CH 01

Chapter 1
Introduction to Accounting and Business
OBJECTIVES
Obj 1 Describe the nature of a business and the role of ethics and accounting in business.
Obj 2 Summarize the development of accounting principles and relate them to practice.
Obj 3 State the accounting equation and define each element of the equation.
Obj 4 Describe and illustrate how business transactions can be recorded in terms of the
resulting change in the basic elements of the accounting equation.
Obj 5 Describe the financial statements of a proprietorship and explain how they
interrelate.
QUESTION GRID
True / False
No. Objective Difficulty No. Objective Difficulty No. Objective Difficulty
1 01-01 Moderate 23 01-01 Easy 45 01-04 Easy
2 01-01 Moderate 24 01-01 Easy 46 01-04 Moderate
3 01-01 Easy 25 01-01 Easy 47 01-04 Difficult
4 01-01 Easy 26 01-01 Easy 48 01-04 Moderate
5 01-01 Moderate 27 01-01 Easy 49 01-04 Moderate
7 01-01 Moderate 29 01-02 Moderate 51 01-04 Easy
11 01-01 Easy 33 01-02 Easy 55 01-04 Easy
12 01-01 Easy 34 01-02 Easy 56 01-04 Easy
14 01-01 Easy 36 01-03 Difficult 58 01-05 Easy
15 01-01 Easy 37 01-03 Easy 59 01-05 Easy
16 01-01 Easy 38 01-03 Moderate 60 01-05 Easy
19 01-01 Easy 41 01-03 Moderate 63 01-05 Moderate
21 01-01 Easy 43 01-04 Difficult
22 01-01 Easy 44 01-04 Moderate
1
2  Chapter 1/Introduction to Accounting and Business
Matching
7 01-04 Moderate 14 01-05 Easy
Multiple Choice
1 01-01 Easy 33 01-02 Difficult 65 01-04 Moderate
3 01-01 Easy 35 01-02 Difficult 67 01-04 Difficult
6 01-01 Moderate 38 01-02 Moderate 70 01-04 Difficult
9 01-01 Easy 41 01-03 Easy 73 01-04 Easy
16 01-01 Moderate 48 01-04 Moderate 80 01-04 Moderate
31 01-02 Difficult 63 01-04 Moderate 95 01-05 Easy
32 01-02 Moderate 64 01-04 Moderate
Chapter 1/Introduction to Accounting and Business  3
Exercise/Other
3 01-03 Moderate 7 01-05 Moderate
4 01-04 Difficult 8 01-05 Difficult
Problem
1 01-01 Moderate 8 01-05 Easy 15 01-05 Difficult
2 01-01 Moderate 9 01-05 Easy 16 01-05 Difficult
4 01-02 Easy 11 01-05 Difficult 18 01-05 Difficult
6 01-04 Moderate 13 01-05 Difficult 20 01-05 Difficult
7 01-04 Moderate 14 01-05 Difficult
Chapter 1—Introduction to Accounting and Business
TRUE/FALSE
1. The main objective of a not-for-profit business is not to make a profit.

ANS: F DIF: Moderate OBJ: 01-01
NAT: AACSB Analytic | AICPA BB-Industry
2. An example of a business stakeholder is the federal government.

ANS: T DIF: Moderate OBJ: 01-01
3. A corporation is a business that is legally separate and distinct from its owners.
ANS: T DIF: Easy OBJ: 01-01
4. About 90% of the businesses in the United States are organized as corporations.
ANS: F DIF: Easy OBJ: 01-01
5. Primary users of accounting information are accountants.

6. Accounting is thought to be the "language of business" because business information is
communicated to stakeholders.
NAT: AACSB Analytic | AICPA FN-Measurement
7. The role of accounting is to provide many different users with financial information to
make economic decisions.
8. Proprietorships are owned by one owner and provide only services to their customers.
9. Large corporations such as Wal-Mart, Coca-Cola, and Nike operate as manufacturing

businesses.
10. Only large companies such as Wal-Mart, JCP, General Motors, and the Bank of America can
be organized as corporations.
11. A business stakeholder is a person or entity that has an economic interest in the company.
12. Senior executives cannot be criminally prosecuted for the wrong doings they commit on
behalf of the companies where they work.
NAT: AACSB Ethics | AICPA BB-Legal
13. The primary role of accounting is to determine the amount of taxes a business will be
required to pay to taxing entities.
14. Stakeholders use only accounting reports as the source of information to base all of their
business decisions.
15. Accounting reports are designed with the information needs of the stakeholders in mind.
16. Public accountants are normally hired by companies and the Internal Revenue Service.
17. Managerial accounting information is used by external and internal users equally.
18. Financial accounting provides information to all of the business stakeholders, while the main
focus for managerial accounting is to provide information to the management.
19. Proper ethical conduct implies that you only consider what's in your best interest.
20. Some of the major fraudulent acts by senior executives started as what they considered to be
small ethical lapses which grew out of control.
21. CMA is an acronym that stands for Certified Manufacturing Accountant.

22. Individuals who wish to practice public accounting as a CPA must meet the requirements of
the state in which they reside.
23. A business is an organization that provides goods or services to their customers in exchange
for money or other items of value.
24. Profits are the difference between the amounts received from customers and the amounts
paid to provide the goods or services.
25. The main objective for all businesses is to maximize profits.

26. Manufacturing and merchandising companies are similar because they purchase products
from other companies to sell to their customers.
27. Managerial accounting is primarily concerned with the recording and reporting of economic
data and activities of an entity for use by owners, creditors, governmental agencies, and the
public.
28. The Financial Accounting Standards Board (FASB) is the authoritative body that has
primary responsibility for developing accounting principles.
29. The cost concept is the basis for entering the exchange price into the accounting records.
30. Without the cost concept, accounting reports would become unstable and unreliable.
31. The unit of measurement concept requires that economic data be recorded in a common unit
of measurement.
32. If a building is appraised for $90,000, offered for sale at $95,000, and the buyer pays
$85,000 cash for it, the buyer would record the building at $90,000.
33. GAAP stands for General Accepted Accounting Protocols.

34. Generally accepted accounting principles regulate how and what financial information is
reported by businesses.
35. The accounting equation can be expressed as Assets - Liabilities = Stockholders' Equity.
36. The rights or claims to the assets of a business may be subdivided into rights of creditors and
rights of stockholders.
ANS: T DIF: Difficult OBJ: 01-03
37. The stockholders’ rights to the assets rank ahead of the creditors' rights to the assets.
38. If the liabilities owed by a business total $500,000 and stockholders’ equity is equal to
$500,000, then the assets also total $500,000.
39. If total assets decreased by $40,000 during a specific period and stockholders' equity
decreased by $45,000 during the same period, the period's change in total liabilities was an
$85,000 increase.
40. If the assets owned by a business total $500,000, and stockholders' equity totals $400,000,
liabilities total $100,000.
41. If the assets owned by a business total $100,000 and liabilities total $50,000, the total for
stockholders' equity is $150,000.
42. If total assets increased by $175,000 during a specific period and liabilities decreased by
$10,000 during the same period, the period's change in total stockholders' equity was a
$185,000 increase.
43. If net income for a corporation was $25,000, the dividends paid in cash of $10,000, and the
stockholders’ invested $5,000 in cash, the stockholders’ equity increased by $20,000.
ANS: T DIF: Difficult OBJ: 01-04
44. If net income for a corporation was $175,000, dividends were $40,000 in cash, and the
stockholders made no additional investment, the stockholders’ equity increased $215,000.
45. An account receivable is a claim against a customer arising from a sale on account.
46. Paying an account payable increases liabilities and decreases assets.

47. Receiving payments on an account receivable increases both stockholders’ equity and assets.
ANS: F DIF: Difficult OBJ: 01-04
48. Cash investments by stockholders increase both stockholders’ equity and assets.
49. Cash dividends decrease assets and increase stockholders’ equity.

