Q: Which of the following is true regarding the expanded accounting equation for a sole proprietorship?

$$\text{Assets} = \text{Liabilities} + \text{Capital} - \text{Withdrawals} + \text{Revenues} - \text{Expenses}$$

Question 1

Which of the following best describes the primary purpose of accounting?

Accepted Answer

To measure, process, and communicate financial information to decision makers.

Question 2

Which of the following users would most likely rely on financial accounting information rather than management accounting information?

Accepted Answer

An external investor considering buying shares.

Question 3

Which qualitative characteristic of accounting information ensures that users can compare financial statements of different companies within the same industry?

Accepted Answer

Comparability

Question 4

A sole proprietor pays $5,000 from personal funds to remodel their home. How should this transaction be recorded in the business’s accounting records?

Accepted Answer

It should not be recorded in the business’s accounting records.

Question 5

Which of the following is NOT considered an asset according to the accounting definition?

Accepted Answer

Notes Payable

Question 6

Which accounting principle requires that assets and services be recorded at their actual cost at the time of acquisition?

Accepted Answer

Cost Principle

Question 7

A business purchases office supplies for $7,000 on credit. Which accounts are affected and how?

Accepted Answer

Increase Supplies (Asset) and Increase Accounts Payable (Liability)

Question 8

Which of the following is a constraint in accounting that requires the benefits of information to outweigh the costs of providing it?

Accepted Answer

Cost/Benefit

Question 9

If a company’s assets total $$500,000 and liabilities are 350$$,000, what is the owner’s equity?

Accepted Answer

$150,000

Question 10

Which of the following transactions would increase owner’s equity?

Accepted Answer

Business earns service revenue.

Question 11

Which statement is prepared first in the sequence of financial statement preparation?

Accepted Answer

Income Statement

Question 12

Which of the following is true regarding the expanded accounting equation for a sole proprietorship?

Accepted Answer

$$	ext{Assets} = 	ext{Liabilities} + 	ext{Capital} - 	ext{Withdrawals} + 	ext{Revenues} - 	ext{Expenses}$$

Question 13

A company earns $30,000 in service revenue and collects the amount in cash. What is the effect on the accounting equation?

Accepted Answer

Increase Assets and Increase Owner’s Equity by $30,000

Question 14

Which of the following is NOT a qualitative characteristic of accounting information?

Accepted Answer

Materiality

Question 15

Which organization administers Canadian GAAP for publicly accountable enterprises?

Accepted Answer

Accounting Standards Board (AcSB)

Question 16

Under the economic-entity assumption, which of the following is true?

Accepted Answer

Each entity’s transactions are accounted for separately from other entities.

Question 17

Which of the following is a key difference between IFRS and ASPE?

Accepted Answer

IFRS is used for publicly accountable enterprises, while ASPE is for private enterprises.

Question 18

A business pays $12,000 in cash for expenses during the month. Which accounts are affected?

Accepted Answer

Decrease Cash (Asset) and Increase Expenses (Owner’s Equity decreases)

Question 19

Which of the following best describes the role of an audit performed by a CPA?

Accepted Answer

To express an opinion on whether financial statements fairly reflect economic events.

Question 20

If a company’s inventory is $$1,000,000 and there is a 100$$,000 error, according to the materiality constraint, is this error likely to be considered material?

Accepted Answer

Yes, because the error is significant relative to the total inventory.

Chapter 1: Accounting and the Business Environment – Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards