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

$$\text{ROA} = \dfrac{\text{Net Income}}{\text{Average Total Assets}}$$

Q: A company had beginning total assets of $$80,000 and ending total assets of 100$$,000. If net income for the year was $18,000, what is the company’s Return on Assets (ROA)?

$$\text{ROA} = \dfrac{18,000}{(80,000 + 100,000)/2} = \dfrac{18,000}{90,000} = 0.20 = 20\%$$

Question 1

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

Accepted Answer

To measure business activities and communicate the results to external decision makers.

Question 2

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

Accepted Answer

Financial Accounting Standards Board (FASB)

Question 3

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

Accepted Answer

Assets increase by $$1,000; Liabilities increase by 1$$,000; Equity is unchanged.

Question 4

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

Accepted Answer

Personal liability for owners

Question 5

According to the cost principle, how should assets be recorded on the balance sheet?

Accepted Answer

At their actual cost at the time of acquisition

Question 6

Which of the following transactions would increase both assets and equity?

Accepted Answer

The company earns service revenue and receives cash.

Question 7

A business has total assets of $$150,000 and total liabilities of 90$$,000. What is the amount of equity?

Accepted Answer

$60,000

Question 8

Which of the following best describes the purpose of the statement of retained earnings?

Accepted Answer

To show how much of the company’s earnings were kept and reinvested.

Question 9

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

Accepted Answer

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

Question 10

A company had beginning total assets of $$80,000 and ending total assets of 100$$,000. If net income for the year was $18,000, what is the company’s Return on Assets (ROA)?

Accepted Answer

$$	ext{ROA} = \dfrac{18,000}{(80,000 + 100,000)/2} = \dfrac{18,000}{90,000} = 0.20 = 20\%$$

Question 11

Which of the following is an example of a liability?

Accepted Answer

Notes Payable

Question 12

Which of the following events would decrease retained earnings?

Accepted Answer

Payment of dividends

Question 13

Which of the following is NOT a requirement for accounting information to be useful under GAAP?

Accepted Answer

It must be based on management’s opinion.

Question 14

A company pays $2,000 for rent expense in cash. What is the effect on the accounting equation?

Accepted Answer

Assets decrease by $$2,000; Equity decreases by 2$$,000.

Question 15

Which of the following best describes the economic entity assumption?

Accepted Answer

A business is a separate economic unit from its owners.

Question 16

Which of the following is a real-world example of how data analytics is used in accounting?

Accepted Answer

Examining large sets of financial data to identify trends and support business decisions.

Question 17

Which of the following is true about the Sarbanes-Oxley Act (SOX)?

Accepted Answer

It requires companies to review internal controls and established the PCAOB.

Question 18

Which of the following best describes the difference between financial and managerial accounting?

Accepted Answer

Financial accounting is for external decision makers; managerial accounting is for internal decision makers.

Question 19

A company issues $50,000 of common stock for cash. Which financial statement(s) will this transaction affect?

Accepted Answer

The balance sheet and the statement of stockholders’ equity

Question 20

Which of the following is the correct sequence for preparing financial statements?

Accepted Answer

Income statement, statement of retained earnings, balance sheet, statement of cash flows

Chapter 1: Accounting and the Business Environment – Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards