Test Bank

Chapter (1)
Question (1): True/False
1. Owners of business firms are the only people who need accounting information.
2. Transactions that can be measured in dollars and cents are recorded in the financial information
system.
3. The hiring of a new company president is an economic event recorded by the financial information
system.
4. Management of a business enterprise is the major external user of information.
5. Accounting communicates financial information about a business enterprise to both internal and
external users.
6. Accounting information is used only by external users with a financial interest in a business enterprise.
7. Financial statements are the major means of communicating accounting information to interested
parties.
8. The study of accounting will be useful only if a student is interested in working for a profit-oriented
business firm.
9. Private accountants are accountants who are not employees of business enterprises.
10. The study of accounting is not useful for a business career unless your career objective is to become
an accountant.
11. A working knowledge of accounting is not relevant to a lawyer or an architect.
12. Expressing an opinion as to the fairness of the information presented in financial statements is a
service performed by CPAs.
13. Accountants rely on a fundamental business concept—ethical behavior—in reporting financial
information.
14. The primary accounting standard-setting body in the United States is the International Accounting
Standards Board.
15. The Financial Accounting Standards Board is a part of the Securities and Exchange Commission.
16. The Securities and Exchange Commission oversees U.S. financial markets and accounting standard-
setting bodies.
17. Even though a partnership is not a separate legal entity, for accounting purposes the partnership
affairs should be kept separate from the personal activities of the owners.
18. A partnership must have more than one owner.
19. The economic entity assumption requires that the activities of an entity be kept separate and distinct
from the activities of its owner and all other economic entities.
20. The monetary unit assumption states that transactions that can be measured in terms of money
should be recorded in the accounting records.
21. In order to possess future service potential, an asset must have physical substance.
22. Owners' claims to total business assets take precedence over the claims of creditors because owners
invest assets in the business and are liable for losses.
23. The basic accounting equation states that Assets = Liabilities.
24. Accountants record both internal and external transactions.
25. Internal transactions do not affect the basic accounting equation because they are economic events
that occur entirely within one company.
26. The purchase of store equipment for cash reduces the owner's equity by an equal amount.
27. The purchase of office equipment on credit increases total assets and total liabilities.
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 28. The primary purpose of the statement of cash flows is to provide information about the cash receipts
and cash payments of a company during a period.
29. Net income for the period is determined by subtracting total expenses and drawings from total
revenues.
30. Identifying is the process of keeping a chronological diary of events measured in dollars and cents.
31. Management consulting includes examining the financial statements of companies and expressing
an opinion as to the fairness of their presentation.
32. Accountants do not have to worry about issues of ethics.
33. At the time an asset is acquired, cost and fair value should be the same.
34. The monetary unit assumption requires that all dollar amounts be rounded to the nearest dollar.
35. The basic accounting equation is in balance when the creditor and ownership claims against the
business equal the assets.
36. External transactions involve economic events between the company and some other enterprise or
party.
37. In the owner's equity statement, revenues are listed first, followed by expenses, and net income (or
net loss).

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 7. T 13. T 19. T 25. F 31. F 37. F
2. T 8. F 14. F 20. F 26. F 32. F 38. T
3. F 9. F 15. T 21. F 27. T 33. T 39. T
4. F 10. F 16. T 22. F 28. T 34. F 40. F
5. T 11. F 17. T 23. F 29. F 35. T
6. F 12. T 18. T 24. T 30. F 36. T

Question (2): MCQ

1. Accountants refer to an economic event as a
a. purchase.
b. sale.
c. transaction.
d. change in ownership.
Ans: c

2. The process of recording transactions has become more efficient because

a. fewer events can be quantified in financial terms.
b. computers are used in processing business events.
c. more people have been hired to record business transactions.
d. business events are recorded only at the end of the year.
Ans: b

3. Communication of economic events is the part of the accounting process that involves
a. identifying economic events.
b. quantifying transactions into dollars and cents.
c. preparing accounting reports.
d. recording and classifying information.
Ans: c

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4. Which of the following events cannot be quantified into dollars and cents and recorded as an
accounting transaction?
a. The appointment of a new CPA firm to perform an audit.
b. The purchase of a new computer.
c. The sale of store equipment.
d. Payment of income taxes.
Ans: a
5. The use of computers in recording business events
a. has made the recording process more efficient.
b. does not use the same principles as manual accounting systems.
c. has greatly impacted the identification stage of the accounting process.
d. is economical only for large businesses.
Ans: a
6. The accounting process involves all of the following except
a. identifying economic transactions that are relevant to the business.
b. communicating financial information to users by preparing financial reports.
c. recording nonquantifiable economic events.
d. analyzing and interpreting financial reports.
Ans: c

7. The accounting process is correctly sequenced as

a. identification, communication, recording.
b. recording, communication, identification.
c. identification, recording, communication.
d. communication, recording, identification.
Ans: c

8. Which of the following techniques are not used by accountants to interpret and report financial
information?
a. Graphs.
b. Special memos for each class of external users.
c. Charts.
d. Ratios.
Ans: b

