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2.5: Practice Questions

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    Multiple Choice

    1.

    LO 2.1Which of these statements is not one of the financial statements?

    1. income statement
    2. balance sheet
    3. statement of cash flows
    4. statement of owner investments
    2.

    LO 2.1Stakeholders are less likely to include which of the following groups?

    1. owners
    2. employees
    3. community leaders
    4. competitors
    3.

    LO 2.1Identify the correct components of the income statement.

    1. revenues, losses, expenses, and gains
    2. assets, liabilities, and owner’s equity
    3. revenues, expenses, investments by owners, distributions to owners
    4. assets, liabilities, and dividends
    4.

    LO 2.1The balance sheet lists which of the following?

    1. assets, liabilities, and owners’ equity
    2. revenues, expenses, gains, and losses
    3. assets, liabilities, and investments by owners
    4. revenues, expenses, gains, and distributions to owners
    5.

    LO 2.1Assume a company has a $350 credit (not cash) sale. How would the transaction appear if the business usesaccrual accounting?

    1. $350 would show up on the balance sheet as a sale.
    2. $350 would show up on the income statement as a sale.
    3. $350 would show up on the statement of cash flows as a cash outflow.
    4. The transaction would not be reported because the cash was not exchanged.
    6.

    LO 2.2Which of the following statements is true?

    1. Tangible assets lack physical substance.
    2. Tangible assets will be consumed in a year or less.
    3. Tangible assets have physical substance.
    4. Tangible assets will be consumed in over a year.
    7.

    LO 2.2Owners have no personal liability under which legal business structure?

    1. a corporation
    2. a partnership
    3. a sole proprietorship
    4. There is liability in every legal business structure.
    8.

    LO 2.2The accounting equation is expressed as ________.

    1. Assets + Liabilities = Owner’s Equity
    2. Assets – Noncurrent Assets = Liabilities
    3. Assets = Liabilities + Investments by Owners
    4. Assets = Liabilities + Owner’s Equity
    9.

    LO 2.2Which of the following decreases owner’s equity?

    1. investments by owners
    2. losses
    3. gains
    4. short-term loans
    10.

    LO 2.2Exchanges of assets for assets have what effect on equity?

    1. increase equity
    2. may have no impact on equity
    3. decrease equity
    4. There is no relationship between assets and equity.
    11.

    LO 2.2All of the following increase owner’s equity except for which one?

    1. gains
    2. investments by owners
    3. revenues
    4. acquisitions of assets by incurring liabilities
    12.

    LO 2.3Which of the following is not an element of the financial statements?

    1. future potential sales price of inventory
    2. assets
    3. liabilities
    4. equity
    13.

    LO 2.3Which of the following is the correct order of preparing the financial statements?

    1. income statement, statement of cash flows, balance sheet, statement of owner’s equity
    2. income statement, statement of owner’s equity, balance sheet, statement of cash flows
    3. income statement, balance sheet, statement of owner’s equity, statement of cash flows
    4. income statement, balance sheet, statement of cash flows, statement of owner’s equity
    14.

    LO 2.3The three heading lines of financial statements typically include which of the following?

    1. company, statement title, time period of report
    2. company headquarters, statement title, name of preparer
    3. statement title, time period of report, name of preparer
    4. name of auditor, statement title, fiscal year end
    15.

    LO 2.3Which financial statement shows the financial performance of the company on a cash basis?

    1. balance sheet
    2. statement of owner’s equity
    3. statement of cash flows
    4. income statement
    16.

    LO 2.3Which financial statement shows the financial position of the company?

    1. balance sheet
    2. statement of owner’s equity
    3. statement of cash flows
    4. income statement
    17.

    LO 2.3Working capital is an indication of the firm’s ________.

    1. asset utilization
    2. amount of noncurrent liabilities
    3. liquidity
    4. amount of noncurrent assets

    Questions

    1.

    LO 2.1Identify the four financial statements and describe the purpose of each.

    2.

    LO 2.1Define the term stakeholders. Identify two stakeholder groups, and explain how each group might use the information contained in the financial statements.

    3.

    LO 2.1Identify one similarity and one difference between revenues and gains. Why is this distinction important to stakeholders?

    4.

    LO 2.1Identify one similarity and one difference between expenses and losses. Why is this distinction important to stakeholders?

    5.

    LO 2.1Explain the concept of equity, and identify some activities that affect equity of a business.

    6.

    LO 2.2Explain the difference between current and noncurrent assets and liabilities. Why is this distinction important to stakeholders?

    7.

    LO 2.2Identify/discuss one similarity and one difference between tangible and intangible assets.

    8.

    LO 2.2Name the three types of legal business structure. Describe one advantage and one disadvantage of each.

    9.

    LO 2.2What is the “accounting equation”? List two examples of business transactions, and explain how the accounting equation would be impacted by these transactions.

    10.

    LO 2.3Identify the order in which the four financial statements are prepared, and explain how the first three statements are interrelated.

    11.

    LO 2.3Explain how the following items affect equity: revenue, expenses, investments by owners, and distributions to owners.

    12.

    LO 2.3Explain the purpose of the statement of cash flows and why this statement is needed.

    Exercise Set A

    EA1.

    LO 2.1For each independent situation below, calculate the missing values.

    Revenues minus Expenses plus Gains minus Losses equals Net Income/(Loss), respectively: $1,250, 1,100, 125, 75, ?; ?, 100,755, 0, 1,550 (485); 75,560, 68,600, ?, 1,675, 6,485; 26,390, ?, 320, 600, (990); 872,300, 856,995, 11,000, ?, 26,305. EA2.

    LO 2.1For each independent situation below, calculate the missing values for owner’s equity

    Beginning Balance plus Investments minus Distributions equals Ending Balance, respectively: $0, 22,750, 12,000, ?; 17,630, ?, 7,500, 66,330; ?, 75,300, 163,200, 138,900; 0, 175,300, ?, 159,530; 85,800, 62,750, 43,900, ?. EA3.

    LO 2.1For each independent situation below, calculate the missing values.

    Assets minus Liabilities equals Owner’s Equity, respectively: $32,000, 17,000, ?; 168,700, ?, 146,300; 17,500, 16,830, ?; ?, 232,000, 330,700; 382,170, ?, 125,270. EA4.

    LO 2.1For each independent situation below, place an (X) by the transactions that would be included in the statement of cash flows.

    Transaction Included
    Sold items on account
    Wrote check to pay utilities
    Received cash investment by owner
    Recorded wages owed to employees
    Received bill for advertising

    Table2.3

    EA5.

    LO 2.2For each of the following items, identify whether the item is considered current or noncurrent, and explain why.

    Item Current or Noncurrent?
    Cash
    Inventory
    Machines
    Trademarks
    Accounts Payable
    Wages Payable
    Owner, Capital
    Accounts Receivable

    Table2.4

    EA6.

    LO 2.2For the items listed below, indicate how the item affects equity (increase, decrease, or no impact.

    Item Increase? Decrease? or No Impact?
    Expenses
    Assets
    Gains
    Liabilities
    Dividends

    Table2.5

    EA7.

    LO 2.2Forest Company had the following transactions during the month of December. What is the December 31 cash balance?

    Cash sales $3,250, Payments for inventory 1,760, Investments by owners 3,000, Supplies used 175, Cash withdrawals 260, Inventory received 2,500, Wages paid 2,390, Cash balance December 1, 4,250. EA8.

    LO 2.2Here are facts for the Hudson Roofing Company for December.

    Hudson Alexander, Capital December 1 $175,300, December Revenue 56,400, December Expenses 59,800.

    Assuming no investments or withdrawals, what is the ending balance in the owners’ capital account?

    EA9.

    LO 2.3Prepare an income statement using the following information for DL Enterprises for the month of July 2018.

    Sales revenue $62,500, Rental revenue 15,300, Product expense 52,200, Wages expense 18,900, Owner investment 12,000, Equipment purchases 56,000, Utilities expense 1,800, Taxes expense 400. EA10.

    LO 2.3Prepare a statement of owner’s equity using the information provided for Pirate Landing for the month of October 2018.

    Cash $14,500, Pirate Pete capital October 1 56,000, Net loss October 2017 7,800, Owner investments 1,500, Wages payable 3,250, Supplies expense 750, Owner withdrawals 100. EA11.

    LO 2.3Prepare a balance sheet using the following information for the Ginger Company as of March 31, 2019.

    Accounts payable $1,730, Cash 11,050, Ginger Ale capital March 1 17,300, Inventory 8,230, Wages payable 2,150, Sales 13,600, Product expenses 8,200, Ginger Ale capital March 31 22,700, Equipment 7,300.

    Exercise Set B

    EB1.

    LO 2.1For each independent situation below, calculate the missing values.

    Revenues minus Expenses plus Gains minus Losses equals Net Income/(Loss), respectively: $1,813, 1,595, 181, 109, ?; ?, 146,095, 0, 2,248, (703); 109,562, 99,470, ?, 2,429, 9,403; 38,266, ?, 464, 870, (1,436); 1,264,835, 1,242,643, 15,950, ?, 38,142. EB2.

