Question 1

The income statement is based on the fundamental accounting equation:
Assets = Liabilities + Owner's Equity.

Accepted Answer

The income statement is not based on the fundamental accounting equation. Instead, it shows revenues, expenses, and net income over a period of time. The fundamental accounting equation is used to show the relationship between assets, liabilities, and owner's equity on a specific date.

Question 2

On a projected income statement, a business owner's target income is ________.
A)the sum of a reasonable salary for the time spent running the business and a normal return on the amount invested in it
B)the income at which the company's total revenues and its total expenses are equal
C)the income that will produce a 10 percent return on the owner's financial investment in the business
D)the income that the owner could earn working for someone else

Accepted Answer

A business owner's target income on a projected income statement is typically the sum of a reasonable salary for the time spent running the business and a normal return on the amount invested in it. This target income reflects the owner's desire for fair compensation for their time and energy invested in the business, as well as a reasonable return on their financial investment.

Question 3

The ________ represents a "snapshot" of a business, showing an estimate of its value on a given date, while the ________ is a "moving picture" of the firm's profitability over time.
A)balance sheet; income statement
B)income statement; balance sheet
C)statement of cash flows; income statement
D)balance sheet; statement of cash flows

Accepted Answer

The balance sheet represents the financial position of a business on a specific date, and it shows the assets, liabilities, and equity of the company. It provides a snapshot of the company's financial health, but it doesn't show the performance over time. 
On the other hand, the income statement shows the revenue, expenses, and net income of the business over a period of time (usually a month, quarter, or year). It provides a moving picture of the company's profitability and performance over time.

Question 4

Service companies spend the greatest percentage of their sales revenue on cost of goods sold.

Accepted Answer

Cost of goods sold is a term used for manufacturing or retail companies to represent the direct costs associated with producing or purchasing products for sale. Service companies do not produce tangible goods, instead, they sell intangible services. Therefore, they do not have cost of goods sold but rather have other operating expenses such as labor costs, supplies, and marketing expenses.

Question 5

On a company's statement of cash flows, depreciation is ________.
A)the difference between the total sources available to the owner and the total uses of those assets
B)listed as a source of funds because it is a noncash expense, already deducted as a cost of doing business
C)the owner's total investment at the company's inception plus retained earnings
D)creditors' total claims against the firm's assets

Accepted Answer

Depreciation is listed as a source of funds because it is a noncash expense, already deducted as a cost of doing business. It does not involve any actual cash outflow, but reduces the value of an asset over time, which is why it is treated as an expense.

Question 6

Comparing a company's current income statement to those of prior accounting periods rarely reveals valuable information about key trends.

Accepted Answer

Comparing a company's current income statement to those of prior accounting periods can reveal valuable information about key trends, such as changes in revenue, expenses, and profits over time. This analysis can help identify areas of strength and weakness in the company's operations and inform strategic decision-making.

Question 7

The ________ shows what assets the business owns and what claims creditors and owners have against those assets, and is built on the basic accounting equation: Assets = Liabilities + Owner's Equity.
A)income statement
B)sources and uses of funds statement
C)balance sheet
D)cash budget

Accepted Answer

The balance sheet shows a company's assets, liabilities, and equity, and is based on the accounting equation of Assets = Liabilities + Owner's Equity. The income statement shows a company's revenues, expenses, and net profit or loss over a period of time. The sources and uses of funds statement shows how the company is using its funds, while the cash budget outlines the company's expected cash inflows and outflows over a given time period.

Question 8

Which of the following items would not be listed as a current asset in a company's financial reports?
A)Cash
B)Accounts receivable
C)Fixtures
D)Inventory

Accepted Answer

Fixtures are a type of property, plant, and equipment and are not classified as a current asset. Current assets are those that are expected to be converted into cash or used up within one year or less, such as cash, accounts receivable, and inventory.

Question 9

According to one study, 23 percent of small business owners lack financial literacy to identify the cost that has the greatest impact on their companies.

Accepted Answer

The statement accurately reflects the findings of the study.

Question 10

To reach profit objectives, entrepreneurs must be aware of their firms' ________.
A)current ratio and liabilities
B)fixed assets and owner's equity
C)assets and liabilities
D)overall financial position and any changes in the financial status

Accepted Answer

Entrepreneurs need to understand their firm's overall financial position and any changes in financial status to make informed decisions that align with their profit objectives. This encompasses all aspects of the firm's finances, including assets, liabilities, equity, and financial performance metrics.

Question 11

Which of the following is not true regarding the components of the income statement?
A)Cost of goods sold represents the total cost, excluding shipping, of the merchandise sold during the accounting period.
B)Gross profit margin is calculated by dividing gross profit by net sales revenue.
C)Operating expenses include those costs that contribute directly to the manufacture and distribution of goods.
D)A and B above

Accepted Answer

The answer of Which of the following is not true...