9. Which of the following would not be considered an internal user of accounting data for the GHI
Company?
a. President of the company.
b. Production manager.
c. Merchandise inventory clerk.
d. President of the employees' labor union.
Ans: d

10. Which of the following would not be considered an external user of accounting data for the GHI
Company?
a. Internal Revenue Service Agent.
b. Management.
c. Creditors.
d. Customers.
Ans: b

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11. Which of the following would not be considered internal users of accounting data for a company?
a. The president of a company.
b. The controller of a company.
c. Creditors of a company.
d. Salesmen of the company.
Ans: c
12. Which of the following is an external user of accounting information?
a. Labor unions.
b. Finance directors.
c. Company officers.
d. Managers.
Ans: a

13. Which one of the following is not an external user of accounting information?
a. Regulatory agencies.
b. Customers.
c. Investors.
d. All of these answers choices are external users.
Ans: d

14. All the following are services offered by public accountants except
a. budgeting.
b. auditing.
c. tax planning.
d. consulting.
Ans: a

15. Which list below best describes the major services performed by public accountants?
a. Bookkeeping, mergers, budgets.
b. Employee training, auditing, bookkeeping.
c. Auditing, taxation, management consulting.
d. Cost accounting, production scheduling, recruiting.
Ans: c

16. Preparing tax returns and engaging in tax planning is performed by

a. public accountants only.
b. private accountants only.
c. both public and private accountants.
d. IRS accountants only.
Ans: c

17. A private accountant can perform many activities in a business organization but would not work in
a. budgeting.
b. accounting information systems.
c. external auditing.
d. tax accounting.
Ans: c

18. Financial accounting provides economic and financial information for all of the following except
a. creditors.
b. investors.
c. managers.
d. other external users.
Ans: c
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19. The final step in solving an ethical dilemma is to
a. identify and analyze the principal elements in the situation.
b. recognize an ethical situation.
c. identify the alternatives and weigh the impact of each alternative on stakeholders.
d. recognize the ethical issues involved.
Ans: c

20. The first step in solving an ethical dilemma is to

a. identify and analyze the principal elements in the situation.
b. identify the alternatives.
c. recognize an ethical situation and the ethical issues involved.
d. weigh the impact of each alternative on various stakeholders.
Ans: c

21. Ethics are the standards of conduct by which one's actions are judged as
a. right or wrong.
b. honest or dishonest.
c. fair or unfair.
d. all of these answer choices are correct.
Ans: d

22. Generally accepted accounting principles are

a. income tax regulations of the Internal Revenue Service.
b. standards that indicate how to report economic events.
c. theories that are based on physical laws of the universe.
d. principles that have been proven correct by academic researchers.
Ans: b

23. The historical cost principle requires that when assets are acquired, they be recorded at
a. appraisal value.
b. cost.
c. market price.
d. book value.
Ans: b
24. The historical cost of an asset and its fair value are
a. never the same.
b. the same when the asset is sold.
c. irrelevant when the asset is used by the business in its operations.
d. the same on the date of acquisition.
Ans: d

25. The body of theory underlying accounting is not based on

a. physical laws of nature.
b. concepts.
c. principles.
d. definitions.
Ans: a

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26. The private sector organization involved in developing accounting principles is the
a. Feasible Accounting Standards Body.
b. Financial Accounting Studies Board.
c. Financial Accounting Standards Board.
d. Financial Auditors' Standards Body.
Ans: c

27. The SEC and FASB are two organizations that are primarily responsible for establishing generally
accepted accounting principles. It is true that
a. they are both governmental agencies.
b. the SEC is a private organization of accountants.
c. the SEC often mandates guidelines when no accounting principles exist.
d. the SEC and FASB rarely cooperate in developing accounting standards.
Ans: c

28. GAAP stands for

a. Generally Accepted Auditing Procedures.
b. Generally Accepted Accounting Principles.
c. Generally Accepted Auditing Principles.
d. Generally Accepted Accounting Procedures.
Ans: b

29. Financial information that is capable of making a difference in a decision is

a. faithfully representative.
b. relevant.
c. convergent.
d. generally accepted.
Ans: b

30. The Duce Company has five plants nationwide that cost a total of $100 million. The current fair value
of the plants is $500 million. The plants will be recorded and reported as assets at
a. $100 million.
b. $600 million.
c. $400 million.
d. $500 million.
Ans: a

31. The fair value principle is applied for

a. all assets.
b. current assets.
c. buildings.
d. investment securities.
Ans: d

32. The proprietorship form of business organization

a. must have at least three owners in most states.
b. represents the largest number of businesses in the United States.
c. combines the records of the business with the personal records of the owner.
d. is characterized by a legal distinction between the business as an economic unit and the owner.
Ans: b

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33. The economic entity assumption requires that the activities
a. of different entities can be combined if all the entities are corporations.
b. must be reported to the Securities and Exchange Commission.
c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners.
d. of an entity be kept separate from the activities of its owner.
Ans: d

34. A business organized as a corporation

a. is not a separate legal entity in most states.
b. requires that stockholders be personally liable for the debts of the business.
c. is owned by its stockholders.
d. terminates when one of its original stockholders dies.
Ans: c