    LO 2.1For each independent situation below, calculate the missing values for Owner’s Equity.

    Beginning Balance plus Investments minus Distributions equals Ending Balance, respectively: $0, 14,333, 7,560, ?; 11,107, ?, 4,725, 41,788; ?, 47,439, 102,816, 87,507; 0, 110,439, ? 100,504; 54,054, 39,533, 27,657, ?. EB3.

    LO 2.1For each independent situation below, calculate the missing values.

    Assets minus Liabilities equals Owner’s Equity, respectively: $81,600, 17,000, ?; 430,185, ?, 373,065; 44,625, 42,917, ?; ?, 591,600, 843,285; 974,534, ?, 319,439. EB4.

    LO 2.1For each of the following independent situations, place an (X) by the transactions that would be included in the statement of cash flows.

    Transaction Included
    Purchased supplies with check
    Received inventory (a bill was included)
    Paid cash to owner for withdrawal
    Gave cash donation to local charity
    Received bill for utilities

    Table2.6

    EB5.

    LO 2.2For each of the following items, identify whether the item is considered current or noncurrent, and explain why.

    Item Current or Noncurrent?
    Inventory
    Buildings
    Accounts Receivable
    Cash
    Trademarks
    Accounts Payable
    Wages Payable
    Common Stock

    Table2.7

    EB6.

    LO 2.2For the items listed below, indicate how the item affects equity (increase, decrease, or no impact).

    Item Increase? Decrease? or No Impact?
    Revenues
    Gains
    Losses
    Drawings
    Investments

    Table2.8

    EB7.

    LO 2.2Gumbo Company had the following transactions during the month of December. What was the December 1 cash balance?

    Dividends paid $221, Credit sales 149, Payments for equipment 1,496, Taxes paid 2,032, Common stock sold 2,550, Inventory received 2,125, Cash sales 2,763, Cash balance December 31 9,869. EB8.

    LO 2.2Here are facts for Hailey’s Collision Service for January.

    Hailey Shusher, Capital January 1 $61,355, January Revenue 23,240, January Expenses 20,930.

    Assuming no investments or withdrawals, what is the ending balance in the owners’ capital account?

    EB9.

    LO 2.3Prepare an income statement using the following information for CK Company for the month of February 2019.

    Sales revenue $26,250, Rental revenue 6,426, Product expense 21,924, Wages expense 7,938, Owner investment 5,040, Equipment purchases 23,520, Utilities expense 756, Taxes expense 168. EB10.

    LO 2.3Prepare a statement of owner’s equity using the following information for the Can Due Shop for the month of September 2018.

    Cash $51,040, Steve due capital September 197,120, Net income September 2018 27,456, Owner investments 5,280, Wages payable 11,440, Supplies expense 2,640, Owner withdrawals 352. EB11.

    LO 2.3Prepare a balance sheet using the following information for Mike’s Consulting as of January 31, 2019.

    Accounts payable $570, Cash 3,646, Mike Michael capital January 1 5,709, Inventory 2,716, Wages payable 710, Sales 4,488, Product expenses 2,706, Mike Michael capital January 31 7,491, Equipment 2,409.

    Problem Set A

    PA1.

    LO 2.1The following information is taken from the records of Baklava Bakery for the year 2019.

    Revenues: January 22,500; Gains: February 1,200; Losses: March 3,700; Expenses: February 21,620; Gains: January 0; Revenues: March 42,800; Losses: February 1,600; Expenses: March 45,100; Losses: January 0; Revenues: February 37,550; Expenses: January 20,760; Gains: March 5,600.
    1. Calculate net income or net loss for January.
    2. Calculate net income or net loss for February.
    3. Calculate net income or net loss for March.
    4. For each situation, comment on how a stakeholder might view the firm’s performance. (Hint: Think about the source of the income or loss.)
    PA2.

    LO 2.1Each situation below relates to an independent company’s owners’ equity.

    Beginning Balance plus Net Income minus Net Loss plus Investments minus Distributions equals Ending Balance, respectively: ?, 16,500, 0, 22,300, 1,750, 37,050; 63,180, 0, 12,000, 0, ?, 44,880; 275,300, ?, 0, 0, 24,100, 299,400.
    1. Calculate the missing values.
    2. Based on your calculations, make observations about each company.
    PA3.

    LO 2.1The following information is from a new business. Comment on the year-to-year changes in the accounts and possible sources and uses of funds (how were the funds obtained and used).

    Assets minus Liabilities equals Owner’s Equity, respectively: End of Year 1: 245,000, 120,000, 125,000; End of Year 2: 286,000, 150,000, 136,000; End of Year 3: 212,000, 80,000, 132,000. PA4.

