True or False

1. Owners of business firms are the only people who need accounting information.

2. The hiring of a new company president is an economic event recorded by the financial information
system.

3. The origins of accounting are attributed to Luca Pacioli, a famous mathematician.

4. Private accountants are accountants who are not employees of business enterprises.

5. Even though a partnership is not a separate legal entity, for accounting purposes the partnership
affairs should be kept separate from the personal activities of the owners.

6. The economic entity assumption requires that the activities of an entity be kept separate and distinct
from the activities of its owner and all other economic entities.

7. Owners' claims to total business assets take precedence over the claims of creditors because owners
invest assets in the business and are liable for losses.

8. Accountants record both internal and external transactions.

9. Internal transactions do not affect the basic accounting equation because they are economic events
that occur entirely within one company.

10. The purchase of store equipment for cash reduces the owner's equity by an equal amount.

11. In order to possess future service potential, an asset must have physical substance.

12. The purchase of office equipment on credit increases total assets and total liabilities.

13. The primary purpose of the statement of cash flows is to provide information about the cash
receipts and cash payments of a company during a period.

14. Net income for the period is determined by subtracting total expenses and drawings from total
revenues.

15. Identifying is the process of keeping a chronological diary of events measured in dollars and cents.

16. At the time an asset is acquired, cost and value should be the same.

17. The monetary unit assumption requires that all dollar amounts be rounded to the nearest dollar.

18. The basic accounting equation is in balance when the creditor and ownership claims against the
business equal the assets.

19. External transactions involve economic events between the company and some other enterprise or
party.

20. In the owner's equity statement, revenues are listed first, followed by expenses, and net income (or
net loss).
Multiple Choices

1. Accountants refer to an economic event as a

a. purchase b. sale c. transaction d. change in ownership

2. Which of the following events cannot be quantified into dollars and cents and recorded as an
accounting transaction?
a. The appointment of a new CPA firm to perform an audit.
b. The purchase of a new computer.
c. The sale of store equipment.
d. Payment of income taxes.

3. The accounting process involves all of the following except

a. identifying economic transactions that are relevant to the business.
b. communicating financial information to users by preparing financial reports.
c. recording non-quantifiable economic events.
d. analyzing and interpreting financial reports.

4. The accounting process is correctly sequenced as

a. identification, communication, recording.
b. recording, communication, identification.
c. identification, recording, communication.
d. communication, recording, identification.

5. Which of the following would not be considered an internal user of accounting data for the
XYZ Company?

a. President of the company

b. Production manager
c. Merchandise inventory clerk
d. President of the employees' labor union

6. Which of the following would not be considered an external user of accounting data for the
XYZ Company?

a. Internal Revenue Service Agent

b. Management
c. Creditors
d. Customers

7. Which of the following would not be considered internal users of accounting data for a
company?

a. The president of a company

b. The controller of a company
c. Creditors of a company
d. Salesmen of the company
8. Which of the following is an external user of accounting information?

a. Labor unions
b. Finance directors
c. Company officers
d. Managers

9. Which one of the following is not an external user of accounting information?

a. Regulatory agencies
b. Customers
c. Investors
d. All of these are external users

10. Bookkeeping differs from accounting in that bookkeeping primarily involves which part of
the accounting process?

a. Identification
b. Communication
c. Recording
d. Analysis

11. All of the following are services offered by public accountants except

a. budgeting.
b. auditing.
c. tax planning.
d. consulting.

12. The origins of accounting are generally attributed to the work of

a. Christopher Columbus.
b. Abner Doubleday.
c. Luca Pacioli.
d. Leonardo da Vinci.

13. Generally accepted accounting principles are

a. income tax regulations of the Internal Revenue Service.

b. standards that indicate how to report economic events.
c. theories that are based on physical laws of the universe.
d. principles that have been proven correct by academic researchers.

14. The body of theory underlying accounting is not based on

a. physical laws of nature.

b. concepts.
c. principles.
d. definitions.
15. GAAP stands for

a. Generally Accepted Auditing Procedures.

b. Generally Accepted Accounting Principles.
c. Generally Accepted Auditing Principles.
d. Generally Accepted Accounting Procedures.

16. The proprietorship form of business organization

a. must have at least three owners in most states.

b. represents the largest number of businesses in the United States.
c. combines the records of the business with the personal records of the owner.
d. is characterized by a legal distinction between the business as an economic unit and
the owner.

17. The partnership form of business organization

a. is a separate legal entity.

b. is a common form of organization for service-type businesses.
c. enjoys an unlimited life.
d. has limited liability.

18. A basic assumption of accounting that requires activities of an entity be kept separate
from the activities of its owner is referred to as the

a. stand-alone concept.
b. monetary unit assumption.
c. corporate form of ownership.
d. economic entity assumption.

19. A business that enjoys limited liability is a

a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.

20. Owner's equity is best depicted by the following:

a. Assets = Liabilities.
b. Liabilities + Assets.
c. Residual equity + Assets.
d. Assets – Liabilities.

21. The basic accounting equation may be expressed as

a. Assets = Equities.
b. Assets – Liabilities = Owner's Equity.
c. Assets = Liabilities + Owner's Equity.
d. all of these.
22. Liabilities of a company would not include

a. notes payable.
b. accounts payable.
c. wages payable.
d. cash.

23. Owner's equity can be described as

a. creditorship claim on total assets.

b. ownership claim on total assets.
c. benefactor's claim on total assets.
d. debtor claim on total assets.

24. Owner's equity is often referred to as

a. residual equity.
b. leftovers.
c. spoils.
d. second equity.

25. Revenues would not result from

a. sale of merchandise.
b. initial investment of cash by owner.
c. performance of services.
d. rental of property.

26. The basic accounting equation cannot be restated as

a. Assets – Liabilities = Owner's Equity.

b. Assets – Owner's Equity = Liabilities.
c. Owner's Equity + Liabilities = Assets.
d. Assets + Liabilities = Owner's Equity.

27. If total liabilities increased by $15,000 and owner’s equity increased by $5,000 during a
period of time, then total assets must change by what amount and direction during that
same period?

a. $20,000 decrease
b. $20,000 increase
c. $25,000 increase
d. $30,000 increase

28. If total liabilities decreased by $15,000 and owner’s equity increased by $5,000 during a
period of time, then total assets must change by what amount and direction during that
same period?
a. $20,000 increase
b. $10,000 decrease
c. $10,000 increase
d. $15,000 decrease

29. If total liabilities decreased by $25,000 and owner’s equity increased by $5,000 during a
period of time, then total assets must change by what amount and direction during that
same period?

a. $20,000 decrease
b. $20,000 increase
c. $25,000 increase
d. $30,000 increase

30. If total liabilities decreased by $15,000 and owner’s equity decreased by $5,000 during a
period of time, then total assets must change by what amount and direction during that
same period?

a. $20,000 increase
b. $10,000 increase
c. $20,000 decrease
d. $10,000 decrease

31. If total liabilities increased by $14,000 during a period of time and owner’s equity
decreased by $6,000 during the same period, then the amount and direction (increase or
decrease) of the period’s change in total assets is a(n)

a. $14,000 increase.
b. $20,000 increase.
c. $8,000 decrease.
d. $8,000 increase.

32. If total liabilities increased by $4,000, then

a. assets must have decreased by $4,000.

b. owner's equity must have increased by $4,000.
c. assets must have increased by $4,000, or owner's equity must have decreased by

$4,000.
d. assets and owner's equity each increased by $2,000.

33. If an individual asset is increased, then

a. there must be an equal decrease in a specific liability.

b. there must be an equal decrease in owner's equity.
c. there must be an equal decrease in another asset.
d. none of these is possible.

34. If supplies that have been purchased are used in the course of business, then
a. a liability will increase.
b. an asset will increase.
c. owner's equity will decrease.
d. owner's equity will increase.

35. A balance sheet shows

a. revenues, liabilities, and owner's equity.

b. expenses, drawings, and owner's equity.
c. revenues, expenses, and drawings.
d. assets, liabilities, and owner's equity.

36. An income statement

a. summarizes the changes in owner's equity for a specific period of time.

b. reports the changes in assets, liabilities, and owner's equity over a period of time.
c. reports the assets, liabilities, and owner's equity at a specific date.
d. presents the revenues and expenses for a specific period of time.