35. The partnership form of business organization

a. is a separate legal entity.
b. is a common form of organization for service-type businesses.
c. enjoys an unlimited life.
d. has limited liability.
Ans: b

36. Which of the following is not an advantage of the corporate form of business organization?
a. Limited liability of stockholders
b. Transferability of ownership
c. Unlimited personal liability for stockholders
d. Unlimited life
Ans: c

37. A small neighborhood barber shop that is operated by its owner would likely be organized as a
a. joint venture.
b. partnership.
c. corporation.
d. proprietorship.
Ans: d

38. John and Sam met at law school and decide to start a small law practice after graduation. They agree
to split revenues and expenses evenly. The most common form of business organization for a
business such as this would be a
a. joint venture.
b. partnership.
c. corporation.
d. proprietorship.
Ans: b

39. Which of the following is true regarding the corporate form of business organization?
a. Corporations are the most prevalent form of business organization.
b. Corporate businesses are generally smaller in size than partnerships and proprietor-ships.
c. The revenues of corporations are greater than the combined revenues of partnerships and
proprietorships.
d. Corporations are separate legal entities organized exclusively under federal law.
Ans: c

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40. A basic assumption of accounting that requires activities of an entity be kept separate from the
activities of its owner is referred to as the
a. stand alone concept.
b. monetary unit assumption.
c. corporate form of ownership.
d. economic entity assumption.
Ans: d

41. Ted Leo is the proprietor (owner) of Ted's, a retailer of golf apparel. When recording the financial
transactions of Ted's, Ted does not record an entry for a car he purchased for personal use. Ted took
out a personal loan to pay for the car. What accounting concept guides Ted's behavior in this
situation?
a. Pay back concept
b. Economic entity assumption
c. Cash basis concept
d. Monetary unit assumption
Ans: b

42. A basic assumption of accounting assumes that the dollar is

a. unrelated to business transactions.
b. a poor measure of economic activities.
c. the common unit of measure for all business transactions.
d. useless in measuring an economic event.
Ans: c

43. The assumption that the unit of measure remains sufficiently constant over time is part of the
a. economic entity assumption.
b. cost principle.
c. historical cost principle.
d. monetary unit assumption.
Ans: d

44. A business that enjoy limited liability is a

a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
Ans: c

45. A problem with the monetary unit assumption is that

a. the dollar has not been stable over time.
b. the dollar has been stable over time.
c. the dollar is a common medium of exchange.
d. it is impossible to account for international transactions.
Ans: a

46. The common characteristic possessed by all assets is

a. long life.
b. great monetary value.
c. tangible nature.
d. future economic benefit.
Ans: d

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47. Owner's equity is best depicted by the following:
a. Assets = Liabilities.
b. Liabilities + Assets.
c. Residual equity + Assets.
d. Assets – Liabilities.
Ans: d

48. The basic accounting equation may be expressed as

a. Assets = Equities.
b. Assets – Liabilities = Owner's Equity.
c. Assets = Liabilities + Owner's Equity.
d. All of these answer choices are correct..
Ans: d

49. Liabilities
a. are future economic benefits.
b. are existing debts and obligations.
c. possess service potential.
d. are things of value used by the business in its operation.
Ans: b

50. Liabilities of a company would not include

a. notes payable.
b. accounts payable.
c. salaries and wages payable.
d. cash.
Ans: d
51. Liabilities of a company are owed to
a. debtors.
b. benefactors.
c. creditors.
d. underwriters.
Ans: c

52. Owner's equity can be described as

a. creditorship claim on total assets.
b. ownership claim on total assets.
c. benefactor's claim on total assets.
d. debtor claim on total assets.
Ans: b

53. Owner's equity is often referred to as

a. residual equity.
b. leftovers.
c. spoils.
d. second equity.
Ans: a
54. When an owner withdraws cash or other assets from a business for personal use, these withdrawals
are termed
a. depletions.
b. consumptions.
c. drawings.
d. a credit line.
Ans: c

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55. Capital is
a. an owner's permanent investment in the business.
b. equal to liabilities minus owner's equity.
c. equal to assets minus owner's equity.
d. equal to liabilities plus drawings.
Ans: a

56. The basic accounting equation cannot be restated as

a. Assets – Liabilities = Owner's Equity.
b. Assets – Owner's Equity = Liabilities.
c. Owner's Equity + Liabilities = Assets.
d. Assets + Liabilities = Owner's Equity.
Ans: d

57. Owner's equity is decreased by all of the following except

a owner's investments.
b. owner's withdrawals.
c. expenses.
d. owner's drawings.
Ans: a

58. A net loss will result during a time period when

a. liabilities exceed assets.
b. drawings exceed investments.
c. expenses exceed revenues.
d. revenues exceed expenses.
Ans: c

59. If total liabilities increased by $30,000 and owner’s equity increased by $20,000 during a period of
time, then total assets must change by what amount and direction during that same period?
a. $50,000 decrease
b. $10,000 decrease
c. $10,000 increase
d. $50,000 increase
Ans: d

