ACCOUNTING BASIS

1. Which financial statement reports the revenues and expenses for a period of time such as
a year or a month?

Balance Sheet Income Statement Statement Of Cash Flows

2. Which financial statement reports the assets, liabilities, and stockholders' (owner's) equity
at a specific date?

Balance Sheet Income Statement Statement Of Cash Flows

3. Under the accrual basis of accounting, revenues are reported in the accounting period
when which of the following occurs?

Cash Is Received Service Or Goods Have Been Delivered

4. Under the accrual basis of accounting, expenses are reported in the accounting period
when which of the following occurs?

Cash Is Paid An Expense Matches The Revenues Or Is Used Up

5. Revenues minus expenses equals __________.

6. Resources owned by a company (such as cash, accounts receivable, vehicles) are reported
on the balance sheet and are referred to as __________.

7. Assets are usually reported on the balance sheet at which amount?

Cost Current Market Value Expected Selling Price

8. Obligations (amounts owed) are reported on the balance sheet and are referred to as
__________.
9. Liabilities often have the word __________ in their account title.
10. Unearned Revenues is what type of account?
Asset Liability Stockholders' (Owner's) Equity
11. Accounting entries involve a minimum of how many accounts?
One Two Three
12. The listing of all of the accounts available for use in a company's accounting system is
known as the __________.
13. Assets minus liabilities equals __________.
14. Which term is associated with "left" or "left-side"?
Debit Credit
15. Which term is associated with "right" or "right-side"?
Debit Credit
16. When cash is received, the account Cash will be __________.
 Debited Credited
17. When a company pays a bill, the account Cash will be __________.
Debited Credited
18. What will usually cause an asset account to increase?
Debit Credit
19. What will usually cause the liability account Accounts Payable to increase?
Debit Credit
20. Entries to expenses such as Rent Expense are usually __________.
Debits Credits
21. Entries to revenues accounts such as Service Revenues are usually __________.
Debits Credits

ACCOUNTING EQUATION
1. The basic accounting equation is Assets = Liabilities + __________.

For each of the transactions in items 2 through 13, indicate the two (or more) effects on the
accounting equation of the business or company.

2. The owner invests personal cash in the business.

Assets Increase Decrease No Effect

Liabilities Increase Decrease No Effect

Owner's (or Stockholders') Equity Increase Decrease No Effect

3. The owner withdraws cash from the business for personal use.

Assets Increase Decrease No Effect

Liabilities Increase Decrease No Effect

Owner's (or Stockholders') Equity Increase Decrease No Effect

4. The company receives cash from a bank loan.

Assets Increase Decrease No Effect

Liabilities Increase Decrease No Effect

Owner's (or Stockholders') Equity Increase Decrease No Effect

 5. The company repays the bank that had lent money to the company.

Assets Increase Decrease No Effect

Liabilities Increase Decrease No Effect

Owner's (or Stockholders') Equity Increase Decrease No Effect

6. The company purchases equipment with its cash.

Assets Increase Decrease No Effect

Liabilities Increase Decrease No Effect

Owner's (or Stockholders') Equity Increase Decrease No Effect

7. The owner contributes his/her personal truck to the business.

Assets Increase Decrease No Effect

Liabilities Increase Decrease No Effect

Owner's (or Stockholders') Equity Increase Decrease No Effect

8. The company purchases a significant amount of supplies on credit.

Assets Increase Decrease No Effect

Liabilities Increase Decrease No Effect

Owner's (or Stockholders') Equity Increase Decrease No Effect

9. The company purchases land by paying half in cash and signing a note payable for the other
half.

Assets Increase Decrease No Effect

Liabilities Increase Decrease No Effect

Owner's (or Stockholders') Equity Increase Decrease No Effect

Information for Items 10 through 13

Company X provides consulting services to Client Q in May. Company X bills Client Q in May
for the agreed upon amount of $5,000. The sales invoice shows that the amount will be due in
June.

10.

In May, Company X records the transaction by a debit to Accounts Receivable for $5,000 and a
credit to Service Revenues for $5,000. What is the effect of this entry upon the accounting
equation for Company X?

Assets Increase Decrease No Effect

Liabilities Increase Decrease No Effect

Owner's (or Stockholders') Equity Increase Decrease No Effect

11. In June, Company X receives the $5,000. What is the net effect on the accounting equation
totals and which accounts are affected at Company X?

Assets Increase Decrease No Effect

Liabilities Increase Decrease No Effect

Owner's (or Stockholders') Equity Increase Decrease No Effect

12. What is the effect on Client Q's accounting equation in May when Client Q records the
transaction as a debit to Consultant Expense for $5,000 and a credit to Accounts Payable for
$5,000?