Use the following information for questions 37–39.

Jimmy's Car Repair Shop started the year with total assets of $270,000 and total liabilities of
$180,000. During the year, the business recorded $450,000 in car repair revenues, $255,000 in
expenses, and Jimmy withdrew $45,000.

37. Jimmy's Capital balance at the end of the year was

a. $240,000.
b. $225,000.
c. $285,000.
d. $195,000.

38. The net income reported by Jimmy's Car Repair Shop for the year was

a. $150,000.
b. $195,000.
c. $90,000.
d. $405,000.

39. Jimmy's Capital balance changed by what amount from the beginning of the year to the
end of the year?

a. $45,000
b. $195,000
c. $90,000
d. $150,000

40. The balance sheet is frequently referred to as

a. an operating statement.
b. the statement of financial position.
c. the statement of cash flows.
d. the statement of owner's equity.

41. All of the financial statements are for a period of time except the

a. income statement.
b. owner's equity statement.
c. balance sheet.
d. statement of cash flows.

Use the following information for questions 42–43.

Berwick Company compiled the following financial information as of December 31, 2008:
Revenues $140,000
Berwick, Capital (1/1/08) 105,000
Equipment 40,000
Expenses 125,000
Cash 35,000
Berwick, Drawings 10,000
Supplies 5,000
Accounts payable 20,000
Accounts receivable 15,000

42. Berwick’s assets on December 31, 2008 are

a. $235,000.
b. $170,000.
c. $80,000.
d $95,000.

43. Berwick’s owner’s equity on December 31, 2008 is

a. $105,000.
b. $110,000.
c. $80,000.
d. $120,000.

44. Morreale Beaver Company buys a $12,000 van on credit. The transaction will affect the

a. income statement only.

b. balance sheet only.
c. income statement and owner's equity statement only.
d. income statement, owner's equity statement, and balance sheet.

45. James Company purchases $600 of equipment from Mundelein Inc. for cash. The effect
on the components of the basic accounting equation of James Company is

a. an increase in assets and liabilities.

b. a decrease in assets and liabilities.
c. no change in total assets.
d. an increase in assets and a decrease in liabilities.
Problems

Exercise No.1

For each of the following, describe a transaction that will have the stated effect on the elements of
the accounting equation.

(a)Increase one asset and decrease another asset.

(b) Increase an asset and increase a liability.
(c) Decrease an asset and decrease a liability.
(d) Increase an asset and increase owner's equity.
(e) Increase one asset, decrease one asset, and increase a liability.

Exercise No. 2
The following transactions represent part of the activities of Lyon Company for the first month of
its existence. Indicate the effect of each transaction upon the total assets of the business by one
of the following phrases: increased total assets, decreased total assets, or no change in total
assets.

(a) The owner invested cash to start the business.

(b) Purchased a computer for cash.
(c) Purchased office equipment with money borrowed from the bank.
(d) Paid the first month's utility bill.
(e) Collected an accounts receivable.
(f) Owner withdrew cash from the business.

Exercise No.3

Prepare an income statement, an owner's equity statement, and a balance sheet for the dental
practice of Ted Terner, DDS, from the items listed below for the month of September.
Ted Terner, Capital, September 1 $42,000
Accounts payable 7,000
Equipment 30,000
Service revenue 25,000
Ted Terner, Drawings 6,000
Dental supplies expense 3,500
Cash 6,000
Utilities expense 700
Dental supplies 2,800
Salaries expense 9,000
Accounts receivable 14,000
Rent expense 2,000
Exercise No.4
One item is omitted in each of the following summaries of balance sheet and income statement
data for three different sole proprietorships, X, Y, and Z. Determine the amounts of the missing
items, identifying each proprietorship by letter.

Proprietorship

X Y Z

Beginning of the Year:

Assets $380,000 $150,000 $199,000

Liabilities 250,000 105,000 168,000

End of the Year:

Assets 450,000 185,000 195,000
Liabilities 280,000 95,000 169,000

During the Year:

Additional Investment by the owner ? 79,000 80,000

Withdrawals by the owner 90,000 83,000 ?
Revenue 195,000 ? 187,000
Expenses 170,000 113,000 175,000