Solution: $30,000 + $20,000 = $50,000 increase

60. If total liabilities decreased by $30,000 and owner’s equity increased by $20,000 during a period of
time, then total assets must change by what amount and direction during that same period?
a. $50,000 decrease
b. $10,000 decrease
c. $10,000 increase
d. $50,000 increase
Ans: b

Solution: $20,000 - $30,000 = ($10,000)

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61. If total liabilities decreased by $50,000 and owner’s equity increased by $30,000 during a period of
time, then total assets must change by what amount and direction during that same period?
a. $80,000 decrease
b. $20,000 decrease
c. $20,000 increase
d. $80,000 increase
Ans: b
Solution: $30,000 - $50,000 = ($20,000)

62. If total liabilities decreased by $30,000 and owner’s equity decreased by $20,000 during a period of
time, then total assets must change by what amount and direction during that same period?
a. $50,000 decrease
b. $10,000 decrease
c. $10,000 increase
d. $50,000 increase
Ans: a

Solution: ($30,000) + ($20,000) = ($50,000)

63. If total liabilities increased by $25,000 during a period of time and owner’s equity decreased by $9,000
during the same period, then the amount and direction (increase or decrease) of the period’s change
in total assets is a(n)
a. $34,000 decrease.
b. $16,000 decrease.
c. $16,000 increase.
d. $34,000 increase.
Ans: c

Solution: $25,000 - $9,000 = $16,000 increase

64. The accounting equation for Quattro Enterprises is as follows:

Assets Liabilities Owner’s Equity
$120,000 = $60,000 + $60,000
If Quattro purchases office equipment on account for $25,000, the accounting equation will change
to
Assets Liabilities Owner’s Equity
a. $120,000 = $60,000 + $60,000
b. $145,000 = $60,000 + $85,000
c. $145,000 = $72,500 + $72,500
d. $145,000 = $85,000 + $60,000
Ans: d

Solution: $120,000 + $25,000 = $145,000; $60,000 + $25,000 = $85,000

65. As of June 30, 2014, Actual Tigers Company has assets of $100,000 and owner’s equity of $40,000.
What are the liabilities for Actual Tigers Company as of June 30, 2014?
a. $40,000
b. $60,000
c. $100,000
d. $140,000
Ans: b

Solution: $100,000 - $40,000 = $60,000

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66. Owner's equity is increased by
a. drawings.
b. revenues.
c. expenses.
d. liabilities.
Ans: b
67. Owner's equity is decreased by
a. assets.
b. revenues.
c. expenses.
d. liabilities.
Ans: c

68. If total liabilities increased by $8,000, then

a. assets must have decreased by $8,000.
b. owner's equity must have increased by $8,000.
c. assets must have increased by $8,000, or owner's equity must have decreased by $8,000.
d. assets and owner's equity each increased by $4,000.
Ans: c

69. Collection of a $1,000 Accounts Receivable

a. increases an asset $1,000; decreases an asset $1,000.
b. increases an asset $1,000; decreases a liability $1,000.
c. decreases a liability $1,000; increases owner's equity $1,000.
d. decreases an asset $1,000; decreases a liability $1,000.
Ans: a

70. Revenues are

a. the cost of assets consumed during the period.
b. gross increases in owner's equity resulting from business activities.
c. the cost of services used during the period.
d. actual or expected cash outflows.
Ans: b

71. If an individual asset is increased, then

a. there must be an equal decrease in a specific liability.
b. there must be an equal decrease in owner's equity.
c. there must be an equal decrease in another asset.
d. All of these answer choices are possible.
Ans: c

72. If services are rendered for credit, then

a. assets will decrease.
b. liabilities will increase.
c. owner's equity will increase.
d. liabilities will decrease.
Ans: c

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73. If expenses are paid in cash, then
a. assets will increase.
b. liabilities will decrease.
c. owner's equity will increase.
d. assets will decrease.
Ans: d
74. If an owner makes a withdrawal of cash from a proprietorship, then
a. there has been a violation of accounting principles.
b. owner's equity will increase.
c. owner's equity will decrease.
d. there will be a new liability showing the owner owes money to the business.
Ans: c

75. If supplies that have been purchased are used in the course of business, then
a. a liability will increase.
b. an asset will increase.
c. owner's equity will decrease.
d. owner's equity will increase.
Ans: c

76. As of December 31, 2014, Calexico Company has assets of $42,000 and owner's equity of $20,000.
What are the liabilities for Calexico Company as of December 31, 2014?
a. $22,000.
b. $20,000.
c. $42,000.
d. $62,000.
Ans: a

Solution: $42,000 - $20,000 = $22,000

77. Which of the following events is not a business transaction?

a. Investment of cash by the owner.
b. Hired employees.
c. Incurred utility expenses for the month.
d. Earned revenue for services provided.
Ans: b

78. Net income results when

a. Assets > Liabilities.
b. Revenues = Expenses.
c. Revenues > Expenses.
d. Revenues < Expenses.
Ans: c

