Question 1

Which of the following statements best describes the cash flow statement?
A)It provides information about the financial position of an entity at a specific point in time.
B)It measures the economic performance of the entity over a period of time.
C)It summarizes the changes to retained earnings during a period.
D)It shows how an entity managed its cash during the reporting period.

Accepted Answer

The cash flow statement shows how an entity managed its cash during the reporting period by providing information on cash inflows and outflows from operating, investing, and financing activities. Options A and B refer to the balance sheet and income statement, respectively. Option C describes the statement of retained earnings.

Question 2

Which of the following correctly describes an asset?
A)An obligation of the entity
B)An investment the owners have made
C)An economic resource that provides future benefits
D)An economic sacrifice made to earn revenue

Accepted Answer

An asset is defined as an economic resource that provides future benefits to the entity, such as the potential to generate revenue or reduce expenses. This can include physical items, such as property or inventory, as well as intangible items, such as patents or trademarks. Choices A and D describe liabilities and expenses, respectively, and choice B describes owner's equity, which is not necessarily the same as an asset.

Question 3

Which of the following statements best describes the statement of comprehensive income?
A)It provides information about the financial position of an entity at a specific point in time.
B)It measures economic events that involve non-owners but affect equity.
C)It summarizes the changes to shareholders' equity during a period.
D)It is an extension of the balance sheet.

Accepted Answer

The statement of comprehensive income includes all items of income and expense that affect non-owner stakeholders but also have an impact on equity. It is not focused solely on the financial position at a specific point in time, nor does it summarize changes to shareholders' equity during a period. Although it is a statement of financial performance, it is not an extension of the balance sheet.

Question 4

Which of the following correctly describes a liability?
A)An obligation of the entity
B)An investment the owners have made
C)An economic resource that provides future benefits
D)An economic sacrifice made to earn revenue

Accepted Answer

A liability is an obligation of the entity, which means the entity owes something to someone else, such as paying back a loan or providing goods or services to customers who have already paid for them. Choices B, C, and D do not accurately describe a liability.

Question 5

Which of the following statements best describes the balance sheet?
A)It provides information about the financial position of an entity at a specific point in time.
B)It measures the economic performance of the entity over a period of time.
C)It summarizes only the changes to retained earnings during a period.
D)It shows how an entity managed its cash during the reporting period.

Accepted Answer

The balance sheet provides information about the financial position of an entity at a specific point in time. It presents an overview of an entity's assets, liabilities, and equity as of a particular date. It does not measure the economic performance of the entity over a period of time, summarize only changes to retained earnings, or show how an entity managed its cash during the reporting period.

Question 6

Which of the following statements about the cash flow statement is true?
A)The cash flow statement reports what the net income would be if the cash basis of accounting had been followed.
B)The cash flow statement deals with cash, an asset; therefore, the cash flow statement is a snapshot statement just like the balance sheet.
C)The cash flow statement does not have to be included in general purpose financial statements.
D)The cash flow statement shows how the company managed its money for the period from more than just operations.

Accepted Answer

The cash flow statement shows the inflow and outflow of cash for the period, including how the company managed its money from sources other than operations. Option A is incorrect because the cash flow statement reports actual cash inflows and outflows, not what the net income would be if the cash basis of accounting had been followed. Option B is incorrect because the cash flow statement is a change statement, not a snapshot statement like the balance sheet. Option C is incorrect because the cash flow statement is a required component of general purpose financial statements under generally accepted accounting principles (GAAP).

Question 7

A shareholder invested $75,000, made up of $50,000 in cash and a vehicle worth $25,000, in a new company and received shares in exchange.What is the effect of this transaction on the accounting equation?
A)Assets increases by $75,000 and owners' equity increases by $75,000.
B)Assets increases by $75,000 owners' equity increases by $50,000, and liabilities increases by $25,000.
C)Assets increases by $50,000 and owners' equity increases by $50,000.
D)Assets increases by $50,000 and liabilities increases by $50,000.

Accepted Answer

The transaction increases both the assets and owners' equity by $75,000. The $50,000 in cash increases the company's cash or other asset account, while the $25,000 vehicle is also an asset. The shareholder's investment of $75,000 in exchange for shares increases the owners' equity by the same amount. Thus, there is no effect on liabilities, and option B can be eliminated as a possible answer. The transaction does not involve any borrowing or increase in liabilities, so option D can also be eliminated. Therefore, the correct answer is A.

