Chapter 02 - Basic Financial Statements
Chapter 02 - Basic Financial Statements
Chapter 02 - Basic Financial Statements
Chapter 02
Basic Financial Statements
1. A business entity is regarded as separate from the personal activities of its owners whether
it is a sole proprietorship, a partnership, or a corporation.
True False
3. The going concern principle assumes that the business will continue indefinitely.
True False
4. Notes payable and accounts payable are written promises to pay an amount owed by a
certain date. Notes payable generally have interest, while accounts payable generally do not.
True False
5. A net profit results from having more revenues than liabilities.
True False
6. The sale of additional shares of capital stock will cause treasury stock to increase.
True False
7. Articulation between the financial statements means that they relate closely to each other.
True False
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Chapter 02 - Basic Financial Statements
8. Limited liability means that owners of a business are only liable for the debts of the
business up to the amounts they can afford.
True False
9. In a business organized as a corporation, it is not necessary to list the equity of each
stockholder on the balance sheet.
True False
10. Total assets must always equal total liabilities plus total owners' equity.
True False
11. A cash flows statement reports revenue and expense activities for a specific time period
such as one month or one year.
True False
12. Any business event that might affect the future profitability of a business should be
reported in its balance sheet.
True False
13. Total assets plus total liabilities must equal total owners' equity.
True False
14. The practice of showing assets on the balance sheet at their cost, rather than at their
current market value is explained, in part, by the fact that cost is supported by objective
evidence that can be verified by independent experts.
True False
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Chapter 02 - Basic Financial Statements
15. The realization principle states that the activities of an entity should be kept separate from
those of its owner.
True False
16. The entity principle states that the affairs of the owners are not part of the financial
operations of a business entity and should be separated.
True False
17. The accounting equation may be stated as "assets minus liabilities equals owners' equity."
True False
18. A transaction that causes an increase in an asset may also cause a decrease in another
asset, an increase in a liability, or an increase in owners' equity.
True False
21. When a business borrows money from a bank, the immediate effect is an increase in total
assets and a decrease in liabilities or owners' equity.
True False
22. The purchase of an asset, such as office equipment, for cash will cause owners' equity to
decrease.
True False
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Chapter 02 - Basic Financial Statements
23. The owner of a sole proprietorship is personally liable for the debts of the business,
whereas the stockholders of a corporation are not personally liable for the debts of the
business.
True False
24. If a company purchases equipment with cash, its total assets will increase.
True False
25. If a company purchases equipment by issuing a note payable, its total assets will not
change.
True False
26. It is not unusual for an entity to report a significant increase in cash from operating
activities, but a decrease in the total amount of cash.
True False
27. The cash flows statement provides a link between two balance sheets by showing how net
income (or loss) has changed owners' equity from one balance sheet date to the next.
True False
28. According to the Sarbanes-Oxley Act of 2002, internal controls must be audited by the
same accounting firm that audits the financial statements.
True False
29. The Public Company Accounting Oversight Board was created by the American Institute
of CPAs to oversee the public accounting profession.
True False
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Chapter 02 - Basic Financial Statements
30. The major outgrowth from business failures and allegations of fraudulent financial
reporting during the 1990's was the passage of the Securities and Exchange Act.
True False
34. Blue Wholesale Shirt Co. sold shirts to Pink Retail Shoppe. The owner of Pink Retail said
she would pay Blue at a later date, which Blue Wholesale agreed to. Blue Wholesale Shirt Co.
is considered to be a:
A. borrower.
B. liability.
C. creditor.
D. debtor.
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Chapter 02 - Basic Financial Statements
37. Which one of the following is not considered one of the three primary financial
statements?
A. Balance sheet.
B. Income statement.
C. Statement of cash flows.
D. Statement of budgeting activities.
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42. If total assets equal $270,000 and total liabilities equal $202,500, the total owners' equity
must equal:
A. $472,500.
B. $67,500.
C. $270,000.
D. Cannot be determined from the information given.
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Chapter 02 - Basic Financial Statements
45. If total assets equal $345,000 and total owners' equity equal $120,000, then total liabilities
must equal:
A. $465,000.
B. $225,000.
C. $120,000.
D. Cannot be determined from the information given.
47. Which of the following is correct if a company purchases equipment for $70,000 cash?
A. Total assets will increase by $70,000.
B. Total assets will decrease by $70,000.
C. Total assets will remain the same.
D. The company's total owners' equity will decrease.
48. From an accounting viewpoint, when is a business considered an entity separate from its
owner(s)?
A. Only when organized as a sole proprietorship.
B. Only when organized as a partnership.
C. Only when organized as a corporation.
D. In each of the above situations, the business is an accounting entity separate from the
activities of the owner(s).
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51. Which of the following is not a generally accepted accounting principle relating to the
valuation of assets?
A. The cost principle - in general, assets are valued at cost, rather than at estimated market
values.
B. The objectivity principle - accountants prefer to use objective, rather than subjective,
information as the basis for accounting information.
C. The safety principle - assets are valued at no more than the value for which they are
insured.
D. The going-concern assumption - one reason for valuing assets such as buildings and
equipment at cost rather than at their current market values is the assumption that the business
will use these assets rather than sell them.
52. Each year, the accountant for Southern Real Estate Company adjusts the recorded value of
each asset to its market value. Using these market value figures on the balance sheet violates:
A. The accounting equation.
B. The stable-dollar assumption.
C. The business entity concept.
D. The cost principle.
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53. The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away
at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurant's
balance sheet. The reporting of this item in this manner violated the:
A. Cost principle.
B. Business entity concept.
C. Objectivity principle.
D. Going-concern assumption.
54. Which of the following is correct when a corporation uses cash to pay for an expense?
A. Total assets will decrease.
B. Retained earnings will decrease.
C. Owners' equity will decrease.
D. All three of the above statements are correct.
56. Eton Corporation purchased land in 1990 for $190,000. In 2008, it purchased a nearly
identical parcel of land for $430,000. In its 2008 balance sheet, Eton valued these two parcels
of land at a combined value of $860,000. Reporting the land in this manner violated the:
A. Cost principle.
B. Principle of the business entity.
C. Objectivity principle.
D. Going-concern assumption.
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57. Bob Bertolucci, owner of Bob's Bazaar, also owns a personal residence that costs
$575,000. The market value of his residence is $725,000. During preparation of the financial
statements for Bob's Bazaar, the accounting principle most relevant to the presentation of
Bob's home is:
A. The concept of the business entity.
B. The cost principle.
C. The going-concern assumption.
D. The objectivity principle.
58. Which of the following will not cause a change in the owners' equity of a business?
A. Payment of an interest free business debt.
B. Withdrawal of cash by the owner.
C. Sale of land at a profit.
D. Losses from unprofitable operations.
59. Which business organization is recognized as a separate legal entity under the law?
A. Corporation.
B. Sole proprietorship.
C. Partnership.
D. All business organizations are separate legal entities.
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64. If a transaction causes an asset account to decrease, which of the following related effects
may occur?
