Question 1

Which of the following best describes the primary purpose of the income statement?

Accepted Answer

To report the revenues and expenses and determine net income or net loss for a period

Question 2

A company has beginning retained earnings of $$10,000, net income of 4$$,000, and dividends of $$1,500 for the year. What is the ending retained earnings balance?

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

Accepted Answer

$$12,500$$

Question 3

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

Accepted Answer

Income is only taxed once at the corporate level

Question 4

Which financial statement would you consult to determine the amount of cash generated from operating activities during the year?

Accepted Answer

Statement of Cash Flows

Question 5

If a company’s assets are $$120,000 and its liabilities are 75$$,000, what is the amount of owners’ equity?

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

Accepted Answer

$$45,000$$

Question 6

Which of the following is an example of a current asset?

Accepted Answer

Accounts Receivable

Question 7

Which accounting assumption states that a business will continue to operate for the foreseeable future?

Accepted Answer

Going-Concern Assumption

Question 8

A company reports the following: Revenues of $$50,000, Cost of Goods Sold of 20$$,000, Operating Expenses of $$15,000, and Interest Expense of 2$$,000. What is the company’s net income before tax?

$$	ext{Net Income Before Tax} = 	ext{Revenues} - 	ext{Cost of Goods Sold} - 	ext{Operating Expenses} - 	ext{Interest Expense}$$

Accepted Answer

$$13,000$$

Question 9

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

Accepted Answer

Suppliers of raw materials only

Question 10

Which of the following best describes the relationship between the income statement and the statement of retained earnings?

Accepted Answer

Net income from the income statement is added to beginning retained earnings on the statement of retained earnings

Question 11

Which of the following is a key difference between financial accounting and management accounting?

Accepted Answer

Financial accounting provides information for both internal and external users

Question 12

Which of the following is an example of an operating activity on the statement of cash flows?

Accepted Answer

Paying suppliers for inventory

Question 13

Which of the following is a responsibility of the auditor in the financial reporting process?

Accepted Answer

Providing an opinion on whether the financial statements comply with GAAP

Question 14

A company has the following balances: Cash $$5,000, Accounts Receivable 8$$,000, Inventory $$12,000, Equipment 20$$,000, Accounts Payable $$7,000, and Long-term Debt 10$$,000. What is the total amount of current assets?

$$	ext{Current Assets} = 	ext{Cash} + 	ext{Accounts Receivable} + 	ext{Inventory}$$

Accepted Answer

$$25,000$$

Question 15

Which of the following is a principle that requires assets to be recorded at their original purchase price?

Accepted Answer

Historical-Cost Assumption

Question 16

Which of the following is a risk associated with the use of technology in accounting?

Accepted Answer

Data could be input incorrectly

Question 17

Which of the following is NOT a component of shareholders’ equity on the balance sheet of a corporation?

Accepted Answer

Accounts payable

Question 18

Which of the following best describes the ethical decision-making framework for accountants?

Accepted Answer

Identify stakeholders, consider consequences, evaluate alternatives, and choose the most ethical option

Question 19

Which of the following is a real-world example of a financing activity on the statement of cash flows?

Accepted Answer

Issuing new shares to investors

Question 20

A company’s balance sheet shows total assets of $$200,000, total liabilities of 120$$,000, and common shares of $$50,000. What is the amount of retained earnings?

$$	ext{Assets} = 	ext{Liabilities} + 	ext{Common Shares} + 	ext{Retained Earnings}$

Accepted Answer

$$30,000$$

Chapter 1: The Financial Statements – Foundations of Financial Accounting

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