50. Purchasing supplies on account increases liabilities and decreases stockholders’ equity.
51. The dividends paid to stockholders are from the profits made by the corporation.
52. Receiving a bill or otherwise being notified that an amount is owed is not recorded until the
amount is paid.
53. Revenue is earned only when money is received.

54. Expenses are expired costs of doing business.

55. The excess of revenue over the expenses incurred in earning the revenue is called capital.
56. Expenses increase stockholders’ equity.

57. The excess of expenses over revenues is called net income.

58. The principal financial statements of a corporation are the income statement, statement of
retained earnings, statement of cash flows, and the balance sheet.
59. A balance sheet is a list of the assets, liabilities, and stockholders’ equity of a business for a
period of time.
60. An income statement is a summary of the revenues and expenses of a business as of a

specific date.
61. A statement of retained earnings reports the changes in the retained earnings account for a
period of time.
62. The statement of cash flows consists of an operating section, an income section, and a
stockholders’ equity section.
63. The financial statements of a corporation should include the stockholders’ personal assets
and liabilities.
64. The Balance Sheet represents the accounting equation.

MATCHING
Match the following transactions with their affects to the accounting equation.
a. Increase assets, increase liabilities
b. Increase liabilities, decrease stockholders’ equity
c. Increase assets, increase stockholders’ equity
d. No affect
e. Decrease assets, decrease liabilities
f. Decrease assets, decrease stockholders’ equity
1. Received cash for services provided

2. Received utility invoice to be paid next month
3. Investment of land by stockholder
4. Paid part of an amount owed to a creditor
5. Paid cash for the purchase of a one year insurance policy
6. Received payment from a customer for an invoice that was billed last month
7. Dividends paid
8. Provided a service to a customer on account
9. Purchased supplies on credit
10. Paid wages
1. ANS: C DIF: Moderate OBJ: 01-04

2. ANS: B DIF: Moderate OBJ: 01-04
4. ANS: E DIF: Moderate OBJ: 01-04
5. ANS: D DIF: Moderate OBJ: 01-04
6. ANS: D DIF: Moderate OBJ: 01-04
7. ANS: F DIF: Moderate OBJ: 01-04
9. ANS: A DIF: Moderate OBJ: 01-04
10. ANS: F DIF: Moderate OBJ: 01-04
Match the following accounts to the financial statement where they can be found.
a. Balance Sheet
b. Income Statement
c. Statement of Cash Flows
d. Statement of Retained Earnings
11. Dividends
12. Revenues
13. Supplies
14. Land
15. Accounts Payable
16. Accounts Receivable
17. Operating Activities
18. Wages Expense
19. Net Income
20. Cash
11. ANS: D DIF: Easy OBJ: 01-05

12. ANS: B DIF: Easy OBJ: 01-05
13. ANS: A DIF: Easy OBJ: 01-05
17. ANS: C DIF: Easy OBJ: 01-05
18. ANS: B DIF: Easy OBJ: 01-05
19. ANS: D DIF: Easy OBJ: 01-05
MULTIPLE CHOICE
1. Profit is the difference between

a. assets and liabilities
b. the incoming cash and outgoing cash
c. the assets purchased with cash contributed by the owner and the cash spent to operate the
business
d. the assets received for goods and services and the amounts used to provide the goods and
services
ANS: D DIF: Easy OBJ: 01-01
2. Most businesses in the United States are

a. sole proprietorships
b. partnerships
c. corporations
d. separate entities
ANS: A DIF: Easy OBJ: 01-01
3. Which of the items below is not a business organization form?

a. entrepreneurship
b. proprietorship
c. partnership
d. corporation
4. An entity that is organized according to state or federal statutes and in which ownership is
divided into shares of stock is a
a. proprietorship
b. corporation
c. partnership
d. governmental unit
ANS: B DIF: Easy OBJ: 01-01
5. Financial reports are used by

a. management
b. creditors
c. investors
d. all are correct
6. Which of the following best describes accounting?

a. records economic data but does not communicate the data to users according to any
specific rules
b. is an information system that provides reports to stakeholders
c. is of no use by individuals outside of the business
d. is used only for filling out tax returns and for financial statements for various type of
governmental reporting requirements
ANS: B DIF: Moderate OBJ: 01-01
7. Which of the following is not a step in providing accounting information to stakeholders?

a. design the accounting information system
b. prepare accounting surveys
c. identify stakeholders
d. record economic data
8. The two most common specialized fields of accounting in practice are

a. forensic accounting and financial accounting
b. managerial accounting and financial accounting
c. managerial accounting and environmental accounting
d. financial accounting and tax accounting systems
9. Public accountants are normally

a. Certified Public Accountants
b. Forensic accountants
c. Certified Internal Auditors
d. Certified Management Accountants
10. Which of the following is a specialized field of accounting?

a. social accounting
b. tax accounting
c. environmental accounting
d. all are correct
11. Which of the following is not true about a manufacturing business?

a. They change inputs to products which are sold to their customers.
b. Their primary goal is to maximize profits.
c. Only large business can be considered a manufacturing business.
d. All are true.
ANS: C DIF: Moderate OBJ: 01-01
12. Which of the following group of companies are all examples of a merchandising business?
a. Delta Airlines, Marriott, Gap
b. Gap, Amazon, NIKE
c. GameStop, Sony, Dell
d. GameStop, Best Buy, Gap
13. Which of the following would not normally operate as a service business?
a. Pet Groomers
b. Restaurant
c. Video Rentals
d. Styling Salon
14. Select the type of business that is most likely to obtain large amounts of resources by issuing
stock.
a. Partnership
b. Corporation
c. Proprietorship
d. None are correct.
15. Which of the following is true in regards to a Limited Liability Company?

a. It is organized as a corporation.
b. It can elect to be taxed as a partnership.
c. Provides tax and liability advantages to the owners.
d. All are correct.
16. Capital market stakeholders have an interest in the company because

a. they provide incentives for the company to market their products.
b. they are part of the Marketing Department that is responsible for promoting the products
or services to increase the business profits.
c. they help market their products to customers or find vendors to supply needed inputs.
d. they provide major financing for the business.
ANS: D DIF: Moderate OBJ: 01-01
17. ____ are considered to be product or service market stakeholders.

a. Employees and customers
b. Customers and vendors
c. Owners and managers
d. Government and banks
18. The following are examples of internal stakeholders except:

a. Managers
b. Owners
c. Employees
d. all of the above
19. Due to various fraudulent business practices and accounting coverups in the early 2000’s,
Congress enacted the Sarbanes-Oxley Act of 2002. The act was responsible for establishing
a new oversight board for public accountants called the
a. Generally Accepted Accounting Practices for Public Accountants Board.
b. Public Company Accounting Oversight Board.
c. Congressional Accounting Oversight Board.
20. Which of the following is the best description of accounting’s role in business?
a. Accounting provides stockholders with information regarding the market value of the
company’s stocks.
b. Accounting provides information to managers to operate the business and to other
stakeholders to make decisions regarding the economic condition of the company.
c. Accounting provides creditors and banks with information regarding the credit risk rating
of the company.
d. Accounting is not responsible for providing any form of information to stakeholders.
That is the role of the Information Systems Department.
21. Managerial accountants would be responsible for providing the following information:
a. Tax reports to government agencies.
b. Profit reports to owners and management.
c. Expansion of a product line report to management.
d. Consumer reports to customers.
22. Which of the following is not a certification for accountants?

a. CIA
b. CMA
c. CISA
d. All are true.
23. Which of the following is not a characteristic of a corporation?

a. Corporations are organized as a separate legal taxable entity
b. Ownership is divided into shares of stock.
c. Corporations experience an ease in obtaining large amounts of resources by issuing stock.
d. A corporation’s resources are limited to their individual owners’ resources.
e. Corporations make up 20% of all businesses.
24. Which of the following is not a role of accounting in business?

a. To provide reports to stakeholders about the economic activities and conditions of a
business.
b. To personally guarantee loans of the business.
c. To provide information for managers to use in operating the business.
d. To assess the various informational needs of stakeholders and design its accounting
system to meet those needs.
e. To provide information to other stakeholders to use in assessing the economic
performance and condition of the business.