A. An increase of equal amount in an owners' equity account.
B. An increase in a liability account.
C. An increase of equal amount in another asset account.
D. An increase in the combined total of liabilities and owners' equity.
66. The accounting principle that assumes that a company will operate in the foreseeable
future is:
A. Going concern.
B. Objectivity.
C. Liquidity.
D. Disclosure.
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67. Deerpark Corporation recently borrowed $70,000 cash from its bank. Which of the
following was unaffected by this transaction?
A. Assets.
B. Liabilities.
C. Owners' equity.
D. Cash.
68. Which of the following transactions would cause an increase in both assets and owners'
equity?
A. Investment of cash in the business by the owner.
B. Sale of land for a price less than its cost.
C. Borrowing money from a bank.
D. Sale of land for cash at a price equal to its cost.
69. A transaction caused an increase in both assets and owners' equity. This transaction could
have been:
A. A sale of service to a customer producing revenue.
B. Sale of land for a price less than its cost.
C. Borrowing money from a bank.
D. Sale of land for cash at a price equal to its cost.
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73. Which of the following activities is not a category into which cash flows are classified?
A. Marketing activities.
B. Operating activities.
C. Financing activities.
D. Investing activities.
74. The change in owners' equity from one balance sheet to the next is partially explained by
the:
A. Statement of cash flows.
B. Statement of financial position.
C. Income statement.
D. Tax return.
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76. The balance sheet item that represents the portion of owners' equity resulting from
profitable operations of the business is:
A. Accounts receivable.
B. Cash.
C. Capital stock.
D. Retained earnings.
78. Which of the following statements regarding liquidity and profitability is not true?
A. If a business is unable to pay its debts as they come due, it is operating unprofitably.
B. A business may be liquid, yet operate unprofitably for several years.
C. A business may operate profitably, yet be unable to meet its obligations.
D. In order to survive in the long-run, a business must both remain liquid and operate
profitably.
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Chapter 02 - Basic Financial Statements
80. According to the Sarbanes-Oxley Act, CEOs and CFOs must certify to the accuracy of
their company's financial statements:
A. Monthly and Quarterly.
B. Quarterly and Annually.
C. Monthly and Annually.
D. CEOs and CFOs are not required to certify to the company's financial statement; only
CPA's do.
81. A strong statement of cash flows indicates that significant cash is being generated by:
A. Operating activities.
B. Financing activities.
C. Investing activities.
D. Effective tax planning.
At December 31, 2009, the accounting records of Braun Corporation contain the following
items:
82. If Capital Stock is $260,000, what is the December 31, 2009 cash balance?
A. $86,000.
B. $94,000.
C. $46,000.
D. $686,000.
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Chapter 02 - Basic Financial Statements
83. If Capital Stock is $320,000, total assets of Braun Corporation at December 31, 2009,
amount to:
A. $686,000.
B. $926,000.
C. $726,000.
D. $106,000.
85. If Cash at December 31, 2009, is $26,000, total owners' equity is:
A. $160,000.
B. $366,000.
C. $606,000.
D. $400,000.
86. If Cash at December 31, 2009, is $66,000, total assets amount to:
A. $606,000.
B. $806,000.
C. $662,000.
D. $646,000.
At December 31, 2010, the accounting records of Hercules Manufacturing, Inc. contain the
following items:
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87. If total assets of Hercules Manufacturing, Inc. are $556,000, Equipment is carried in
Hercules Manufacturing accounting records at:
A. $377,000.
B. $179,000.
C. $150,000.
D. $90,000.
88. If total assets of Hercules Manufacturing, Inc. are $556,000, Retained Earnings at
December 31, 2010, must be:
A. $811,000.
B. $180,000.
C. $221,000.
D. $335,000.
89. If Retained Earnings at December 31, 2010, is $140,000, total assets amount to:
A. $98,000.
B. $377,000.
C. $475,000.
D. $188,000.
90. If Retained Earnings at December 31, 2010, is $100,000, Equipment is carried in Hercules
Manufacturing, Inc. accounting records at:
A. $42,000.
B. $58,000.
C. $43,500.
D. $345,000.
91. Assume the Equipment shown above was acquired by the business five years ago and has
a book value of $156,000, but has a current appraised value of $200,000. Hercules
Manufacturing's Retained Earnings at December 31, 2010, amounts to:
A. $533,000.
B. $345,000.
C. $198,000.
D. $356,000.
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Chapter 02 - Basic Financial Statements
At December 31, 2011 the accounting records of Gordon, Inc. contain the following items:
92. If the Notes Payable is $10,000, the December 31, 2011 cash balance is:
A. $60,000.
B. $160,000.
C. $30,000.
D. $20,000.
93. If the Notes Payable balance is $25,000, then the total assets of Gordon, Inc. at December
31, 2011 amount to:
A. $27,500.
B. $152,500.
C. $120,000.
D. $165,000.
94. If the Cash balance at December 31, 2011 is $67,500, the Notes Payable balance is:
A. $118,750.
B. $47,500.
C. $137,500.
D. $140,000.
95. If the Cash balance at December 31, 2011 is $62,500 then total liabilities amount to:
A. $42,500.
B. $140,000.
C. $45,000.
D. $182,500.
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Chapter 02 - Basic Financial Statements
96. Which of the following is correct if at the end of Crystal Imports' first year of operations,
assets are $800,000 and owners' equity is $720,000?
A. The owner must have invested $720,000 to start the business.
B. The business must be operating profitably.
C. Liabilities are $80,000.
D. Liabilities are $1,520,000.
97. During the current year, the assets of Wheatley's increased by $362,000, and the liabilities
increased by $260,000. The owners' equity in the business must have:
A. Decreased by $102,000.
B. Decreased by $622,000.
C. Increased by $102,000.
D. Increased by $622,000.
98. The total liabilities of Hogan's Company on the balance sheet are $270,000; this amount is
equal to three-fourths of the total assets. What is the amount of owners' equity?
A. $202,500.
B. $90,000.
C. $360,000.
D. $630,000.
99. Thirty percent of the total assets of Shanahan Corporation have been financed through
borrowing. The total liabilities of the company are $600,000. What is the amount of owners'
equity?
A. $180,000.
B. $2,000,000.
C. $1,400,000.
D. $2,600,000.
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Chapter 02 - Basic Financial Statements
100. A transaction caused a $60,000 increase in both assets and total liabilities. This
transaction could have been which of the following?
A. Purchase of office equipment for $60,000 cash.
B. Purchase of office equipment for $120,000, paying $60,000 cash and issuing a note
payable for the balance.
