$$\text{Assets} = \text{Liabilities} + \text{Equity}$$

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

Question 1

Which of the following best describes the accounting equation?

Accepted Answer

$$	ext{Assets} = 	ext{Liabilities} + 	ext{Equity}$$

Question 2

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

Accepted Answer

Unlimited liability of stockholders

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

A company purchases office supplies on account for $1,000. Which accounts are affected and how?

Accepted Answer

Increase Office Supplies (Asset) and Increase Accounts Payable (Liability) by $1,000

Question 5

Which of the following is an example of a liability?

Accepted Answer

Accounts Payable

Question 6

Which principle requires that assets and services be recorded at their actual cost?

Accepted Answer

Cost Principle

Question 7

A business earns $$10,000 in service revenue and pays 4$$,000 in expenses during the year. What is the net income?

Accepted Answer

$$6,000$$

Question 8

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

Accepted Answer

Balance Sheet

Question 9

Which of the following transactions will increase equity?

Accepted Answer

Earning service revenue

Question 10

If a company has assets of $$50,000 and liabilities of 20$$,000, what is its equity?

Accepted Answer

$$30,000$$

Question 11

Which of the following best describes the purpose of the Statement of Cash Flows?

Accepted Answer

To report a business’s cash receipts and cash payments for a specific period

Question 12

Which of the following is NOT a user of financial accounting information?

Accepted Answer

Production line worker

Question 13

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

Accepted Answer

Decrease Assets and Decrease Equity

Question 14

Which of the following is a requirement for accounting information to be useful under GAAP?

Accepted Answer

It must be relevant and have faithful representation

Question 15

Which of the following best describes the Return on Assets (ROA) formula?

Accepted Answer

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

Question 16

A company reported net income of $$8,000. Its beginning total assets were 40$$,000 and ending total assets were $48,000. What is the company's ROA?

Accepted Answer

$$\frac{8,000}{44,000} = 18.18\%$$

Question 17

Which of the following is an example of an event that is NOT considered a transaction in accounting?

Accepted Answer

Hiring a new employee

Question 18

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

Accepted Answer

It requires companies to review internal controls.

Question 19

Which of the following best describes contributed capital?

Accepted Answer

The amount invested in the corporation by its owners

Question 20

Which of the following is a responsibility of the Public Company Accounting Oversight Board (PCAOB)?

Accepted Answer

Monitoring the work of independent accountants who audit public companies

Chapter 1: Accounting and the Business Environment – Study Notes

Study Guide - Practice Questions