25. Which of the following is one of the sound principles for ethical behavior?
a. avoiding small ethical lapses
b. focusing on long-term reputation
c. possibly suffering adverse consequences for holding to an ethical position
d. all are correct
e. none are correct
26. Which of the following is not a requirement by any state for obtaining a CPA certificate?
a. earning 150 semester hours of college credit
b. having experience in wordprocessing, electronic spreadsheets and databases
c. acquiring college education in accounting
d. passing an examination prepared by the AICPA
e. working for one to three years in a public accounting setting
27. The initials GAAP stand for

a. General Accounting Procedures
b. Generally Accepted Plans
c. Generally Accepted Accounting Principles
d. Generally Accepted Accounting Practices
28. Presently, the dominant body in the development of accounting principles is the
a. American Institute of Certified Public Accountants (AICPA)
b. American Accounting Association (AAA)
c. Financial Accounting Standards Board (FASB)
d. Institute of Management Accountants (IMA)
ANS: C DIF: Easy OBJ: 01-02
29. The business entity concept means that

a. the owner is part of the business entity
b. an entity is organized according to state or federal statutes
c. an entity is organized according to the rules set by the FASB
d. the entity is an individual economic unit for which data are recorded, analyzed, and
reported
30. For accounting purposes, the business entity should be considered separate from its owners
if the entity is
a. a corporation
b. a proprietorship
c. a partnership
d. all of the above
31. Smith Company purchased $105,000 of computer equipment from Brown Company. Smith
Company paid for the equipment using cash that had been obtained from the initial
investment by Connie Smith. The transaction involving the computer equipment should be
recorded on the accounting records of which of the following entities?
a. Smith Company and Connie Smith's personal records
b. Brown Company and Connie Smith's personal records
c. Brown Company
d. Smith Company and Brown Company
ANS: D DIF: Difficult OBJ: 01-02
32. The objectivity principle requires that

a. business transactions must be consistent with the objectives of the entity
b. the Financial Accounting Standards Board must be fair and unbiased in its deliberations
over new accounting standards
c. accounting principles must meet the objectives of the Security and Exchange
Commission
d. amounts recorded in the financial statements must be based on independently verifiable
evidence
33. The Reynolds Company estimated that the value of its land had increased from $10,000 to
$16,000 and therefore wrote up the land account to $16,000. Which accounting concept(s)
was (were) violated?
a. cost concept
b. objectivity concept
c. unit of measure concept
d. cost and objectivity concepts
ANS: A DIF: Difficult OBJ: 01-02
34. John Williams owns stock in the Indoor Advertising Company. Recently, John was paid
$18,000 in the form of cash dividends from Indoor Advertising, and he contributed $10,000,
in his name, to the Red Cross. The contribution of the $10,000 should be recorded on the
accounting records of which of the following entities?
a. Indoor Advertising and the Red Cross

b. John William's personal records and the Red Cross
c. John William's personal records and Indoor Advertising
d. John William's personal records, Indoor Advertising, and the Red Cross
ANS: B DIF: Difficult OBJ: 01-02
35. Equipment with an estimated market value of $45,000 is offered for sale at $65,000. The
equipment is acquired for $10,000 in cash and a note payable of $40,000 due in 30 days. The
amount used in the buyer's accounting records to record this acquisition is
a. $50,000
b. $65,000
c. $10,000
d. $45,000
ANS: A DIF: Difficult OBJ: 01-02
36. ____ is the authoritative body having the primary responsibility for developing accounting
principles.
a. FASB
b. IRS
c. SEC
d. AICPA
37. Which of the following concepts relates to separating the reporting of business and personal
economic transactions?
a. Cost Concept
b. Unit of Measure Concept
c. Business Entity Concept
d. Objectivity Concept
38. Aztec Company is selling a piece of land adjacent to their business. An appraisal reported
the market value of the land to be $100,000. The Majestic Company initially offered to buy
the land for $87,000. The companies settled on a purchase price of $95,000. On the same
day, another piece of land on the same block sold for $102,000. Under the cost concept,
what is the amount that will be used to record this transaction in the accounting records?
a. $100,000
b. $87,000
c. $102,000
d. $95,000
39. Which of the following is not true of accounting principles?

a. Financial accountants follow generally accepted accounting principles (GAAP).
b. Following GAAP allows stakeholders to compare one company to another.
c. A new accounting principle can be adopted with stockholders approval.
d. The Financial Accounting Standards Board (FASB) has primary responsibility for
developing accounting principles.
e. Accounting principles develop from research, accepted accounting practices, and
pronouncements of authoritative bodies.
40. Owned resources of a business are referred to as

a. assets
b. liabilities
c. equities
d. revenues
41. Assets are

a. always greater than liabilities.
b. either cash or accounts receivables
c. the same as expenses because they are acquired with cash
d. financed by the company and/or creditors
42. Debts owed by a business are referred to as

a. accounts receivables
b. equities
c. stockholders’ equity
d. liabilities
43. The accounting equation may be expressed as

a. Assets = Equities - Liabilities
b. Assets + Liabilities = Stockholders’ Equity
c. Assets = Revenues less Liabilities
d. Assets - Liabilities = Stockholders’ Equity
44. Which of the following is not an asset?

a. Investments
b. Cash
c. Inventory
d. Stockholders’ Equity
45. The assets and liabilities of the company are $155,000 and $60,000 respectfully.
Stockholders’ equity should equal
a. $215,000
b. $155,000
c. $60,000
d. $95,000
46. If total liabilities decreased by $25,000 during a period of time and stockholders' equity
increased by $30,000 during the same period, the amount and direction (increase or
decrease) of the period's change in total assets is
a. $65,000 increase
b. $5,000 decrease
c. $5,000 increase
d. $65,000 decrease
47. Which of the following is not a true statement about the accounting equation and its
elements?
a. The accounting equation is Assets = Liabilities - Stockholders’ Equity.
b. Assets are the resources a business possesses.
c. Liabilities represent debts of a business.
d. Examples of assets are cash, land, buildings, and equipment.
e. Stockholders’ equity are the rights of the stockholders.
ANS: A DIF: Moderate OBJ: 01-03
48. Which of the following is not a business transaction?

a. make a sales offer
b. sell goods for cash
c. receive cash for services to be rendered later
d. pay for supplies
49. A business paid $9,000 to a creditor in payment of an amount owed. The effect of the
transaction on the accounting equation was to
a. increase one asset, decrease another asset
b. increase an asset, increase a liability
c. decrease an asset, decrease a liability
d. increase an asset, increase stockholders' equity
50. Earning revenue

a. increases assets, increases stockholders’ equity.
b. increases assets, decreases stockholders' equity
c. increases one asset, decreases another asset
d. decreases assets, increases liabilities
51. The monetary value charged to customers for the performance of services sold is called a(n)
a. asset
b. net income
c. capital
d. revenue
52. Revenues are reported when

a. a contract is signed
b. cash is received from the customer
c. work is begun on the job
d. work is completed on the job
53. Expenses are recorded when

a. cash is paid for services rendered
b. a bill is received in advance of services rendered
c. services are rendered
d. none are correct
54. Goods purchased on account for future use in the business, such as supplies, are called
a. prepaid liabilities
b. revenues
c. prepaid expenses
d. liabilities
55. The asset created by a business when it makes a sale on account is termed
a. accounts payable
b. prepaid expense
c. unearned revenue
d. accounts receivable
56. The debt created by a business when it makes a purchase on account is referred to as an
a. account payable
b. account receivable
c. asset
d. expense payable
57. If total assets decreased by $47,000 during a period of time and stockholders' equity
increased by $24,000 during the same period, then the amount and direction (increase or
decrease) of the period's change in total liabilities is
a. $23,000 increase
b. $47,000 decrease
c. $71,000 decrease
d. $71,000 increase
58. The payment of dividends

a. increase expenses
b. decrease expenses
c. increase cash
d. decrease stockholders' equity
59. Stockholders' Equity is increased by which of the following accounts?