C. Repayment of a $60,000 bank loan.
D. Investment of $60,000 cash in the business by the owner.
101. If $9,600 cash and a $31,000 note payable are given in exchange for some office
machines to be used in a business:
A. Total assets are increased.
B. Total liabilities are decreased.
C. Total assets are decreased.
D. The owners' equity is increased.
102. If during the current year, liabilities of Corbett's Store increased by $220,000 and
owners' equity increased by $160,000, then:
A. Assets at the end of the year total $380,000.
B. Assets at the end of the year total $60,000.
C. Assets increased during the year by $380,000.
D. Assets decreased during the year by $60,000.
103. If during the current year, liabilities of Hayden Travel decreased by $50,000 and owners'
equity increased by $75,000, then:
A. Assets at the end of the year total $125,000.
B. Assets at the end of the year total $25,000.
C. Assets increased during the year by $25,000.
D. Assets decreased during the year by $125,000.
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Chapter 02 - Basic Financial Statements
104. At the end of the current year, the owners' equity in Barclay Bakery is $246,000. During
the year, the assets of the business had increased by $120,000 and the liabilities had increased
by $72,000. Owners' equity at the beginning of the year must have been:
A. $198,000.
B. $174,000.
C. $284,000.
D. $438,000.
105. At the end of the current year, the owners' equity in Durante Co. is $360,000. During the
year, the assets of the business had increased by $68,000 and the liabilities had increased by
$118,000. Owners' equity at the beginning of the year must have been:
A. $410,000.
B. $310,000.
C. $546,000.
D. $174,000.
106. During the current year, the assets of Quality Stairs increased by $175,000 and the
liabilities decreased by $15,000. If the owners' equity in the business is $475,000 at the end of
the year, the owners' equity at the beginning of the year must have been:
A. $335,000.
B. $285,000.
C. $665,000.
D. $615,000.
107. During the month of May, the Henderson Company had the following transactions:
* Revenues of $60,000 were earned and received in cash.
* Bank loans of $9,000 were paid off.
* Equipment of $20,000 was purchased.
* Expenses of $36,800 were paid.
* Stockholders purchased additional shares for $22,000 cash.
A statement of cash flows for May would report net cash flows from operating activities of:
A. $60,000.
B. $16,200.
C. $23,200.
D. $20,000.
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Chapter 02 - Basic Financial Statements
Astoria Co. had the following transactions during the month of August:
108. What amount of net income will be reported on an income statement for the month of
August?
A. $20,000.
B. $7,500.
C. $0.
D. $33,500.
109. At the beginning of August, 2010, owners' equity in Astoria was $160,000. Given the
transactions of August, what will owners' equity be at the end of the month?
A. $167,500.
B. $150,500.
C. $193,500.
D. $158,000.
110. For the month of August, net cash flows from operating activities for Astoria were:
A. $33,500.
B. $7,500.
C. $20,000.
D. $26,000.
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111. The major provisions of the Sarbanes-Oxley Act of 2002 include all of the following
except:
A. The creation of a new agency to oversee the public accounting profession.
B. Restrictions on the types of consulting services that accounting firms can provide to audit
clients.
C. Reducing responsibility for audit committees when overseeing the financial reporting
process.
D. Requiring the chief executive office and the chief financial officer to certify the accuracy
of their company's financial statements.
During the month of August, the Boyce Company had the following transactions:
112. A statement of cash flows for August, would report net cash flows from operating
activities of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
113. A statement of cash flows for August, would report net cash flows from financing
activities of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
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Chapter 02 - Basic Financial Statements
114. A statement of cash flows for August, would report net cash flows from investing
activities of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
115. A statement of cash flows for August, would report an increase in cash of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
Waldorf Co. had the following transactions during the month of October:
116. What amount of net income will be reported on an income statement for the month of
October?
A. $18,500.
B. $22,500.
C. $78,000.
D. $100,500.
117. At the beginning of October, owners' equity in Waldorf was $480,000. Given the
transactions of October, 2011, what will owners' equity be at the end of the month?
A. $480,000.
B. $484,000.
C. $502,500.
D. $580,500.
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Chapter 02 - Basic Financial Statements
118. For the month of October, net cash flows from operating activities for Waldorf were:
A. $18,500.
B. $22,500.
C. $78,000.
D. $100,500.
During the month of February, the Fadness Company had the following transactions:
119. A statement of cash flows for February, would report net cash flows from operating
activities of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
120. A statement of cash flows for February, would report net cash flows from financing
activities of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
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Chapter 02 - Basic Financial Statements
121. A statement of cash flows for February, would report net cash flows from investing
activities of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
122. A statement of cash flows for February, would report an increase in cash of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
Essay Questions
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Chapter 02 - Basic Financial Statements
123. Accounting terminology
Listed below are nine technical accounting terms introduced in this chapter:
Each of the following statements may (or may not) describe one of these technical terms. In
the space provided below each statement, indicate the accounting term described, or answer
"None" if the statement does not correctly describe any of the terms. Do not use a term more
than once.
(A.) Having the financial ability to pay debts as they become due.
(B.) An assumption that a business will operate in the foreseeable future.
(C.) Economic resources owned by businesses that are expected to benefit future operations.
(D.) The debts or obligations of a business organization.
(E.) Assets = Liabilities + Owners' Equity
(F.) The principle which states that assets are valued in the balance sheet at their historical
cost.
(G.) A residual amount equal to assets minus liabilities.
124. Accounting equation
(A.) During the current year, the assets of Duffy Stationery increased by $650,000 and the
liabilities decreased by $340,000. What was the change in owners' equity during the year?
(B.) The owners' equity of Graham Interiors appears on the balance sheet as $720,000 and is
equal to one-fourth of total assets. Compute the amount of total liabilities.
(C.) At the end of the year, the owners' equity in Scott Mfg. amounted to $845,000. During
2009, the assets of the business increased by $515,000 and the liabilities increased by
$205,000. The owners' equity at the beginning of 2009 was how much?
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Chapter 02 - Basic Financial Statements
127. List the following accounts in the order that they would appear in a balance sheet.
Capital Stock
Equipment
Accounts Receivable
Retained Earnings
Revenue
Accounts Payable
Cash
Rent Expense
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Chapter 02 - Basic Financial Statements
129. Computation of assets, liabilities, and owners' equity after a series of transactions. The
December 31, 2009 balance sheet of Charles Realty reported total assets of $900,000, total
liabilities of $350,000, and owners' equity of $550,000. The following transactions occurred
in January of 2010:
(1) The business purchased land for $250,000, paying $100,000 cash and issuing a note
payable for the balance.
(2) The business collected accounts receivable totaling $45,000.
(3) The business sold land costing $50,000 for $60,000 cash.
(4) The business paid $50,000 of the note payable.
Compute the following at January 31, 2010:
(A.) Total assets $__________
(B.) Total liabilities $__________
(C.) Owners' equity $__________
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136. An inexperienced accounting intern at Tasso Company prepared the following income
statement for the month of July 2009:
Instructions: Prepare a revised income statement in accordance with generally accepted
accounting principles.
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Chapter 02 - Basic Financial Statements
137. From the following accounts and amounts prepare a balance sheet for the Swell
Company for December 31, 2010. You must compute the amount for retained earnings to
complete the balance sheet.
138. Financial statements
A set of financial statements includes three related accounting reports, or statements. In the
space provided, list the names of three primary statements, and give a brief description of the
accounting information contained in each.
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Chapter 02 - Basic Financial Statements
This list includes:
A. Four assets and three liabilities.
B. Five assets and three liabilities.
C. Five assets and two liabilities.
D. Six assets and two liabilities.
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Chapter 02 - Basic Financial Statements
Presented below is the balance sheet for Sabino Family Dentistry on January 1 of the current
year.
During the first few days of January, the following transactions occurred:
Jan 1 The business borrowed $99,000 from the bank, giving a note payable due in 90 days.
3 Additional capital stock was issued in exchange for $44,550 cash.
3 Equipment was purchased for $62,700 on credit.
5 The business collected $26,400 of its accounts receivable and paid $37,950 of its accounts
payable.
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Essay Questions
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Chapter 02 - Basic Financial Statements
152. Presented below is the balance sheet for Manhattan Family Dentistry on January 1 of the
current year.
During the first few days of January, the following transactions occurred:
Jan 2 Equipment was purchased for $38,000 on credit.
2 The business collected $16,000 of its accounts receivable and paid $23,000 of its accounts
payable.
3 The business borrowed $60,000 from the bank, giving a note payable due in 90 days.
3 Additional capital stock was issued in exchange for $27,000 cash.
Complete the following balance sheet for Manhattan Family Dentistry on January 4 of the
current year.
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Chapter 02 - Basic Financial Statements
153. Complete the January 31, 20__, balance sheet of Countrywide Legal Services using the
following information.
(1) Stockholders' equity at January 1, 20__, included capital stock of $140,000.
(2) The land and building were purchased by the business for a total price of $200,000 on
January 25, 20__, from a company forced out of business. On January 31, an appraiser valued
the property at $260,000.
(3) Additional capital stock was issued in exchange for $50,000 cash.
(4) Retained earnings at January 31, 20___, amounted to $49,400.
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Chapter 02 - Basic Financial Statements
155. Which of the following statements is not consistent with generally accepted accounting
principles relating to asset valuation?
A. Many assets are originally recorded in accounting records at their cost to the business
entity.
B. Subtracting total liabilities from total assets indicates what the owner's equity in the
business is worth under current market conditions.
C. Accountants assume that assets such as office supplies, land, and buildings will be used in
business operations, rather than being sold at current market prices.
D. Accountants prefer to base the valuation of assets upon objective, verifiable evidence
rather than upon appraisals or personal opinion.
156. Water world Boat Shop purchased a truck for $12,000, making a down payment of
$5,000 cash, and signing a $7,000 note payable due in 60 days. As a result of this transaction:
A. Total assets increased by $12,000.
B. Total liabilities increased by $7,000.
C. From the viewpoint of a short-term creditor, this transaction makes the business more
solvent.
D. This transaction had no immediate effect upon the owner's equity in the business.
157. A transaction caused a $15,000 decrease in both total assets and total liabilities. This
transaction could have been:
A. Purchase of a delivery truck for $15,000 cash.
B. An asset with a cost of $15,000 was destroyed by fire.
C. Repayment of a $15,000 bank loan.
D. Collection of a $15,000 account receivable.
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Chapter 02 - Basic Financial Statements
160. What information would you find in a statement of cash flows that you would not be able
to get from the other two primary financial statements?
A. Cash provided by or used in financing activities.
B. Cash balance at the end of the period.
C. Total liabilities due to creditors at the end of the period.
D. Net income.
161. Which of the following statements relating to the role of professional judgment in the
financial reporting process are valid?
A. Different accountants may evaluate similar situations differently.
B. The determination of which items should be disclosed in notes to financial statements
requires professional judgment.
C. Once a complete list of generally accepted accounting principles is prepared, judgment
need no longer enter into the financial reporting process.
D. The possibility always exists that professional judgment later may prove to have been
incorrect.
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Chapter 02 - Basic Financial Statements
1. A business entity is regarded as separate from the personal activities of its owners whether
it is a sole proprietorship, a partnership, or a corporation.
TRUE
3. The going concern principle assumes that the business will continue indefinitely.
TRUE
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Chapter 02 - Basic Financial Statements
4. Notes payable and accounts payable are written promises to pay an amount owed by a
certain date. Notes payable generally have interest, while accounts payable generally do not.
TRUE
5. A net profit results from having more revenues than liabilities.
FALSE
6. The sale of additional shares of capital stock will cause treasury stock to increase.
FALSE
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Chapter 02 - Basic Financial Statements
7. Articulation between the financial statements means that they relate closely to each other.
TRUE
8. Limited liability means that owners of a business are only liable for the debts of the
business up to the amounts they can afford.
FALSE
9. In a business organized as a corporation, it is not necessary to list the equity of each
stockholder on the balance sheet.
TRUE
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Chapter 02 - Basic Financial Statements
10. Total assets must always equal total liabilities plus total owners' equity.
TRUE
11. A cash flows statement reports revenue and expense activities for a specific time period
such as one month or one year.
FALSE
12. Any business event that might affect the future profitability of a business should be
reported in its balance sheet.
FALSE
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Chapter 02 - Basic Financial Statements
13. Total assets plus total liabilities must equal total owners' equity.
FALSE
14. The practice of showing assets on the balance sheet at their cost, rather than at their
current market value is explained, in part, by the fact that cost is supported by objective
evidence that can be verified by independent experts.
TRUE
15. The realization principle states that the activities of an entity should be kept separate from
those of its owner.
FALSE
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Chapter 02 - Basic Financial Statements
16. The entity principle states that the affairs of the owners are not part of the financial
operations of a business entity and should be separated.
TRUE
17. The accounting equation may be stated as "assets minus liabilities equals owners' equity."
TRUE
18. A transaction that causes an increase in an asset may also cause a decrease in another
asset, an increase in a liability, or an increase in owners' equity.
TRUE
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Chapter 02 - Basic Financial Statements
21. When a business borrows money from a bank, the immediate effect is an increase in total
assets and a decrease in liabilities or owners' equity.
FALSE
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Chapter 02 - Basic Financial Statements
22. The purchase of an asset, such as office equipment, for cash will cause owners' equity to
decrease.
FALSE
23. The owner of a sole proprietorship is personally liable for the debts of the business,
whereas the stockholders of a corporation are not personally liable for the debts of the
business.
TRUE
24. If a company purchases equipment with cash, its total assets will increase.
FALSE
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Chapter 02 - Basic Financial Statements
25. If a company purchases equipment by issuing a note payable, its total assets will not
change.
FALSE
26. It is not unusual for an entity to report a significant increase in cash from operating
activities, but a decrease in the total amount of cash.
TRUE
27. The cash flows statement provides a link between two balance sheets by showing how net
income (or loss) has changed owners' equity from one balance sheet date to the next.
FALSE
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Chapter 02 - Basic Financial Statements
28. According to the Sarbanes-Oxley Act of 2002, internal controls must be audited by the
same accounting firm that audits the financial statements.
TRUE
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why
management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties
29. The Public Company Accounting Oversight Board was created by the American Institute
of CPAs to oversee the public accounting profession.
FALSE
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why
management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties
30. The major outgrowth from business failures and allegations of fraudulent financial
reporting during the 1990's was the passage of the Securities and Exchange Act.
FALSE
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why
management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties
2-57
Chapter 02 - Basic Financial Statements
2-58
Chapter 02 - Basic Financial Statements
34. Blue Wholesale Shirt Co. sold shirts to Pink Retail Shoppe. The owner of Pink Retail said
she would pay Blue at a later date, which Blue Wholesale agreed to. Blue Wholesale Shirt Co.
is considered to be a:
A. borrower.
B. liability.
C. creditor.
D. debtor.
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Chapter 02 - Basic Financial Statements
37. Which one of the following is not considered one of the three primary financial
statements?
A. Balance sheet.
B. Income statement.
C. Statement of cash flows.
D. Statement of budgeting activities.
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Chapter 02 - Basic Financial Statements
2-61
Chapter 02 - Basic Financial Statements
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Chapter 02 - Basic Financial Statements
42. If total assets equal $270,000 and total liabilities equal $202,500, the total owners' equity
must equal:
A. $472,500.
B. $67,500.
C. $270,000.
D. Cannot be determined from the information given.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
45. If total assets equal $345,000 and total owners' equity equal $120,000, then total liabilities
must equal:
A. $465,000.
B. $225,000.
C. $120,000.
D. Cannot be determined from the information given.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
47. Which of the following is correct if a company purchases equipment for $70,000 cash?
A. Total assets will increase by $70,000.
B. Total assets will decrease by $70,000.
C. Total assets will remain the same.
D. The company's total owners' equity will decrease.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
48. From an accounting viewpoint, when is a business considered an entity separate from its
owner(s)?
A. Only when organized as a sole proprietorship.
B. Only when organized as a partnership.
C. Only when organized as a corporation.
D. In each of the above situations, the business is an accounting entity separate from the
activities of the owner(s).
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
51. Which of the following is not a generally accepted accounting principle relating to the
valuation of assets?
A. The cost principle - in general, assets are valued at cost, rather than at estimated market
values.
B. The objectivity principle - accountants prefer to use objective, rather than subjective,
information as the basis for accounting information.
C. The safety principle - assets are valued at no more than the value for which they are
insured.
D. The going-concern assumption - one reason for valuing assets such as buildings and
equipment at cost rather than at their current market values is the assumption that the business
will use these assets rather than sell them.
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Chapter 02 - Basic Financial Statements
52. Each year, the accountant for Southern Real Estate Company adjusts the recorded value of
each asset to its market value. Using these market value figures on the balance sheet violates:
A. The accounting equation.
B. The stable-dollar assumption.
C. The business entity concept.
D. The cost principle.
53. The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away
at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurant's
balance sheet. The reporting of this item in this manner violated the:
A. Cost principle.
B. Business entity concept.
C. Objectivity principle.
D. Going-concern assumption.
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Chapter 02 - Basic Financial Statements
54. Which of the following is correct when a corporation uses cash to pay for an expense?
A. Total assets will decrease.
B. Retained earnings will decrease.
C. Owners' equity will decrease.
D. All three of the above statements are correct.
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Chapter 02 - Basic Financial Statements
56. Eton Corporation purchased land in 1990 for $190,000. In 2008, it purchased a nearly
identical parcel of land for $430,000. In its 2008 balance sheet, Eton valued these two parcels
of land at a combined value of $860,000. Reporting the land in this manner violated the:
A. Cost principle.
B. Principle of the business entity.
C. Objectivity principle.
D. Going-concern assumption.
57. Bob Bertolucci, owner of Bob's Bazaar, also owns a personal residence that costs
$575,000. The market value of his residence is $725,000. During preparation of the financial
statements for Bob's Bazaar, the accounting principle most relevant to the presentation of
Bob's home is:
A. The concept of the business entity.
B. The cost principle.
C. The going-concern assumption.
D. The objectivity principle.
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Chapter 02 - Basic Financial Statements
58. Which of the following will not cause a change in the owners' equity of a business?
A. Payment of an interest free business debt.
B. Withdrawal of cash by the owner.
C. Sale of land at a profit.
D. Losses from unprofitable operations.
59. Which business organization is recognized as a separate legal entity under the law?
A. Corporation.
B. Sole proprietorship.
C. Partnership.
D. All business organizations are separate legal entities.
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Chapter 02 - Basic Financial Statements
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Chapter 02 - Basic Financial Statements
64. If a transaction causes an asset account to decrease, which of the following related effects
may occur?
A. An increase of equal amount in an owners' equity account.
B. An increase in a liability account.
C. An increase of equal amount in another asset account.
D. An increase in the combined total of liabilities and owners' equity.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
66. The accounting principle that assumes that a company will operate in the foreseeable
future is:
A. Going concern.
B. Objectivity.
C. Liquidity.
D. Disclosure.
67. Deerpark Corporation recently borrowed $70,000 cash from its bank. Which of the
following was unaffected by this transaction?
A. Assets.
B. Liabilities.
C. Owners' equity.
D. Cash.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
68. Which of the following transactions would cause an increase in both assets and owners'
equity?
A. Investment of cash in the business by the owner.
B. Sale of land for a price less than its cost.
C. Borrowing money from a bank.
D. Sale of land for cash at a price equal to its cost.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
69. A transaction caused an increase in both assets and owners' equity. This transaction could
have been:
A. A sale of service to a customer producing revenue.
B. Sale of land for a price less than its cost.
C. Borrowing money from a bank.
D. Sale of land for cash at a price equal to its cost.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
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Chapter 02 - Basic Financial Statements
73. Which of the following activities is not a category into which cash flows are classified?
A. Marketing activities.
B. Operating activities.
C. Financing activities.
D. Investing activities.
74. The change in owners' equity from one balance sheet to the next is partially explained by
the:
A. Statement of cash flows.
B. Statement of financial position.
C. Income statement.
D. Tax return.
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Chapter 02 - Basic Financial Statements
76. The balance sheet item that represents the portion of owners' equity resulting from
profitable operations of the business is:
A. Accounts receivable.
B. Cash.
C. Capital stock.
D. Retained earnings.
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Chapter 02 - Basic Financial Statements
78. Which of the following statements regarding liquidity and profitability is not true?
A. If a business is unable to pay its debts as they come due, it is operating unprofitably.
B. A business may be liquid, yet operate unprofitably for several years.
C. A business may operate profitably, yet be unable to meet its obligations.
D. In order to survive in the long-run, a business must both remain liquid and operate
profitably.
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Chapter 02 - Basic Financial Statements
80. According to the Sarbanes-Oxley Act, CEOs and CFOs must certify to the accuracy of
their company's financial statements:
A. Monthly and Quarterly.
B. Quarterly and Annually.
C. Monthly and Annually.
D. CEOs and CFOs are not required to certify to the company's financial statement; only
CPA's do.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why
management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties
2-80
Chapter 02 - Basic Financial Statements
81. A strong statement of cash flows indicates that significant cash is being generated by:
A. Operating activities.
B. Financing activities.
C. Investing activities.
D. Effective tax planning.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
At December 31, 2009, the accounting records of Braun Corporation contain the following
items:
82. If Capital Stock is $260,000, what is the December 31, 2009 cash balance?
A. $86,000.
B. $94,000.
C. $46,000.
D. $686,000.
A/P ($16,000) + N/P ($190,000) + Capital Stock ($260,000) + R.E. ($160,000) = $626,000
Cash (?) + A/R ($40,000) +Land ($240,000) + Building ($180,000) + Equipment ($120,000)
= $626,000 Cash = $46,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
83. If Capital Stock is $320,000, total assets of Braun Corporation at December 31, 2009,
amount to:
A. $686,000.
B. $926,000.
C. $726,000.
D. $106,000.
A/P ($16,000) + N/P ($190,000) + Capital Stock ($320,000) + R.E. ($160,000) $686,000
Total Assets = $686,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
85. If Cash at December 31, 2009, is $26,000, total owners' equity is:
A. $160,000.
B. $366,000.
C. $606,000.
D. $400,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
86. If Cash at December 31, 2009, is $66,000, total assets amount to:
A. $606,000.
B. $806,000.
C. $662,000.
D. $646,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
At December 31, 2010, the accounting records of Hercules Manufacturing, Inc. contain the
following items:
87. If total assets of Hercules Manufacturing, Inc. are $556,000, Equipment is carried in
Hercules Manufacturing accounting records at:
A. $377,000.
B. $179,000.
C. $150,000.
D. $90,000.
Cash ($7,000) + A/R ($30,000) +Land ($90,000) + Building ($250,000) + Equipment (?) =
$556,000 Equipment = $179,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
88. If total assets of Hercules Manufacturing, Inc. are $556,000, Retained Earnings at
December 31, 2010, must be:
A. $811,000.
B. $180,000.
C. $221,000.
D. $335,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
89. If Retained Earnings at December 31, 2010, is $140,000, total assets amount to:
A. $98,000.
B. $377,000.
C. $475,000.
D. $188,000.
A/P ($12,000) + N/P ($135,000) + Capital Stock ($188,000) + R.E. ($140,000) = $475,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
90. If Retained Earnings at December 31, 2010, is $100,000, Equipment is carried in Hercules
Manufacturing, Inc. accounting records at:
A. $42,000.
B. $58,000.
C. $43,500.
D. $345,000.
A/P ($12,000) + N/P ($135,000) + Capital Stock ($188,000) + R.E. ($100,000) = $435,000
Cash ($7,000) + A/R ($30,000) + Land ($90,000) + Building ($250,000) + Equipment (?) =
$435,000 Equipment = $58,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
91. Assume the Equipment shown above was acquired by the business five years ago and has
a book value of $156,000, but has a current appraised value of $200,000. Hercules
Manufacturing's Retained Earnings at December 31, 2010, amounts to:
A. $533,000.
B. $345,000.
C. $198,000.
D. $356,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
At December 31, 2011 the accounting records of Gordon, Inc. contain the following items:
92. If the Notes Payable is $10,000, the December 31, 2011 cash balance is:
A. $60,000.
B. $160,000.
C. $30,000.
D. $20,000.
Cash (?) + A/R ($18,750) +Land ($30,000) + Building ($31,250) + Equipment ($40,000) =
$150,000 Cash = $30,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
93. If the Notes Payable balance is $25,000, then the total assets of Gordon, Inc. at December
31, 2011 amount to:
A. $27,500.
B. $152,500.
C. $120,000.
D. $165,000.
A/P ($2,500) + N/P ($25,000) + Capital Stock ($12,500) + R.E. ($125,000) = $165,000 Total
Assets = $165,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
94. If the Cash balance at December 31, 2011 is $67,500, the Notes Payable balance is:
A. $118,750.
B. $47,500.
C. $137,500.
D. $140,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
95. If the Cash balance at December 31, 2011 is $62,500 then total liabilities amount to:
A. $42,500.
B. $140,000.
C. $45,000.
D. $182,500.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
96. Which of the following is correct if at the end of Crystal Imports' first year of operations,
assets are $800,000 and owners' equity is $720,000?
A. The owner must have invested $720,000 to start the business.
B. The business must be operating profitably.
C. Liabilities are $80,000.
D. Liabilities are $1,520,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
97. During the current year, the assets of Wheatley's increased by $362,000, and the liabilities
increased by $260,000. The owners' equity in the business must have:
A. Decreased by $102,000.
B. Decreased by $622,000.
C. Increased by $102,000.
D. Increased by $622,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
98. The total liabilities of Hogan's Company on the balance sheet are $270,000; this amount is
equal to three-fourths of the total assets. What is the amount of owners' equity?
A. $202,500.
B. $90,000.
C. $360,000.
D. $630,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
99. Thirty percent of the total assets of Shanahan Corporation have been financed through
borrowing. The total liabilities of the company are $600,000. What is the amount of owners'
equity?
A. $180,000.
B. $2,000,000.
C. $1,400,000.
D. $2,600,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
100. A transaction caused a $60,000 increase in both assets and total liabilities. This
transaction could have been which of the following?
A. Purchase of office equipment for $60,000 cash.
B. Purchase of office equipment for $120,000, paying $60,000 cash and issuing a note
payable for the balance.
C. Repayment of a $60,000 bank loan.
D. Investment of $60,000 cash in the business by the owner.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
101. If $9,600 cash and a $31,000 note payable are given in exchange for some office
machines to be used in a business:
A. Total assets are increased.
B. Total liabilities are decreased.
C. Total assets are decreased.
D. The owners' equity is increased.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
102. If during the current year, liabilities of Corbett's Store increased by $220,000 and
owners' equity increased by $160,000, then:
A. Assets at the end of the year total $380,000.
B. Assets at the end of the year total $60,000.
C. Assets increased during the year by $380,000.
D. Assets decreased during the year by $60,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
2-92
Chapter 02 - Basic Financial Statements
103. If during the current year, liabilities of Hayden Travel decreased by $50,000 and owners'
equity increased by $75,000, then:
A. Assets at the end of the year total $125,000.
B. Assets at the end of the year total $25,000.
C. Assets increased during the year by $25,000.
D. Assets decreased during the year by $125,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
104. At the end of the current year, the owners' equity in Barclay Bakery is $246,000. During
the year, the assets of the business had increased by $120,000 and the liabilities had increased
by $72,000. Owners' equity at the beginning of the year must have been:
A. $198,000.
B. $174,000.
C. $284,000.
D. $438,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Hard
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
105. At the end of the current year, the owners' equity in Durante Co. is $360,000. During the
year, the assets of the business had increased by $68,000 and the liabilities had increased by
$118,000. Owners' equity at the beginning of the year must have been:
A. $410,000.
B. $310,000.
C. $546,000.
D. $174,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Hard
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
106. During the current year, the assets of Quality Stairs increased by $175,000 and the
liabilities decreased by $15,000. If the owners' equity in the business is $475,000 at the end of
the year, the owners' equity at the beginning of the year must have been:
A. $335,000.
B. $285,000.
C. $665,000.
D. $615,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Hard
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
107. During the month of May, the Henderson Company had the following transactions:
* Revenues of $60,000 were earned and received in cash.
* Bank loans of $9,000 were paid off.
* Equipment of $20,000 was purchased.
* Expenses of $36,800 were paid.
* Stockholders purchased additional shares for $22,000 cash.
A statement of cash flows for May would report net cash flows from operating activities of:
A. $60,000.
B. $16,200.
C. $23,200.
D. $20,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
Astoria Co. had the following transactions during the month of August:
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Chapter 02 - Basic Financial Statements
108. What amount of net income will be reported on an income statement for the month of
August?
A. $20,000.
B. $7,500.
C. $0.
D. $33,500.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses.
Topic: Income Statement
109. At the beginning of August, 2010, owners' equity in Astoria was $160,000. Given the
transactions of August, what will owners' equity be at the end of the month?
