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1.15: Self-test

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    Indicate whether each of the following statements is true or false.

    The three forms of business organizations are single proprietorship, partnership, and trust.

    The three types of business activity are service, merchandising, and manufacturing.

    The income statement shows the profitability of the company and is dated as of a particular date, such as 2010 December 31.

    The statement of retained earnings shows both the net income for the period and the beginning and ending balances of retained earnings.

    The balance sheet contains the same major headings as appear in the accounting equation.


    Select the best answer for each of the following questions.

    The ending balance in retained earnings is shown in the:

    a. Income statement.

    b. Statement of retained earnings.

    c. Balance sheet.

    d. Both (b) and (c).

    Which of the following is not a correct form of the accounting equation?

    a. Assets = Equities.

    b. Assets = Liabilities + Stockholders’ equity.

    c. Assets – Liabilities = Stockholders’ equity.

    d. Assets + Stockholders’ equity = Liabilities.

    Which of the following is not one of the five underlying assumptions or concepts mentioned in the chapter?

    a. Exchange-price concept.

    b. Inflation accounting concept.

    c. Business entity concept.

    d. Going-concern concept.

    When the stockholders invest cash in the business, what is the effect?

    a. Liabilities increase and stockholders’ equity increases.

    b. Both assets and liabilities increase.

    c. Both assets and stockholders’ equity increase.

    d. None of the above.

    When services are performed on account, what is the effect?

    a. Both cash and retained earnings decrease.

    b. Both cash and retained earnings increase.

    c. Both accounts receivable and retained earnings increase.

    d. Accounts payable increases and retained earnings decreases.

    Now turn to “Answers to self-test” at the end of your chapter to check your answers.


    ➢ Accounting has often been called the language of business. In what respects would you agree with this description? How might you argue that this description is deficient?

    ➢ Define asset, liability, and stockholders’ equity.

    ➢ How do liabilities and stockholders’ equity differ? How are they similar?

    ➢ How do accounts payable and notes payable differ? How are they similar?

    ➢ Define revenues. How are revenues measured?

    ➢ Define expenses. How are expenses measured?

    ➢ What is a balance sheet? On what aspect of a business does the balance sheet provide information?

    ➢ What is an income statement? On what aspect of a business does this statement provide information?

    ➢ What information does the statement of retained earnings provide?

    ➢ Identify the three types of activities shown in a statement of cash flows.

    ➢ What is a transaction? What use does the accountant make of transactions? Why?

    ➢ What is the accounting equation? Why must it always balance?

    ➢ Give an example from your personal life that illustrates your use of accounting information in reaching a decision.

    ➢ You have been elected to the governing board of your church. At the first meeting you attend, mention is made of building a new church. What accounting information would the board need in deciding whether or not to go ahead?

    ➢ A company purchased equipment for USD 2,000 cash. The vendor stated that the equipment was worth USD 2,400. At what amount should the equipment be recorded?

    ➢ What is meant by money measurement?

    ➢ Of what significance is the exchange-price (or cost) concept? How is the cost to acquire an asset determined?

    ➢ What effect does the going-concern (continuity) concept have on the amounts at which long-term assets are carried on the balance sheet?

    ➢ Of what importance is the periodicity (time periods) concept to the preparation of financial statements?

    ➢ Describe a transaction that would:

    ➢ Increase both an asset and capital stock.

    ➢ Increase both an asset and a liability.

    ➢ Increase one asset and decrease another asset.

    ➢ Decrease both a liability and an asset.

    ➢ Increase both an asset and retained earnings.

    ➢ Decrease both an asset and retained earnings.

    ➢ Increase a liability and decrease retained earnings.

    ➢ Decrease both an asset and retained earnings.

    ➢ Identify the causes of increases and decreases in stockholders’ equity

    Real world question: Refer to the 2000 financial statements of The Limited in the Annual Report Appendix at the back of the text. What were the net income or loss amounts in the latest three years? Discuss the meaning of the changes after reading management’s discussion and analysis of financial condition and results of operations.

    Real world question: Refer to the financial statements of The Limited in the Annual Report Appendix. Has the solvency of the company improved from one year to the next? Discuss.

    1.15: Self-test is shared under a not declared license and was authored, remixed, and/or curated by LibreTexts.

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