a. cash
b. revenue
c. accounts receivable
d. all are correct
60. How does the purchase of supplies on account affect the accounting equation?
a. assets increase; stockholders' equity decreases
b. assets increase; liabilities increase
c. assets increase; liabilities decrease
d. liabilities increase; stockholders' equity decreases
61. How does the rendering of services on account affect the accounting equation?
a. assets increase; stockholders’ equity increases
b. assets decrease; stockholders' equity decrease
c. assets increase; stockholders' equity decreases
62. How does paying a liability in cash affect the accounting equation?
a. assets increase; liabilities decrease
c. assets decrease; liabilities decrease
d. liabilities decrease; stockholders' equity increases
63. How does the payment of dividends affect the accounting equation?
a. assets decrease; stockholders' equity decreases
b. assets decrease; stockholders' equity increases
c. assets increase; liabilities decrease
d. no effect on the assets, liabilities, or stockholders' equity
64. How does receiving a bill to be paid next month for services rendered affect the accounting
equation?
c. liabilities increase; stockholders' equity increases
65. How does the collection of cash from a customer who was previously put on account affect
the accounting equation?
b. assets increase; stockholders' equity increases
c. assets increase; assets decrease
d. assets increase; liabilities increase
66. How does the purchase of equipment by signing a note affect the accounting equation?
a. assets increase; assets decrease
b. assets increase; liabilities decrease
c. assets increase; liabilities increase
d. assets increase; stockholders' equity increases
67. Land, originally purchased for $20,000, is sold for $75,000 in cash. What is the effect of the
sale on the accounting equation?
a. assets increase $75,000; stockholders' equity increases $75,000
b. assets increase $55,000; stockholders' equity increases $55,000
c. assets increase $75,000; liabilities decrease $20,000; stockholders' equity increases
$55,000
d. assets increase $20,000; no change for liabilities; stockholders' equity increases $75,000
68. The Kennedy Company sold land for $60,000 in cash. The land was originally purchased for
$40,000, and at the time of the sale, $15,000 was still owed to First National Bank on that
purchase. After the sale, The Kennedy Company paid off the loan to First National Bank.
What is the effect of the sale and the payoff of the loan on the accounting equation?
a. assets increase $20,000; liabilities decrease $15,000; stockholders' equity increases
$5,000
b. assets increase $5,000; liabilities decrease $15,000; stockholders' equity increases
$20,000
c. assets increase $60,000; liabilities decrease $15,000; stockholders' equity increases
$20,000
d. assets increase $20,000; liabilities decrease $15,000; stockholders' equity increases
$35,000
69. On November 1 of the current year, the assets and liabilities of Jim Chu, M.D., are as
follows: Cash, $10,000; Accounts Receivable, $8,200; Supplies, $1,050; Land, $25,000;
Accounts Payable, $6,530. What is the amount of stockholders' equity as of November 1 of
the current year?
a. $37,720
b. $44,430
c. $21,500
d. $50,780
70. Al Shea is a stockholder and operator of SawTooth Company. As of the end of its accounting
period, December 31, 2007, SawTooth Company has assets of $925,000 and liabilities of
$285,000. During 2008, Al Shea invested an additional $50,000 in exchange for capital
stock and was paid dividends in the amount of $30,000 from the business. What is the
amount of net income during 2008, assuming that as of December 31, 2008, assets were
$980,000, and liabilities were $255,000?
a. $ 95,000
b. $ 65,000
c. $165,000
d. $725,000
71. The total assets and the total liabilities of a business at the beginning and at the end of the
year appear below. During the year, the stockholders were paid dividends in the amount of
$50,000 and had made an additional investment of $35,000 in the business.
Assets Liabilities
Beginning of year $295,000 $190,000
End of year 355,000 220,000
The amount of net income for the year was

a. $85,000
b. $40,000
c. $135,000
d. $45,000
72. If stockholders’equity at the beginning of the period was $65,000, ending balance is
$43,000, and the dividends were paid in the amount of $16,000, the amount of net income or
net loss was
a. net income of $37,000
b. net income of $8,000
c. net loss of $22,000
d. net loss of $6,000
73. Transactions affecting stockholders' equity include

a. stockholders’ investments and payment of liabilities
b. stockholders’ investments and dividends, revenues, and expenses
c. stockholders’ investments, revenues, expenses, and collection of accounts receivable
d. dividends, revenues, expenses, and purchase of supplies on account
74. Rudy River is starting his computer repair business and has deposited in initial investment of
$10,000 into the business cash account in exchange for capital stock. Identify how the
accounting equation will be affected.
a. Increase Assets (Cash) and increase Liabilities (Accounts Payable)
b. Increase Assets (Cash) and increase Assets (Accounts Receivable)
c. Increase Assets (Accounts Receivable) and decrease Liabilities (Accounts Payable)
d. Increase Assets (Cash) and increase Stockholders’ Equity (Capital Stock)
75. Rivers Computer Makeover Company purchased $15,000 of Computer and Office
Equipment. The company paid $3,000 in cash at the time of the purchase and signed a
promissory note for the remainder to be paid in six monthly installments. How will this
transaction affect the accounting equation?
a. Increase Assets (Computer and Office Equipment $15,000) and decrease Liabilities
(Accounts Payable $15,000)
b. Increase Total Assets by a net amount of $12,000 (increase Computer and Office
Equipment $15,000 and decrease Cash $3,000) and increase Liabilities (Notes Payable
$12,000)
c. Increase Total Assets by a net amount of $15,000 (increase Computer and Office
Equipment $12,000 and increase Cash $3,000) and decrease Liabilities (Accounts
Payable $15,000)
d. Increase Assets (Computer and Office Equipment $12,000) and increase Liabilities
(Accounts Payable $12,000)
76. Rivers Computer Makeover Company purchased various computer supplies on account to be
used for repairing their customers’ computers. How will this business transaction affect the
accounting equation?
a. Increase Assets (Supplies) and decrease Assets (Cash)
b. Increase Assets (Supplies) and Increase Liabilities (Accounts Payable)
c. Increase Assets (Supplies) and decrease Stockholders’ Equity (Supplies Expense)
d. Increase Stockholders’ Equity (Supplies Expense) and increase Liabilities (Accounts
Payable)
77. There are four transactions that affect stockholders’ equity. Which are the two transactions
that increase stockholders’ equity?
a. Revenues and expenses
b. Expenses and dividends
c. Revenues and stockholders’ investments
d. Stockholders investments and expenses
78. There are four transactions that directly affect Stockholders’ Equity. Which are the two
transactions that decrease Stockholders’ Equity?
a. Dividends and expenses
b. Revenues and expenses
c. Stockholders’ investments and revenues
d. Stockholders’ investments and expenses
79. Rivers Computer Makeover Company has received $3,500 in cash for services rendered.
What affect does this transaction have on the accounting equation?
a. Increase Assets (Cash) and decrease Stockholders’ Equity (Expenses)
b. Increase Assets (Cash) and decrease Assets (Accounts Receivable)
c. Increase Assets (Accounts Receivable) and increase Stockholders’ Equity (Fees Earned)
d. Increase Assets (Cash) and increase Stockholders’ Equity (Fees Earned)
80. Rivers Computer Makeover Company paid their first installment on their Notes Payable in
the amount of $2,000. How will this transaction affect the accounting equation?
a. Increase Liabilities (Notes Payable) and decrease Assets (Cash)
b. Decrease Assets (Cash) and decrease Stockholders’ Equity (Note Payable Expense)
c. Decrease Assets (Cash) and decrease Assets (Notes Receivable)
d. Decrease Assets (Cash) and decrease Liabilities (Notes Payable)
81. Rivers Computer Makeover Company received their first electric bill in the amount of $60
which will be paid next month. How will this transaction affect the accounting equation?
a. Increase Liabilities (Accounts Payable) and decrease Stockholders’ Equity (Utilities
Expense)
b. Increase Liabilities (Accounts Receivable) and decrease Stockholders’ Equity (Utilities
Expense)
c. Decrease Assets (Cash) and decrease Liabilities (Accounts Payable)
d. Decrease Assets (Cash) and decrease Stockholders’ Equity (Utilities Expense)
82. Rudy Rivers has withdrawn $750 from Rivers Computer Makeover Company’s cash account
to deposit in his personal account. How does this transaction affect Rivers Computer
Makeover Company’s accounting equation?
a. Increase Assets (Accounts Receivable) and decrease Assets (Cash)
b. Decrease Assets (Cash) and decrease Stockholders’ Equity (Dividends)
c. Decrease Assets (Cash) and decrease Liabilities (Accounts Payable)
d. Increase Assets (Cash) and decrease Stockholders’ Equity (Dividends)
83. Which of the following is not a business transaction?