    LO 2.1Each of the following situations relates to a different company.

    Revenues, Expenses, Gains, Losses, and Net Income (Loss), respectively: Company A 16,500, 12,400, 750, 900, ?; Company B 167,320, ?, 1,350, 6,240, (9,250); Company C ?, 72,300, 0, 5,200, 5,100; Company D 235,000, 241,000, ?, 0, 6,300.
    1. For each of these independent situations, find the missing amounts.
    2. How would stakeholders view the financial performance of each company? Explain.
    PA5.

    LO 2.2For each of the following independent transactions, indicate whether there was an increase, a decrease, or no impact for each financial statement element.

    Transaction Assets Liabilities Owners’ Equity
    Paid cash for expenses
    Sold common stock for cash
    Owe vendor for purchase of asset
    Paid owners for dividends
    Paid vendor for amount previously owed

    Table2.9

    PA6.

    LO 2.2Olivia’s Apple Orchard had the following transactions during the month of September, the first month in business.

    Transaction, Amount, Asset equals Liability plus Owner’s Equity (respectively): Amount owed for land purchase $50,000, 50,000, 50,000, 0; Apple sales: cash, 3,000, ?, ?, ?; Apple sales: credit 6,000, ?, ?, ?; Collections of credit sales 4,000, ?, ?, ?; Cash purchase of equipment 10,000, ?, ?, ?; Owner investments 25,000, ?, ?, ?; Wages expenses paid 6,000, ?, ?, ?; Fuel expenses paid 400, ?, ?, ?; Amount owed for utility expense 1,000, ?, ?, ?; Current Totals: - , 50,000, 50,000, 0.

    Complete the chart to determine the ending balances. As an example, the first transaction has been completed. Note: Negative amounts should be indicated with minus signs (–) and unaffected should be noted as $0.

    (Hints: 1. each transaction will involve two financial statement elements; 2. the net impact of the transaction may be $0.)

    PA7.

    LO 2.2Using the information in Exercise 2.6, determine the amount of revenue and expenses for Olivia’s Apple Orchard for the month of September.

    PA8.

    LO 2.3The following ten transactions occurred during the July grand opening of the Pancake Palace. Assume all Retained Earnings transactions relate to the primary purpose of the business.

    Increase Cash $50,000, increase Common Stock $50,000. Decrease Cash 6,000, increase Inventory 6,000. Increase Equipment 22,000, increase Accounts Payable 22,000. Increase Cash 1,250, increase Retained Earnings 1,250. Decrease Cash 750, decrease Retained Earnings 750 Increase Accounts Payable 600, decrease Retained Earnings 600. Increase Wages Payable 3,000, decrease Retained Earnings 3,000. Increase Cash 3,200, increase Retained Earnings 3,200 Increase Liabilities 175, decrease Retained Earnings 175. Decrease Cash 1,000, increase Equipment 1,000.
    1. Calculate the ending balance for each account.
    2. Create the income statement.
    3. Create the statement of owner’s equity.
    4. Create the balance sheet.

    Problem Set B

    PB1.

    LO 2.1The following information is taken from the records of Rosebloom Flowers for the year 2019.

    Revenues: January 36,425; Gains: February 2,820; Losses: March 8,695; Expenses: February 50,807; Gains: January 0; Revenues: March 53,580; Losses: February 3,760; Expenses: March 58,985; Losses: January 0; Revenues: February 88,243; Expenses: January 48,786; Gains: March 13,160.
    1. Calculate net income or net loss for January.
    2. Calculate net income or net loss for February.
    3. Calculate net income or net loss for March.
    4. For each situation, comment on how a stakeholder might view the firm’s performance. (Hint: think about the source of the income or loss.)
    PB2.

    LO 2.1Each situation below relates to an independent company’s Owners’ Equity.

    Beginning Balance plus Net Income minus Net Loss plus Investments minus Distributions equals Ending Balance, respectively: 163,800, 16,500, 0, ?, 1,750, 254,150; 63,180, 0, 12,000, 0, 51,180, ?; 0, 0, ?, 150,000, 0, 101,400.
    1. Calculate the missing values.
    2. Based on your calculations, make observations about each company.
    PB3.

    LO 2.1The following information is from a new business. Comment on the year-to-year changes in the accounts and possible sources and uses funds (how were the funds obtained and used).

    Assets minus Liabilities equals Owner’s Equity, respectively: End of Year 1: 137,000, 62,000, 75,000; End of Year 2: 148,000, 57,000, 91,000; End of Year 3: 168,000, 80,000, 88,000. PB4.

