect. It should be $36,340.
(6) The name of the company is missing from the balance sheet heading.
(7) The balance sheet should be as of "March 31, 2007," not "For the Three Months
Ended March 31, 2007."
(8) Cash, not Land, should be the first asset listed in the balance sheet.
(9) Accounts Payable is incorrectly listed as an asset in the balance sheet. Accounts
Payable should be listed as a liability.
(10) Liabilities should be listed in the balance sheet ahead of stockholders' equity.
(11) Accounts Receivable is incorrectly listed as a liability in the balance sheet.
Accounts Receivable should be listed as an asset.
(12) The total assets and the total liabilities do not foot.
Correctly prepared financial statements for Jay Pyle, CPA, are shown below.
Jay Pyle, CPA
Income Statement
Fees earned
Operating expenses:
Salary expense
Rent expense
Wages expense
Utilities expense
Answering service expense
Supplies expense
Net income
$40,000
$7,735
3,200
1,950
1,225
550
2,000
2,000
18,660
$21,340
Jay Pyle, CPA

Statement of Stockholders' Equity
Retained earnings, January, 1, 2007
Net income for three months
21,340
$21,340
Less dividends
5,000
Retained earnings, March 31, 2007
$16,340
Jay Pyle, CPA

Balance Sheet
March 31, 2007
Assets
Cash
Accounts receivable
Supplies
$15,860
12,225
925
Land
Total assets
10,000
$39,010
Liabilities
Accounts payable
Capital stock
20,000
Retained earnings
16,340
DIF: Difficult
OBJ: 01-05
$ 2,670
36,340
$39,010
Telephone Expense
Cash
Accounts Payable
Dividends
Fees Earned
Rent Expense
Supplies
Accounts Receivable
Computer Equipment
Capital Stock
Wages Expense
Utilities Expense
Notes Payable
Office Expense
$750
$3,150
$640
$300
$10,700
$1,000
$230
$1,800
$15,000
$13,080
$3,600
$350
$2,000
$240
17. Using the above accounts and their amounts, prepare in good format an Income Statement
for ABC Tutoring Company, month ended July 31, 2007:
ANS:
ABC Tutoring Company
Income Statement
For Month Ended July 31, 2007
Fees Earned
Expenses:
Wages Expense
Rent Expense
Telephone Expense
Utilities Expense
Office Expense
Total Expenses
Net Income
$10,700
$3,600
1,000
750
350
240
DIF: Moderate
OBJ: 01-05
5,940
$4,760
18. Using the above accounts and their amounts, prepare in good format a Statement of Retained
Earnings for ABC Tutoring Company, month ended July 31, 2007:
ANS:
For Month Ended July 31, 2007
Retained Earnings
Net Income
$ 0
4,760
$ 4,760
300
$ 4,460
Subtotal
Less: Dividends
Retained Earnings July 31, 2007
DIF: Moderate
OBJ: 01-05
19. Using the above accounts and their amounts, prepare in good format a Balance Sheet for
ABC Tutoring Company, month ended July 31, 2007:
ANS:
Balance Sheet
July 31, 2007
Assets
Cash
Accounts Receivable
Supplies
Computer Equipment
Total Assets
Total Liabilities and Stockholders
Equity
Liabilities:
Accounts Payable
Notes Payable
Total Liabilities
Capital Stock
13,080
Retained Earnings
4,460
Total Liabilities and Stockholders
Equity
$ 3,150
1,800
230
15,000
$ 20,180
640
2,000
$ 2,640
17,540
$20,180
DIF: Difficult
OBJ: 01-05
20. The account balances of Lovelady Travel Services at December 31, 2007 are listed below:
Accounts Payable
$12,000
Capital Stock
$10,000
Accounts Receivable
6,000
Supplies
2,000
Cash
16,000
Taxes Expense
300
Computer Equip
13,000
Utilities Expense
4,000
Fees Earned
47,000
Wages Expense
21,000
Rent Expense
6,000
Supplies Expense
700
Prepare and income statement, statement of retained earnings, and a balance sheet as of
December 31, 2007.
ANS:
Lovelady Travel Services
Income Statement
For the Year Ended December 31, 2007
Fees Earned
Operating
Expenses:
$ 47,000
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Taxes Expense
Total Operating Expenses
$ 21,000
6,000
4,000
700
300
$32,000
$15,000
Net Income
For the Year Ended December 31, 2007
Retained earnings 1/1/07
Net Income for the year
Retained earnings, 12/31/07
$0
15,000
$15,000

Balance Sheet
December 31, 2007
Assets
Cash
Accounts Receivable
Computer Equipment
Supplies
Liabilities
$16,000
6,000
13,000
2,000
Accounts Payable
$12,000
Stockholders Equity
Capital Stock
10,000
Retained Earnings 15,000
25,000
Total Assets
$37,000
Total Liabilities and

Stockholders Equity
DIF: Difficult
OBJ: 01-05
$37,000

Ch01 Introduction To Accounting and Business

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Ch01 Introduction To Accounting and Business

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Chapter 1

Introduction to Accounting and Business

Chapter 1/Introduction to Accounting and Business 2

Chapter 1/Introduction to Accounting and Business 3

Chapter 1Introduction to Accounting and Business

4 Chapter 1/Introduction to Accounting and Business

1. The main objective of a not-for-profit business is not to make a profit.

Accounting is thought to be the "language of business" because business information is

Large corporations such as Wal-Mart, Coca-Cola, and Nike operate as manufacturing

Chapter 1/Introduction to Accounting and Business 5

6 Chapter 1/Introduction to Accounting and Business

Chapter 1/Introduction to Accounting and Business 7

8 Chapter 1/Introduction to Accounting and Business

56. Expenses increase stockholders equity.

Received cash for services provided

Chapter 1/Introduction to Accounting and Business 9

10 Chapter 1/Introduction to Accounting and Business

Chapter 1/Introduction to Accounting and Business 11

Profit is the difference between

Most businesses are

Which of the items below is not a business organization form?

An entity that is organized in which ownership is divided into shares of stock is a

Financial reports are used by

Which of the following best describes accounting?

12 Chapter 1/Introduction to Accounting and Business

Which of the following is not a step in providing accounting information to stakeholders?

The two most common specialized fields of accounting in practice are

Public accountants are normally

Chapter 1/Introduction to Accounting and Business 13

16. Capital market stakeholders have an interest in the company because

14 Chapter 1/Introduction to Accounting and Business

c. Expansion of a product line report to management.

Chapter 1/Introduction to Accounting and Business 15

c. an entity is organized according to the rules set by the IASB

16 Chapter 1/Introduction to Accounting and Business

John William's personal records and the Red Cross

Chapter 1/Introduction to Accounting and Business 17

18 Chapter 1/Introduction to Accounting and Business

Chapter 1/Introduction to Accounting and Business 19

52. Revenues are reported when

20 Chapter 1/Introduction to Accounting and Business

58. The payment of dividends

Chapter 1/Introduction to Accounting and Business 21

assets decrease; stockholders' equity decreases

22 Chapter 1/Introduction to Accounting and Business

Chapter 1/Introduction to Accounting and Business 23

The amount of net income for the year was

24 Chapter 1/Introduction to Accounting and Business

Chapter 1/Introduction to Accounting and Business 25

26 Chapter 1/Introduction to Accounting and Business

Chapter 1/Introduction to Accounting and Business 27

Statement of Cash Flows

28 Chapter 1/Introduction to Accounting and Business

Received cash from the stockholder as additional investment $15,000.

Indicate the effect of each transaction on the accounting equation:

Chapter 1/Introduction to Accounting and Business 29

30 Chapter 1/Introduction to Accounting and Business