a. Becky deposits $25,000 in a bank account in the name of Becky’s Daycare.
b. Becky provided services to customers earning fees of $300.
c. Becky pays her monthly personal credit card bill.
d. Becky hires a part-timer to begin work next week.
e. Becky purchased cribs for her daycare agreeing to pay the supplier next month.
ANS: C DIF: Difficult OBJ: 01-04
84. The financial statement that presents a summary of the revenues and expenses of a business
for a specific period of time, such as a month or year, is called a(n)
a. prior period statement
b. statement of retained earnings
c. income statement
d. balance sheet
85. All of the following are financial statement(s) of a corporation except the
a. statement of retained earnings
b. statement of owner's equity
c. income statement
d. statement of cash flows
86. Which of the following financial statements reports information as of a specific date?
a. income statement
c. statement of cash flows
d. balance sheet
87. Four financial statements are usually prepared for a business. The statement of cash flows is
usually prepared last. The statement of retained earnings (RE), the balance sheet (B), and the
income statement (I) are prepared in a certain order to obtain information needed for the
next statement. In what order are these three statements prepared?
a. I,RE, B
b. B, I, RE
c. RE, I, B
d. B,RE, I
88. Liabilities are reported on the

a. income statement
c. statement of cash flows
d. balance sheet
89. Cash investments made by the stockholders of the business are reported on the statement of
cash flows in the
a. financing activities section
b. investing activities section
c. operating activities section
d. supplemental statement
90. The year-end balance of the retained earnings account appears in

a. both the statement of retained earnings and the income statement
b. only the statement of retained earnings
c. both the statement of retained earnings and the balance sheet
d. both the statement of retained earnings and the statement of cash flows
91. A financial statement user would determine if a company was profitable or not during a
specific period of time by reviewing
a. the Income Statement.
b. the Balance Sheet.
c. the Statement of Cash Flows.
d. cannot be determined.
92. If the president of the company wanted to know how money flowed into and out of the
company, what financial statement would she use?
a. Income Statement
b. Statement of Cash Flows
c. Balance Sheet
93. The asset section of the Balance Sheet normally presents assets in
a. alphabetical order.
b. order of largest to smallest dollar amounts.
c. in the order what will be converted into cash.
d. no order.
94. The statement of cash flows is separately in three major sections. They are as follows:
a. Operating, Investing, and Financing
b. Revenues, Expenses, and Net Income
c. Assets, Liabilities, and Stockholders’ Equity
d. Investments, Dividends, and Income
95. Which of the following is not a principle financial statement?

a. Income Statement
b. Statement of Resources Owned
c. Statement of Retained Earnings
d. Statement of Cash Flows
e. Balance Sheet
EXERCISE/OTHER
1. Give the major disadvantage of disregarding the cost concept and constantly revaluing assets
based on appraisals and opinions.
ANS:
Accounting reports would become unstable and unreliable.
DIF: Easy OBJ: 01-01
2. On June 7, Roller Skates Company offered to pay $75,000 for land that had a selling price of
$90,000. On June 15, Roller Skates accepted a counteroffer of $83,000. On July 5, the land
was assessed at a value of $100,000 for property tax purposes. On December 10, Roller
Skates Company was offered $125,000 for the land by another company. At what value
should the land be recorded in Roller Skates Company’s records?
ANS:
$83,000
NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 1-1
3. Dan Aaron is the president and operator of Reach It Baseball Batting Cages. At the end of its
accounting period, December 31, 2007, Reach It has assets of $650,000 and liabilities of
$225,000. Using the accounting equation, determine the following amounts:
(a) Stockholders’ Equity as of December 31, 2007.
(b) Stockholders’ Equity as of December 31, 2008, assuming that assets increased
by $85,000 and liabilities increased by $15,000 during 2008.
ANS:
(a) $650,000 = $225,000 + $425,000
(b) ($650,000 + $85,000) = ($225,000 + $15,000) + $495,000
DIF: Moderate OBJ: 01-03

4. Sara Thomson is the president and operates the Thomson Company. The following selected
transactions were completed by Thomson Company during August:
1. Received cash from the stockholder as additional investment $15,000.

2. Paid creditors on account $3,000.
3. Billed customers for services on account, $7,665.
4. Received cash from customers on accounts $5,645.
5. Paid cash dividends, $3,500.
6. Received electric bill $60, to be paid next month.
Indicate the effect of each transaction on the accounting equation:

1) By Account type - (A)assets, (L)liabilities, (SE)Stockholders’ Equity,
(R)revenue, and (E)expense
2) Name of Account for the entry
3) The amount by of the transaction.
4) Indicate the specific item within the account equation element that is affected.
Note: Each transaction has two entries.

Entry Entry
Acct Name of Amount Increase or Acct Name Amount Increase or
Type Acct Decrease Type of Acct Decrease
(1) (2) (3) (4) (1) (2) (3) (4)
1
2
3
4
5
6
ANS:
Entry Entry
Acct Name of Amount Increase or Acct Name of Amount Increase or
Type Acct Decrease Type Acct Decrease
(1) (2) (3) (4) (1) (2) (3) (4)
1 A Cash 15,000 Incr SE Capital 15,000 Incr
stock
2 A Cash 3,000 Decr L Liab
3,000 Decr
3 A Acct 7,665 Incr R Fees
7,665 Incr
Rec Earned
4 A Cash 5,645 Incr A Acct Rec
5,645 Decr
5 A Cash 3,500 Decr SE Dividends
3,500 Incr
6 L Acct 60 Incr E Util Exp
60 Incr
Pay
DIF: Difficult OBJ: 01-04
5. The assets and liabilities of Robinson Tree Services at May 31, 2008, the end of the current
year, and its revenue and expenses for the year are listed below. The stockholders’ equity
was $190,000 at June 1, 2007, the beginning of the current year.
Accounts Payable $1,200 Miscellaneous Expense $220

Accounts Receivable $12,340 Office Expense $560
Cash $32,990 Supplies $1,670
Fees Earned $78,350 Wages Expense $26,770
Land $65,000 Dividends $3,000
Building $143,670
Prepare an income statement for the current year ended May 31, 2008.
ANS:
Robinson Tree Services

Income Statement
For the Year Ended May 31, 2008
Fees Earned $78,350

Expenses:
Wages Expense $26,770
Office Expense 560
Miscellaneous Expense 220
Total Expenses 27,550
Net Income $50,800

year, and its revenue and expenses for the year are listed below. The capital stock was
$100,000 at June 1, 2007, the beginning of the current year. Mr. Robinson invested an
additional $15,000 in the business in exchange for capital stock during the year.