Assets Increase Decrease No Effect

Liabilities Increase Decrease No Effect

Owner's (or Stockholders') Equity Increase Decrease No Effect

13. What is the effect on Client Q's accounting equation in June when Client Q remits the
$5,000? Also, which accounts will be involved?

Assets Increase Decrease No Effect

Liabilities Increase Decrease No Effect

Owner's (or Stockholders') Equity Increase Decrease No Effect

 14. Which of the following will cause owner's equity to increase?

Expenses Owner's Draws Revenue

15. Which of the following will cause owner's equity to decrease?

Net Income Net Loss Revenue

16. The accounting equation should remain in balance because every transaction affects how
many accounts?

Only One Only Two Two Or More

17. A corporation's net income is eventually recorded in the following stockholders' equity
account: __________.

18. A corporation's quarterly __________ will cause a reduction in the corporation's retained
earnings, which in turn reduces the corporation's stockholders' equity. However, this will not
reduce the corporation's net income.

19. The financial statement with a structure that is similar to the accounting equation is the
__________.

20. The financial statement that reports the portion of change in owner's equity resulting from
revenues and expenses during a specified time interval is the __________.

ACCOUNTING PRINCIPLE

1. The personal assets of the owner of a company will not appear on the company's balance sheet
because of which principle/guideline?

Cost Economic Entity Monetary Unit

2. Which principle/guideline requires a company's balance sheet to report its land at the amount the
company paid to acquire the land, even if the land could be sold today at a significantly higher
amount?

Cost Economic Entity Monetary Unit

3. Which principle/guideline allows a company to ignore the change in the purchasing power of
the dollar over time?
Cost Economic Entity Monetary Unit
4. Which principle/guideline requires the company's financial statements to have footnotes
containing information that is important to users of the financial statements?

Conservatism Economic Entity Full Disclosure

5. Which principle/guideline justifies a company violating an accounting principle because the
amounts are immaterial?

Conservatism Full Disclosure Materiality

6. Which principle/guideline is associated with the assumption that the company will continue on
long enough to carry out its objectives and commitments?

Economic Entity Going Concern Time Period

7. A very large corporation's financial statements have the dollar amounts rounded to the nearest
$1,000. Which accounting principle/guideline justifies not reporting the amounts to the penny?

Full Disclosure Materiality Monetary Unit

8. Accountants might recognize losses but not gains in certain situations. For example, the
company might write-down the cost of inventory, but will not write-up the cost of inventory.
Which principle/guideline is associated with this action?

Conservatism Materiality Monetary Unit

9. Which principle/guideline directs a company to show all the expenses related to its revenues
of a specified period even if the expenses were not paid in that period?

Cost Matching Monetary Unit

10. When the accountant has to choose between two acceptable alternatives, the accountant
should select the alternative that will report less profit, less asset amount, or a greater liability
amount. This is based upon which principle/guideline?

Conservatism Cost Materiality

11. Public utilities' balance sheets list the plant assets before the current assets. This is acceptable
under which accounting principle/guideline?

Conservatism Cost Industry Practices

12. A large company purchases a $250 digital camera and expenses it immediately instead of
recording it as an asset and depreciating it over its useful life. This practice may be acceptable
because of which principle/guideline?
Cost Matching Materiality
13. A corporation pays its annual property tax bill of approximately $12,000 in one payment
each December 28. During the year, the corporation's monthly income statements report Property
Tax Expense of $1,000. This is an example of which accounting principle/guideline?

Conservatism Matching Monetary Unit

14.A company sold merchandise of $8,000 to a customer in December. The company's sales
terms require the customer to pay the company in 30 days. The company's income statement
reported the sale in December. This is proper under which accounting principle/guideline?

Full Disclosure Monetary Unit Revenue Recognition

15. Accrual accounting is based on this principle/guideline.

Cost Full Disclosure Matching

16. The creative chief executive of a corporation who is personally responsible for numerous
inventions and innovations is not reported as an asset on the corporation's balance sheet. The
accounting principle/guideline that prevents the corporation from reporting this person as an
asset is __________.

Conservatism Cost Going Concern

17. An asset with a cost of $120,000 is depreciated over its useful life of 10 years rather than
expensing the entire amount when it is purchased. This complies with which principle/guideline?

Cost Full Disclosure Matching

18. Near the end of the current year, a company required a customer to pay $200,000 as a deposit
for work that is to begin in the following year. At the end of the current year the company
reported the $200,000 as a liability on its balance sheet. Which accounting principle/guideline
prevented the company from reporting the $200,000 on its income statement for the current
year?