A. $167,500.
B. $150,500.
C. $193,500.
D. $158,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
110. For the month of August, net cash flows from operating activities for Astoria were:
A. $33,500.
B. $7,500.
C. $20,000.
D. $26,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
111. The major provisions of the Sarbanes-Oxley Act of 2002 include all of the following
except:
A. The creation of a new agency to oversee the public accounting profession.
B. Restrictions on the types of consulting services that accounting firms can provide to audit
clients.
C. Reducing responsibility for audit committees when overseeing the financial reporting
process.
D. Requiring the chief executive office and the chief financial officer to certify the accuracy
of their company's financial statements.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why
management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties
During the month of August, the Boyce Company had the following transactions:
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Chapter 02 - Basic Financial Statements
112. A statement of cash flows for August, would report net cash flows from operating
activities of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
113. A statement of cash flows for August, would report net cash flows from financing
activities of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
2-98
Chapter 02 - Basic Financial Statements
114. A statement of cash flows for August, would report net cash flows from investing
activities of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
115. A statement of cash flows for August, would report an increase in cash of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
Waldorf Co. had the following transactions during the month of October:
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Chapter 02 - Basic Financial Statements
116. What amount of net income will be reported on an income statement for the month of
October?
A. $18,500.
B. $22,500.
C. $78,000.
D. $100,500.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses.
Topic: Income Statement
117. At the beginning of October, owners' equity in Waldorf was $480,000. Given the
transactions of October, 2011, what will owners' equity be at the end of the month?
A. $480,000.
B. $484,000.
C. $502,500.
D. $580,500.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
2-100
Chapter 02 - Basic Financial Statements
118. For the month of October, net cash flows from operating activities for Waldorf were:
A. $18,500.
B. $22,500.
C. $78,000.
D. $100,500.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
During the month of February, the Fadness Company had the following transactions:
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Chapter 02 - Basic Financial Statements
119. A statement of cash flows for February, would report net cash flows from operating
activities of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
120. A statement of cash flows for February, would report net cash flows from financing
activities of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
Sale of stock $50,000 + bank loan issued $15,000 - bank loan paid 18,000 = $47,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
2-102
Chapter 02 - Basic Financial Statements
121. A statement of cash flows for February, would report net cash flows from investing
activities of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
122. A statement of cash flows for February, would report an increase in cash of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
Essay Questions
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Chapter 02 - Basic Financial Statements
123. Accounting terminology
Listed below are nine technical accounting terms introduced in this chapter:
Each of the following statements may (or may not) describe one of these technical terms. In
the space provided below each statement, indicate the accounting term described, or answer
"None" if the statement does not correctly describe any of the terms. Do not use a term more
than once.
(A.) Having the financial ability to pay debts as they become due.
(B.) An assumption that a business will operate in the foreseeable future.
(C.) Economic resources owned by businesses that are expected to benefit future operations.
(D.) The debts or obligations of a business organization.
(E.) Assets = Liabilities + Owners' Equity
(F.) The principle which states that assets are valued in the balance sheet at their historical
cost.
(G.) A residual amount equal to assets minus liabilities.
(A.) Liquidity; (B.) Going concern assumption; (C.) Assets; (D.) Liabilities; (E.) Accounting
equation; (F.) Cost principle; (G.) Owners' equity
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Chapter 02 - Basic Financial Statements
124. Accounting equation
(A.) During the current year, the assets of Duffy Stationery increased by $650,000 and the
liabilities decreased by $340,000. What was the change in owners' equity during the year?
(B.) The owners' equity of Graham Interiors appears on the balance sheet as $720,000 and is
equal to one-fourth of total assets. Compute the amount of total liabilities.
(C.) At the end of the year, the owners' equity in Scott Mfg. amounted to $845,000. During
2009, the assets of the business increased by $515,000 and the liabilities increased by
$205,000. The owners' equity at the beginning of 2009 was how much?
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
2-105
Chapter 02 - Basic Financial Statements
2-106
Chapter 02 - Basic Financial Statements
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
2-107
Chapter 02 - Basic Financial Statements
2-108
Chapter 02 - Basic Financial Statements
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
2-109
Chapter 02 - Basic Financial Statements
127. List the following accounts in the order that they would appear in a balance sheet.
Capital Stock
Equipment
Accounts Receivable
Retained Earnings
Revenue
Accounts Payable
Cash
Rent Expense
Cash, Accounts Receivable, Equipment, Accounts Payable, Capital Stock, Retained Earnings
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
2-110
Chapter 02 - Basic Financial Statements
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
2-111
Chapter 02 - Basic Financial Statements
129. Computation of assets, liabilities, and owners' equity after a series of transactions. The
December 31, 2009 balance sheet of Charles Realty reported total assets of $900,000, total
liabilities of $350,000, and owners' equity of $550,000. The following transactions occurred
in January of 2010:
(1) The business purchased land for $250,000, paying $100,000 cash and issuing a note
payable for the balance.
(2) The business collected accounts receivable totaling $45,000.
(3) The business sold land costing $50,000 for $60,000 cash.
(4) The business paid $50,000 of the note payable.
Compute the following at January 31, 2010:
(A.) Total assets $__________
(B.) Total liabilities $__________
(C.) Owners' equity $__________
Feedback:
(A.) Total assets: $900,000 + $250,000 - $100,000 + $45,000 - $45,000 - $50,000 + $60,000 -
$50,000 = $1,010,000
(B.) Total liabilities: $350,000 + $150,000 - $50,000 = $450,000
(C.) Owners' equity: $550,000 + $10,000 = $560,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
2-112
Chapter 02 - Basic Financial Statements
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
2-113
Chapter 02 - Basic Financial Statements
2-114
Chapter 02 - Basic Financial Statements
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
2-115
Chapter 02 - Basic Financial Statements
2-116
Chapter 02 - Basic Financial Statements
Feedback:
(a.) Total assets must be $620,000 to agree with the total of liabilities plus owners' equity.
(b.) Cash must be $5,000 to achieve a total asset figure of $620,000.
(c.) Cash ($5,000) plus accounts receivable ($85,000) equals $90,000. This total is stated to be
1.5 times the amount of notes payable. Notes payable is computed as $90,000 divided by 1.5,
or $60,000.
(d.) Accounts payable must be $115,000 to achieve total liabilities figure of $215,000.
(e.) Retained earnings at the end of the first accounting period must be earnings ($275,000)
less dividends $(70,000), or $205,000.
(f.) Capital stock must be $200,000 to achieve total liabilities and owners' equity figure of
$620,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
2-117
Chapter 02 - Basic Financial Statements
2-118
Chapter 02 - Basic Financial Statements
Feedback: (a.) Total of liabilities & owners' equity must be $835,000 to agree with the
amount of total assets.
(b.) Cash and accounts receivable together amount to 3 times accounts payable, or $120,000.
Since cash is $30,000, accounts receivable are $120,000 - $30,000, or $90,000.
(c.) Equipment must be $200,000 to achieve total assets of $835,000.
(d.) Beginning capital stock is $150,000 + stock issued of $40,000 = $190,000.
(e.) Beginning retained earnings (175,000 - 150,000) + net income of 200,000 = 225,000.
(f.) Total liabilities must be $420,000 to achieve the total of liabilities plus owners' equity of
$835,000.