Cash $32,990 Supplies $1,670
Building $143,670 Retained Earnings $90,000
Prepare a statement of retained earnings for the current year ended May 31, 2008.
ANS:

Statement of Retained Earnings
Retained earnings, June 1, 2007 $90,000

Net Income for the year 50,800
$140,800
Less dividends 3,000
Retained earnings, May 31, 2008 $137,800

year, and its revenue and expenses for the year are listed below. The capital stock account
was $100,000 at June 1, 2007, the beginning of the current year. Additional information: Mr.
Robinson made an additional investment of $15,000 in exchange for capital stock during the
year.

Cash $32,990 Building $143,670
Retained earnings $90,000
Prepare a balance sheet for the current year ended May 31, 2008.
ANS:

Balance Sheet
May 31, 2008
Assets Liabilities
Cash $32,990 Accounts Payable $ 1,200
Accounts Receivable 12,340
Land 65,000 Stockholders’ Equity
Building 143,670 Capital stock 115,000
Retained Earnings 137,800
Total Stockholders’ Equity 252,800
Total Assets $254,000 Total liab and Stockholder’s $254,000
Equity

8. A summary of cash flows for Robinson Tree Services for the year ended May 31, 2008, is
shown below.
Cash receipts:
Cash received from customers $82,990
Cash received from additional investment by stockholder 15,000
Cash payments:
Cash paid for expenses $26,000
Cash paid for land 65,000
Cash paid for supplies 430
Dividends 3,000
The cash balance as of June 1, 2007 $29,340

Prepare a statement of cash flows for Robinson Tree Services for the year ended May 31,
2008.
ANS:

Statement of Cash Flows
Cash flows from operating activities:

Deduct cash payments for expenses/supplies 26,430
Net cash flows from operating expenses $56,560
Cash flows from investing activities:

Cash paid for land and building (65,000)
Cash from financing activities:

Cash received from stockholder as investment 15,000
Deduct cash dividends paid 3,000
Net cash flows from financing activities 12,000
Net increase in cash during year $ 3,560
Cash as of June 1, 2007 29,340
Cash as of May 31, 2008 $32,900

9. What information does the Income Statement give to business stakeholders?

ANS:
The Income Statement reports the revenues and expenses for a period of time. The result is either
a Net Income or a Net Loss.
10. What are the three sections of the Statement of Cash Flows?
ANS:
Operating Activities, Investing Activities, and the Financing Activities
PROBLEM
1. For each of the following companies, identify whether they are a service, merchandising, or
manufacturing business.
A. Dillards
B. Time Warner Cable
C. ebay.com
D. Blockbuster
E. Applebee’s
F. Sylvania
G. Circuit City
H. Banana Republic
I. H & R Block
ANS:
A. Merchandising
B. Service
C. Service
D. Service
E. Service / Manufacturing
F. Manufacturing
G. Merchandising
H. Merchandising
I. Service

2. What type of business stakeholders are the following? Identify them as Capital Market
Stakeholders, Product or Service Market Stakeholders, Government Stakeholders, or
Internal Stakeholders.
A. Payroll Manager
B. Bank
C. President’s Secretary
D. Internal Revenue Service
E. Raw Material Vendors
F. Owner
G. Social Security Administration
H. Health Insurance Provider
ANS:
A. Internal Stakeholder
B. Capital market stakeholder
C. Internal Stakeholder
D. Government Stakeholder
E. Product or service market stakeholder
F. Capital market stakeholder
G. Government Stakeholder
H. Product or service market stakeholder

3. Determine the missing amount for each of the following:
Assets Liabilities Stockholders' Equity

(a) $18,000 $11,000
$50,000 (b) $28,000
$35,000 $ 7,000 (c)
ANS:
(a) $29,000
(b) $22,000
(c) $28,000

4. Indicate whether each of the following represents an asset, liability, or stockholders' equity:
(a) accounts payable

(b) wages expense
(c) capital
(d) accounts receivable
(e) dividends
(f) land
ANS:
(a) liability
(b) stockholders’ equity
(c) stockholders’ equity
(d) asset
(e) stockholders’ equity
(f) asset

5. Identify each of the following as an (1) increase in stockholders' equity, or a (2) decrease in
stockholders' equity.
(a) Fees Earned

(b) Wages Expense
(c) Dividends
(d) Lawn Care Revenue
(e) Investment
(f) Supplies Expense
ANS:
(a) 1
(b) 2
(c) 2
(d) 1
(e) 1
(f) 2

6. Selected transactions completed by a corporation are described below. Indicate the effects of
each transaction on assets, liabilities, and stockholders' equity by inserting "+" for increase
and "-" for decrease in the appropriate columns at the right. If appropriate, you may insert
more than one symbol in a column. If there is no change in the column, leave it blank.
A L SE
(a) Received cash from stockholder as an additional _____ _____ _____
investment
(b) Purchased supplies on account _____ _____ _____
(c) Paid rent for the current month _____ _____ _____
(d) Received cash for services sold to customers _____ _____ _____
(e) Returned some defective supplies purchased in (b) _____ _____ _____
(f) Paid insurance premiums in advance _____ _____ _____
(g) Paid cash to creditor for purchases in (b) _____ _____ _____
(h) Charged customers for services sold on account _____ _____ _____
(i) Paid cash to a customer as a refund for an _____ _____ _____
overcharge
(j) Received cash on account from customers _____ _____ _____
(k) Dividends paid _____ _____ _____
(l) Recorded the cost of supplies used during the year _____ _____ _____
(m) Received invoice for electricity used _____ _____ _____
(n) Paid wages _____ _____ _____
(o) Purchased a truck for cash _____ _____ _____
ANS:
A L SE
(a) + +
(b) + +
(c) - -
(d) + +
(e) - -
(f) +,-
(g) - -
(h) + +
(i) - -
(j) +,-
(k) - -
(l) - -
(m) + -
(n) - -
(o) +,-

7. Henry’s Taxes, a tax preparation business had the following transactions during the month of
April:
Example: Received cash the stockholder, $15,000.
1. Received cash for providing accounting services, $8,000.
2. Billed customers on account for providing services, $4,000.
3. Paid advertising expense, $400.
4. Received cash from customers on account, $3,500.
5. Dividends were paid to stockholders, $1,000.
6. Received telephone bill, $100.
7. Paid telephone bill, $100.
Required:
1) In the table below, state the accounts affected by each transaction.
2) Indicate the effect on the accounting equation of each transaction.
Assets = Liabilities + Stockholders’

Equity
Ex Cash +15,000
+15,000
1.
2.
3.
4.
5.
6.
7.
ANS:
Assets = Liabilities + Stockholders’ Equity

Ex Cash +15,000 +15,000
1. Cash + 8,000 Revenues + 8,000
2. A/R + 4,000 Revenues + 4,000
3. Cash -400 Expenses - 400
4. Cash + 3,500
A/R -3,500
5. Cash -1,000 Dividends -1,000
6. A/P + 100 Expenses -100
7. Cash -100 A/P -100

8. From the following list of accounts taken from Danson's accounting records, identify those
that would appear on the Income Statement.
(a) Rent Expense

(b) Land
(c) Capital
(d) Fees Earned
(e) Dividends
(f) Wages Expense
(g) Investment
ANS:
(a), (d), (f)
9. Identify which of the following accounts appear on a balance sheet.
(a) Cash
(b) Fees Earned
(c) Capital Stock
(d) Wages Payable
(e) Rent Expense
(f) Prepaid Advertising
(g) Land
ANS:
(a), (c), (d), (f), (g)
10. Indicate whether each of the following activities would be reported on the Statement of Cash
Flows as an Operating Activity, an Investing Activity, a Financing Activity, or does not
appear on the Cash Flow Statement.
(a) Cash paid for building

(b) Cash paid to suppliers
(c) Cash paid for dividends
(d) Cash received from customers
(e) Cash received from the sale of capital stock.
(f) Cash received from the sale of a building
(g) Borrowed cash from a bank
ANS:
(a) Investing
(b) Operating
(c) Financing
(d) Operating
(e) Financing
(f) Investing
(g) Financing