Going Concern Materiality Revenue Recognition

19. A retailer wishes to report its merchandise inventory on its balance sheet at its retail value.
This would violate which accounting principle/guideline?

Cost Full Disclosure Monetary Unit

20. A company borrowed $100,000 in December and will make its only payment for interest
when the note comes due six months later. The total interest for the six months will be $3,600.
 On the December income statement the accountant reported Interest Expense of $600. This
action was the result of which accounting principle/guideline?

Cost Matching Revenue Recognition

FINANCIAL STATEMENT
1. Which accounting method will result in financial statements that report a more complete
picture of a corporation’s financial position and a better measure of profitability during a recent
accounting year?
Accrual Method Cash Method
2. Which type of journal entries are made at the end of each accounting period so that the
financial statements better reflect the accrual method of accounting?
Adjusting Closing Reversing
3. The generally accepted accounting principles used in the financial statements of U.S.
corporations are researched and developed by which organization?
American Accounting Association (AAA)
Financial Accounting Standards Board (FASB)
Internal Revenue Service (IRS)
4. Which financial statement will allow you to determine the gross margin for a retailer or
manufacturer?
Balance Sheet
Income Statement
Statement Of Cash Flows
Statement Of Comprehensive Income
Statement Of Stockholders’ Equity
5. Does the heading of a balance sheet indicate a period of time or a point in time?
Point In Time Period Of Time
6. A corporation's net income will cause a change in which component of stockholders' equity?
Accumulated Other Comprehensive Income
Paid-in Capital
Retained Earnings
7. Which financial statement's structure is closest to that of the basic accounting equation?
Balance Sheet
Income Statement
Statement Of Cash Flows
 Statement Of Comprehensive Income
Statement Of Stockholders’ Equity
8. Is it true or false that a grocery store’s sale of its old delivery van to one of its employees for
$2,000 should be recorded in the general ledger account Sales?
True False
9. Is it true or false that the total amount of stockholders’ equity reported on the balance sheet is
intended to show the fair market value of the corporation?
True False
10. Comprehensive income is defined as _______________ plus other comprehensive income.
Extraordinary Items Gains And Losses Net Income
11. Which financial statement reports the adjustments for foreign currency translation?
Statement Of Cash Flows Statement Of Comprehensive Income Statement Of
Income
12. Ten years ago, a corporation created a new brand name that is now considered to be its most
valuable asset. On which financial statement and at what amount will you see the brand name
reported?
Balance Sheet At Its Present Value
Statement Of Comprehensive Income With No Value
Not Reported On A Financial Statement
13. A corporation's working capital is calculated using which amounts?
Total Assets And Total Liabilities
Total Assets And Current Liabilities
Current Assets And Current Liabilities
14. The changes that occurred during a recent year in the accounts Retained Earnings and Treasury
Stock will be presented in which financial statement?
Balance Sheet
Income Statement
Statement Of Cash Flows
Statement Of Comprehensive Income
Statement Of Stockholders' Equity
15. The amount spent for capital expenditures will be reported in which section of the statement of
cash flows?
Cash Provided/Used In Financing Activities
 Cash Provided/Used In Investing Activities
Cash Provided/Used In Operating Activities
Supplemental Information
16. Which of the following will appear as a negative amount on a statement of cash flows that was
prepared using the indirect method?
A Decrease In Inventory
An Increase In Accounts Payable
An Increase In Accounts Receivable
Depreciation Expense
17. Which of the following will appear as a positive amount on a statement of cash flows that was
prepared using the indirect method?
An Increase In Accounts Receivable
An Increase In Inventory
A Decrease In Accounts Payable
Depreciation Expense
18. What is usually presented first in the notes to the financial statements?
Accumulated Other Comprehensive Income
Commitments And Contingencies
Significant Accounting Policies
19. Which is the annual report to the SEC that contains the financial statements of a publicly-traded
corporation?
Form 1040 Form 10-K Form 10-Q Schedule C
20. Important disclosures regarding likely losses that could not be estimated are found where?
General Ledger Accounts Income Statement Notes To The Financial Statements