Question 8

What is the accounting equation?
A)Assets + Liabilities = Owners' Equity
B)Assets = Liabilities - Owners' Equity
C)Assets = Liabilities + Owners' Equity
D)Assets + Owners' Equity = Liabilities

Accepted Answer

The accounting equation states that Assets are equal to Liabilities plus Owners' Equity. This means that the amount of resources a company controls (Assets) must be balanced by the amount of debt (Liabilities) and the amount of value contributed by the owners (Owners' Equity).

Question 9

Brantford Business Ltd.(BBL) has a loan outstanding from a Canadian bank.It uses the loan to finance its working capital.The bank has asked for BBL to provide it with monthly listings of their accounts receivables and inventory items.The requested listing is an example of:
A)a special purpose report.
B)a general purpose report.
C)a balance sheet report.
D)a cash flow report.

Accepted Answer

The requested listing is specific to BBL's accounts receivables and inventory items, which makes it a special purpose report. This report is meant to provide the bank with updates on BBL's working capital, which is the purpose of the loan. It is not a general purpose report because it is not meant for general use or to provide an overall view of BBL's financial situation. It is also not a balance sheet or cash flow report because it only includes specific items, not all of BBL's assets and liabilities or cash inflows and outflows.

Question 10

Trout Co.ordered and received inventory worth $45,000 on credit.What is the effect of this transaction on the accounting equation?
A)Assets increases by $45,000 and liabilities increases by $45,000.
B)Assets increases by $45,000 and liabilities decreases by $45,000.
C)Assets decreases by $45,000 and liabilities increases by $45,000.
D)Assets decreases by $45,000 and liabilities decreases by $45,000.

Accepted Answer

When inventory worth $45,000 is ordered and received on credit, the assets of the company (inventory) increase by $45,000 and the liabilities to the creditors increase by $45,000. Therefore, the accounting equation is: Assets = Liabilities + Equity. After the transaction, both the assets and the liabilities have increased by $45,000, which keeps the equation in balance. This can only happen in option A.

Question 11

Which of the following statements best describes the Statement of Changes in Equity?
A)It provides information about the financial position of an entity at a specific point in time.
B)It measures the economic performance of the entity over a period of time.
C)It summarizes the changes to shareholders' equity during a period.
D)It shows how an entity managed its cash during the reporting period.

Accepted Answer

The Statement of Changes in Equity summarizes the changes to shareholders' equity during a period. It shows how the entity's equity has changed from the beginning of the period to the end of the period, including factors such as profits, losses, share issuances, and dividend payments. It does not provide information about the financial position at a specific point in time or measure economic performance over a period of time, and it does not show how the entity managed its cash during the reporting period.

Question 12

Whitefish Inc.bought a building worth $750,000.They paid $150,000 in cash and borrowed the remainder from a bank.What is the effect of this transaction on the accounting equation?
A)Assets increases by $750,000 and liabilities increases by $750,000.
B)Assets increases by $750,000 and liabilities increases by $660,000.
C)Assets increases by $600,000 and liabilities increases by $750,000.
D)Assets increases by $600,000 and liabilities increases by $600,000.
Both assets and liabilities increased by $600,000 ($750,000 - $150,000)

Accepted Answer

Both assets and liabilities increased by $600,000 ($750,000 - $150,000)

Question 13

The bookkeeper at Walin Ltd.has prepared a list of all the property, plant and equipment the company owns, including their original cost to the company and how much has been depreciated to date.Where will this information most likely be included in the company's general purpose financial statements?
A)On the balance sheet.
B)In the cash flow statement.
C)In the notes to the financial statements.
D)This information will not be included in the company's general purpose financial statements.

Accepted Answer

The answer of The bookkeeper at Walin Ltd.has prepared a...

Question 14

If an entity receives cash from a customer for payment of an amount owing to them, what is the effect on the accounting equation?
A)Assets and liabilities both increase.
B)Assets and liabilities both decrease.
C)Assets and owners' equity both decrease
D)There is no effect on the accounting equation.

Accepted Answer

Receiving cash from a customer for an amount owing increases one asset (cash) and decreases another asset (accounts receivable) by the same amount, resulting in no net effect on the accounting equation.

Question 15

If an entity pays off an amount owed to a supplier, what is the effect on the accounting equation?
A)Assets and liabilities both increase.
B)Assets and liabilities both decrease.
C)Assets and owners' equity both decrease
D)There is no effect on the accounting equation.

Accepted Answer

Paying off an amount owed to a supplier decreases assets (cash or cash equivalents go out) and also decreases liabilities (the owed amount is reduced), thus maintaining the balance in the accounting equation.

