Question 1

Which of the following are assets?

Accepted Answer

Inventory is an asset because it represents goods or products that a company intends to sell in the near future, and can be converted into cash.

Salaries payable and accounts payable are liabilities because they represent amounts owed by a company to its employees or suppliers, respectively.

Bad debts represent amounts owed to a company by customers who are unlikely to repay, and are therefore considered a type of expense, not an asset.

Question 2

What does the statement of cash flows show about a firm?

Accepted Answer

The statement of cash flows shows the sources and uses of cash that result from a firm's operating, investing, and financing activities, providing an overview of the company's cash flows for the accounting period. It does not show actual net profits or losses, current assets and liabilities, or a schedule of debt payments.

Question 3

What is the income statement equation?

Accepted Answer

The income statement equation is Revenue - Expenses = Net Income. This equation is used to calculate the profitability of a company by subtracting all expenses from total revenue. The resulting net income is a key metric for measuring a company's financial health. Option A is the equation for the balance sheet, option C is the accounting equation, and option D is not a valid equation.

Question 4

Profit is the difference between which of the following?

Accepted Answer

Profit is the difference between revenue (the money earned by a business) and expenses (the money spent by a business). It is not related to retained earnings, cost of goods sold, assets, liabilities, notes payable, or accounts payable.

Question 5

The accounting equation shows us that the value of the firm's assets must equal the value of which of the following?

Accepted Answer

The accounting equation is Assets = Liabilities + Owners' Equity. This equation shows that the value of a firm's assets is equal to the financing provided by both owners (owners' equity) and creditors (liabilities).

Question 6

As the owner of 100 shares of Megabux Corporation's stock, Roman Sworski wants to know whether his company earned a profit or loss during the past year. He can find the answer to this by looking at which of the following of Megabux's financial statements?

Accepted Answer

Roman Sworski can find out if Megabux Corporation earned a profit or loss during the past year by looking at the income statement. The income statement shows the company's revenues and expenses for a specific period, and its bottom line is the net income or net loss for that period.

Question 7

Which of the following shows the cash flowing in and out of a firm through its operating, investing, and financing activities?

Accepted Answer

The statement of cash flows is the only financial statement that shows the cash flowing in and out of a firm through its operating, investing, and financing activities. The income statement shows the company's revenue and expenses, but does not provide information on cash flows. The operating budget is a projection of the company's expected revenues and expenses, not actual cash flows. Retained earnings are a part of the equity section of the balance sheet and do not show the company's cash flows.

Question 8

Which of the following refers to the method of accounting where revenues are recognized when they are earned and payment is reasonably assured?

Accepted Answer

Accrual basis accounting is the method of accounting where revenues are recognized when they are earned and payment is reasonably assured. Actuarial accounting is the method of accounting used by the insurance industry. Managerial accounting is the process of identifying, measuring, analyzing, interpreting, and communicating information for the pursuit of an organization's goals. Lastly, LIFO accounting is a method of accounting for inventory where the last items purchased are assumed to be the first items sold.

Question 9

If a firm's assets = $6000 and its liabilities = $3500, what is owners' equity?

Accepted Answer

Owners' equity is calculated as Assets minus Liabilities, which in this case is $6000 - $3500 = $2500.

Question 10

Which of the following would provide stakeholders with information about how a firm obtained and used cash in the most recent accounting period, as well as its cash balance at the end of the accounting period?

Accepted Answer

The statement of cash flows provides information about a firm's cash inflows and outflows during the accounting period, including how cash was obtained and used, and the cash balance at the end of the period. The shareholders' equity statement shows changes in equity accounts, the income statement shows revenue, expenses and profits, and the cash budget is a projection of the future cash inflows and outflows.

Question 11

Which of the following is normally the first asset listed on a balance sheet?

Accepted Answer

Cash is listed first on the balance sheet, as it is the most liquid asset and the basis for all other financial transactions.

Question 12

Which of the following would be listed in the liabilities section of the balance sheet?

Accepted Answer

Short-term notes payable represents a type of debt or liability that a company owes to creditors or lenders. Retained earnings, debits, and expenses are not liabilities but rather represent equity and expenses on the income statement.

Question 13

Which of the following would be listed in the owners' equity section of a balance sheet?

Accepted Answer

Retained earnings are a type of accumulated earnings that represent the portion of a company's profits that are not distributed as dividends to shareholders but instead are kept for reinvestment in the business. Retained earnings are listed in the owners' equity section of a balance sheet because they represent the owners' claim on the company's assets. Accounts receivable and cash are listed in the assets section of a balance sheet, while net income is typically reported on an income statement rather than a balance sheet.

Question 14

The amount of cash at the end of the period, as reflected on the statement of cash flows, should match which of the following?

Accepted Answer

The amount of cash on the statement of cash flows should match the cash balance on the current balance sheet, as they both represent the same information at different points in time. Retained earnings (choices B and D) are not related to the cash balance and liabilities for the next accounting period (choice C) are a future obligation and not relevant to the current cash balance.

Question 15

Which item would be listed first on the income statement?

Accepted Answer

Revenue is typically listed first on the income statement as it represents the top line or total sales generated by the company before any expenses are deducted.

Question 16

Which of the following items would be listed on an income statement?

Accepted Answer

Cost of goods sold is a major expense for a business and is directly related to the revenue generated from the sale of goods or services. It is the cost incurred to produce or purchase the products sold during a specific period, and hence will be listed on the income statement. Accounts receivable, cash flows from operations, and current liabilities are all balance sheet items and will not be listed on the income statement.

Question 17

What is the term for the claims owners have against the firm's assets?

Accepted Answer

Owners' equity represents the claims owners have against the firm's assets, reflecting the residual interest in the assets of the entity after deducting liabilities.

Question 18

Which of the following indicates whether a firm earned a profit or suffered a loss over the past accounting period?

Accepted Answer

The income statement shows the revenues earned and expenses incurred by a company during a specific accounting period and helps in determining whether the company made a profit or incurred a loss. The cash budget helps in managing cash inflows and outflows, the balance sheet shows the financial position of a company at a specific point in time, and the statement of cash flows shows the cash inflows and outflows from operating, investing, and financing activities.

Question 19

By subtracting dividends paid to shareholders from the net income, which of the following are managers able to calculate?

Accepted Answer

By subtracting dividends paid to shareholders from net income, managers are able to calculate the change in retained earnings. Retained earnings is the portion of net income that is kept in the company, rather than distributed to shareholders as dividends.

Question 20

According to the accrual basis of accounting, how are expenses treated?

Accepted Answer

According to the accrual basis of accounting, expenses are matched with the revenues they helped generate. This means that expenses are recognized when they are incurred, regardless of when payment is made. This allows for a more accurate representation of the company's financial performance during a given period.

Quiz 7: Accounting: Decision Making by the Numbers