BALANCE SHEET
1. Another name for the balance sheet is
Statement Of Operations Statement Of Financial Position
2. The balance sheet heading will specify a
Period Of Time Point In Time
3. Which of the following is a category, classification, or element of the balance sheet?
Expenses Gains Liabilities Losses
4. Which of the following is an asset account?
Accounts Payable Prepaid Insurance Unearned Revenue
5. Which of the following is a contra account?
Accumulated Depreciation Mary Smith, Capital
6. What is the normal balance for an asset account?
Debit Credit
7. What is the normal balance for liability accounts?
Debit Credit
8. What is the normal balance for stockholders' equity and owner's equity accounts?
Debit Credit
9. What is the normal balance for contra asset accounts?
Debit Credit
10. ABC Co. received $1,000 in December for services it will perform in the following
month. ABC uses the accrual basis of accounting. In December ABC debited Cash for $1,000.
What will be the other account involved in the December accounting entry prepared by ABC
(and what type of account is it)?
Accounts Receivable (asset)
Prepaid Services (asset)
Service Revenues (revenue)
Unearned Revenues (liability)
11. ABC Co. performed services for Client Kay in December and billed Kay $4,000 with
terms of net 30 days. ABC follows the accrual basis of accounting. In January ABC received the
$4,000 from Kay. In January ABC will debit Cash, since cash was received. What account
should ABC credit in the January entry?
Accounts Receivable Service Revenue Owner's Equity
12. ABC Co. follows the accrual basis of accounting and performs a service on account (on
credit) in December. The service was billed at the agreed upon amount of $3,500. ABC Co.
debited Accounts Receivable for $3,500 and credited Service Revenue for $3,500. The effect of
this entry on the balance sheet of ABC is to increase assets by $3,500 and to __________.
Decrease Assets By $3,500 Increase Owner's (Stockholders') Equity By $3,500
13. Which of the following is not a current asset?
Accounts Receivable Land Prepaid Insurance Supplies
14. Which of the following is normally a current liability?
Note Payable Due In Two Years Unearned Revenue
15. When an owner draws $5,000 from a sole proprietorship or when a corporation declares
and pays a $5,000 dividend, the asset Cash decreases by $5,000. What is the other effect on the
balance sheet?
Owner's/Stockholders' Equity Decreases None
16. ABC Co. incurs cleanup expense of $500 on December 30. The supplier's invoice states
that the $500 is due by January 10 and ABC will pay the invoice on January 9. ABC follows the
accrual basis of accounting and its accounting year ends on December 31. What is the effect of
the cleanup service on the December balance sheet of ABC?
Assets Decreased Liabilities Increased No Effect On Owner's Equity
17. Deferred credits will appear on the balance sheet under which heading/classification?
Assets Liabilities Owner's/Stockholders' Equity
18. Notes Payable could not appear as a line on the balance sheet in which classification?
Current Assets Current Liabilities Long-term Liabilities
19. On December 1, ABC Co. hired Juanita Perez to begin working on January 2 at a
monthly salary of $4,000. ABC's balance sheet of December 31 will show a liability of what
amount?
$4,000 $48,000 No Liability
20. ABC Co. has current assets of $50,000 and total assets of $150,000. ABC has current
liabilities of $30,000 and total liabilities of $80,000. What is the amount of ABC's owner's
equity?
$20,000 $30,000 $70,000 $120,000
21. The amount reported on the balance sheet for Property, Plant and Equipment is the
company's estimate of the fair market value as of the balance sheet date.
True False
22. The total amount reported for stockholders' equity is the approximate fair value or net
worth of the corporation as of the balance sheet date.
True False
23. The book value of a corporation is the total amount of stockholders' equity reported on
the balance sheet.
True False
24. The third line of the balance sheet heading for the end of the year should begin with "For
the Year Ended".
True False
 INCOME STATEMENT
1. Which of the following names is NOT associated with the income statement?
P&L Statement Of Financial Position Statement Of Operations
2. The income statement heading will specify which of the following?
A POINT In Time A PERIOD Of Time
3. Amounts earned by a company in its main operating activities are known as __________.
Revenues Gains
4. A company disposes of equipment that it no longer uses in its business. The amount received by
the company is more than the amount the asset is carried at in the accounting records. The
company will report a(n) __________.
Expense Gain Loss Revenue
5. On December 1 a large corporation borrowed $100,000 at 12% per year. The interest will be paid
quarterly, with the first payment due on March 1. What should the corporation report on its
income statement for December?
Nothing Interest Expense Of $1,000
6. Is a retailer's Interest Expense an operating expense or a non-operating expense?
Operating Expense Non-operating Expense
7. The income statement line gross profit will appear on which income statement format?
Single-step Multiple-step
8. Which income statement format segregates the operating revenues and expenses from the non-
operating revenues and expenses?
Single-step Multiple-step
9. Interest earned on investments would appear in which section of a retailer's multiple-step income
statement?
Non-operating Operating Would Not Appear
10. Under the accrual basis of accounting, revenues are recognized in the accounting period in which
__________.
Cash Is Received Revenues Are Earned
11. Net Sales minus the Cost of Goods Sold is __________.
Gross Profit Income From Operations Net Income
12. The combination of net income + other comprehensive income is known as __________ income.
Comprehensive Net Total
13. Which basis of accounting best measures profitability during a short time interval?
 Accrual Basis Cash Basis
14. Gross Profit minus Operating Expenses is best defined as __________.
Net Income Net Sales Operating Income
15. What is defined as sales minus all variable expenses?
Contribution Margin Gross Profit Net Income
16. Are the draws of a sole proprietor reported as an expense on the company's income statement?
Yes No
17. A corporation's net income will cause an increase to which of the following?
Accumulated Other Comprehensive Income
Common Stock
Retained Earnings
18. If a company's stock is publicly traded, is it a requirement that the earnings per share appear on
the income statement?
Yes No
19. Are the notes to the financial statements considered to be an integral part of the financial
statements?
Yes No
20. Is it acceptable that some of the expenses reported on the income statement be estimates?
Yes No

CASH FLOW STATEMENT

For all questions assume that the indirect method is used.
There are four parts to the Statement of Cash Flows (or Cash Flow Statement):
● Operating Activities
● Investing Activities
● Financing Activities
● Supplemental Disclosures
For items 1-18, indicate which part will be affected.
1. Depreciation Expense.
Operating Investing Financing Supplemental
2. Proceeds from the sale of equipment used in the business.
Operating Investing Financing Supplemental
3. The Loss on the Sale of Equipment in Question #2.
Operating Investing Financing Supplemental
4. Declaration and payment of dividends on company's stock.
Operating Investing Financing Supplemental
5. Gain on the Sale of Automobile formerly used in the business.
Operating Investing Financing Supplemental
6. The proceeds from the sale of the automobile in Item #5.
Operating Investing Financing Supplemental
7. An increase in the balance in a retailer's Merchandise Inventory.
Operating Investing Financing Supplemental
8. An increase in the balance in Accounts Payable.
Operating Investing Financing Supplemental
9. Retirement of long-term Bonds Payable.
Operating Investing Financing Supplemental
10. Purchase of Treasury Stock (company's own stock).
Operating Investing Financing Supplemental
11. The purchase of a new delivery truck to be used in the business.
Operating Investing Financing Supplemental
12. A decrease in the balance of Accounts Receivable.
Operating Investing Financing Supplemental
13. An increase in Bonds Payable (a long-term liability).
Operating Investing Financing Supplemental
14. A decrease in the current asset account Prepaid Insurance.
Operating Investing Financing Supplemental
15. A decrease in the current liability Income Taxes Payable.
Operating Investing Financing Supplemental
16. The proceeds from issuing additional Common Stock.
Operating Investing Financing Supplemental
17. The amortization of the cost of an intangible asset.
Operating Investing Financing Supplemental
18. The exchange/conversion of long-term bonds into common stock.
Operating Investing Financing Supplemental
For items 19 – 30 indicate whether they will have a positive or negative EFFECT ON CASH.
A positive effect could also be thought of as a source of cash, an increase in cash, or a positive
amount on the cash flow statement.
 A negative effect could also be thought of as a use of cash, a decrease in cash, or a negative
amount on the cash flow statement.
19. An increase in the balance of Prepaid Insurance.
Positive Negative
20. A decrease in Supplies on hand.
Positive Negative
21. The proceeds from the sale of equipment formerly used in the business.
Positive Negative
22. The Loss on the Sale of Equipment in the previous question.
Positive Negative
23. An increase in the current liability Income Taxes Payable.
Positive Negative
24. A decrease in Accounts Payable.
Positive Negative
25. An increase in Accounts Receivable.
Positive Negative
26. An increase in the current liability Warranty Liability.
Positive Negative
27. Dividends declared and paid.
Positive Negative
28. Proceeds from the issuance of Preferred Stock.
Positive Negative
29. The Gain on the Sale of Equipment formerly used in the business.
Positive Negative
30. An increase in the long-term asset Investment in Another Company.
Positive Negative
31. For a recent year a corporation's financial statements reported the following:
 Based on the above information, what amount will the corporation report as Net Cash Provided
by Operating Activities on the cash flow statement?
$65,000 $125,000 $155,000
32. A corporation reported the following information for the past year:

Assuming these are the only facts, what amount will the corporation report as the Net Cash
Provided by Operating Activities on the cash flow statement?
$225,000 $235,000 $253,000
33. Using the information in Question #32, what amount will be reported under Cash From Investing
Activities?
$3,000 $8,000 $13,000