$\text{Assets} +1,000$; $\text{Liabilities} +1,000$; $\text{Equity}$ no change

$\text{Assets} +50,000$; $\text{Liabilities}$ no change; $\text{Equity} +50,000$

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

$\text{Assets} = \text{Liabilities} + \text{Equity}$, so $120,000 = 45,000 + 75,000$

Question 1

Which of the following best describes the primary purpose of accounting in a business environment?

Accepted Answer

To measure business activities, process the information into reports, and communicate the results to decision makers.

Question 2

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

Accepted Answer

A potential investor evaluating whether to buy shares in the company

Question 3

Which organization is primarily responsible for the creation and governance of accounting standards in the United States?

Accepted Answer

Financial Accounting Standards Board (FASB)

Question 4

Which of the following is NOT a characteristic of useful accounting information according to GAAP?

Accepted Answer

It must be based on estimates only.

Question 5

A business purchases office supplies on account for $1,000. Which of the following correctly shows the effect on the accounting equation?

Accepted Answer

$	ext{Assets} +1,000$; $	ext{Liabilities} +1,000$; $	ext{Equity}$ no change

Question 6

Which of the following best describes the economic entity assumption?

Accepted Answer

A business is considered a separate economic unit from its owners and other businesses.

Question 7

Which of the following transactions would NOT be considered a business transaction that affects the accounting equation?

Accepted Answer

Hiring a new employee

Question 8

A corporation issues $50,000 of common stock to its owner in exchange for cash. What is the effect on the accounting equation?

Accepted Answer

$	ext{Assets} +50,000$; $	ext{Liabilities}$ no change; $	ext{Equity} +50,000$

Question 9

Which of the following is the correct expanded accounting equation?

Accepted Answer

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

Question 10

If a company has assets of $120,000, liabilities of $45,000, and equity of $75,000, which of the following statements is true?

Accepted Answer

$	ext{Assets} = 	ext{Liabilities} + 	ext{Equity}$, so $120,000 = 45,000 + 75,000$

Question 11

Which of the following is an example of a liability?

Accepted Answer

Notes Payable

Question 12

A company earned $10,000 in service revenue and incurred $7,000 in expenses during the year. What is the net income for the year?

Accepted Answer

$3,000$

Question 13

Which financial statement reports the assets, liabilities, and stockholders’ equity of a business as of a specific date?

Accepted Answer

Balance Sheet

Question 14

Which of the following best describes the purpose of the Statement of Retained Earnings?

Accepted Answer

To report how the company’s retained earnings balance changed from the beginning to the end of the period

Question 15

A company has beginning retained earnings of $2,000, net income of $5,000, and dividends of $1,500. What is the ending retained earnings?

Accepted Answer

$5,500$

Question 16

Which of the following is the correct formula for Return on Assets (ROA)?

Accepted Answer

$	ext{ROA} = \frac{	ext{Net Income}}{	ext{Average Total Assets}}$

Question 17

If a company has net income of $8,000 and average total assets of $40,000, what is its Return on Assets (ROA)?

Accepted Answer

$0.20$ or $20\%$

Question 18

Which of the following is NOT a feature of a corporation?

Accepted Answer

Unlimited liability of stockholders

Question 19

Which of the following best describes the purpose of an audit in accounting?

Accepted Answer

To ensure that a company’s financial statements and records are examined for accuracy and compliance

Chapter 1: Accounting and the Business Environment – Study Notes

Study Guide - Practice Questions