79. Owner's capital at the end of the period is equal to

a. owner's capital at the beginning of the period plus net income minus liabilities.
b. owner's capital at the beginning of the period plus net income minus drawings.
c. net income.
d. assets plus liabilities.
Ans: b

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80. A balance sheet shows
a. revenues, liabilities, and owner's equity.
b. expenses, drawings, and owner's equity.
c. revenues, expenses, and drawings.
d. assets, liabilities, and owner's equity.
Ans: d
81. If the owner's equity account increases from the beginning of the year to the end of the year, then
a. net income is less than owner drawings.
b. a net loss is less than owner drawings.
c. additional owner investments are less than net losses.
d. net income is greater than owner drawings.
Ans: d

82. Mofro’s Computer Repair Shop started the year with total assets of $300,000 and total liabilities of
$200,000. During the year, the business recorded $500,000 in computer repair revenues, $300,000
in expenses, and Mofro withdrew $50,000. Mofro's Owner’s Capital balance at the end of the year
was
a. $200,000.
b. $100,000.
c. $250,000.
d. $300,000.
Ans: c

Solution: ($300,000 - $200,000) + ($500,000 - $300,000) - $50,000 = $250,000

83. Mofro’s Computer Repair Shop started the year with total assets of $300,000 and total liabilities of
$200,000. During the year, the business recorded $500,000 in computer repair revenues, $300,000
in expenses, and Mofro withdrew $50,000. The net income reported by Mofro's Computer Repair
Shop for the year was
a. $100,000.
b. $150,000.
c. $200,000.
d. $250,000.
Ans: c
Solution: $500,000 - $300,000 = $200,000

84. Mofro’s Computer Repair Shop started the year with total assets of $300,000 and total liabilities of
$200,000. During the year, the business recorded $500,000 in computer repair revenues, $300,000
in expenses, and Mofro withdrew $50,000. Mofro's Owner’s Capital balance changed by what amount
from the beginning of the year to the end of the year?
a. $100,000.
b. $150,000.
c. $200,000.
d. $250,000.
Ans: b

Solution: ($300,000 - $200,000) + ($500,000 - $300,000) - $50,000 = $250,000; $250,000 - $100,000 = $150,000

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85. The balance sheet is frequently referred to as
a. an operating statement.
b. the statement of financial position.
c. the statement of cash flows.
d. the statement of owner's equity.
Ans: b

86. The primary purpose of the statement of cash flows is to report

a. a company's investing transactions.
b. a company's financing transactions.
c. information about cash receipts and cash payments of a company.
d. the net increase or decrease in cash.
Ans: c

87. The ending owner's equity amount is shown on

a. the balance sheet only.
b. the owner's equity statement only.
c. both the income statement and the owner's equity statement.
d. both the balance sheet and the owner's equity statement.
Ans: d

88. Black Keys Company began the year with owner’s equity of $280,000. During the year, the company
recorded revenues of $375,000, expenses of $285,000, and had owner drawings of $30,000. What
was Black Keys’ owner’s equity at the end of the year?
a. $280,000.
b. $340,000.
c. $370,000.
d. $400,000.
Ans: b

Solution: $280,000 + ($375,000 - $285,000) - $30,000 = $340,000

89. Sufjan Stevens Ito began the Sufjan Company by investing $75,000 of cash in the business. The
company recorded revenues of $555,000, expenses of $420,000, and had owner drawings of
$30,000. What was Sufjan’s net income for the year?
a. $105,000.
b. $135,000.
c. $165,000.
d. $180,000.
Ans: b
Solution: $555,000 - $420,000 = $135,000

90. Centro-matic Company began the year with owner’s equity of $30,000. During the year, Centro-matic
received additional owner investments of $42,000, recorded expenses of $120,000, and had owner
drawings of $8,000. If Centro-matic’s ending owner’s equity was $112,000, what was the company’s
revenue for the year?
a. $160,000.
b. $168,000.
c. $202,000.
d. $210,000.
Ans: b

Solution: $30,000 + $42,000 + (X - $120,000) - $8,000 = $112,000; X = $168,000

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91. Borsuk Company began the year with owner’s equity of $108,000. During the year, Borsuk received
additional owner investments of $147,000, recorded expenses of $420,000, and had owner drawings
of $28,000. If Borsuk’s ending owner’s equity was $290,000, what was the company’s revenue for
the year?
a. $455,000.
b. $483,000.
c. $602,000.
d. $630,000.
Ans: b
Solution: $108,000 + $147,000 + (X - $420,000) - $28,000 = $290,000; X = $483,000

92. Fat Possum’s Service Shop started the year with total assets of $330,000 and total liabilities of
$240,000. During the year, the business recorded $630,000 in revenues, $420,000 in expenses, and
owner drawings of $60,000.
Owner’s equity at the end of the year was
a. $90,000.
b. $240,000.
c. $300,000.
d. $360,000.
Ans: b

Solution: ($330,000 - $240,000) + ($630,000 - $420,000) - $60,000 = $240,000

93. Fat Possum’s Service Shop started the year with total assets of $330,000 and total liabilities of
$240,000. During the year, the business recorded $630,000 in revenues, $420,000 in expenses, and
owner drawings of $60,000.
The net income reported by Fat Possum’s Service Shop for the year was
a. $150,000.
b. $210,000.
c. $240,000.
d. $270,000.
Ans: b

Solution: $630,000 - $420,000 = $210,000

94. Misra Company compiled the following financial information as of December 31, 2014:
Revenues $340,000
Owner’s Capital (1/1/14) 140,000
Equipment 80,000
Expenses 250,000
Cash 90,000
Owner’s Drawings 20,000
Supplies 10,000
Accounts payable 40,000
Accounts receivable 70,000
Misra’s assets on December 31, 2014 are
a. $180,000.
b. $250,000.
c. $360,000.
d $490,000.
Ans: b

Solution: $80,000 + $90,000 + $10,000 + $70,000 = $250,000

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95. Misra Company compiled the following financial information as of December 31, 2014:
Revenues $340,000
Owner’s Capital (1/1/14) 140,000
Equipment 80,000
Expenses 250,000
Cash 90,000
Owner’s Drawings 20,000
Supplies 10,000
Accounts payable 40,000
Accounts receivable 70,000
Misra’s owner’s equity on December 31, 2014 is
a. $90,000.
b. $140,000.
c. $210,000.
d. $250,000.
Ans: c

Solution: $140,000 + ($340,000 - $250,000) - $20,000 = $210,000

96. Teamboo Company’s owner’s equity at the beginning of August 2014 was $750,000. During the
month, the company earned net income of $175,000 and owner’s drawings were $75,000. At the end
of August 2014, what is the balance in owner’s equity?
a. $675,000
b. $750,000
c. $825,000
d. $850,000
Ans: d

Solution: $750,000 + $175,000 - $75,000 = $850,000

97. On January 1, 2014, Cat Power Company reported owner’s equity of $705,000. During the year, the
owner withdrew cash of $30,000. At December 31, 2014, the balance in owner’s equity was $825,000.
What amount of net income or net loss would the company report for 2014?
a. Net loss of $30,000
b. Net income of $90,000
c. Net income of $120,000
d. Net income of $150,000
Ans: d LO8 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

Solution: $705,000 + X - $30,000 = $825,000; X = $150,000

98. Stahl Consulting started the year with total assets of $60,000 and total liabilities of $15,000. During
the year, the business recorded $48,000 in catering revenues and $30,000 in expenses. Stahl made
an additional investment of $9,000 and withdrew cash of $15,000 during the year. The owner’s equity
at the end of the year was
a. $33,000.
b. $54,000.
c. $57,000.
d. $63,000.
Ans: c
Solution: ($60,000 - $15,000) + ($48,000 - $30,000) + $9,000 - $15,000 = $57,000

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99. Stahl Consulting started the year with total assets of $60,000 and total liabilities of $15,000. During
the year, the business recorded $48,000 in catering revenues and $30,000 in expenses. Stahl made
an additional investment of $9,000 and withdrew cash of $15,000 during the year. The net income
reported by Stahl Consulting for the year was:
a. $3,000.
b. $12,000.
c. $18,000.
d. $27,000.
Ans: c

Solution: $48,000 - $30,000 = $18,000

100. Stahl Consulting started the year with total assets of $60,000 and total liabilities of $15,000. During
the year, the business recorded $48,000 in catering revenues and $30,000 in expenses. Stahl made
an additional investment of $9,000 and withdrew cash of $15,000 during the year. Owner’s equity
changed by what amount from the beginning of the year to the end of the year?
a. $3,000.
b. $9,000.
c. $12,000.
d. $45,000.
Ans: c

Solution: ($60,000 - $15,000) + ($48,000 - $30,000) + $9,000 - $15,000 = $57,000; $57,000 - $45,000 = $12,000

101. During the year 2014, Dilego Company earned revenues of $90,000, had expenses of $56,000,
purchased assets with a cost of $10,000 and had owner drawings of $6,000. Net income for the year
is
a. $18,000.
b. $24,000.
c. $28,000.
d. $34,000.
Ans: d

Solution: $90,000 - $56,000 = $34,000

102. On October 1, Arcade Fire Enterprises reported owner’s equity of $70,000. During October, no
additional investments were made and the company earned net income of $18,000. If owner’s equity
at October 31 totals $78,000, what amount of owner drawings were made during the month?
a. $0
b. $8,000
c. $10,000
d. $26,000
Ans: c

Solution: $70,000 + $18,000 - X = $78,000; X = $10,000

103. On October 1, Arcade Fire Enterprises reported owner’s equity of $72,000. During October, no
additional investments were made and the company posted a net loss of $8,000. If owner’s equity at
October 31 totals $64,000, what amount of owner drawings were made during the month?
a. $0
b. $4,000
c. $8,000
d. $16,000
Ans: a

Solution: $72,000 - $8,000 - X = $64,000; X = $0

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104. On October 1, Arcade Fire Enterprises reported owner’s equity of $70,000. During October, the
owner made additional investments of $4,000 and the company earned net income of $14,000. If
owner’s equity at October 31 totals $80,000, what amount of owner drawings were made during the
month?
a. $0
b. $4,000
c. $8,000
d. $10,000
Ans: c