    LO 2.1Each of the following situations relates to a different company.

    Revenues, Expenses, Gains, Losses, and Net Income (Loss) respectively: Company A ?, 455,490, 0, 32,760, 32,130; Company B 1,480,500, 1,518,300, ?, 0, 39,690; Company C 103,950, 78,120, 4,725, 5,670, ?; Company D 1,054,116, ?, 8,505, 39,312, (58,275).
    1. For each of these independent situations, find the missing amounts.
    2. How would stakeholders view the financial performance of each company? Explain.
    PB5.

    LO 2.2For each of the following independent transactions, indicate whether there was an increase, decrease, or no impact on each financial statement element.

    Transaction Assets Liabilities Owners’ Equity
    Received cash for sale of asset (no gain or loss)
    Cash distribution to owner
    Cash sales
    Investment by owners
    Owe vendor for inventory purchase

    Table2.10

    PB6.

    LO 2.2Mateo’s Maple Syrup had the following transactions during the month of February, its first month in business.

    Transaction, Amount, Asset equals Liability plus Owner’s Equity (respectively): Common stock sold, $3,000, 3,000, 0, 3,000; Amount owed for tax expense, 1,950, ?, ?, ?; Amount owed for insurance expense, 750, ?, ?, ?; Syrup sales: cash 13,000, ?, ?, ?; Syrup sales: credit 6,000, ?, ?, ? Dividends paid 40, ?, ?, ?; Collections of credit sales 1,700, ?, ?, ?; Cash purchase of supplies expenses 250, ?, ?, ?; Cash paid for amounts owed 1,600, ?, ?, ?; Utility expenses paid 400, ?, ?, ?; Taxes paid 600, ?, ?, ?; Current Totals: - , 3,000, 0, 3,000.

    Complete the chart to determine the ending balances. As an example, the first transaction has been completed. Note: negative amounts should be indicated with minus signs (–).

    (Hints: 1. each transaction will involve two financial statement elements; 2. the net impact of the transaction may be $0.)

    PB7.

    LO 2.2Using the information in Exercise 2.6, determine the amount of revenue and expenses for Mateo’s Maple Syrup for the month of February.

    Thought Provokers

    TP1.

    LO 2.1Choose three stakeholders (or stakeholder groups) for Walmart and prepare a written response for each stakeholder. In your written response, consider the factors about the business the particular stakeholder would be interested in. Consider the financial and any nonfinancial factors that would be relevant to the stakeholder (or stakeholder group). Explain why these factors are important. Do some research and see if you can find support for your points.

    TP2.

    LO 2.1Assume you purchased ten shares of Roku during the company’s IPO. Comment on why this might be a good investment. Consider factors such as what you expect to get from your investment, why you think Roku would become a publicly traded company, and what you think is the landscape of the industry Roku is in. What other factors might be relevant to your decision to invest in Roku?

    TP3.

    LO 2.2A trademark is an intangible asset that has value to a business. Assume that you are an accountant with the responsibility of valuing the trademark of a well-known company such as Nike or McDonald’s. What makes each of these companies unique and adds value? While the value of a trademark may not necessarily be recorded on the company’s balance sheet, discuss what factors you think would affect (increase or decrease) the value of the company’s trademark? Consider your answer through the perspective of various stakeholders.

    TP4.

    LO 2.3For each of the following ten independent transactions, provide a written description of what occurred in each transaction. Figure 2.4 might help you.

    Increase Cash $57,500, increase Common Stock 57,500. Decrease Cash 6,900, increase Inventory 6,900. Increase Equipment 25,300, increase Accounts Payable 25,300. Increase Cash 1,438, increase Retained Earnings 1,438. Decrease Cash 863, decrease Retained Earnings 863. Increase Accounts Payable 460, decrease Retained Earnings 460. Increase Wages Payable 3,450, decrease Retained Earnings 3,450. Increase Cash 3,680, increase Retained Earnings 3,680. Increase Accounts Payable 102, decrease Retained Earnings 102. Decrease Cash 1,150, increase Equipment 1,150. TP5.

    LO 2.3The following historical information is from Assisi Community Markets.

    Year 1 42,000, 12,500, 6,200, 12,500, 3,200. Year 2 37,500, 16,800, 7,600, 14,600, 3,700. Year 3 26,800, 22,900, 10,300, 19,800, 4,500. Year 4 22,100, 28,000, 15,400, 20,600, 6,000. Year 5 15,700, 29,500, 16,700, 22,900, 8,200.

    Calculate the working capital and current ratio for each year. What observations do you make, and what actions might the owner consider taking?

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