Q: Which formula correctly represents the relationship between assets, liabilities, and owners’ equity?

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

Question 1

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

Accepted Answer

To record and analyze financial data to provide information for decision-making by internal and external parties.

Question 2

A company’s balance sheet shows total assets of $$5,515,000 and total liabilities of 1$$,672,000. What is the owners’ equity?

Accepted Answer

$3,843,000

Question 3

Which formula correctly represents the relationship between assets, liabilities, and owners’ equity?

Accepted Answer

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

Question 4

Which of the following is NOT considered a current asset?

Accepted Answer

Plant and Equipment

Question 5

A company has current assets of $$2,810,000 and current liabilities of 778$$,000. What is the current ratio?

Accepted Answer

$$\frac{2,810,000}{778,000} \approx 3.61$$

Question 6

Which of the following best describes the cost principle of accounting?

Accepted Answer

Assets are valued based on their original purchase price.

Question 7

If a company’s net income is $$680,000 and total assets are 6$$,195,000, what is the Return on Assets (ROA)?

Accepted Answer

$$\frac{680,000}{6,195,000} \approx 0.11 or 11$$%

Question 8

Which financial ratio is most conservative in measuring a company’s liquidity?

Accepted Answer

Acid-Test Ratio (Quick Ratio)

Question 9

A company has sales of $$2,934,000 and inventory of 1$$,375,000. What is the inventory turnover ratio?

Accepted Answer

$$\frac{2,934,000}{1,375,000} \approx 2.13$$

Question 10

Which of the following is a plausible consequence of a low inventory turnover ratio?

Accepted Answer

Weak sales and possible overstocking.

Question 11

Which ratio would an investor use to assess how efficiently a company uses its assets to generate profit?

Accepted Answer

Return on Assets (ROA)

Question 12

A company’s net income is $$680,000 and total equity is 4$$,509,000. What is the Return on Equity (ROE)?

Accepted Answer

$$\frac{680,000}{4,509,000} \approx 0.15 or 15$$%

Question 13

Which of the following is NOT a component of the income statement?

Accepted Answer

Assets

Question 14

Which user of financial accounting information is most interested in whether the company will pay its bills and be a reliable business partner?

Accepted Answer

Creditors

Question 15

If a company’s current assets are $$2,810,000, inventory is 1$$,375,000, prepaid expenses are $$0, and current liabilities are 778$$,000, what is the acid-test (quick) ratio?

Accepted Answer

$$\frac{2,810,000 - 1,375,000}{778,000} \approx 1.84$$

Question 16

Which of the following statements about financial ratio analysis is TRUE?

Accepted Answer

Ratios are best used in combination for a comprehensive picture.

Question 17

Which of the following is an example of a long-term liability?

Accepted Answer

Long-term bank loan

Question 18

A company’s total owners’ equity is $$4,509,000 and total assets are 6$$,195,000. What is the equity ratio?

Accepted Answer

$$\frac{4,509,000}{6,195,000} \approx 0.73 or 73$$%

Question 19

Which of the following is a plausible reason why values in financial statements may not reflect market values?

Accepted Answer

Values are recorded using the cost principle, based on original purchase price.

Financial Accounting Fundamentals and Ratio Analysis

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