SELF-TEST QUESTIONS FROM TEXTBOOK
Note:
In order to review as many chapter concepts as possible, some self-test questions include
more than one
correct answer. In these cases, you should indicate
all
of the correct answers.
1A set of financial statements:
aIs intended to assist users in evaluating the financial position, profitability, and future prospects of an entity.
bIs intended to assist the IRS in determining the amount of income taxes owed by a business organization.
cIncludes notes disclosing information necessary for the proper interpretation of the statements.
dIs intended to assist investors and creditors in making decisions involving the allocation of economic resources.
2Which of the following statements is
not
consistent with generally accepted accounting principles relating to asset valuation?
aMany assets are originally recorded in accounting records at their cost to the business entity.
bSubtracting total liabilities from total assets indicates what the owner’s equity in the business is worth under current market conditions.
cAccountants assume that assets such as office supplies, land, and buildings will be used in business operations, rather than being sold at current market prices.
dAccountants prefer to base the valuation of assets upon objective, verifiable evidence rather than upon appraisals or personal opinion.
3Waterworld Boat Shop purchased a truck for $12,000, making a down payment of $5,000 cash, and signing a $7,000 note payable due in 60 days. As a result of this transaction:
aTotal assets increased by $12,000.
bTotal liabilities increased by $7,000.
cFrom the viewpoint of a short-term creditor, this transaction makes the business more solvent.
dThis transaction had no immediate effect upon the owner’s equity in the business.
4A transaction caused a $15,000
decrease
in both total assets and total liabilities. This transaction could have been:
aPurchase of a delivery truck for $15,000 cash.
bAn asset with a cost of $15,000 was destroyed by fire.
cRepayment of a $15,000 bank loan.
dCollection of a $15,000 account receivable.
5Which of the following is (are) correct about a company’s balance sheet?
aIt displays sources and uses of cash for the period.
bIt is an expansion of the basic accounting equation: Assets = Liabilities + Owners’ Equity.
cIt is sometimes referred to as a statement of financial position.
dIt is unnecessary if both an income statement and statement of cash flows are available.
6Which of the following would you expect to find in a correctly-prepared income statement?
aCash balance at the end of the period.
bRevenues earned during the period.
cContributions by the owner during the period.
dExpenses incurred during the period to earn revenues.
7What information would you find in a statement of cash flows that you would not be able to get from the other two primary financial statements?
aCash provided by or used in financing activities.
bCash balance at the end of the period.
cTotal liabilities due to creditors at the end of the period.
dNet income.
8Which of the following statements relating to the role of professional judgment in the financial reporting process are valid?
aDifferent accountants may evaluate similar situations differently.
bThe determination of which items should be disclosed in notes to financial statements requires professional judgment.
cOnce a complete list of generally accepted accounting principles is prepared, judgment need no longer enter into the financial reporting process.
dThe possibility always exists that professional judgment later may prove to have been incorrect.