11. For each of the following, determine the amount of net income or net loss for the year.
(a) Revenues for the year totaled $90,500 and expenses totaled $44,500. The
stockholder made an additional investment of $15,000 in exchange for capital
stock during the year.
(b) Revenues for the year totaled $75,500 and expenses totaled $110,500. Dividends
were paid in the amount of $20,000 during the year.
(c) Revenues for the year totaled $198,000 and expenses totaled $85,000. The
stockholder invested an additional $20,000 in exchange for capital stock and
dividends of $15,000 per paid during the year.
(d) Revenues for Smith Co. totaled $273,500 and expenses totaled $263,800. Cash
dividends of $30,000 were paid during the year.
ANS:
(a) $46,000 net income ($90,500 - $44,500)
(b) $35,000 net loss ($75,500 - $110,500)
(c) $113,000 net income ($198,000 - $85,000)
(d) $9,700 net income ($273,500 - $263,800)

12. The total assets and total liabilities of Missy's Draperies, Inc. at the beginning and at the end
of the current fiscal year are as follows:
Jan. 1 Dec. 31
Total assets $250,000 $430,000
Total liabilities 200,000 140,000
(a) Determine the amount of net income earned during the year. The stockholders
did not invest any additional assets in the business during the year and made no
dividends were paid.
(b) Determine the amount of net income during the year. The assets and liabilities
at the beginning and at the end of the year are unchanged from the amounts
presented above. However, dividends of $32,000 were paid in cash during the
year (no additional investments).
(c) Determine the amount of net income earned during the year. The assets and
liabilities at the beginning and at the end of the year are unchanged from the
amounts presented above. However, the stockholder invested an additional
$40,000 in exchange for capital stock in the business in June of the current
fiscal year (no dividends).
(d) Determine the amount of net income earned during the year. The assets and
liabilities at the beginning and at the end of the year are unchanged from the
amounts presented above. However, the stockholder invested an additional
$10,000 in exchange for capital stock in August of the current fiscal year and
dividends of $32,000 were paid during the year.
ANS:
(a) Stockholders' Equity at end of year $290,000
Stockholders' Equity at beginning of year 50,000
Net income $240,000
(b) Increase in Stockholders' Equity as in (a) $240,000

Add dividends 32,000
Net income $272,000
(c) Increase in Stockholders' Equity as in (a) $240,000

Deduct additional investment 40,000
Net income $200,000
(d) Increase in Stockholders' Equity as in (a) $240,000

Add dividends 36,000
$276,000
Deduct additional investment 10,000
Net income $266,000

13. Selected transaction data of a business for June are summarized below. Determine the
following amounts for June: (a) total revenue, (b) total expenses, (c) net income.
Service sales charged to customers on account during June $35,000

Cash received from cash customers for services performed in June 30,000
Cash received from customers on account during June:
Services performed and charged to customers prior to June 15,000
Services performed and charged to customers during June 20,000
Expenses incurred prior to June and paid during June 8,250
Expenses incurred and paid in June 38,500
Expenses incurred in June but not paid in June 7,000
Expenses for supplies used and insurance (not included above) applicable to 1,000
June
ANS:
(a) $65,000 ($35,000 + $30,000)
(b) $46,500 ($38,500 + $7,000 + $1,000)
(c) $18,500 ($65,000 - $46,500)

14. On May 1, 2007, Beth’s Services Company had account balances as follows:
Accounts payable $ 8,900
Accounts receivable 25,950
Cash 11,390
Fees earned 70,800
Insurance expense 1,475
Land 74,400
Miscellaneous expense 1,510
Prepaid insurance 2,000
Rent expense 8,000
Salary expense 35,300
Dividends 15,100
Supplies 950
Supplies expense 825
Utilities expense 3,800
Capital stock 81,000
Retained earnings 20,000
Present, in good form, (a) an income statement for May, (b) a statement of retained earnings
for May, and (c) a balance sheet as of May 31.
ANS:
(a)
Beth’s Services Company
Income Statement
For the Month Ended May 31, 2007
Fees earned $70,800
Operating expenses:
Salary expense $35,300
Rent expense 8,000
Supplies expense 825
Insurance expense 1,475
Total operating expenses 50,910
Net income $19,890
(b)
For the Month Ended May 31, 2007
Retained Earnings May 1, 2007 $20,000
Net income for the month 19,890
Subtotal 39,890
Retained Earnings, May 31, 2007 $24,790
(c)
Balance Sheet
May 31, 2007
Assets Liabilities
Cash $ 11,390 Accounts payable $ 8,900
Accounts receivable 25,950
Prepaid insurance 2,000 Stockholders' Equity
Supplies 950 Capital Stock
81,000
Land 74,400 Retained Earnings
24,790
Total liabilities and
Total assets $114,690 Stockholders' Equity $114,690

15. Koger Consultants began operations on June 1, 2007 by making an investment of $30,000 in
return for capital stock. The financial statements for Koger Consultants are shown below for
the month ended June 30, 2007 (the first month of operations). Determine the missing
amounts for letters (a) through (p).
Koger Consultants
Income Statement
For the Month Ended June 30, 2007
Fees earned $22,000
Operating expenses:
Wages expense $7,250
Rent expense (a)
Supplies expense 1,600
Utilities expense 900
Total operating expenses (b)
Net income $ (c)
Koger Consultants
Statement of Retained Equity
Retained earnings, June 1, 2007 0
Net income for June 30, 2007 (d)
$ (e)
Retained earnings, June 30, 2007 (f)
Koger Consultants
Balance Sheet
June 30, 2007
Assets Liabilities
Cash $ (g) Accounts payable $ (i)
Supplies 1,100 Stockholders' Equity
Land (h) Capital stock (j)
Retained earnings (k)
Total assets $45,900 Total liabilities and
Stockholders' Equity $(l)
Koger Consultants
Statement of Cash Flows
Cash flows from operating activities:
Deduct cash payments for expenses and payments to 3,200
creditors
Net cash flow from operating activities $ 18,800
Cash flows from investing activities:
Cash payments for acquisition of land (20,000)
Cash flows from financing activities:
Cash received as owner's investment $ (m)
Deduct cash dividends paid (n)
Net cash flow from financing activities (o)
Net cash flow and Dec. 31, 2007 cash balance $ (p)
Place your answers in the space provided below. Hint: Use the interrelationships among the
financial statements to solve this problem.
(a) __________
(b) __________
(c) __________
(d) __________
(e) __________
(f) __________
(g) __________
(h) __________
(i) __________
(j) __________
(k) __________
(l) __________
(m) __________
(n) __________
(o) __________
(p) __________
ANS:
(a) $4,600
(b) $15,900
(c) $6,100
(d) $6,100
(e) $6,100
(f) $2,100
(g) $24,800
(h) $20,000
(i) $13,800
(j) $30,000
(k) $2,100
(l) $45,900
(m) $30,000
(n) $ 4,000
(o) $26,000
(p) $24,800

16. Pyle Computer Repairs, Inc. was organized on January 1, 2007, as a corporation. List the
errors that you find in the following financial statements and prepare the corrected
statements for the three months ended March 31, 2007.
Pyle Computer Repairs, Inc.