Question 16

Sam's Snow Removal received $500 at the beginning of the winter to cover the fees for the entire winter for cleaning a customer's driveway while they went to Florida for the season.What is the effect of this transaction on the accounting equation?
A)Assets increases by $500 and owners' equity increases by $500.
B)Assets increases by $500 and liabilities increases by $500.
C)Liabilities increases by $500 and owners' equity increases by $500.
D)The increase and decrease in assets offset each other.

Accepted Answer

The $500 received is unearned revenue, which is a liability until the service is performed. Therefore, assets (cash) increase by $500 and liabilities (unearned revenue) increase by $500.

Question 17

Mats owns and operates a small advertising business from an office.His home is worth $400,000, his business assets are worth $275,000, and his business obligations total $65,000.How much equity does he have in his advertising business?
A)$210,000
B)$335,000
C)$340,000
D)$610,000

Accepted Answer

Equity in the business is calculated by subtracting business obligations from the value of business assets: $275,000 - $65,000 = $210,000.

Question 18

If a company pays rent for the next period in advance, what is the effect of the transaction on the accounting equation?
A)Assets decrease, and liabilities decrease.
B)Assets decrease, and owners' equity decrease.
C)Assets increase, and liabilities increase.
D)There is no effect on the accounting equation.

Accepted Answer

Paying rent in advance results in a decrease in cash (an asset) and an increase in prepaid rent (another asset), so the total assets remain unchanged, and there is no effect on liabilities or owners' equity.

Question 19

In 2012, Smith's Corner Store had an increase in gross margin of $28,000; however, the gross margin percentage decreased.This is most likely caused by:
A)a decrease in volume and a decrease in selling price
B)an increase in volume and an increase in selling price.
C)an increase in volume and a decrease in selling price.
D)a decrease in volume and an increase in selling price.

Accepted Answer

An increase in volume and a decrease in selling price can lead to an increase in gross margin in dollar terms due to higher sales volume, but the gross margin percentage can decrease if the selling price reduction impacts the margin rate more significantly than the volume increase.

Question 20

Which of the following statements best describes the income statement?
A)It provides information about the financial position of an entity at a specific point in time.
B)It measures the economic performance of the entity over a period of time.
C)It summarizes the changes to retained earnings during a period.
D)It shows how an entity managed its cash during the reporting period.

Accepted Answer

The income statement measures an entity's economic performance over a period of time, typically one year. It shows the revenues earned and expenses incurred during that period, resulting in net income or loss. It does not provide information about the entity's financial position at a specific point in time, summarize changes to retained earnings, or show how the entity managed its cash.

Quiz 2: Financial Statements: a Window on an Entity

Which of the following statements best describes the cash flow statement?

Which of the following correctly describes an asset?

Which of the following statements best describes the statement of comprehensive income?

Which of the following correctly describes a liability?

Which of the following statements best describes the balance sheet?

Which of the following statements about the cash flow statement is true?

A shareholder invested $75,000, made up of $50,000 in cash and a vehicle worth $25,000, in a new company and received shares in exchange.What is the effect of this transaction on the accounting equation?

What is the accounting equation?

Brantford Business Ltd.(BBL) has a loan outstanding from a Canadian bank.It uses the loan to finance its working capital.The bank has asked for BBL to provide it with monthly listings of their accounts receivables and inventory items.The requested listing is an example of:

Trout Co.ordered and received inventory worth $45,000 on credit.What is the effect of this transaction on the accounting equation?

Which of the following statements best describes the Statement of Changes in Equity?

Whitefish Inc.bought a building worth $750,000.They paid $150,000 in cash and borrowed the remainder from a bank.What is the effect of this transaction on the accounting equation?

If an entity receives cash from a customer for payment of an amount owing to them, what is the effect on the accounting equation?

If an entity pays off an amount owed to a supplier, what is the effect on the accounting equation?

Sam's Snow Removal received $500 at the beginning of the winter to cover the fees for the entire winter for cleaning a customer's driveway while they went to Florida for the season.What is the effect of this transaction on the accounting equation?

Mats owns and operates a small advertising business from an office.His home is worth $400,000, his business assets are worth $275,000, and his business obligations total $65,000.How much equity does he have in his advertising business?

If a company pays rent for the next period in advance, what is the effect of the transaction on the accounting equation?

In 2012, Smith's Corner Store had an increase in gross margin of $28,000; however, the gross margin percentage decreased.This is most likely caused by:

Which of the following statements best describes the income statement?