Solution: $70,000 + $4,000 + $14,000 - X = $80,000; X = $8,000

105. On October 1, Arcade Fire Enterprises reported owner’s equity of $70,000. During October, the
owner made additional investments of $10,000 and the company posted a net loss of $4,000. If
owner’s equity at October 31 totals $70,000, what amount of owner drawings were made during the
month?
a. $0
b. $4,000
c. $6,000
d. $10,000
Ans: c
Solution: $70,000 + $10,000 - $4,000 - X = $70,000; X = $6,000

106. Which of the following is not part of the accounting process?

a. Recording
b. Identifying
c. Financial decision making
d. Communicating
Ans: c

107. The first part of the accounting process is

a. communicating.
b. identifying.
c. processing.
d. recording.
Ans: b
108. Keeping a systematic, chronological diary of events that are measured in dollars and cents is
called
a. communicating.
b. identifying.
c. processing.
d. recording.
Ans: d

109. Auditing is
a. the examination of financial statements by a CPA in order to express an opinion on their fairness.
b. a part of accounting that involves only recording of economic events.
c. an area of accounting that involves such activities as cost accounting, budgeting, and accounting
information systems.
d. conducted by the Securities and Exchange Commission to ensure that registered financial
statements are presented fairly.
Ans: a

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 110. Internal users of accounting information include all of the following except
a. company officers.
b. investors.
c. marketing managers.
d. production supervisors.
Ans: b

BRIEF EXERCISES

BE(1):
Match the following external users of financial accounting information with the type of decision that user will
make with the information.

a. Creditor
b. Investor
c. Regulatory Agency
d Internal Revenue Service

_______ (1) Is the company operating within prescribed guidelines?

_______ (2) Is the company complying with tax laws?

_______ (3) Is the company able to pay its debts?

_______ (4) Is the company a good investment?

Solution
1. c
2. d
3. a
4. b

BE (2)
Match the following terms and definitions.

a. Accounts receivable c. Accounts payable

b. Creditor d. Note payable

_______ (1) Amounts due from customers

_______ (2) Amounts owed to suppliers for goods and services purchased
_______ (3) Amounts owed to bank
_______ (4) Party to whom money is owed

Solution
1. a
2. c
3. d
4. b

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BE (3)
Indicate which of these items is an asset (A), liability (L) or owner’s equity (OE) account.
_______ (1) Supplies
_______ (2) Owner’s Drawings
_______ (3) Buildings
_______ (4) Notes Payable
_______ (5) Salaries and Wages Payable

Solution
1. Assets (A)
2. Owner’s equity (OE)
3. Asset (A)
4. Liability (L)
5. Liability (L)

BE (4)
Use the accounting equation to answer the following questions.
1. Picaresque Sails Co. has total assets of $140,000 and total liabilities of $45,000. What is owner’s equity?
2. The Natenal Fun Center has total assets of $225,000 and owner’s equity of $100,000. What are total
liabilities?
3. Okkervil River Restaurant has total liabilities of $50,000 and owner’s equity of $100,000. What are total
assets?
Solution
1. $140,000 – $45,000 = $95,000 owner’s equity
2. $225,000 – $100,000 = $125,000 total liabilities
3. $50,000 + $100,000 = $150,000 total assets

BE (4)
Determine the missing items.

Assets = Liabilities + Owner’s Equity

$85,000 $52,000 (a)
(b) $28,000 $34,000
$84,000 (c) $50,000

Solution
a. $33,000
b. $62,000
c. $34,000

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BE (5)
Classify each of these items as an asset (A), liability (L), or owner’s equity (OE).

_____ 1. Accounts receivable

_____ 2. Accounts payable
_____ 3. Owner’s Capital
_____ 4. Supplies
_____ 5. Utilities expense
_____ 6. Cash
_____ 7. Notes payable
_____ 8. Equipment
Solution
1. A 5. OE
2. L 6. A
3. OE 7. L
4. A 8. A

BE (6)
Identify the impact on the accounting equation of each of the following transactions.
1. Purchase office supplies on account.
2. Paid secretary weekly salary.
3. Purchased office furniture for cash.
4. Received monthly utility bill to be paid at later time.

Solution
1. Increase assets and increase liabilities.
2. Decrease assets and decrease owner’s equity.
3. Increase assets and decrease assets.
4. Increase liabilities and decrease owner’s equity.

BE (7)

Use the following information to calculate for the year ended December 31, 2014 (a) net income, (b) ending
owner’s equity, and (c) total assets.