(g.) Since total liabilities are $420,000 and accounts payable are $40,000, notes payable must
be $380,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
2-119
Chapter 02 - Basic Financial Statements
2-120
Chapter 02 - Basic Financial Statements
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
2-121
Chapter 02 - Basic Financial Statements
2-122
Chapter 02 - Basic Financial Statements
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
2-123
Chapter 02 - Basic Financial Statements
136. An inexperienced accounting intern at Tasso Company prepared the following income
statement for the month of July 2009:
Instructions: Prepare a revised income statement in accordance with generally accepted
accounting principles.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses.
Topic: Income Statement
2-124
Chapter 02 - Basic Financial Statements
137. From the following accounts and amounts prepare a balance sheet for the Swell
Company for December 31, 2010. You must compute the amount for retained earnings to
complete the balance sheet.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
138. Financial statements
A set of financial statements includes three related accounting reports, or statements. In the
space provided, list the names of three primary statements, and give a brief description of the
accounting information contained in each.
* Balance sheet. A report showing at a specific date the financial position of the company by
reporting the assets (resources) that it owns, the liabilities (debts) that it owes, and the amount
of the owners' equity in the business.
* Income statement. A report indicating the profitability (or net income) of the business over a
specific time period.
* Statement of cash flows. A report summarizing the cash receipts and cash payments of the
business over the same time period covered by the income statement. The cash flows from
three activities are presented on the statement. In order of presentation, they include: (1)
operating activities; (2) investing activities; and (3) financing activities.
(A.) Generally accepted accounting principles are the concepts, standards, or rules used in the
preparation of financial statements.
(B.) Student may list any three of the following:
* Financial Accounting Standards Board (FASB)
* American Institute of Certified Public Accountants (AICPA)
* Securities and Exchange Commission (SEC)
* American Accounting Association (AAA)
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
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Chapter 02 - Basic Financial Statements
(1) Sole Proprietorship-One person, unlimited liability, and owner acts as manager.
(2) Partnership-Two or more persons and owners are personally responsible for debts.
(3) Corporation-Stockholders are owners, limited liability, ease of transfer of ownership, and
separate entity under the law.
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Chapter 02 - Basic Financial Statements
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses.
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses.
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
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Chapter 02 - Basic Financial Statements
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses.
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
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Chapter 02 - Basic Financial Statements
This list includes:
A. Four assets and three liabilities.
B. Five assets and three liabilities.
C. Five assets and two liabilities.
D. Six assets and two liabilities.
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses.
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses.
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
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Chapter 02 - Basic Financial Statements
Presented below is the balance sheet for Sabino Family Dentistry on January 1 of the current
year.
During the first few days of January, the following transactions occurred:
Jan 1 The business borrowed $99,000 from the bank, giving a note payable due in 90 days.
3 Additional capital stock was issued in exchange for $44,550 cash.
3 Equipment was purchased for $62,700 on credit.
5 The business collected $26,400 of its accounts receivable and paid $37,950 of its accounts
payable.
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
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Chapter 02 - Basic Financial Statements
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
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Chapter 02 - Basic Financial Statements
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Essay Questions
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Chapter 02 - Basic Financial Statements
152. Presented below is the balance sheet for Manhattan Family Dentistry on January 1 of the
current year.
During the first few days of January, the following transactions occurred:
Jan 2 Equipment was purchased for $38,000 on credit.
2 The business collected $16,000 of its accounts receivable and paid $23,000 of its accounts
payable.
3 The business borrowed $60,000 from the bank, giving a note payable due in 90 days.
3 Additional capital stock was issued in exchange for $27,000 cash.
Complete the following balance sheet for Manhattan Family Dentistry on January 4 of the
current year.
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Chapter 02 - Basic Financial Statements
Computations:
a $20,000 + $16,000 (A/R collected) - $23,000 (paid on A/P) + $60,000 (borrowed) +
$27,000 (invested) = $100,000
b $31,000 - $16,000 collected = $15,000
c $35,000 + $38,000 (equipment purchased) = $73,000
d $456,000 + $27,000 additional investment = $483,000
e A/P $45,000 + $38,000 - $23,000 (paid) = $60,000
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
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Chapter 02 - Basic Financial Statements
153. Complete the January 31, 20__, balance sheet of Countrywide Legal Services using the
following information.
(1) Stockholders' equity at January 1, 20__, included capital stock of $140,000.
(2) The land and building were purchased by the business for a total price of $200,000 on
January 25, 20__, from a company forced out of business. On January 31, an appraiser valued
the property at $260,000.
(3) Additional capital stock was issued in exchange for $50,000 cash.
(4) Retained earnings at January 31, 20___, amounted to $49,400.
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Chapter 02 - Basic Financial Statements
Computations:
a. Total assets must be equal to total liabilities plus owners' equity of $375,000.
b. $200,000 (cost of land and building) less $135,000 for land = $65,000 for building.
(Appraised value of property ignored.)
c. Accounts receivable must be $50,000 to achieve total assets of $375,000.
d. $140,000 (capital stock at January 1) plus $50,000 (additional investment).
e. Total liabilities must be $135,600 to achieve total liabilities plus owners' equity of
$375,000.
f. Notes payable must be $90,000 to achieve total liabilities of $135,600.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
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Chapter 02 - Basic Financial Statements
155. Which of the following statements is not consistent with generally accepted accounting
principles relating to asset valuation?
A. Many assets are originally recorded in accounting records at their cost to the business
entity.
B. Subtracting total liabilities from total assets indicates what the owner's equity in the
business is worth under current market conditions.
C. Accountants assume that assets such as office supplies, land, and buildings will be used in
business operations, rather than being sold at current market prices.
D. Accountants prefer to base the valuation of assets upon objective, verifiable evidence
rather than upon appraisals or personal opinion.
156. Water world Boat Shop purchased a truck for $12,000, making a down payment of
$5,000 cash, and signing a $7,000 note payable due in 60 days. As a result of this transaction:
A. Total assets increased by $12,000.
B. Total liabilities increased by $7,000.
C. From the viewpoint of a short-term creditor, this transaction makes the business more
solvent.
D. This transaction had no immediate effect upon the owner's equity in the business.
157. A transaction caused a $15,000 decrease in both total assets and total liabilities. This
transaction could have been:
A. Purchase of a delivery truck for $15,000 cash.
B. An asset with a cost of $15,000 was destroyed by fire.
C. Repayment of a $15,000 bank loan.
D. Collection of a $15,000 account receivable.
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Chapter 02 - Basic Financial Statements
160. What information would you find in a statement of cash flows that you would not be able
to get from the other two primary financial statements?
A. Cash provided by or used in financing activities.
B. Cash balance at the end of the period.
C. Total liabilities due to creditors at the end of the period.
D. Net income.
161. Which of the following statements relating to the role of professional judgment in the
financial reporting process are valid?
A. Different accountants may evaluate similar situations differently.
B. The determination of which items should be disclosed in notes to financial statements
requires professional judgment.
C. Once a complete list of generally accepted accounting principles is prepared, judgment
need no longer enter into the financial reporting process.
D. The possibility always exists that professional judgment later may prove to have been
incorrect.
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