Question 12

Cost of goods sold is located on which financial statement?
A)Income statement
B)Balance sheet
C)Statement of cash flows
D)All of the above

Accepted Answer

Cost of goods sold is an expense item that is subtracted from revenue on the income statement to arrive at gross profit. It is not reported on the balance sheet or statement of cash flows.

Question 13

The statement of cash flows ________.
A)compares costs and expenses against a firm's net profits
B)is built on the basic accounting equation: Assets = Liabilities + Capital
C)shows what assets the business owns and what claims creditors and owners have against those assets
D)shows changes in working capital by listing sources and uses of funds

Accepted Answer

The statement of cash flows shows changes in working capital by listing sources and uses of funds, such as cash inflows and outflows from operating, investing, and financing activities. A compares costs and expenses against net profits is the income statement. B is the balance sheet, which shows what assets the business owns and what claims creditors and owners have against those assets.

Question 14

The balance sheet provides owners with an estimate of the firm's worth for a specific moment in time, while the income statement presents a "moving picture" of its profitability over a period of time.

Accepted Answer

The balance sheet shows the financial position of the company at a specific point in time while the income statement shows the performance of the company over a period of time (usually a quarter or a year).

Question 15

Assets represent what a business owns, while liabilities represent the claims creditors have against a company's assets.

Accepted Answer

This statement accurately defines assets and liabilities. Assets are the resources owned by the business, such as cash, inventory, and equipment, while liabilities refer to the obligations or debts that a company owes to others, such as loans, accounts payable, and accrued expenses. Liabilities represent the claims that creditors and other stakeholders have against the company's assets.

Question 16

________ are those items of value the business owns; ________ are those things the business owes.
A)Assets; liabilities
B)Liabilities; assets
C)Ratios; equities
D)Equities; liabilities

Accepted Answer

Assets are things like property, equipment, and investments that the business owns and can use to generate profit. Liabilities are debts and obligations owed by the business to others, such as loans, accounts payable, and taxes.

Question 17

The first section of a balance sheet lists ________.
A)assets
B)liabilities
C)claims creditors have against the firm's assets payable within one year
D)the owner's equity in terms of initial capital invested and retained earnings

Accepted Answer

The first section of a balance sheet lists the assets of the company, which are typically classified as current assets (those that can be converted into cash within one year) and noncurrent assets (those that have a longer life beyond one year).

Question 18

To determine net profit, the owner records sales revenue for the year and subtracts liabilities.

Accepted Answer

To determine net profit, the owner subtracts expenses from total revenue, not liabilities.

Question 19

On the income statement, the cost of goods sold represents the total cost, excluding shipping, of the merchandise sold during the year.

Accepted Answer

The answer of On the income statement, the cost of...

Question 20

Which of the following associations is correct?
A)Balance sheet - cost of goods sold
B)Income statement - owner's equity
C)Current assets - inventory
D)Long-term liabilities - accounts payable

Accepted Answer

Current assets typically include cash, accounts receivable, and inventory. Therefore, the association between current assets and inventory is correct. Balance sheet items such as liabilities and owner's equity do not appear on the income statement, and cost of goods sold is a line item on the income statement, not the balance sheet. Long-term liabilities and accounts payable are two different items; accounts payable are typically a current liability item, while long-term liabilities refer to debt obligations that are not due in the current accounting period.

Quiz 12: Creating a Successful Financial Plan

The income statement is based on the fundamental accounting equation: Assets = Liabilities + Owner's Equity.

On a projected income statement, a business owner's target income is ________.

The represents a "snapshot" of a business, showing an estimate of its value on a given date, while the is a "moving picture" of the firm's profitability over time.

Service companies spend the greatest percentage of their sales revenue on cost of goods sold.

On a company's statement of cash flows, depreciation is ________.

Comparing a company's current income statement to those of prior accounting periods rarely reveals valuable information about key trends.

The ________ shows what assets the business owns and what claims creditors and owners have against those assets, and is built on the basic accounting equation: Assets = Liabilities + Owner's Equity.

Which of the following items would not be listed as a current asset in a company's financial reports?

According to one study, 23 percent of small business owners lack financial literacy to identify the cost that has the greatest impact on their companies.

To reach profit objectives, entrepreneurs must be aware of their firms' ________.

Which of the following is not true regarding the components of the income statement?

Cost of goods sold is located on which financial statement?

The statement of cash flows ________.

The balance sheet provides owners with an estimate of the firm's worth for a specific moment in time, while the income statement presents a "moving picture" of its profitability over a period of time.

Assets represent what a business owns, while liabilities represent the claims creditors have against a company's assets.

are those items of value the business owns; are those things the business owes.

The first section of a balance sheet lists ________.

To determine net profit, the owner records sales revenue for the year and subtracts liabilities.

On the income statement, the cost of goods sold represents the total cost, excluding shipping, of the merchandise sold during the year.

Which of the following associations is correct?