Supplies $ 3,000 Revenues $25,000

Operating expenses 12,000 Cash 15,000
Accounts payable 9,000 Drawings 1,000
Accounts receivable 3,000 Notes payable 1,000
Beginning Capital 5,000 Equipment 6,000

Solution
(a) $13,000 (b) $17,000 (c) $27,000

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BE (8)
Determine the missing amount for each of the following.
Assets = Liabilities + Owner's Equity
1. (a) $55,000 $95,000
2. $125,000 (b) $85,000
3. $160,000 $65,000 (c)

Solution
1. (a) = $150,000 ($55,000 + $95,000)
2. (b) = $40,000 ($125,000 - $85,000)
3. (c) = $95,000 ($160,000 - $65,000)

BE (9)
For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability,
or owner's equity item.
Code
Asset A
Liability L
Owner's Equity OE

_____ 1. Rent Expense _____ 6. Cash

_____ 2. Equipment _____ 7. Accounts Receivable

_____ 3. Accounts Payable _____ 8. Owner’s Drawings

_____ 4. Owner’s Capital _____ 9. Service Revenue

_____ 5. Insurance Expense _____ 10. Notes Payable

Solution
1. OE 6. A
2. A 7. A
3. L 8. OE
4. OE 9. OE
5. OE 10. L

BE (10)
Magnolia Electric Car Cleaning has the following accounts:
Accounts Receivable Notes Payable
Accounts Payable Owner’s Capital
Cash Owner’s Drawing
Supplies Equipment

Identify which items are (1) Assets

(2) Liabilities
(3) Owner's Equity

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Solution
(1) Assets—Equipment, Cash, Supplies, Accounts Receivable, Equipment
(2) Liabilities—Accounts Payable, Notes Payable
(3) Owner's Equity— Owner’s, Capital, Owner’s, Drawing

BE (11)
Compute the missing amount in each category of the accounting equation.
Assets Liabilities Owner's Equity
(a) $319,000 $ ? $143,000
(b) $223,000 $ 79,000 $ ?
(c) $ ? $233,000 $325,000

Solution
(a) $176,000 ($319,000 – $143,000 = $176,000).
(b) $144,000 ($223,000 – $79,000 = $144,000).
(c) $558,000 ($233,000 + $325,000 = $558,000).

BE (12)
Analyze the transactions of a business organized as a proprietorship described below and indicate their effect
on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate
a decrease.

Assets = Liabilities + Owner's Equity

1. Received cash for services rendered. _______ ______ ______

2. Purchased office equipment on credit. _______ ______ ______
3. Paid employees' salaries. _______ ______ ______
4. Received cash from customer in payment
on account. _______ ______ ______
5. Paid telephone bill for the month. _______ ______ ______
6. Paid for office equipment purchased in
transaction 2. _______ ______ ______
7. Purchased office supplies on credit. _______ ______ ______
8. Owner withdrew cash for personal
expenses. _______ ______ ______
9. Obtained a loan from the bank. _______ ______ ______
10. Billed customers for services rendered. _______ ______ ______

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Solution
Assets = Liabilities + Owner's Equity

1. Received cash for services rendered. + +

2. Purchased office equipment on credit. + +
3. Paid employees' salaries. – –
4. Received cash from customer in payment +,–
on account.
5. Paid telephone bill for the month. – –
6. Paid for office equipment purchased in
transaction 2. – –
7. Purchased office supplies on credit. + +
8. Owner withdrew cash for personal
expenses. – –
9. Obtained a loan from the bank. + +
10. Billed customers for services rendered. + +
COMPLETION STATEMENTS
1 Accounting is an information system that identifies, _____________, and _____________ the
economic events of an organization.

2 The three major services rendered by a certified public accountant are ______________,
________________, and management ________________.

3 Accountants who are employees of business enterprises are referred to as ________________

accountants.

4 A common set of standards that provides guidelines to accountants and indicates how to report
economic events is called _________________.

5 The ________________ principle states that assets should be recorded at the value exchanged at
the time the asset is acquired.

6 The _________________ assumption requires that the activities of an entity be kept separate from
the activities of its owner.

7 The residual claim on total assets of a business is known as ________________ and is equal to total
assets minus total liabilities.

8 Drawings ________________ owner's equity but are not expenses.

9 The ________________ reports the assets, liabilities, and owner's equity of a business enterprise at
a specific date.
Page 25 of 26
 Answers to Completion Statements
1) records, communicates 5) Historical cost
227. bookkeeping, accounting 6) economic entity
2) auditing, taxation, consulting 7) owner's equity
3) private (or managerial) 8) reduce
4) generally accepted accounting principles 9_ balance sheet

MATCHING
Match the items below by entering the appropriate code letter in the space provided.

A. CPA F. Corporation
B. Budgeting G. Assets
C. SEC H. Equities
D. Proprietorship I. Expenses
E. Economic Entity Assumption J. Transaction

_____ 1. Activities of an entity must be kept separate from its owner’s activities.
_____ 2. Consumed assets or services.
_____ 3. Ownership is limited to one person.
_____ 4. Offers expert accounting service to the general public.
_____ 5. Creditor and ownership claims against the assets of the business.
_____ 6. A separate legal entity under state laws.
_____ 7. Government agency that can mandate accounting rules.
_____ 8. Quantifying goals and objectives.
_____ 9. Future economic benefits.
_____ 10. Economic events recorded by accountants.

Answers to Matching
1. E 6. F
2. I 7. C
3. D 8. B
4. A 9. G
5. H 10. J

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