Income Statement
For the Three Months Ended March 31, 2007
Fees earned $40,000
Operating expenses:
Rent expense 3,200
Wages expense 1,950
Answering service expense 550
Net income $11,000
Jay Pyle, CPA

March 31, 2007
Retained Earnings January, 1, 2007 $ 0
Net income for the 3 months 11,000
11,000
Increase in Retained Earnings 6,000
Retained Earnings, March 31, 2007. $6,000
Balance Sheet
Assets Stockholders' Equity
Land $10,000 Capital stock $36,000
Cash 15,860 Liabilities
Accounts payable 2,670 Accounts receivable 12,225
Supplies 925 Total liabilities and
Total assets $48,125 Stockholders' Equity 48,125
ANS:
Errors in the Jay Pyle, CPA, financial statements include the following:
(1) Miscellaneous expense is incorrectly listed after utilities expense in the income
statement. Miscellaneous expense should be listed as the last expense, regardless of
the amount.
(2) The operating expenses are incorrectly added. Instead of $29,000, the total should
be $18,660.
(3) Because operating expenses are incorrectly added, the net income is incorrect. It
should be listed as $21,340.
(4) The statement of retained earnings should be for a period of time instead of a
specific date. That is, the statement of retained earnings should be reported "For the
Three Months Ended March 31, 2007."
(5) The amount of the stockholders’ equity is incorrect. It should be $36,340.
(6) The name of the company is missing from the balance sheet heading.
(7) The balance sheet should be as of "March 31, 2007," not "For the Three Months
Ended March 31, 2007."
(8) Cash, not Land, should be the first asset listed in the balance sheet.
(9) Accounts Payable is incorrectly listed as an asset in the balance sheet. Accounts
Payable should be listed as a liability.
(10) Liabilities should be listed in the balance sheet ahead of stockholders' equity.
(11) Accounts Receivable is incorrectly listed as a liability in the balance sheet.
Accounts Receivable should be listed as an asset.
(12) The total assets and the total liabilities do not foot.
Correctly prepared financial statements for Jay Pyle, CPA, are shown below.
Jay Pyle, CPA

Income Statement
Fees earned $40,000
Operating expenses:
Rent expense 3,200
Wages expense 1,950
Answering service expense 550
Net income $21,340
Jay Pyle, CPA

Statement of Stockholders' Equity
Retained earnings, January, 1, 2007 $ 0
Net income for three months 21,340
$21,340
Retained earnings, March 31, 2007 $16,340
Jay Pyle, CPA

Balance Sheet
March 31, 2007
Assets Liabilities
Cash $15,860 Accounts payable $ 2,670
Accounts receivable 12,225 Stockholders' Equity
Supplies 925 Capital stock
20,000
Retained earnings
16,340
Land 10,000 Total liabilities and
Total assets $39,010 Stockholders' Equity $39,010

Telephone Expense $750

Cash $3,150
Accounts Payable $640
Dividends $300
Fees Earned $10,700
Rent Expense $1,000
Supplies $230
Accounts Receivable $1,800
Computer Equipment $15,000
Capital Stock $13,080
Utilities Expense $350
Notes Payable $2,000
Office Expense $240
17. Using the above accounts and their amounts, prepare in good format an Income Statement
for ABC Tutoring Company, month ended July 31, 2007:
ANS:
ABC Tutoring Company

Income Statement
For Month Ended July 31, 2007
Fees Earned $10,700

Expenses:
Rent Expense 1,000
Telephone Expense 750
Utilities Expense 350
Office Expense 240
Total Expenses 5,940
Net Income $4,760

18. Using the above accounts and their amounts, prepare in good format a Statement of Retained
Earnings for ABC Tutoring Company, month ended July 31, 2007:
ANS:

For Month Ended July 31, 2007
Retained Earnings $ 0
Net Income 4,760
Subtotal $ 4,760
Less: Dividends 300
Retained Earnings July 31, 2007 $ 4,460

19. Using the above accounts and their amounts, prepare in good format a Balance Sheet for
ABC Tutoring Company, month ended July 31, 2007:
ANS:

Balance Sheet
July 31, 2007
Assets
Cash $ 3,150
Accounts Receivable 1,800
Supplies 230
Computer Equipment 15,000
Total Assets $ 20,180
Total Liabilities and Stockholders’

Equity
Liabilities:
Accounts Payable $ 640
Notes Payable 2,000
Total Liabilities $ 2,640
Capital Stock
13,080
Retained Earnings
4,460
Total Liabilities and Stockholders’
Equity $20,180

20. The account balances of Lovelady Travel Services at December 31, 2007 are listed below:
Accounts Payable $12,000 Capital Stock $10,000

Accounts Receivable 6,000 Supplies 2,000
Cash 16,000 Taxes Expense 300
Computer Equip 13,000 Utilities Expense 4,000
Fees Earned 47,000 Wages Expense 21,000
Rent Expense 6,000 Supplies Expense 700
Prepare and income statement, statement of retained earnings, and a balance sheet as of
December 31, 2007.
ANS:
Lovelady Travel Services

Income Statement
For the Year Ended December 31, 2007
Fees Earned $ 47,000

Operating
Expenses:
Wages Expense $ 21,000
Rent Expense 6,000
Utilities Expense 4,000
Supplies Expense 700
Taxes Expense 300
Total Operating Expenses $32,000
Net Income $15,000

For the Year Ended December 31, 2007
Retained earnings 1/1/07 $0

Net Income for the year 15,000
Retained earnings, 12/31/07 $15,000

Balance Sheet
December 31, 2007
Assets Liabilities
Cash $16,000
Accounts Receivable 6,000 Accounts Payable $12,000
Computer Equipment 13,000
Supplies 2,000 Stockholders’ Equity
Capital Stock 10,000
Retained Earnings 15,000
Total Stockholders’ Equity
25,000
Total Liabilities and
Total Assets $37,000 Stockholders’ Equity $37,000


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Chapter 1

Introduction to Accounting and Business

Chapter 1—Introduction to Accounting and Business

1. The main objective of a not-for-profit business is not to make a profit.

2. An example of a business stakeholder is the federal government.

5. Primary users of accounting information are accountants.

9. Large corporations such as Wal-Mart, Coca-Cola, and Nike operate as manufacturing

21. CMA is an acronym that stands for Certified Manufacturing Accountant.

25. The main objective for all businesses is to maximize profits.

33. GAAP stands for General Accepted Accounting Protocols.

46. Paying an account payable increases liabilities and decreases assets.

49. Cash dividends decrease assets and increase stockholders’ equity.

53. Revenue is earned only when money is received.

54. Expenses are expired costs of doing business.

56. Expenses increase stockholders’ equity.

57. The excess of expenses over revenues is called net income.

60. An income statement is a summary of the revenues and expenses of a business as of a

64. The Balance Sheet represents the accounting equation.

1. Received cash for services provided

1. ANS: C DIF: Moderate OBJ: 01-04

11. ANS: D DIF: Easy OBJ: 01-05

1. Profit is the difference between

2. Most businesses in the United States are

3. Which of the items below is not a business organization form?

5. Financial reports are used by

6. Which of the following best describes accounting?

7. Which of the following is not a step in providing accounting information to stakeholders?

8. The two most common specialized fields of accounting in practice are

9. Public accountants are normally

10. Which of the following is a specialized field of accounting?

11. Which of the following is not true about a manufacturing business?

15. Which of the following is true in regards to a Limited Liability Company?

16. Capital market stakeholders have an interest in the company because

17. ____ are considered to be product or service market stakeholders.

18. The following are examples of internal stakeholders except:

22. Which of the following is not a certification for accountants?

23. Which of the following is not a characteristic of a corporation?

24. Which of the following is not a role of accounting in business?

ANS: B DIF: Moderate OBJ: 01-01

27. The initials GAAP stand for

29. The business entity concept means that

32. The objectivity principle requires that

a. Indoor Advertising and the Red Cross

39. Which of the following is not true of accounting principles?

40. Owned resources of a business are referred to as

41. Assets are

42. Debts owed by a business are referred to as

43. The accounting equation may be expressed as

44. Which of the following is not an asset?

48. Which of the following is not a business transaction?

50. Earning revenue

52. Revenues are reported when

53. Expenses are recorded when

58. The payment of dividends

59. Stockholders' Equity is increased by which of the following accounts?

The amount of net income for the year was

73. Transactions affecting stockholders' equity include

83. Which of the following is not a business transaction?