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

$$\text{Ending Retained Earnings} = \text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends}$$

Question 1

Which of the following best describes the relationship between the balance sheet and the income statement as depicted in the diagram?

Accepted Answer

The income statement feeds into retained earnings, which is part of stockholders' equity on the balance sheet.

Question 2

According to the diagram, which formula correctly represents the expanded accounting equation?

Accepted Answer

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

Question 3

Which account is directly affected by the net income calculated on the income statement, as shown in the diagram?

Accepted Answer

Retained Earnings

Question 4

If a company declares and pays dividends, which section(s) of the diagram are affected?

Accepted Answer

Both the statement of retained earnings and the balance sheet

Question 5

Based on the diagram, which of the following is the correct sequence for preparing financial statements?

Accepted Answer

Income Statement → Statement of Retained Earnings → Balance Sheet

Question 6

Which of the following transactions would increase both assets and stockholders' equity, as shown in the diagram?

Accepted Answer

Issuing common stock for cash

Question 7

If a company earns revenue but has not yet received cash, which accounts are affected according to the diagram?

Accepted Answer

Accounts Receivable and Service Revenue

Question 8

Which of the following best explains why expenses decrease retained earnings, as shown in the diagram?

Accepted Answer

Expenses are subtracted from revenues to calculate net income, which decreases retained earnings.

Question 9

According to the diagram, which of the following is NOT a component of stockholders' equity?

Accepted Answer

Notes Payable

Question 10

If a company reports a net loss on the income statement, what is the effect on the statement of retained earnings and the balance sheet?

Accepted Answer

Retained earnings decrease and total equity decreases.

Question 11

Which formula correctly calculates ending retained earnings, as shown in the diagram?

Accepted Answer

$$	ext{Ending Retained Earnings} = 	ext{Beginning Retained Earnings} + 	ext{Net Income} - 	ext{Dividends}$$

Question 12

Which of the following best describes the flow of information from the income statement to the balance sheet?

Accepted Answer

Net income from the income statement increases retained earnings, which is part of stockholders' equity on the balance sheet.

Question 13

If a company issues additional common stock, which financial statement(s) will be directly affected?

Accepted Answer

Only the balance sheet

Question 14

Which of the following is the correct order for the flow of net income through the financial statements, as shown in the diagram?

Accepted Answer

Income Statement → Statement of Retained Earnings → Balance Sheet

Question 15

Which of the following transactions would NOT affect the income statement?

Accepted Answer

Declaring and paying dividends

Chapter 2: Recording Business Transactions – Transaction Analysis and the Accounting Cycle

Study Guide - Practice Questions