2.

5: Practice Questions
Multiple Choice
1.
LO 2.1Which of these statements is not one of the financial statements?
A. income statement
B. balance sheet
C. statement of cash flows
D. statement of owner investments
2.
LO 2.1Stakeholders are less likely to include which of the following groups?
A. owners
B. employees
C. community leaders
D. competitors
3.
LO 2.1Identify the correct components of the income statement.
A. revenues, losses, expenses, and gains
B. assets, liabilities, and owner’s equity
C. revenues, expenses, investments by owners, distributions to owners
D. assets, liabilities, and dividends
4.
LO 2.1The balance sheet lists which of the following?
A. assets, liabilities, and owners’ equity
B. revenues, expenses, gains, and losses
C. assets, liabilities, and investments by owners
D. revenues, expenses, gains, and distributions to owners
5.
LO 2.1Assume a company has a $350 credit (not cash) sale. How would the transaction appear if the business usesaccrual
accounting?
A. $350 would show up on the balance sheet as a sale.
B. $350 would show up on the income statement as a sale.
C. $350 would show up on the statement of cash flows as a cash outflow.
D. The transaction would not be reported because the cash was not exchanged.
6.
LO 2.2Which of the following statements is true?
A. Tangible assets lack physical substance.
B. Tangible assets will be consumed in a year or less.
C. Tangible assets have physical substance.
D. Tangible assets will be consumed in over a year.
7.
LO 2.2Owners have no personal liability under which legal business structure?
A. a corporation
B. a partnership
C. a sole proprietorship

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D. There is liability in every legal business structure.
8.
LO 2.2The accounting equation is expressed as ________.
A. Assets + Liabilities = Owner’s Equity
B. Assets – Noncurrent Assets = Liabilities
C. Assets = Liabilities + Investments by Owners
D. Assets = Liabilities + Owner’s Equity
9.
LO 2.2Which of the following decreases owner’s equity?
A. investments by owners
B. losses
C. gains
D. short-term loans
10.
LO 2.2Exchanges of assets for assets have what effect on equity?
A. increase equity
B. may have no impact on equity
C. decrease equity
D. There is no relationship between assets and equity.
11.
LO 2.2All of the following increase owner’s equity except for which one?
A. gains
B. investments by owners
C. revenues
D. acquisitions of assets by incurring liabilities
12.
LO 2.3Which of the following is not an element of the financial statements?
A. future potential sales price of inventory
B. assets
C. liabilities
D. equity
13.
LO 2.3Which of the following is the correct order of preparing the financial statements?
A. income statement, statement of cash flows, balance sheet, statement of owner’s equity
B. income statement, statement of owner’s equity, balance sheet, statement of cash flows
C. income statement, balance sheet, statement of owner’s equity, statement of cash flows
D. income statement, balance sheet, statement of cash flows, statement of owner’s equity
14.
LO 2.3The three heading lines of financial statements typically include which of the following?
A. company, statement title, time period of report
B. company headquarters, statement title, name of preparer
C. statement title, time period of report, name of preparer
D. name of auditor, statement title, fiscal year end
15.
LO 2.3Which financial statement shows the financial performance of the company on a cash basis?

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A. balance sheet
B. statement of owner’s equity
C. statement of cash flows
D. income statement
16.
LO 2.3Which financial statement shows the financial position of the company?
A. balance sheet
B. statement of owner’s equity
C. statement of cash flows
D. income statement
17.
LO 2.3Working capital is an indication of the firm’s ________.
A. asset utilization
B. amount of noncurrent liabilities
C. liquidity
D. amount of noncurrent assets

Questions
1.
LO 2.1Identify the four financial statements and describe the purpose of each.
2.
LO 2.1Define the term stakeholders. Identify two stakeholder groups, and explain how each group might use the information
contained in the financial statements.
3.
LO 2.1Identify one similarity and one difference between revenues and gains. Why is this distinction important to stakeholders?
4.
LO 2.1Identify one similarity and one difference between expenses and losses. Why is this distinction important to stakeholders?
5.
LO 2.1Explain the concept of equity, and identify some activities that affect equity of a business.
6.
LO 2.2Explain the difference between current and noncurrent assets and liabilities. Why is this distinction important to
stakeholders?
7.
LO 2.2Identify/discuss one similarity and one difference between tangible and intangible assets.
8.
LO 2.2Name the three types of legal business structure. Describe one advantage and one disadvantage of each.
9.
LO 2.2What is the “accounting equation”? List two examples of business transactions, and explain how the accounting equation
would be impacted by these transactions.
10.
LO 2.3Identify the order in which the four financial statements are prepared, and explain how the first three statements are
interrelated.
11.
LO 2.3Explain how the following items affect equity: revenue, expenses, investments by owners, and distributions to owners.

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12.
LO 2.3Explain the purpose of the statement of cash flows and why this statement is needed.

Exercise Set A
EA1.
LO 2.1For each independent situation below, calculate the missing values.

EA2.
LO 2.1For each independent situation below, calculate the missing values for owner’s equity

EA3.
LO 2.1For each independent situation below, calculate the missing values.

EA4.
LO 2.1For each independent situation below, place an (X) by the transactions that would be included in the statement of cash
flows.

Transaction Included

Sold items on account

Wrote check to pay utilities

Received cash investment by owner

Recorded wages owed to employees

Received bill for advertising

Table2.3
EA5.
LO 2.2For each of the following items, identify whether the item is considered current or noncurrent, and explain why.

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 Item Current or Noncurrent?

Cash

Inventory

Machines

Trademarks

Accounts Payable

Wages Payable

Owner, Capital

Accounts Receivable

Table2.4
EA6.
LO 2.2For the items listed below, indicate how the item affects equity (increase, decrease, or no impact.

Item Increase? Decrease? or No Impact?

Expenses

Assets

Gains

Liabilities

Dividends

Table2.5
EA7.
LO 2.2Forest Company had the following transactions during the month of December. What is the December 31 cash balance?

EA8.
LO 2.2Here are facts for the Hudson Roofing Company for December.

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Assuming no investments or withdrawals, what is the ending balance in the owners’ capital account?
EA9.
LO 2.3Prepare an income statement using the following information for DL Enterprises for the month of July 2018.

EA10.
LO 2.3Prepare a statement of owner’s equity using the information provided for Pirate Landing for the month of October 2018.

EA11.
LO 2.3Prepare a balance sheet using the following information for the Ginger Company as of March 31, 2019.

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Exercise Set B
EB1.
LO 2.1For each independent situation below, calculate the missing values.

EB2.
LO 2.1For each independent situation below, calculate the missing values for Owner’s Equity.

EB3.
LO 2.1For each independent situation below, calculate the missing values.

EB4.
LO 2.1For each of the following independent situations, place an (X) by the transactions that would be included in the statement of
cash flows.

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 Transaction Included

Purchased supplies with check

Received inventory (a bill was included)

Paid cash to owner for withdrawal

Gave cash donation to local charity

Received bill for utilities

Table2.6
EB5.
LO 2.2For each of the following items, identify whether the item is considered current or noncurrent, and explain why.

Item Current or Noncurrent?

Inventory

Buildings

Accounts Receivable

Cash

Trademarks

Accounts Payable

Wages Payable

Common Stock

Table2.7
EB6.
LO 2.2For the items listed below, indicate how the item affects equity (increase, decrease, or no impact).

Item Increase? Decrease? or No Impact?

Revenues

Gains

Losses

Drawings

Investments

Table2.8
EB7.
LO 2.2Gumbo Company had the following transactions during the month of December. What was the December 1 cash balance?

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 EB8.
LO 2.2Here are facts for Hailey’s Collision Service for January.

Assuming no investments or withdrawals, what is the ending balance in the owners’ capital account?
EB9.
LO 2.3Prepare an income statement using the following information for CK Company for the month of February 2019.

EB10.
LO 2.3Prepare a statement of owner’s equity using the following information for the Can Due Shop for the month of September
2018.

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 EB11.
LO 2.3Prepare a balance sheet using the following information for Mike’s Consulting as of January 31, 2019.

Problem Set A
PA1.
LO 2.1The following information is taken from the records of Baklava Bakery for the year 2019.

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A. Calculate net income or net loss for January.
B. Calculate net income or net loss for February.
C. Calculate net income or net loss for March.
D. For each situation, comment on how a stakeholder might view the firm’s performance. (Hint: Think about the source of the
income or loss.)
PA2.
LO 2.1Each situation below relates to an independent company’s owners’ equity.

A. Calculate the missing values.

B. Based on your calculations, make observations about each company.
PA3.
LO 2.1The following information is from a new business. Comment on the year-to-year changes in the accounts and possible
sources and uses of funds (how were the funds obtained and used).

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 PA4.
LO 2.1Each of the following situations relates to a different company.

A. For each of these independent situations, find the missing amounts.

B. How would stakeholders view the financial performance of each company? Explain.
PA5.
LO 2.2For each of the following independent transactions, indicate whether there was an increase, a decrease, or no impact for
each financial statement element.

Transaction Assets Liabilities Owners’ Equity

Paid cash for expenses

Sold common stock for cash

Owe vendor for purchase of asset

Paid owners for dividends

Paid vendor for amount

previously owed

Table2.9
PA6.
LO 2.2Olivia’s Apple Orchard had the following transactions during the month of September, the first month in business.

Complete the chart to determine the ending balances. As an example, the first transaction has been completed. Note: Negative
amounts should be indicated with minus signs (–) and unaffected should be noted as $0.
(Hints: 1. each transaction will involve two financial statement elements; 2. the net impact of the transaction may be $0.)
PA7.

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LO 2.2Using the information in Exercise 2.6, determine the amount of revenue and expenses for Olivia’s Apple Orchard for the
month of September.
PA8.
LO 2.3The following ten transactions occurred during the July grand opening of the Pancake Palace. Assume all Retained Earnings
transactions relate to the primary purpose of the business.

A. Calculate the ending balance for each account.

B. Create the income statement.
C. Create the statement of owner’s equity.
D. Create the balance sheet.

Problem Set B
PB1.
LO 2.1The following information is taken from the records of Rosebloom Flowers for the year 2019.

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A. Calculate net income or net loss for January.
B. Calculate net income or net loss for February.
C. Calculate net income or net loss for March.
D. For each situation, comment on how a stakeholder might view the firm’s performance. (Hint: think about the source of the
income or loss.)
PB2.
LO 2.1Each situation below relates to an independent company’s Owners’ Equity.

A. Calculate the missing values.

B. Based on your calculations, make observations about each company.
PB3.
LO 2.1The following information is from a new business. Comment on the year-to-year changes in the accounts and possible
sources and uses funds (how were the funds obtained and used).

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 PB4.
LO 2.1Each of the following situations relates to a different company.

A. For each of these independent situations, find the missing amounts.

B. How would stakeholders view the financial performance of each company? Explain.
PB5.
LO 2.2For each of the following independent transactions, indicate whether there was an increase, decrease, or no impact on each
financial statement element.

Transaction Assets Liabilities Owners’ Equity

Received cash for sale of asset (no

gain or loss)

Cash distribution to owner

Cash sales

Investment by owners

Owe vendor for inventory

purchase

Table2.10
PB6.
LO 2.2Mateo’s Maple Syrup had the following transactions during the month of February, its first month in business.

Complete the chart to determine the ending balances. As an example, the first transaction has been completed. Note: negative
amounts should be indicated with minus signs (–).

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(Hints: 1. each transaction will involve two financial statement elements; 2. the net impact of the transaction may be $0.)
PB7.
LO 2.2Using the information in Exercise 2.6, determine the amount of revenue and expenses for Mateo’s Maple Syrup for the
month of February.

Thought Provokers
TP1.
LO 2.1Choose three stakeholders (or stakeholder groups) for Walmart and prepare a written response for each stakeholder. In your
written response, consider the factors about the business the particular stakeholder would be interested in. Consider the financial
and any nonfinancial factors that would be relevant to the stakeholder (or stakeholder group). Explain why these factors are
important. Do some research and see if you can find support for your points.
TP2.
LO 2.1Assume you purchased ten shares of Roku during the company’s IPO. Comment on why this might be a good investment.
Consider factors such as what you expect to get from your investment, why you think Roku would become a publicly traded
company, and what you think is the landscape of the industry Roku is in. What other factors might be relevant to your decision to
invest in Roku?
TP3.
LO 2.2A trademark is an intangible asset that has value to a business. Assume that you are an accountant with the responsibility of
valuing the trademark of a well-known company such as Nike or McDonald’s. What makes each of these companies unique and
adds value? While the value of a trademark may not necessarily be recorded on the company’s balance sheet, discuss what factors
you think would affect (increase or decrease) the value of the company’s trademark? Consider your answer through the perspective
of various stakeholders.
TP4.
LO 2.3For each of the following ten independent transactions, provide a written description of what occurred in each transaction.
Figure 2.4 might help you.

TP5.
LO 2.3The following historical information is from Assisi Community Markets.

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Calculate the working capital and current ratio for each year. What observations do you make, and what actions might the owner
consider taking?

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